**SECURITIESAND EXCHANGE COMMISSIONFORM 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 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe fiscal year ended: December 31, 2005OR**

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

**Forthe transition period from                   to                   **

**OR**

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

**Commissionfile number 1-9932**

**ENDESA, S.A.**

(Exact name of Registrantas specified in its charter)

**Kingdom of Spain**

(Jurisdiction ofincorporation)

**Ribera del Loira, 6028042 Madrid, Spain**

(Address of principalexecutive offices)

**Securities registered or to beregistered 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                      |

 

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*                     Listed on the New York Stock Exchange notfor trading, but only in connection with the registration of AmericanDepositary Shares, pursuant to the requirements of the New York Stock Exchange.

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

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

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

**Ordinaryshares, nominal value**€1.20 each: 1,058,752,117

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

| Yes x |   | No o |
|------------|--------|-----------|

 

**Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934.**

| Yes o |   | No x |
|------------|--------|-----------|

 

**Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.**

| Yes x |   | No o  |
|------------|--------|-----------------|

 

**Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct.**

Large accelerated filer x          Acceleratedfiler o          Non-acceleratedfiler o

**Indicate by check mark whichfinancial statement item the registrant has elected to follow.**

| Item 17 o |   | Item 18 x |
|----------------|--------|----------------|

 

**Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of theExchange Act).**

| Yes o |   | No x  |
|------------|--------|-----------------|

 

 

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**TABLEOF 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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**CERTAINTERMS 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 comprisethe Endesa Group unless the context otherwise requires. When we use secondperson, personal pronouns in this report, such as “you” and “your”, we meanexclusively persons who have purchased our American depositary receipts orsecurities issued or guaranteed by Endesa or one of its consolidatedsubsidiaries as the context requires.

References to “TW” and “TWh” are to terawatts andterawatt hours, respectively; references to “GW” and “GWh” are to gigawatts andgigawatt hours, respectively; references to “MW” and “MWh” are to megawatts andmegawatt hours, respectively; references to “kW” and “kWh” are to kilowatts andkilowatt hours, respectively; and references to “kV” are to kilovolts. Referencesto “Nm3” are to normal cubic meters and references to “bcm” are to billions ofcubic meters. Unless otherwise indicated, statistics provided in this annualreport with respect to electricity generation facilities are expressed in MW,in the case of the installed capacity of such facilities, and in GWh, in thecase 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 toaggregate annual electricity production are expressed in GWh and are based on ayear of 8,760 hours. Statistics relating to our production do not includeelectricity consumed by our generators. 25.2 thermies are equivalent to atherm.

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

**PRESENTATIONOF FINANCIAL INFORMATION**

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

**IFRS differs in certain significant respects from Spanish GAAP. As aresult, our financial information presented under IFRS is not directlycomparable to our financial information presented under Spanish GAAP, and readersshould avoid such a comparison.**

**FORWARD-LOOKINGSTATEMENTS**

This annual report contains statements that constitute“forward-looking statements” within the meaning of the Private SecuritiesLitigation 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 orvariations on such expressions. These statements appear in a number of placesin this annual report and include statements regarding our intent, belief orcurrent expectations with respect to, among other things, trends affecting ourbusiness, financial condition or results of operations.

These forward-looking statements are not guarantees offuture performance and involve risks and uncertainties. Actual results maydiffer materially from those in the forward-looking statements as a result ofvarious factors that may be beyond our control. The accompanying information containedin this annual report, including, without limitation, the information under “Item3. Key Information—Risk Factors”, “Item 4. Information on the Company” and “Item5. Operating and Financial Review and Prospects” identifies important factorsthat could cause such differences.

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Readers are cautioned notto place undue reliance on these forward-looking statements, which speak onlyas of their dates. We undertake no obligation to release publicly the result ofany revisions to these forward-looking statements which may be made to reflectevents or circumstances after the dates thereof, including, without limitation,changes in our business strategy or planned capital expenditures, or to reflectthe occurrence of unanticipated events.

**Enforceability ofCivil Liabilities Under The U.S. Securities Laws**

Endesa, S.A. is a company organized under Spanish lawwith limited liability. All of our directors and executive officers arenon-residents of the United States. In addition, substantially all of ourassets and the assets of our directors and executive officers are locatedoutside of the United States. As a result, you may not be able to effectservice of process within the United States upon us or our directors andexecutive officers or to enforce a judgment obtained against us or ourdirectors and executive officers predicated solely upon the civil liabilityprovisions of U.S. securities laws.

There is also doubt that alawsuit based upon U.S. federal or state securities laws could be brought in anoriginal action in Spain and that a judgment obtained in a U.S. court againstus or our directors and executive officers based upon U.S. securities lawswould be enforced in Spain.

**PART I**

**ITEM 1.**                             IDENTITYOF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

**A.   DIRECTORSAND SENIOR MANAGEMENT**

Not applicable.

**B.   ADVISERS**

Not applicable.

**C.   AUDITORS**

Not applicable.

**ITEM 2.**                             OFFERSTATISTICS AND EXPECTED TIMETABLE

Not applicable.

**ITEM 3.**                             KEYINFORMATION

**A.   SELECTEDFINANCIAL DATA**

**SelectedConsolidated Financial Information**

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

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

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statements. The principlesof consolidation are described in Note 2 to our consolidated financialstatements.

Thefollowing 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 |   |

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

(2)          In respect of the yearsindicated.

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

(4)          Long-term debt does notinclude current maturities. See Note 16 to our consolidated financialstatements.

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

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and 2003 to eliminatecertain inflation adjustments that are not permissible under IFRS, but whichwere permissible under Spanish GAAP.

Thefollowing 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 |   |

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(1)          We have restated ourpreviously presented U.S. GAAP selected financial data for 2001, 2002, 2003 and2004 to eliminate certain inflation adjustments that are not permissible underIFRS, but which were permissible under Spanish GAAP. The restatement is madeexclusively due to the fact that in prior years, as allowed pursuant to Item17(c)(iv)(A) of Form 20-F, Endesa’s reconciliation fromaccounting principles generally accepted in Spain to U.S. GAAP excluded anyadjustments attributable to the effect of differences resulting from theaccounting for inflation, as it was considered to be part of a comprehensivemeasure of accounting for the effect of certain of our Latin Americansubsidiaries’ price-level changes in the local GAAP. Since such price-leveladjustment under Item 17(c)(iv)(A) of Form 20-F is nolonger applicable as a result of our adoption of EU-IFRSs (see Note 28 to ourconsolidated financial statements), all inflation adjustment for U.S. GAAPbefore January 1, 2004 has been removed from the presented U.S. GAAPamounts.

(2)          The main differencebetween Operating Income under IFRS and U.S. GAAP relates to the disposals offully consolidated companies and companies accounted for using the equitymethod, which are considered within Operating Income under U.S. GAAP but notunder IFRS.

(3)          Perordinary share and per ADS data has been computed based on the weighted averagenumber of ordinary shares outstanding for the periods presented. Each ADSrepresents one ordinary share.

**Exchange Rates**

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

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Thefollowing tables set forth, for the periods and dates indicated, certaininformation concerning the noon buying rate for euro expressed in U.S. dollarsper 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 |   |
|                                    |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Theaverage of the noon buying rates on the last day of each month during therelevant 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 reportprovides translations into euro of amounts denominated in or resulting fromtransactions effected in currencies other than the euro, the conversion hasbeen effected at the relevant exchange as published by the Spanish CentralBank.

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

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

**B.   CAPITALIZATIONAND INDEBTEDNESS**

Not applicable.

**C.   REASONSFOR THE OFFER AND USE OF PROCEEDS**

Not applicable.

**D.   RISKFACTORS**

**Risks Related toOur Business and Industry**

***Our operations are subject to extensive governmentregulation, and our inability to comply with existing regulations orrequirements or changes in applicable regulations or requirements may have anadverse effect on our business, financial condition and results of operations.***

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Our operating subsidiaries are subject to extensiveregulation of tariffs and other aspects of their operations in Spain and ineach of the other countries in which they operate. While we are in substantialcompliance with applicable laws and regulations, we remain subject to a variedand complex body of laws and regulations that both public officials and privateparties may seek to enforce. The introduction of new laws or regulations, orchanges in existing laws or regulations, could have a material adverse effecton our business, financial condition and results of operations.

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

The tariff deficit exists because certain expensesincluded in the overall costs, above all the cost of power purchased on thewholesale market, are determined in a competitive market, whereas thegovernment sets the electricity tariffs. Although we have the right to completerecovery of the amount financed, it is necessary for the government toestablish 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 ordermatching process in the day-ahead and intra-day markets such that the energyacquired by electricity distribution companies is offset by the sales ofelectricity by electricity generation companies in the ordinary regime, whensuch companies are within the same industrial group. The price that willbe used to settle these sales and purchases will eventually be set by theSpanish government as a function of prevailing market prices, but provisionallysuch price has been fixed at €42.35/MWh. The presence orabsence of a tariff deficit for 2006 and the value of such deficit will dependon the fixing of this price. Moreover, the fixing of this price could have anadverse impact on our results of operations for the fiscal year 2006.

In addition, effective as of March 2, 2006, forpurposes of the tariff deficit calculation, proceeds from sales of electricityby electricity generation companies in the ordinary regime will be reduced inan amount equal to the market value of the CO2 emission allowances that were allocated forfree 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 industrialgroup, of the tariff deficit to which such group is entitled in an amountequal to the market value of emission allowances granted to such industrialgroup in this period.

***Our operations are subject to extensive environmentalregulation, and our inability to comply with existing environmental regulationsor requirements or changes in applicable environmental regulations orrequirements may have a material adverse effect on our business, financialcondition and results of operations.***

We and ouroperating subsidiaries are subject to environmental regulations, which, amongother things, require us to perform environmental impact studies on futureprojects, to obtain regulatory licenses, permits and other approvals and tocomply with the requirements of such licenses, permits and regulations. As withany regulated company, we cannot assure you:

·       thatthese environmental impact studies will be approved by governmentalauthorities;

·       thatpublic opposition will not result in delays or modifications to any proposedproject; or

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

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In recent years statutory environmental requirementshave been becoming stricter both in Spain and in the EU. Although we have beenmaking the necessary investments to comply with this legislation, the futureevolution and application thereof may have a material adverse effect on ourbusiness, financial condition and results of operations.

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

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

We are exposed to market price risk for the purchaseof fuel (including fuel-oil, coal and natural gas) used to generate electricityand the sale of a portion of the electricity that we generate. We have enteredinto long-term revolving fuel supply contracts in order to provide for thesecure supply of fuel for our generation activities in Spain. We have signedseveral natural gas supply contracts which include “take or pay” clauses. Thesecontracts have been established by considering reasonable hypotheses of ourfuture needs. Significant deviations of the contemplated hypotheses could leadto the obligation to execute purchases of fuel greater than our needs.

Because the prices under these contracts are notfixed, we actively manage the market price risk relating to our fuelrequirements. There can be no assurance that such management will eliminate allmarket price risk relating to our fuel requirements.

***Our business may beaffected by hydrological conditions.***

Our operations involve hydroelectric generation and,accordingly, we and our Latin American affiliates are dependent uponhydrological conditions prevailing from time to time in the broad geographicregions in which our hydroelectric generation facilities are located. Ifhydrological conditions result in droughts or other conditions that negativelyaffect our hydroelectric generation business, our results of operations couldbe materially adversely affected. At the same time, the electricity business isaffected by atmospheric conditions such as the average temperatures thatinfluence consumption.

***Our financialcondition and results of operations may be adversely affected if we do noteffectively manage our exposure to interest rate and foreign currency exchangerate risk.***

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

***Construction of newfacilities may be adversely affected by factors commonly associated with suchprojects.***

The construction ofpower generation, transmission and distribution facilities can betime-consuming and highly complex. In connection with the development of suchfacilities, we must generally obtain government permits and approvals, enterinto land purchase or lease agreements, equipment procurement and construction contracts,operation and maintenance agreements, fuel supply and transportationagreements, off-take arrangements and obtain sufficient equity capital and debtfinancing. Factors that may affect our ability to construct new facilitiesinclude:

·       delaysin obtaining regulatory approvals, including environmental permits;

·       shortages or changes in theprice of equipment, materials or labor;

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·       oppositionof political and other interest groups;

·       adversechanges in the relevant political and regulatory environments;

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

·       theinability to obtain financing at rates that are satisfactory to us.

Any of these factors may cause delays in completion orcommencement of operations of our construction projects and may increase thecost of contemplated projects. If we are unable to complete the projectscontemplated, the costs incurred in connection with such projects may not berecoverable.

***We could be subjectto environmental and other liability in connection with our operations.***

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

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

***The liberalizationof the electricity industry in the European Union has led to increasedcompetition and lower prices.***

The liberalization of theelectricity industry in the European Union (including the countries in which weare present, such as Spain, Italy, France and Portugal) has led to increasedcompetition as a result of consolidation and the entry of new marketparticipants in European Union electricity markets, including the Spanishelectricity market. The liberalization of the electricity industry in theEuropean Union has also led to lower electricity prices in some market segmentsas a result of the entry of new competitors and cross-border energy suppliersand the establishment of European electricity exchanges, which in turn has ledto increased liquidity in the electricity markets. This liberalization of the electricity marketrequires that diverse areas of our business develop in a more competitiveenvironment. If we are not able to adapt to or manage adequately thiscompetitive market, our business, financial condition or results of operationsmight be adversely affected.

**Risks Related toOur Latin American Operations**

***Our Latin Americansubsidiaries are subject to a variety of risks, including economic downturnsand political risks.***

Our operations andinvestments in Latin America are exposed to various risks inherent in operatingand investing in Latin America, including risks relating to the following:

·       changesin government regulations and administrative policies;

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

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

·       economicdownturns, political instability and civil disturbances affecting operations;

·       governmentexpropriation of assets; and

·       exchangerate fluctuations.

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

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

**Operational Risks**

***Our activitiescould be subject to human or technological error.***

Inthe course of our operations, direct or indirect losses could be caused byinadequate internal processes, technological flaws, human error or as a resultof certain external events. The control and management of these risks, inparticular those that affect the operations of our generation and distributionplants, are based on adequate development and training of personnel and on theexistence of operational procedures, preventative maintenance plans andspecific programs supported by quality control systems which minimize thepossibility of the occurrence and impact of these risks. A failure of theserisk management procedures could have an adverse impact on our business,financial condition and results of operations.

**Other Risks**

***We are a party tolitigation and other proceedings that may affect us.***

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

***We are subject totakeover bids.***

On September 5, 2005, Gas Natural SDG, S.A., aSpanish natural gas company (“Gas Natural”), announced its intention to commencean exchange offer for all of the outstanding ordinary shares and ADSs ofEndesa, S.A. After obtaining regulatory approvals from the Spanish Council ofMinisters and the *Comisión Nacional del Mercado de Valores*(the “CNMV”), the Spanish securities regulator, as well as registration with theSEC, Gas Natural commenced its offer on March 6, 2006. On March 7,2006, the Board of Directors of Endesa adopted a resolution recommending thatEndesa’s shareholders reject the Gas Natural offer. Gas Natural’s offerconsists of €7.34 in cash and 0.569 of a newly-issuedordinary share or ADS of Gas Natural in exchange for each ordinary share andADS, as applicable, of Endesa, S.A. On April 4, 2006, Madrid CommercialCourt No. 3 enjoined Gas Natural’s offer pending the outcome of a lawsuitby Endesa against Gas Natural and Iberdrola S.A., a Spanish company with whichGas Natural had entered into an agreement for the disposal of approximately €9billion of our assets in the event Gas Natural’s bid is successful, allegingviolations of European Commission competition law in connection with GasNatural’s offer. Gas Natural has announced that it intends to appeal the Madridcourt’s decision. 

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Pursuant to the Law ofCivil Judgment, we were required to present an estimate of the damages or losseswe may incur or that may be incurred by the companies affected by thesuspension. We were required to post €1,000 million as a bondrelating to these possible damages or losses. Separately, Endesa has appealedthe Spanish Council of Ministers’ antitrust authorization of the Gas Naturaloffer and has asked the Spanish Supreme Court to enjoin Gas Natural’s offer. OnMay 10, 2006, Endesa was notified that the Spanish Supreme Courttemporarily suspended the authorization until the Court considers Endesa’sclaim and renders a decision. The suspension of the offer is provisional, andwe cannot determine if or when the Gas Natural offer will be permanentlyenjoined. As a condition to the suspension, a €1,000 million bond must beposted relating to possible damages or losses that may be incurred by thecompanies affected by the suspension, but the Spanish Supreme Court hasaccepted the bond already posted by Endesa with the Madrid Commercial CourtNo. 3 in Madrid, provided that the bonding entities agree to extend thebond’s effects to the Spanish Supreme Court’s procedure. Neither the estimatenor the amount of assets posted will determine the existence or quantity ofeventual damages or losses that could be derived from this process.

On February 21, 2006, E.ON AG, a German energycompany (“E.ON”), announced a tender offer by its wholly-owned subsidiary, E.ONZwölfte Verwaltungs GmbH, for all of the outstanding ordinary shares and ADSs ofEndesa, S.A. E.ON’s offer consists of €27.50 in cash for eachordinary share and ADS of Endesa. On February 21, 2006, the Board ofDirectors 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 GasNatural but still fails to reflect Endesa’s real value. On April 25, 2006,the European Commission granted unconditional antitrust approval to E.ON. E.ONis currently awaiting Spanish regulatory approval. In accordance with officialstatements by the CNMV, E.ON’s offer, if and when commenced, must remain openuntil the injunction by Madrid Commercial Court No. 3 on Gas Natural’soffer is removed or Gas Natural’s offer is withdrawn or terminated. Theprovisional suspension by the Spanish Supreme Court of Gas Natural’s offerfurther limits the likelihood that the E.ON offer will commence or progress inthe near term.

Under Spanish law, a public company that is thesubject of an announced tender offer is subject to certain restrictions,including restrictions on its management’s ability to take certain actions thatcould impede the tender offer from succeeding, without shareholders’ approval.If these restrictions limit the ability of our management team to take certainactions to further the interests of the company, our business, financialcondition 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 bepredicted, and we cannot determine the effect that any of these bids, ifsuccessful, or disposition of assets in connection therewith, would have on ourbusiness, financial condition or results of operations. In particular, wecannot predict the conditions that may be imposed by regulatory authorities orcourts 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 “Item8—Legal Proceedings”.

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

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

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***We are a party toagreements with change in control provisions.***

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

***Forward-lookingstatements contained in this annual report may not be realized.***

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

·       ourstrategic plan, including our anticipated capital expenditures anddivestitures;

·       trendsaffecting our business, financial condition or results of operations, includingmarket trends in the Spanish energy sector and the impact of regulations on theenergy sector;

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

·       ourexposure to various types of market risks, such as interest rate risk andforeign exchange rate risk;

·       anticipatedchanges in foreign currency exchange rates;

·       ourproposed dividend payout rate;

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

·       expansionopportunities and potential future acquisitions or dispositions in developedand emerging markets.

These statementsreflect our current expectations. They are subject to a number of risks anduncertainties, including but not limited to:

·       inabilityto access the debt or equity capital markets;

·       ourability to find interested buyers who will pay acceptable prices for assetsexpected to be divested;

·       anincrease in the market interest rates;

·       adversechanges in currency exchange rates;

·       adversedecisions by regulators in the European Union, Spain, Italy, Chile, Argentinaor elsewhere;

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

·       theeffect of new pronouncements from the International Accounting Standards Boardregarding International Financial Reporting Standards;

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

·       theimpact of fluctuations in fuel and electricity prices;

·       ourability to maintain a stable supply of fuel;

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·       ourability to manage the risks involved in the foregoing; and

·       otherfactors 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 risksand uncertainties, you should understand that we cannot assure you that theforward-looking statements contained in this annual report will be realized. Wedisclaim any responsibility or obligation to update or revise anyforward-looking statements in this annual report including, without limitation,any modifications to our strategic plan, our investment plans or due to superveningcauses. You are cautioned not to put undue reliance on any forward-lookinginformation.

**ITEM 4.**                             INFORMATIONON THE COMPANY

**A.   HISTORYAND DEVELOPMENT OF THE COMPANY**

We are a limited liabilitycompany (*sociedad anónima*)organized under the laws of the Kingdom of Spain. Our ordinary shares arepublicly traded on the Madrid, Barcelona, Bilbao and Valencia stock exchangesand the Santiago Off Shore Stock Exchange in Chile, and our ADSs are listed onthe New York Stock Exchange. We were formed under the laws of Spain onNovember 18, 1944 as “Empresa Nacional de Electricidad, S.A.” and changedour name to Endesa, S.A. by resolution of the shareholders’ meeting ofJune 25, 1997. Our principal executive office is located at Ribera delLoira, 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 NorthAmerica, Inc., 410 Park Avenue, Suite 410, New York, NY 10022.

*Public TenderOffers*

On September 5, 2005, Gas Natural SDG, S.A., aSpanish natural gas company (“Gas Natural”), announced its intention tocommence an exchange offer for all of the outstanding ordinary shares and ADSsof Endesa, S.A. After obtaining regulatory approvals from the Spanish Councilof Ministers and the *Comisión Nacional delMercado de Valores* (the “CNMV”), the Spanish securities regulator,as well as registration with the SEC, Gas Natural commenced its offer onMarch 6, 2006. On March 7, 2006, the Board of Directors of Endesaadopted a resolution recommending that Endesa’s shareholders reject the GasNatural offer. Gas Natural’s offer consists of €7.34in cash and 0.569 of a newly-issued ordinary share or ADS of Gas Natural inexchange for each ordinary share and ADS, as applicable, of Endesa, S.A. OnApril 4, 2006, Madrid Commercial Court No. 3 enjoined Gas Natural’soffer pending the outcome of a lawsuit by Endesa against Gas Natural andIberdrola S.A., a Spanish company with which Gas Natural had entered into anagreement for the disposal of approximately €9 billion of our assets inthe event Gas Natural’s bid is successful, alleging violations of EuropeanCommission competition law in connection with Gas Natural’s offer. Gas Naturalhas announced that it intends to appeal the Madrid court’s decision. Pursuantto the Law of Civil Judgment, we were required to present an estimate of thedamages or losses we may incur or that may be incurred by the companiesaffected by the suspension. We were required to post €1,000 millionas a bond relating to these possible damages or losses. Separately,Endesa has appealed the Spanish Council of Ministers’ antitrust authorizationof the Gas Natural offer and has asked the Spanish Supreme Court to enjoin GasNatural’s offer. On May 10, 2006, Endesa was notified that the SpanishSupreme Court temporarily suspended the authorization until the Court considersEndesa’s claim and renders a decision. The suspension of the offer isprovisional, and we can not determine if or when the Gas Natural offer will bepermanently enjoined. As a condition to the suspension, a €1,000 millionbond must be posted relating to possible damages or losses that may be incurredby the companies affected by the suspension, but the Spanish Supreme Court hasaccepted the bond already posted by Endesa with the Madrid Commercial CourtNo. 3 in Madrid, provided that the bonding entities agree to extend thebond’s effects to the Spanish Supreme Court’s procedure. Neither the estimatenor the amount of assets posted will determine the existence or quantity ofeventual damages or losses that could be derived from this process.

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On February 21, 2006, E.ON AG, a German energycompany (“E.ON”), announced a tender offer by its wholly-owned subsidiary, E.ONZwölfte Verwaltungs GmbH, for all of the outstanding ordinary shares and ADSsof Endesa, S.A. E.ON’s offer consists of €27.50in 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’sannounced offer, stating that the price offered by E.On clearly improves thatoffered by Gas Natural but still fails to reflect Endesa’s real value. OnApril 25, 2006, the European Commission granted unconditional antitrustapproval to E.ON. E.ON is currently awaiting Spanish regulatory approval. Inaccordance with official statements by the CNMV, E.ON’s offer, if and whencommenced, must remain open until the injunction by Madrid Commercial CourtNo. 3 on Gas Natural’s offer is removed or Gas Natural’s offer iswithdrawn or terminated. The provisional suspension by the Spanish Supreme Courtof Gas Natural’s offer further limits the likelihood that the E.ON offer willcommence or progress in the near term.

**B.   BUSINESSOVERVIEW**

**Overview**

We are the largest electricity company in Spain andPortugal in terms of installed capacity and market share in generation anddistribution, with a significant presence in the Southern European electricitymarket, in particular in Italy, and one of the largest private-sectormultinational electricity companies in Latin America. Our core business isenergy, including the supply of natural gas.

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

At December 31, 2005, we had a total installedcapacity of 45,908 MW, and in 2005, we generated 185,264 GWh and sold 203,335GWh, 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 Spainand Portugal, and our total assets amounted to approximately €55billion, 43.3% of which were located outside Spain and Portugal.

Thebreakdown of net sales by the three major lines of business, each based on ageographic 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 businessis conducted in Spain and Portugal, the rest of Europe and Latin America. Ourgas business is conducted in Spain and Portugal.

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*Spain and Portugal*

*Electricity Generation and Distribution.*   Weare the leading electricity generator and distributor in Spain with anapproximately 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 installedcapacity in Spain of 21,409 MW at December 31, 2005 and a total net generationof 91,505 GWh in 2005. In 2005, we sold 64,095 GWh to approximately 11.0million regulated customers (i.e., those who have not chosen to contract withsuppliers) in Catalonia, Andalusia, Aragon, the Balearic Islands, the CanaryIslands, parts of Extremadura, Ceuta and Melilla. We are also one of thelargest suppliers of electricity and gas to deregulated customers (i.e., thosewho have chosen to contract with suppliers) with an approximately 37.4% marketshare at December 31, 2005. In 2005, Endesa Energía sold 36,773 GWh to 998,154points of consumption corresponding to deregulated customers.

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

*Natural Gas Distribution.*   Weconduct our natural gas distribution business through Endesa Gas which,together with the natural gas distribution companies in which it holdscontrolling stakes, had 325,107 customers in Spain and 255,518 customers inPortugal at December 31, 2005, an increase of 8.4% from December 31,2004. We are the third largest natural gas distributor in Spain, with anapproximately 10.9% market share in the domestic regulated market and anapproximately 12.1% market share in the liberalized market (including suppliesto our gas-powered facilities) at December 31, 2005. We also seek tosecure the supply of natural gas for our generation activities. In Spain, ourgoal 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 inSouthern Europe, taking advantage of opportunities arising from the deregulationprocess in Europe and the demand for the cross-border supply of electricity toderegulated customers throughout Europe. We operate plants in Italy with totalinstalled capacity of 6,590 MW and have interests in an additional 2,807 MW inSnet (France) at December 31, 2005 and a total net generation in companiesin which we participate of 33,749 GWh in 2005.

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

On September 13, 2004, we acquired fromCharbonnages de France (CdF) a 35% interest in Snet, France’s second-largestelectricity generator, which, in addition to the 30% interest we acquired in2001, gave us a total ownership interest of 65%. The other stockholders are CdFand EdF. As a result, we now control the management of this company and haveachieved a significant presence in the French electricity market, therebyfulfilling one of the objectives in our Strategic Plan. The total price of thetransaction, including the €450 million we paid forthe 30% stake acquired in 2001, was €571 million.

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

In Northern Africa, we hold a 32% stake in aconsortium with Office National de l’Electricité (ONE) in a 400 MW combinedcycle 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. Weparticipate in more than 20 electricity companies in the region, eitherdirectly or 

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through our controllingstake in the Latin American electricity group, Enersis, of which we acquiredcontrol in 1999, becoming one of the largest private electricity groups inLatin America in terms of consolidated assets and operating revenues. EndesaChile manages our electricity generation business in Latin America andChilectra manages our electricity distribution business in Latin America. BothEndesa Chile and Chilectra are controlled by Enersis. In 2005, we had a totalinstalled capacity of 14,095 MW in the region, generated 57,890 GWh anddistributed 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 Americanoperations contributed 28.7% of our operating revenues and 32.4% of ouroperating income.

**Strategy**

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

***2005-2009 Investment Program***

Pursuant to our2005-2009 Strategic Plan, we invested €3,640million in our businesses in 2005. For the period 2005-2009 we expect toinvest a total of approximately €14,600 million in ourbusinesses, 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 ourbusinesses during 2005 was €3,640 million, broken downas 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 investapproximately 71% of the total investment outlined above in the Spanish andPortuguese electricity business. With this investment, we expect to increaseour installed capacity substantially and to revamp our electricity distributioninfrastructure so as to improve the security and quality of our supply.

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

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***Our performance in 2005***

During2005 we made significant achievements:

·       33%growth in gross operating income;

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

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

·       Asound financial position. See Item 5, “Debt Reduction” for our net financialdebt figure and a reconciliation of net financial debt to IFRS, as well as anexplanation of our calculation of net financial debt, the manner in whichmanagement uses this measure and how the measure is useful to investors.

***Operating performance***

Our future growth isexpected to be based on the development of our asset base, as set out in the2005-2009 Strategic Plan.

*Spain and Portugal*

In Spain and Portugal, demand for electricity is increasing at a ratehigher than the EU average, underpinning, in both business and economic terms,the forecast increase in installed generation capacity. This increase will mainlytake the form of new combined cycle gas turbine (CCGT) plants, new generationplants and an increase in installed capacity for the extrapeninsular systems.The installed capacity of these three segments is expected to grow from 6,150MW 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 andimprove the technological structure of its generation mix, through anadditional 1,755 MW and a greater weighting of CCGTs.

We also plan to install 425 MW of renewable energycapacity through 2009 and participate in regasification projects, resulting inincreased access to gas at more competitive prices. The new regasificationfacilities and renewable capacity will enable us to maintain current unitmargins.

Our presence in Italy andFrance is also generating business in the form of international energy tradingwhich is set to increase in the coming years. We are also negotiating our entryinto the Polish electricity market, which, if successful, is expected to offeran attractive growth platform.

*Latin America*

In 2005-2009 weexpect 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 beenhanced by improved asset efficiency. At the same time, new capacity isexpected to be developed primarily in Chile and Peru, where our subsidiariesare scheduled to supply an additional 589 MW.

**ElectricityBusiness in Spain and Portugal**

***Generation***

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

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Spain (excluding installed capacity of cogenerationand renewable energies facilities with an installed capacity of less than 50MW). 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%. In2005, we produced an additional 2,120 GWh using renewable energies (e.g., wind,small-scale hydro power cogeneration and others). The following table setsforth 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 €799million in the generation business under the ordinary regime, of which €375million was applied to the construction of CCGTs.

Thefollowing table sets forth for each type of generating facility the percentageof our total electricity generated, average age of plant, average capacityutilization 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 capacityutilization is defined as actual production as a percentage of theoreticalmaximum production.

(2)          Average availabilityfactor is defined as the total number of hours per year that a power station isavailable for production as a percentage of the total number of hours in suchyear.

The balance in the types of generation facilitiesmeans our plants’ energy output is stable. We also believe our productioncenters are well-located, with ease of access to fuels and proximity to gaspipelines.

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Thetable below sets forth our gross production of electricity (excludingproduction by cogeneration and renewable energies facilities with a capacity ofless than 50 MW) measured at the point of production by type of power stationduring the past two years. Our gross electricity production in 2005 totaled95,811 GWh, and our energy production, net of our own consumption, was 91,505GWh.

| ** **    | ** ** | **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*

Weoperate coal-fired power stations in Spain with total installed capacity of6,127.6 MW at December 31, 2005. The following table sets forth ourcoal-fired power stations at December 31, 2005, installed capacities,years of commencement of operation, average capacity utilization and averageavailability 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 capacityutilization is defined as actual production as a percentage of theoreticalmaximum production.

(2)          Average availabilityfactor is defined as the total number of hours per year that a power station isavailable for production as a percentage of the total number of hours in suchyear.

(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 gasificationtechnology, on behalf of a third party.

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

Our coal-fired power stations were supplied with22,187 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% toViesgo Generación. In order tomeet our total needs for coal, we supplement our own coal production withpurchases in Spain and foreign markets. We have consolidated 

18

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

Thefollowing table sets forth the amounts of coal we extracted and the amountspurchased 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    |       |

 

Wehave a significant interest in the mining of Spanish coal. Our interestamounted to approximately 37% of overall Spanish production in 2005. Many ofthe coal mines are located near our coal-fired power stations. The followingtable 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 7.2million tons, equal to 17.4 billion thermies, representing a 7.0% decrease interms 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 1999-2006Coal Plan in connection with our strategy to achieve a more environmentallyfriendly fuel mix. In 2005 we successfully completed the transformation of thefirst group of As Pontes for the consumption of imported coal, with theobjective of reducing carbon dioxide levels. We also took action in the coalcenters with the objective of reducing SOx and NOx emissions in order to complywith the Environmental Directive of the GIC (large combustion installations) ofthe European Union.

In accordance with environmental regulations onemissions, we mix imported coal, which has a higher calorific and a lowersulfur 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 mineswill be sufficient to cover a substantial part of our coal requirements duringthe useful life of our conventional coal-fired plants. In addition, we have acombination of short-term self-renewing and long-term supply contracts withcoal producers in Spain which we believe are sufficient to meet our needs fordomestic coal in the long term.

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

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

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*Nuclear PowerStations*

We have controlling interests in three nuclear powerstations, 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 SantaMaria de Garoña nuclear power station. We also have interests in threeadditional nuclear power stations, including the Central Nuclear Almaraz,A.I.E., consisting of Almaraz I and II, and Trillo. All such stations areoperational.

Thefollowing table sets forth our nuclear power stations at December 31,2005, our ownership interest and each station’s installed capacity, systemtype, 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 ourownership interest in jointly-owned nuclear power facilities.

(2)          Average availabilityfactor is defined as the total number of hours per year that a power station isavailable for production as a percentage of the total number of hours in suchyear.

(3)          Pressurized waterreactor.

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

Enusa meets its requirements for uranium throughlong-term supply contracts with various suppliers outside Spain. Enusa is alsoparty to contracts with various uranium enrichment facilities outside Spain. Ourmanagement believes that Enusa can meet the requirements for uranium of allnuclear 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 programto decommission nuclear power stations and dispose of nuclear waste (the “*Plan General de Residuos Radioactivos*”). Until now the sums required fortreatment of nuclear waste and dismantling of nuclear power plants have beentreated as a cost of diversification and safe storage. A percentage of theelectric power rate will be allocated to the creation of a fund for thatpurpose. Pursuant to the Royal Decree-Law 5/2005, all the waste treatment anddismantling costs attributable to the operation of nuclear power plants from April 1,2005 forward will cease to be treated as diversification and safe storage costsand will be financed by the owners during the plants’ operation, through acharge per nuclear kWh generated, which will be billed by Enresa. If a powerplant ceases operations in advance for reasons not attributable to its owner,the resulting deficit in the provision will be treated as a diversification andsafe storage cost. If the plant ceases operations for reasons attributable toits owner, the deficit will be covered by the owner during the three yearssubsequent to the shutdown. Enresa is solely responsible for thedecommissioning of nuclear stations and the treatment and disposal of nuclearwaste.

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

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

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

We are liable for damagescaused by our nuclear power stations up to €150.3million, in respect of which we have liability insurance to cover up to suchamount. The Spanish government is liable for damages caused by our and others’nuclear power stations in excess of €150.3 million up to €208million (equivalent to 175 million Special Drawing Rights). The countries thatare signatories to the Paris and Brussels Conventions are proportionatelyresponsible for liabilities between 175 million and 300 million Special DrawingRights at December 31, 2005. The Special Drawing Right is a basketcurrency established by the International Monetary Fund. Neither of thesetreaties nor Spanish law or regulations allocates responsibility forliabilities in excess of 300 million Special Drawing Rights. Moreover, thenuclear plants in which Endesa participates have insurance against damages tothe facilities, including machinery breakdowns, with maximum coverages rangingfrom $700 million to $900 million.

*Hydroelectric PowerStations*

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

Thefollowing table sets forth the installed capacity of our hydroelectricfacilities.

| ** **                  | ** ** | **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    |   |   |

 

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*Fuel Oil and GasPower Stations*

Weoperate fuel oil and gas power stations in Spain with total installed capacityof 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 inAndalusia and Catalonia, respectively. These power stations form part of ourgeneration and production network in those areas. The following table setsforth 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 fueloil 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 outsidethe Spanish mainland (i.e., the Balearic Islands, the Canary Islands, Ceuta andMelilla) was 12 years.

We have a portfolio of gassupply contracts that provides us with flexibility in determining the amount ofgas required. We have formalized a gas supply contract with Gas Naturalexclusively for the generation of electricity in Spain. The duration of thecontract is for 12 years, starting January 1, 2007, stipulating a maximumconsumption volume of three bcm per year starting January 1, 2009. We alsohave a long-term supply contract with Sonatrach which secures the aggregatesupply of 1 billion cubic meters of natural gas. This contract may beterminated at will.

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*Fuel Prices*

The growing demand for fuel worldwide and restrictionsplaced on production, refinery and transmission capacity—factors already in playin 2004—were compounded in 2005 by a severe hurricane season in the Gulf ofMexico, ongoing technical problems plaguing refineries, the unfavorable impactof certain geopolitical conflicts, reduced surplus capacity among oil-producingcountries and low fuel inventories, particularly gasoline.

Consequently, Brent oilprices, which started at €41/bbl in 2005, reachedrecord 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-damagedareas of the Gulf of Mexico, the use of strategic reserves, increasedinventories and lower demand forecasts for crude oil worldwide. The annualaverage price for 2005 was €55.1/bbl.

*CO*2 market: Compliance with ETS requirements

The European Union Emission Trading Scheme (ETS) cameinto force in 2005 to ensure that the objectives set forth in the KyotoProtocol would be achieved.

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

The CO2 market fluctuated widely in 2005. Arecord-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 weresignificant by the year end, following much less buoyant conditions at thebeginning of the year.

We were granted 43 million tons in emission rights for2005 under the National Allocation Plan for Emission Rights. The allocation, initself insufficient, proved even less adequate when the need arose to increasethe load factor (the need to obtain greater use of the thermal groups) forthermal facilities to counter the drought and meet soaring demand. As such, theemission rights used exceeded the original allocation. We covered our needs onall the markets in which we operate by engaging in bilateral trade with othernational and international agents.

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

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***Cogeneration andRenewable Energies***

Wecarry out our cogeneration and renewable energies business through ourwholly-owned subsidiary, Endesa Cogeneración y Renovables, S.A. The main sourcesof energy produced by this division are wind power, cogeneration andsmall-scale hydroelectric power. At December 31, 2005, our cogenerationand 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 tocogeneration and waste treatment plants in Spain. In addition, we have stakesin cogeneration facilities in Portugal, Colombia and Mexico with a totalcapacity of 325 MW. The following table shows certain information relatingto 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 ofapproximately 11.8% in the renewable energies market in Spain.

In 2005, we brought the following renewable energyfacilities into service: Valpardo 21.3 MW, a wind farm in Castilla y León, SasoPlano, a 39.2 MW wind farm in Aragón and Aitona, a 4.95 MW****mini-hydroelectricplant in Catalonia.

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

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

***Distribution andSales to Customers***

In 2005, wesupplied electricity to approximately 12.0 million customers throughout Spainresulting in sales of approximately €7.6 billion indistribution, transmission and supply. Approximately 15% of our customers arecommercial and industrial clients and 85% are residential customers. In 2005,we sold 64,095 GWh to regulated retail customers and 36,773 GWh toderegulated customers, for total sales of 100,868 GWh, a 4.3% increase over2004. 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) tosupply our distribution and supply subsidiaries. The difference between theenergy we generated and the energy we sold is due to:

·       salesto third parties in the wholesale market;

·       acquisitionsof energy from cogenerators and self-producers;

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·       purchasesand sales in other countries; and

·       losses that occur in thetransmission and distribution process.

*Retail Distributionto Regulated Customers*

We currently distribute electricity in the followingregions in Spain: Catalonia, Andalusia, Aragon, the Balearic Islands, theCanary Islands, Ceuta, Melilla and Extremadura. We operate through EndesaDistribución Eléctrica and Endesa Operaciones y Servicios Comerciales, each ofwhich is wholly-owned by our distribution holding company, Endesa Red. EndesaDistribución Eléctrica assumed the transmission, distribution and regulatedsupply activities formerly carried out by the five retail electricitydistribution companies, while Endesa Operaciones y Servicios Comercialesprovides support functions such as billing and collections, customer support,sales offices and other administrative functions to those companies and othercompanies in the Endesa Group.

In 2005, we distributed101,258 GWh to approximately 11 million customers, representing a 2.3% increasein the number of customers over 2004, which was principally due to Spaniardsand foreigners with second homes in areas like Canary Islands, Balearic Islandsand Andalusia.

*Supply toDeregulated Customers*

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

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

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

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

·       Rationalizationof the network of sales offices and service points.

·       *Optimization of Customer Call Centers.*   Throughout2005, we extended the new services created in 2004, such as the Customer CallCenter for corporate customers to all of the geographical areas we supply. Wealso installed further platform reinforcement services to handle calls whensignificant system incidents arise, and we created dedicated Customer CallCenter teams focused on specific equipment and types of complaints.

·       Improvementof complaint management, by further developing the structure and toolsimplemented in 2004.

We have integrated our telephone customer servicecapabilities into four *Centros de AtenciónTelefónica* (CATS), which handled over 9 million calls in 2005. Wehave 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 satisfythe needs of deregulated customers, enabling them, among other things, tomonitor their consumption of energy and to request services.

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Throughout 2005, wecontinued to develop a range of products designed for customers in thederegulated market, leveraging our household customer base for sales ofadditional value added products such as life insurance policies and electricalappliances, including air conditioners and heating machines.

***Supply of NaturalGas***

We believe that there is atendency towards convergence of the markets for the supply of electricity andnatural gas in the Iberian Peninsula, and as part of our new strategy, we havebecome an integrated energy supplier, providing both electricity and naturalgas to our customers. We believe that we were well-positioned for our entryinto the natural gas supply market in 2001 as a result of our consumption oflarge quantities of natural gas in connection with our electricity generationbusiness and our experience supplying electricity to our customers. In 2001, webegan to supply natural gas through Endesa Energía to eligible customers towhom we also supply electricity. At December 31, 2005, we had 221,719points of supply whose annual consumption requirements total approximately18,558 GWh. Our market share for the unregulated supply of naturalgas in Spain at December 31, 2005 was an estimated 10.9%, and an estimated12.1% including the supply to our plants.

***The SpanishWholesale Market***

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

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

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

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

*Performance ofelectricity prices*

The average spot price in 2005 was €55.98/MWh,which differs significantly from the €28.74/MWh calculated ayear previously. The average monthly price fluctuated throughout the yearbetween €44.18/MWhin January and €73.78/MWhin December. Since cost overruns of operating markets and the supply guaranteeadded €2.40/MWhand €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 thefollowing factors: the price of emission rights, which caused fossil-fuel plantcosts to soar; low rainfall during the year; and high fuel prices ininternational markets, particularly the natural gas market.

The high fuel prices prompted several agents to reducethe load factors for combined cycles. Nevertheless, we obtained morecompetitive costs than our competitors through a successful trading policy thatensured our combined cycles a higher load factor.

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

*Purchases and salesin the wholesale market*

We sold 80,575 GWh of power on the wholesale market in2005, which accounts for 30.6% of total power fed to the mainland electricitysystem.

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

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

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

Other purchases include1,893 GWh for exports and 2,152 GWh of our own production for hydroelectricpumping plants.

***Transmission andDistribution Network***

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

Thetable below provides summary information of the transmission and distributionlines 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 | % |   |

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

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

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

In November 2002, our Board of Directors approvedthe sale of our Spanish mainland electricity transmission assets, including anyassets that were in service as of December 31, 2002, as well as certainconstruction projects in progress that were scheduled to commence operations in2003 to REE for 

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€1,052 million.Under the agreement, we will provide REE with operating and maintenanceservices, as well as other technical assistance and consultancy services, inrelation 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 theelectricity lines we sold for a period of 99 years and will share with REE theright to install new fiber optic lines over the existing electricity lines. Thetransaction will not affect our ability to carry out electricity transmissionactivities pursuant to the prevailing regulatory framework in Spain. Thetransaction was closed in the first quarter of 2003. See “—Capital Expendituresand Divestitures—Divestitures”.

In 2005, the grossinvestment in our transmission and distribution network in Spain was €1,389million, approximately 31% of which was dedicated to meeting new supplyrequirements due to the 5.5% increase in the amount of energy distributedand the connection of 230,200 new customers. The other approximately 69% wasinvested in improving the quality of service and procedures. As a result ofthese investments, in 2005 we increased the total length of our transmissionand distribution network by more than 7,773 kilometers to 297,133 kilometers asat December 31, 2005. In 2005, we also constructed 40 new substations andmore than 4,793 transforming centers (from medium- to low-voltage). Investmentsto improve quality of service and procedures included:

·       thereplacement of lines with higher capacity lines;

·       theinstallation of more sophisticated circuits;

·       theinstallation of double power supply systems;

·       theenlargement and modernization of substations and transformer centers;

·       theautomation of medium-voltage networks by installing telecontrol and otherdevices; and

·       theinstallation of new equipment and lines to reinforce facilities in certainareas.

We have continued work onthe integration of systems and procedures which are key to improvingoperational efficiency. We have identified best practices in the provision ofservices, which are being introduced. We have also begun to consolidate thesales systems of former distributors. This will enable us to take advantage ofthe economies of scale provided by a larger customer base to develop advancedtechnology.

***Regasification***

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

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

We hold a 21% interest in Reganosa, which will bebuilt in Mugardos (La Coruña) and which is expected to have a storage andregasification capacity of 300,000 cubic meters and distribution capacity of412,500 Nm3 per hour, equivalent to 3.6 bcm per year of natural gas. This plantwill include a 130 kilometer pipeline network and is expected to commenceoperations in 2007.

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

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

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weexpect to commence operations in 2008 and 2009, respectively. Each of theArinaga and Granadilla plants are expected to have a storage capacity of150,000 cubic meters and a regasification capacity of 210,000 Nm3 per hour,equivalent to 1.8 bcm per year.

***Distribution ofNatural Gas***

We distribute piped natural gas to residential,commercial and industrial customers in seven Spanish autonomous regions throughEndesa Gas and several companies in which it holds stakes. In addition, EndesaGas holds stakes in companies that distribute piped natural gas in Portugal. Weare the third largest natural gas distributor in Spain, with a market share ofapproximately 6% at December 31, 2005. We are also present in thePortuguese natural gas distribution market through our interests in Setgas andPortgas. Our stake in these two companies is a result of our 49% share in NQFGas, SGPS, S.A. (“NQF”), to which both companies belong. In January 2006Endesa reached an agreement with Electricidade de Portugal (EDP) to sell its49% share in NQF and, by extention, its stakes in Setgas and Portgas. Thetransaction is pending approval.

At December 31,2005, Endesa Gas and the companies in which it holds stakes had more than325,000 customers in Spain and approximately 255,000 customers in Portugal. In2005, the volume of energy sold in Spain by Endesa Gas and the companies inwhich it holds stakes increased approximately 18% to 5,713 GWh and thevolume of energy sold in Portugal increased 3% to 2,484 GWh. In accordance withour Strategic Plan 2005-2009, we intend to increase our market share ineach of the Spanish and Portuguese markets for the distribution of natural gas.The following table shows certain information with respect to the companies inwhich 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 andDistribution Infrastructure***

We participate inthe gas transport sector through our wholly-owned subsidiary Endesa GasTransportista. In 2005, we constructed 335 kilometers of network, with an investmentof €20.8million, reaching 2,874 kilometers of the distribution network in Spain, whichrepresents an increase of 13% with respect to the previous year. We also workedon the construction of various gas pipelines in 2005, including most notably:

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

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

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Regarding our transmissioninfrastructure, we hold a 12% interest in the technical and economic viabilitystudy for the new gas pipeline that will connect Algeria and Spain, viaAlmeria, scheduled to enter into service in 2009.

***Portugal***

*General*

Our presence in thePortuguese electricity industry is primarily linked to generation activitiesresulting from our interests in Tejo Energia and cogeneration plants, and toselling electricity to end customers in the deregulated market.

*Generation*

In Portugal, we hold a 38.9% stake in TejoEnergia-Producão e Distribucião de Energia Eléctrica S.A., which owns a600 MW coal-fired plant, accounting for 6.1% of generation capacity in Portugalat December 31, 2005. In 2005, the plant generated approximately 4,702 GWhof electricity. All of the electricity generated by the plant was sold under along-term power purchase agreement with the national grid concessionaire.

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

Furthermore, we became thesole 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 toderegulated market customers*

In 2005, we continued to consolidate our position inthe Portuguese deregulated market, in which we made sales totaling 2,223 GWh, a23.6% increase over 2004. As of November 30, 2005, we had secured a marketshare of 23.2%, and in that same month, we had 919 supply points.

Since 2002, we haveoperated in this market through a 50/50 joint venture with the Portugueseindustrial group Sonae Group, called Sodesa S.A. Sodesa is currently the secondlargest retailer in the Portuguese deregulated market.

**ElectricityBusiness in Europe**

***General***

Our strategy with respect to our electricity businessin Europe responds to the business opportunities arising from the currentliberalization and deregulation of the European electricity market. Directive96/92/EC of the European Union sets forth as its goal the creation of a singleelectricity market.

We have focused principally on markets in the SouthernEuropean region and on specific opportunities outside of such region, inparticular in Northern Africa.

At year end 2005, ourinstalled capacity in Europe was 9,397 MW, of which 6,590 MW corresponded toEndesa Italia and 2,807 MW to the French company Snet. Total output was 33,749GWh (23,362 GWh generated by Endesa Italia and 10,387 GWh by Snet). Salestotaled 47,221 GWh, of which 30,911 GWh corresponded to Endesa Italia and16,310 GWh to Snet. Sales to deregulated customers in Italy and France were13,064 GWh and 4,694 GWh, respectively.

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***Generation***

*Italy*

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

Endesa Italia, which merged into Endesa Holding Italiato form Endesa Italia S.p.A. in December 2003, is one of the three largestgenerators of electricity in Italy with an installed capacity of approximately6,590 MW as of December 31, 2005, including 20 MW of installed capacityrelating to its wind farms, 2,180 MW relating to its fuel oil and gasgenerating plants, 1,014 MW relating to its hydroelectric plants, 976 MWrelating to its coal-fired plants and 2,400 MW relating to its CCGT plants. Netgeneration 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 Tavazzanoplant’s group 6 to a combined cycle generator which commenced operation in2005, and the start-up of two turbo-gas groups at the Fiume Santo plant.

The conversion of theOstiglia plant’s group 3 and the Tavazzano plant’s group 6 combined cycleplants is part of Endesa Italia’s thermal plant repowering program initiated in2002. This program entails the conversion of these plants to more efficient andenvironmentally friendly technologies, while also significantly increasingtheir installed capacity.

*The renewablesbusiness in Italy*

Endesa Italia continues to produce electricity usingrenewable energies at its 20 MW Florinas wind farm located in the Sardinianregion of the same name and uses animal flour for combustion in the coal groupsof the Monfalcone plant.

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

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

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

*France*

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

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includingthe €450million we paid for the 30% stake we acquired in 2001, was €571million. 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 hasfour 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 workbegan on the desulphurization and denitrification systems for two 600 MW groups—Provence5 and Emile Huchet 6. These systems will allow both groups to comply with theEU Directive limiting the emissions produced at large combustion facilities.Investment in the project will total €156 million.

Snet reported sales of16,310 GWh in 2005, of which 10,387 GWh corresponded to its own production and5,923 GWh represented power purchases from third parties. The group sold 4,694GWh of power to 159 customers on the deregulated French market.

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

In2005, 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, Snetcurrently owns 69.58% of Bialystok.

In addition, Snet holds a50% interest in Altek, a Turkish company, which operates a 40 MW hydroelectricplant 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 andoperation of a circulating fluidized-bed boiler at Gardanne (France), withcapacity of 250 MW. Endesa Europa and Snet have a 25% and a 20% interest inSoprolif, respectively.

***Supply***

We seek to take advantageof the opportunities arising from the growing number of customers in Europethat can contract freely with suppliers.

In France, Snet supplied4,694 GWh of electricity in 2005, and in Italy, Endesa Italia supplied 13,064 GWhto deregulated customers.

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

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

*Poland*

In September 2005, the Ministry ofIndustry shortlisted Endesa, Belgium’s Electrabel and Italy’s Enel in thesale of Dolna Odra (Poland), owner of three plants with an installed capacityof 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 Odraon an exclusive basis for one month. The exclusivity period ended on December 5,2005. On January 9, 2006, the European Commission notified Endesa Europathat it was authorized to conclude the transaction, which is now pending onlyan agreement with employees.

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

***The EuropeanWholesale Market and Energy Trading***

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

Endesa has followed a proactive strategy to facilitatethe development of wholesale markets in Europe. In 1999, we acquired a 10%interest in the Amsterdam Power Exchange (which has been renamed ENDEX), whichestablished the first organized spot market in continental Europe, of which wenow 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 exchangein Poland. In November 2001, we acquired a 5% interest in Powernext, whichbegan operating an organized spot market in France at the end of 2001.

The objective of ourtrading activities in Europe is to support our generation and supply businessesby seeking to increase the return on our assets while hedging the market riskassociated with generation and supply activities. During 2005, our tradingactivities involved purchases and sales of electricity, substantially all ofwhich 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 importantactivities have involved sourcing energy for sales to deregulated customers inFrance, as well as hedging purchases and sales of natural gas to deregulatedcustomers in Spain.

*Activities in theEuropean wholesale markets*

We operate in the European wholesale markets toadminister our generation and supply activities outside the Iberian area. Amongother objectives, this strategy provides us with the necessary power supply tofulfill our contracts with European customers and balance our risk positions inthose areas where we operate. We perform this activity through our subsidiary,Endesa Trading.

In 2005, activity in the European wholesale marketswas shaped by CO2 emission rights and the rise in crude andnatural 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 ofthe year, natural gas supply difficulties—especially in the United Kingdom—andunexpected technical problems on the networks in France and Germany pushed spotprices to their highest levels since 2003. The knock on effect caused by these problemsand the challenges in finding short term solutions affected contractsto be supplied in the future, i.e., monthly, quarterly and evenannual products.

Also, volumes traded through bilateral contractsincreased in organized markets such as Powernext, EEX or APX. The EEX reached66 TWh in 2005, up 12% from 2004; the APX climbed to 16 TWh, up 19%; and theFrench market Powernext (in which we hold a 5% stake) recorded a figure of 19TWh, up 34% from 2004.

Electricity futures rose significantly during 2005,and the base price for 2006, €34.5/MWh in Germany at thestart 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. Theaverage base price for both was €45/MWh up from €28/MWhin 2004.

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In 2005, Endesa Trading handled total energy volumesof 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 industrialcustomers and others, and import and export operations via the interconnectionsexisting among Spain, France, Germany, Holland, Belgium, Denmark, Italy and Slovenia.

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

*Cross-borderElectricity Exchange*

In 2005, international interconnection capacity was assignedby grid operators via a series of coordinated auctions. Power continued to beexported 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 Franceand Germany altered as the latter was no longer a net importer of energy fromFrance, becoming primarily an exporter.

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

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

Through these operationswe were able to supply energy to Endesa Energía’s customers abroad and makewholesale sales to other grids. Endesa Trading purchased the remaining energyneeded to supply Endesa Energía’s other European customers.

*CO*2 emissions market

In 2005 the first phase of the Emission TradingDirective (2005-2007) was implemented, with each country publishing itsAllocation Plan for Emission Rights and the creation of National EmissionsRegistries.

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

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

*Endesa in Morocco*

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

This plant, with installed capacity of 400 MW andlocated in the town of the same name, is the result of an agreement made in2001 to incorporate Energie Eléctrique de Tahaddart, S.A., the company incharge of the construction and use of the plant. The company is owned by theMoroccan group Office National d’Electricité (ONE) (48%), Endesa (32%) andSiemens (20%).

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

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

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

**ElectricityBusiness 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 millioncustomers at December 31, 2005. We are one of the largest privateelectricity operators in Latin America in terms of consolidated assets andoperating revenues. We are present in Chile, Argentina, Colombia, Peru, andBrazil, and participate in the Siepac electricity interconnection system thatwill link the six Central American countries.

Our electricity business in Latin America is conductedprincipally through our subsidiary Enersis in which we currently hold a 60.62%interest, as well as through interests we have acquired directly in companiesin the region. We acquired control of Enersis in April 1999. Enersis is anelectricity utility company primarily engaged, through its principalsubsidiaries and related companies, in the generation, transmission anddistribution of electricity in Chile, Argentina, Brazil, Colombia and Peru. ThroughEndesa Chile, one of Enersis’ consolidated subsidiaries, Enersis is the largestprivate sector electricity generation company in Latin America in terms ofinstalled capacity. Enersis also owns electricity distribution companies inLatin 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 StockExchange, and each of Enersis and Endesa Chile is a reporting company in theUnited States that files annual reports on Form 20-F with, andfurnishes periodic reports to, the SEC.

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Thefollowing table sets forth, at December 31, 2005, our principalsubsidiaries 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 | ** ** |   |

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*                    Transmissioncompany.

**             Installed capacityincluded in Endesa Chile.

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

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

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***ElectricityGeneration and Transmission***

*Generation*

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

Thefollowing table shows the installed capacity of our consolidated subsidiariesin 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         |       | 1,458      |       | 1,436    |       | 1,429      |       |       | (0.5       | )%                                |       |
| Brazil       |       | 1,031      |       | 1,039    |       | 1,039      |       |       | 0.0        | %                                 |       |
| Total        |       | 13,333     |       | 14,053   |       | 14,095     |       |       | 0.3        | %                                 |       |

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*                    Figures relateonly to fully consolidated companies. Therefore, these figures do not includethe 781 MW relating to the Atacama (Chile) power plant or the 72 MW ownedby Cepm in the Dominican Republic.

In2005, our gross production of electricity in Latin America totaled 57,890 GWh,an increase of 5.1% over 2004. The following table shows the gross productionof electricity by our consolidated subsidiaries in Latin America by country forthe periods indicated.

| **Country** | ** ** | ** ** | ** ** | **2003**  | ** ** | **2004**   | ** ** | **2005**   | ** ** | **Percentage  change  2005/2004** | ** ** |
|-------------|------------|------------|------------|-----------|------------|------------|------------|------------|------------|-----------------------------------|------------|
| ** **  | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Chile       |       | 16,524     |       | 16,797    |       | 18,764     |       |       | 11.7       | %                                 |       |
| Argentina   |       | 11,208     |       | 15,884    |       | 16,154     |       |       | 1.7        | %                                 |       |
| Colombia    |       | 10,794     |       | 11,881    |       | 11,864     |       |       | (0.1       | )%                                |       |
| Peru        |       | 4,683      |       | 5,655     |       | 6,895      |       |       | 21.9       | %                                 |       |
| Brazil      |       | 3,271      |       | 4,889     |       | 4,213      |       |       | (13.8      | )%                                |       |
| Total       |       | 46,480     |       | 55,106    |       | 57,890     |       |       | 5.1        | %                                 |       |

 

Gas supply restrictions in Argentina remained in placethroughout 2005, affecting the power plants which use this fuel. Likewise, gasexports to Chile were reduced, impacting generation in that country.

The effect of the supply restrictions in Argentina wasminimized to some degree by the fact that most of our fossil-fuel power plantsin that country are equipped with dual-fuel technology which enables them touse either fuel-oil or gas.

In Chile, the San Isidro I power plant was the mostaffected by gas supply restrictions, although this was offset by the highrainfall and the contribution of the Ralco hydroelectric power plant, whichcame on stream in September 2004.

Generation in Peru increased by 21.9% in 2005, duemainly to the Etevensa power plant operating in open mode with gas from theCamisea field for the entire year, compared with only four months in 2004.

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The decrease in production in Brazil was due to thelack of available gas from Petrobras, which led to a 74% drop in generation atthe Fortaleza power plant.

We continue to leveragethe investment opportunities offered by the generation business in Latin America.We currently have several plants under construction in Chile and Peru on whichwork was carried out in 2005.

*Chile: San IsidroII, Palmucho, Ojos de Agua*

Endesa Chile is currently constructing the San IsidroII CCGT power plant in Chile. The operation will be divided into three stages:between April 2005 and October 2007, the plant will operate with itsgas turbines in open-cycle mode using fuel-oil, with maximum installed capacityof 209 MW; between February 2008 and March 2009, it will operate as aCCGT plant using fuel-oil, with installed capacity of 310 MW; and from 2009onwards, the power plant will operate as a natural gas CCGT plant which willincrease installed capacity to 377 MW. The total estimated investment in thisproject is $200 million.

Endesa Chile is also constructing the Palmucho hydropower plant in the Bíobío region. This is a run-of-river power plant located atthe foot of the Ralco hydro power plant dam. It will use the Ralco plant’swater flow (27.1 m3/s), with an installed capacity of 32 MW. The totalinvestment in this project will be $37 million, including civil works andequipment. The plant is due to come on stream in 2007.

The Palmucho plant will not reduce capacity at theRalco plant, nor are new water rights required. The project has received thenecessary authorization from the Chilean environmental authority (CONAMA),which approved the Environmental Impact Statement on February 18, 2005.

Finally, Endesa Eco, a100% owned subsidiary of Endesa Chile, was created to administer and manage renewableenergy projects in Latin America. This company is developing the Ojos de Aguamini-hydro power plant project in the Maule-Chile area, with installed capacityof 9 MW. Total investment in this project will be $15 million and it is due tocome on stream in 2008.

*Peru: Etevensa CCGTand the Camisea gas purchasing contract*

Our Peruvian subsidiary, Etevensa, was granted alicense to supply Camisea natural gas in August 2003. This included acommitment to maintain the installed capacity of its hydro power plant. Thecompany converted two of the turbines at its power plant from fuel-oil tonatural gas with installed capacity of 325 MW and came on stream in open cyclemode in August 2004. It is estimated that the CCGT of the first turbinewill begin operating in May 2006 and increase its installed capacity to400 MW.

In 2005, the Etevensa II project extended ourcommitment to the Peruvian electricity sector with the transformation of thesecond CCGT turbine. This will increase capacity by nearly 100 MW and is expectedto come on stream at the end of 2006.

These works will transform a power plant whichpreviously operated with fuel-oil to one with nearly 500 MW of CCGT capacity. Thisplant will be the first in Peru to use an important local resource such as gas fromthe Camisea field.

Endesa Chile has agreed toincorporate the Matte Group in a new 2,400 MW hydroelectric project. Theproject, which will receive approximately $4 billion in investment through2018, will involve bringing onstream four hydroelectric plans, two on the RiverBaker and the other two on the River Pascua, both approximately 1,700kilometers south of Santiago de Chile. Endesa Chile’s project, which isexpected to be completed at the end of 2018, is the most ambitioushydroelectric plan currently underway in Chile and the rest of Latin America.

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*Transmission*

We own CIEN, the high-voltage electricityinterconnection between Brazil and Argentina. The first phase of the projectcame into service in the first half of 2000, with capacity of 1,000 MW. Work onthe second phase began at the end of 2000, doubling the transmission capacityof the interconnection to 2,000 MW in 2003.

Also, since the end of 2001 we have been a partner inthe Empresa Propietaria de la Red (EPR), created to oversee the Siepac project,which includes the development of an electricity interconnection betweenGuatemala, El Salvador, Honduras, Nicaragua, Costa Rica and Panama through a1,880 km 230 Kv line. This project is scheduled for completion in 2006,with an estimated budget of $320 million.

The Colombian company, ISA (Interconexión Eléctrica S.A.), became the eighth partner of EPR in 2005. The tender process has begun forthe construction of the line, with 12 companies participating.

In 2005, EPR became eligible for a constructionfinance loan from the Inter-American Development Bank. It also borrowed $40million from the Central American Bank for Economic Integration to finance 16substations.

We also carry out electricity transmission activitiesin Argentina as a shareholder of Yacylec, which operates a 282 km line betweenthe Yaciretá hydroelectric plant and the Resistencia switching station.

Through Endesa Chile wehave a 50% stake in the Gas Atacama gas pipeline, which carries gas from thenorthern regions of Argentina to the Norte Grande de Chile interconnectionsystem. The 950 km long gas pipeline came into operation in 1999.

***ElectricityDistribution***

In2005, the companies in which we hold stakes distributed 55,246 GWh, an increaseof 5.6% from 2004, to approximately 11.2 million customers in Chile, Argentina,Brazil, Peru and Colombia. The following table shows our total customers andsales of electricity in Latin America by country in 2005.

| **Country** | ** ** | ** **      | ** ** | **Customers** | ** ** | **Sales** | ** ** |
|-------------|------------|-----------------|------------|---------------|------------|-----------|------------|
| ** **  | ** ** | **(thousands)** | ** ** | **(GWh)**     | ** ** |
| Argentina   |       |            | 2,165      |          |       | 14,018    |       |
| Brazil      |       |            | 4,654      |          |       | 14,753    |       |
| Chile       |       |            | 1,404      |          |       | 11,851    |       |
| Colombia    |       |            | 2,074      |          |       | 10,094    |       |
| Peru        |       |            | 925        |          |       | 4,530     |       |
| Total       |       |            | 11,222     |          |       | 55,246    |       |

 

***Tariff revisions***

In 2005, there were several tariff revisions at our Latin Americansubsidiaries. We highlight the following:

·  InArgentina, Edesur signed an agreement with the government to revise thedistribution tariff, which had been changed into Argentinean pesos and frozenin 2002 under the Economic Emergency Law. This agreement includes an averageincrease of 28% in the DCV (distribution cumulative value) which will come intoforce in 2006, when the integral tariff revision will be effected.

·  In Peru,Edelnor finalized the tariff revision process which it performs every fouryears. Average tariffs remained practically unchanged, increasing only in linewith inflation.

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·       In Brazil,Coelce performed its annual tariff revision and approved a 23.6% increase whichwas fully applied in October 2005 when the Brazilian Supreme Courtrepealed the provisional measures set by the Ceará State Court, which hadlimited the tariff increase to 11.1%.

***Managing distribution losses***

Energy losses in thedistribution from our subsidiaries in Latin America amounted to 11.8% in 2005compared to 11.9% in 2004.

In 2005, we began a projectdesigned to decrease energy losses in the Río de Janeiro distribution areaoperated by Ampla. The project, called Red Ampla, incorporates the mostadvanced technologies into the network to avoid the theft of electricity.Investment in the project is €45 million. Thus far, the project has demonstrated clear results, includingfitting 42,000 customers with new electricity meters, and a decrease of lossesfrom 53.4% to 1.9%. In 2005, Red Ampla supplied 150,000 customers.

These positive results and theshort time frame in which the investment has been recovered—three and a halfyears—make Red Ampla one of the most successful and groundbreaking projects wehave undertaken in the field of electric energy distribution in the region.

Following the trend seen inprevious years, in 2005 we substantially increased the quality of the servicein the countries where we operate. Specifically, the average number ofinterruptions at our subsidiaries in the region was 7.9%, 1.3 percentage pointsless than in 2004, and the annual average interruption time per customer fellby 8.4% to 10.2 hours a year.

*Distributionin Argentina.**  *InArgentina, through Enersis, we own an approximately 39.45% economic interest inEmpresa Distribuidora Sur S.A., or Edesur, the second largest privatizedelectricity distribution company in Argentina in terms of energy purchases. Edesurserves approximately 2.2 million customers in the greater Buenos Airesmetropolitan area and is operated by Chilectra. The concession from theArgentine regulators to transmit and distribute electricity in Argentina is dueto expire in 2087.

*Distributionin Brazil.**  *In Brazil,we conduct our electricity distribution business through Companhia deEletricidade de Rio de Janeiro, S.A. or Ampla, one of the largest electricitydistributors in the State of Rio de Janeiro, and Companhia Energética de Ceará,or Coelce, the sole electricity distributor in the State of Ceará innortheastern Brazil. Ampla serves approximately 2.2 million customers andCoelce serves approximately 2.4 million customers in their respectiveconcession areas. Both Ampla and Coelce are operated by Chilectra, S.A., aChilean distribution company. We currently hold an approximate economicinterest of 55.56% in Ampla. Our economic interest in Coelce is approximately34.78%.

*Distributionin Chile.**  *InChile, through Enersis, we conduct our electricity distribution businessthrough Chilectra S.A. Chilectra is the largest electricity distributioncompany in Chile in terms of the number of clients, assets and energy sales andserved approximately 1.4 million customers in the greater Santiago metropolitanarea in 2005.

As part of our policy to simplify our corporatestructure in Latin America, in 2005 we initiated proceedings to finalize themerger between Elesur, our former investment company in Chile, which iswholly-owned by Enersis, and the distribution company Chilectra.

*Distributionin Colombia.**  *InColombia, we hold an approximately 43.95% economic interest in Codensa, S.A.E.S.P. Codensa is an electricity distribution company which servesapproximately 2.1 million customers in the area of Bogotá and is operated byEndesa. Codensa was created from the division of the generation anddistribution assets of Empresa de Energía de Bogotá S.A. ESP.

*Distributionin Peru.**  *In Peru,we own an approximately 38.24% interest in Edelnor S.A., an electricitydistribution company that serves approximately 0.9 million customers in itsconcession area in the northern part of Lima. Chilectra is the operator ofEdelnor.

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*Edegel—Etevensa merger.*   In 2005 theprocess of merging Edegel, the hydro generator owned by Endesa Chile, andEtevensa, a thermal generation company directly owned by Endesa Internacionalin Peru, began. The plant owned by Etevensa is currently being converted toCCGT technology. This operation is consistent with our policy of simplifyingour corporate structure in Latin America, which we have undertaken sincestarting operations there. Our objective with the merger is to maximizesynergies and simplify the management of assets. On January 17, 2006, thismerger was approved by the shareholders of both companies, and it is expectedto be finalized in the first half of 2006. Following the merger, Endesa Chilewill consolidate Etevensa through Edegel.

***CapitalExpenditures and Divestitures***

Thefollowing table sets forth our capital expenditures and other investments bytype for the years 2004 and 2005. Financing in those years consisted primarilyof internally generated funds.

| ** **                                            | ** ** | **2004**                             | ** ** | **2005** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|----------|------------|
| ** **                                            | ** ** | **(in millions  of euro)** | ** ** |
| **Capital Expenditures:**                             |       |                                 |       |     |       |
| Power stations                                        |       | 1,116                                |       | 1,294    |       |
| Distribution  facilities                              |       | 1,329                                |       | 1,779    |       |
| Other                                                 |       | 120                                  |       | 186      |       |
| **Total capital expenditures**                        |       | 2,565                                |       | 3,259    |       |
| **Investments:**                                      |       |                                 |       |     |       |
| **Total other investments**                           |       | 884                                  | (1)        | 381      | (2)        |
| **Total  capital expenditures and other investments** |       | 3,449                                |       | 3,640    |       |

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(1)          Includes mainly a €121million investment to acquire an additional interest in Snet, a €261million investment to acquire an additional interest in Auna and a €187million capital subscription in Smartcom.

(2)          Includesmainly a €151million investment to acquire 100% of Finerge and a €27 million purchase ofminority shareholders’ interests in Sodelif-Bialystock and San Isidro.

*CapitalExpenditures*

In 2005, we made total capital expenditures of €3,259million, 73.1% of which was made in our domestic electricity business, 8.5% ofwhich was made in our European electricity business and 18.4% of which was madein our Latin American electricity business. Of the total capital expenditures, €2,420million were recurrent capital expenditures and €839 million were investedin increased capacity and other non-recurrent capital expenditures.

In 2004, we made totalcapital expenditures of €2,565 million, 71% ofwhich was made in our domestic electricity business, 10% of which was made inour European electricity business and 19% of which was made in our LatinAmerican electricity business. Of the total capital expenditures, €1,789million were recurrent capital expenditures and €776 million were investedin increased capacity and other non-recurrent capital expenditures.

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*Divestitures*

As part of ourstrategy, we have divested since 2004 €5.0 billion in assets asof the date of this annual report. The following describes our principaldivestitures since 2004:

·       inDecember 2005, we sold 40% of CEPM (Dominican Republic) for €20million, which resulted in capital gains of €7 million;

·       inNovember 2005, we sold a 27.01% stake in Auna (Spain) for €2,221million, which resulted in capital gains of €1,273 million;

·       inAugust 2005, we sold Smartcom (Chile) for €408 million, whichresulted in capital losses of €3 million;

·       inJuly 2005, we sold 23.62% of Sidec (France) for €104million, which resulted in capital gains of €48 million;

·       inMay 2005, we sold Nueva Nuinsa (Spain) for €93 million, which resultedin capital gains of €16 million;

·       inFebruary 2005, we sold 5.3% of Endesa Italia to ASM Brescia for €159million, which resulted in capital gains of €24 million;

·       inJanuary 2005, we sold Lydec (Morocco) for €26 million, which resultedin capital gains of €12 million;

·       during2005, we sold certain real estate in Palma, Mallorca, at which GESA’s corporateheadquarters had been located, for €73 million in netproceeds, which resulted in capital gains of €65 million, and other realestate in Barcelona for €27 million, which resulted in capital gainsof €24 million;

·       inDecember 2004, we sold Enditel (Spain) to Ericsson for €4.7million;

·       inOctober 2004, we sold Senda Ambiental (Spain) for €20.7million;

·       inJune 2004, we, Unión Fenosa and Telecom Italia sold to Auna 100% of NetcoRedes for €100 million,plus the assumption of €47 million in debt by Auna; and

·       in May 2004, we soldour 11.64% stake in Aguas de Barcelona, S.A. (AGBAR) to Spanish institutionalinvestors for €238million.

**EnvironmentalMatters**

We are committed to sustainable development,simultaneously seeking economic growth while ensuring our natural surroundingsremain an ideal place in which to live.

We defined our Corporate Sustainable Strategy in 2002,encompassing the three dimensions of sustainability: people, planet and profit.This strategy reflects our understanding that sustainable development entailsprotecting the interests of our various shareholders, as demonstrated by our 7 Commitmentsfor Sustainable Development announced in 2003 as part of our SustainabilityPolicy and which set forth the criteria guiding our dealings with ourcustomers, shareholders, employees, suppliers, contractors and society.

Based on our mission, vision and values and our 7Commitments to Sustainable Development, we created our 2003-2007Strategic Plan for the Environment and Sustainable Development, which we areimplementing via a series of programs and specific initiatives.

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The implementation of this plan reduces theenvironmental impact of our business activities, leveraging opportunitiescreated by evolving environmental regulation and the favorable marketperception of companies which are clearly committed to sustainable development.

To date, this strategic plan has been 70% implemented.Highlights of this rapid implementation include sustainability initiatives, theimplementation of environmental management systems, reactions to the challengesposed by climate change, our waste and effluents management strategy, thereduction of raw material consumption and energy efficiency and demandmanagement plans.

The consolidation of the programs rolled out in ourLatin American subsidiaries via Endesa Chile’s Sustainable Business OperatingPlan, setting forth sustainability initiatives for the generation business, andthe Strategic Sustainability Plan for the region’s distribution companies,marked a sustainability milestone in 2005.

In Europe, the French subsidiary, Snet, also approvedits 2005-2007 Strategic Plan for the Environment and SustainableDevelopment.

Also in 2005, the Peruviangenerator, Edegel, became the first Endesa company to be certified according tothe International SA 8000 standard, developed by Social AccountabilityInternational, which certifies corporate management of issues related to humanrights, children’s rights and working conditions.

***The environment***

Environmental protection is a cornerstone of ourcommitment to sustainable development. Our track record is a testament to thiscommitment to our environment, which is a fundamental part of our corporatevalues.

Our environmental management is a key component ofcorporate strategy and part of the senior management’s decision-makingprocesses. In this way, we aim to minimize the impact of our operations on thenatural surroundings. We have developed a broad range of initiatives primarilyrelated to environmental management and exemplary management of effluents,waste, pollution and contaminated land, among others.

Our activitiesduring 2005 related to the environment are discussed in more detail as follows:

·       Climatechange;

·       Environmentalmanagement systems;

·       Environmentalimpact studies;

·       Wastemanagement; and

·       Atmospheric emissions.

*Climate change*

Regulations governing greenhouse gas emission (GGE)trading came into effect in 2005, marking the debut by Spanish companies on theEuropean emissions trading market.

Throughout 2005, we implemented the strategy and toolswe prepared in anticipation of this new legislation. We also made progress onthe investment program to cut greenhouse gas emissions, enhancing facilityefficiency and investing in new capacity at combined cycle plants and stationsfuelled by renewable energies.

Among the initiatives aimed at enhancing efficiencyand performance, we introduced ABACO (Advance Boiler Automation for CombustionOptimization) technology, in conjunction with the 

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engineering firm Inerco,at some of our facilities in Spain. With this initiative, clean technology,which contributes to the mitigation of the effects of climate change, isincorporated, reducing CO2 emissions fromthe electricity production centers and reducing NOx emissions. In the firstphase of this initiative, ABACO technology is installed in the thermal groupsof Compostilla 3, Los Barrios and Teruel 2. The initiative is expected toextend, in a second phase starting in 2006, to eleven other of our thermalgroups in Spain.

In the area of emissions trading, we acquiredemissions rights by participating actively in the European market.

Participation in projects and developing mechanisms toreduce emissions is a cornerstone of our strategy for combating climate change.In 2005, we were a particularly active player on an international scale in thearea of Clean Development Mechanisms (CDMs).

We organized aninternal group for acquiring emission rights via projects and definedquantitative and qualitative targets to meet our obligations arising from theKyoto Protocol for 2005-2007 and 2008-2012. This resulted in thefollowing initiatives:

·       Developmentof the legal documentation necessary to acquire Emission Reduction Certificates(ERCs) pursuant to CDMs, such as acquisition letters of intent, exclusivityagreements and purchase contracts;

·       Identificationof CDM projects in Argentina, Brazil, Chile, Colombia and Peru. Our presence inthese five countries enabled us to identify a large number of projects atdifferent stages of maturity and to initiate negotiations with developers ofseveral projects to acquire their ERCs;

·       Identificationof CDM projects in non-Annex I countries such as Mexico and China. Here, ourmost noteworthy initiative was our agreement with Huaneng to purchase 2.6million tons of CO2 by 2012 from a 195 MW wind farm;

·       Executionof framework agreements with companies capable of generating ERCs, including aseries of agreements in 2005 with companies operating in non-Annex I countriesto acquire their ERCs;

·       Launchof our Climate Initiative to acquire the rights to emit 15 million tons of CO2, five million tons between 2005-2007and the remaining 10 million tons between 2008-2012. We carried out twolaunch events: one at our headquarters in Madrid and another in Río de Janeiro(Brazil); and

·       Continued participation inthe World Bank’s CDCF carbon fund which registered several projects with theUnited Nations in 2005, including the first initiative to be granted ERCs.

*EnvironmentalManagement Systems*

The environmentalmanagement systems (EMS) at the following generation plants in Spain werecertified in 2005:

·       TheJinamar fossil fuel plant (Canary Islands) was UNE-EN ISO 14001 certified;

·       Thecoal port terminal at Ferrol was UNE EN-ISO 14001 and EMAS certified; and

·       TheGarraf JV (our degasification and biogas energy recovery facility at theControlled Deposit in the Vall d ́En Joan in Barcelona) was UNE EN-ISO 14001 andEMAS certified.

In addition, the EMS at the Andorra (Teruel) miningcenter underwent an initial audit in preparation for UNE EN-ISO 14001environmental certification.

In the Spanish distribution business, we developed anEMS for the Balearic Islands, and began implementation in November 2005after providing environmental training; in Aragón we performed the 

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preliminary phase fordiagnosing facilities; and in Catalonia, where the EMS was ISO 14001 certifiedin 2004, we performed the first annual revision.

We also completed implementation of the EMS in ourheadquarters in Madrid. We plan to certify the rest of our corporate buildingsover the coming years.

In the European electricity business, Endesa Italiahas certified 100% of its facilities under ISO 14001. This complements the EMAScertification held by all of its fossil fuel generation plants.

In France, our subsidiary, Snet, has startedimplementing the EMS at its facilities.

In Latin America, the EMS implementation process, ledby Endesa Chile at our generation facilities, is ongoing, and 47 power stationsin Argentina, Brazil, Chile, Colombia and Peru were ISO 14001 certified.

Chilectra became thelatest Latin American distributor to receive environmental certification,increasing to 76% the amount of distributed electricity in the region which isISO 14001 certified. The Brazilian utilities, Ampla and Coelce, beganimplementation in 2005**.**

*EnvironmentalImpact Studies*

Endesa’s generation anddistribution projects, due to their type and nature, are subject to the legalrequirement to carry out an Environmental Impact Study, both in Spain and LatinAmerica. These studies are characterized by the consideration of all impacts,whether positive or negative, arising out of the relevant project, from both anenvironmental and socio-economic point of view. The conclusions of each studyare made available to the public.

*Waste Management*

In 2005, we continued to improve and adapt ourfacilities to minimize waste generation. Noteworthy initiatives include therecycling of used oils, minimization of container waste production, gradualwithdrawal of asbestos from installations, the use of rechargeable or long lifebatteries and treatment and recycling of used cleaning detergents, amongothers.

The plan for the elimination and withdrawal ofequipment containing polychlorinated biphenyls (PCBs) is ongoing, as is our campaignfor testing equipment for contamination by these chemicals, even where theywere not made with PCBs.

Finally, approximately 4million tons of waste materials, predominantly ash from our coal fuelledstations, were recycled at our facilities.

*Atmosphericemissions*

Fossil fuel plants are continuously controlling andmonitoring emissions levels, reporting periodically to the government. Thisinformation was reported again in 2005 to the European EPER registry and thenational registry of air pollutants (Corine Aire).

Within the program foradapting its existing fossil fuel stations to the national air pollutionreduction plan, the coal mix consumed in group IV of the As Pontes fossil fuelstation was modified to permit the use of 100% imported coal.

*Renewable energyand cogeneration*

At the end of 2005, we hada share of 11.9% of total renewables/CHP production in Spain; 9.5% incogeneration and waste treatment; and 16% in renewable energies. Our averagestake in these facilities is 63%, which affords us an attributable capacity of1,349 MW on the basis of our percentage of ownership in each category. Ourtotal capacity was 1,007 MW.

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**Breakdown bytechnology**

·       *Wind power.*   At the end of 2005, we had stakes in windfarms in Spain with a total capacity of 1,131 MW in service and 412 MWunder construction, resulting in a share of 15.4% of the Spanish wind powermarket. Our average stake in these wind farms is 75%.

·       *Mini-hydroelectric plants.*   At the end of 2005,we had stakes in 37 mini-hydroelectric plants in service with a total capacityof 206 MW, as well as in two plants currently under construction that will havea joint installed capacity of 29 MW.

·       *Waste treatment.*   We have stakes infour waste treatment plants with an aggregate capacity of 75 MW. Three of theseare urban solid waste plants (Tirme, Tirmadrid and TRM) and the fourth usesother types of industrial waste.

·       *Biomass.*   We have stakes insix biomass plants in service with a total capacity of 59 MW. Three of theseare biogas plants: one is located at the Aguas de Jerez (Cádiz) waste watertreatment plant and the other two are located at the Can Mata and El Garrafurban solid waste landfills in the province of Barcelona.

·       *Cogeneration.*   At the end of 2005,we had stakes in cogeneration plants in service with a total capacity of 533MW, of which 382 MW (71.7%) were located in Spain, 115 MW (21.6%) in Portugaland 36 MW (6.7%) in Latin America.

·       *Other technologies.*   We have ownership interests inseveral other types of renewable energy facilities (e.g., photovoltaic solarand environmentally friendly) with a total capacity of 6 MW.

As a demonstration of ourcommitment to the development of renewable energy, in 2005 we created EndesaEco, whose mission is to contribute to the development and promotion of renewableenergy in Latin America (mini-hydraulic energy, wind-powered energy,geothermal, solar, biomass and others), with clean and environmentally-friendlytechnology, in order to satisfy the growing demand for renewable energy and toensure sustainable development.

**Regulation**

***Regulation in Spainand Portugal***

*Regulation of theSpanish Electricity Sector*

The foundation on which the Spanish regulations forthe electric power industry rest is Law 54/1997 dated November 27, 1997,for the Electric Power Industry. This legislation reorganized the electricpower system’s mode of operation, requiring competition and beginning theprocess of liberalization of customers.

In November 2004 theMinistry of Industry, Tourism, and Commerce commissioned an independent expertto draft a White Paper on electric power generation. The White Paper waspresented in July 2005, and its conclusions are set forth below under “—WhitePaper on the regulatory framework reform for electricity production”.

*Variation inelectricity rates in 2005*

Royal Decree 2392/2004, published on December 30,2004, prescribed the electric power rate schedule for 2005, approving acomprehensive review of rates and grid charges and applying the rate-settingmethodology introduced by Royal Decree 1432/2002, of December 31, 2002.

This methodology, which is applicable from January 1,2003 to December 31, 2010, sets limits on variations in the average orreference rate; if the variation is positive, the approved increase may not 

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exceed 2% unless there isa change in the rules governing remuneration for electric power activity. Thismaximum percentage is broken down into 1.4% for cost variations in the fiscalyear in question, and 0.6% for revisions of the forecasts made in the twopreceding years.

The Royal Decree approved an increase in the averageor reference rate to 1.7%. The rates for household supply (Schedules 1.0, 2.0and 2.0N) increased by 1.7%, and the remaining rates increased by approximately1.6%, with the exception of rates applicable to distributors covered by theEleventh Transitory Provision of Law 54/1997, which rose by 2.8%. At the sametime, the grid charges applicable to the liberalized market rose by an averageof 1.7%.

The rate schedule for the2005 fiscal year includes €80 million to financequality of service improvement plans in areas in which the limits stipulated inthe quality indexes governing distribution activity are exceeded, as well as €10million for the development of national demand-side management programs.

*Establishment of the electric power rate schedule for2006*

Royal Decree 1556/2005,dated December 28, 2005 prescribes the electric power rate schedule for2006, applying, for the fourth consecutive year, the rate methodology discussedin the previous section. The average or reference rate has been increased by4.5%. The rates for household supply (Schedules 1.0, 2.0 and 2.0N) haveincreased by 4.5% and the rest have risen by approximately 5.1%, except for therates applicable to distributors governed by the Eleventh Transitory Provisionof Law 54/1997, whose increase comes to 7.4%. At the same time, the accessrates applied in the liberalized market are increased by an average of 2.9%.

The 4.5% rise in theaverage rate includes the 1.4% maximum variation for discounting costs for2005, a 0.6% increase as a result of the correction of parameters for the 2005fiscal year, and a 2.5% increase due to changes in the specific rules forconsideration of higher costs in the non-mainland systems (€121.1 million),pursuant to Royal Decree 1747/2003, higher renewables/CHP costs (€158.5million) pursuant to Royal Decree 436/2004 and the 2004-2012 StrategicPlan for Energy Saving and Efficiency (€173.5 million).

Royal Decree 1556/2005also aims to revise the average rate in July 2006 to cover the settlementdeficit for 2005 and to revise the costs included in its calculation.

*Insular and extra-peninsular systems*

Royal Decree 1747/2003,regulating the island and nonmainland electric power systems, was approved on December 19,2003 and published in the Official State Bulletin (OSB) on December 29,2003. This Royal Decree further develops the provisions of Electricity IndustryLaw 54/1997 for the electric power industry, with regard to the regulation ofthose systems.

TheRoyal Decree adapts the principles prescribed in the Electric Power IndustryLaw to the special conditions prevailing in the island and nonmainlandterritories, especially in regard to production activity; these conditionsreflect differences vis-à-vis the electric power system on the Iberianpeninsula stemming from the islands’ geographic isolation and size, and thenumber of electric power systems on them:

·       Underthe Royal Decree production activities will not be organized on a market basisbut on a regulated basis, while new operators are allowed to enter the industryand common elements are shared with the production market on the mainland, suchas publication of prices, settlement of power produced and a system ofguarantees. Remuneration for electric power generation is determined accordingto general criteria similar to those imposed by the Electric Power Industry Lawfor electric power transmission.

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·       Inaccordance with this new regulation, consumers may freely acquire power at theprevailing rate, through a retailer or directly at wholesale, at the samereference price as on the mainland.

·       Electricpower planning will be carried out in a coordinated fashion by the centralgovernment (responsible for general planning) and the related regional or localgovernment.

·       Thetransmission and distribution utilities in the island and nonmainland systemsare subject to the same settlement procedure operated by the National EnergyCommission (CNE) as the mainland companies.

·       Theinsular and extra-peninsular systems’ economic and technical management andoperation is entrusted to the Market and System Operators, OMEL and REE,respectively.

On March 30, 2006, the Ministry of Industry,Tourism and Commerce approved two laws which were then published in theOfficial State Bulletin on March 31, 2006. The first, Order/ITC/914/2006,establishes the method of calculating earnings of guaranteed market potentialfor the power plants on a regular basis for the peninsular and extrapeninsularelectric systems. The second law, Order/ITC/913/2006, approves the method ofcalculating the cost of each of the combustibles utilized and the disposal andliquidation process of the energy in the peninsular and extrapeninsularelectric systems.

These pieces of legislationbring to a close the development of the specific regulations of the SEIE whichwere initiated by Law 54/1997 of the Electricity Sector, and later expanded byRoyal Decree 1747/2003. The latter established a stable regulatoryframework for the investments and the generation activity in these systems. Thescheme of remuneration established for generation activity deals withidentifying the cost of investment, operation and maintenance and combustiblesassociated with developing this activity in the SEIE.

*Cost of transitionto competition (CTC)*

The tariff methodology prescribed in Royal Decree1432/2002 takes account of the costs that influence the calculation of theaverage or reference rate and the amount of money needed to complete therecovery of the CTC balance prior to December 31, 2010, among otherthings.

The 2004 annual settlementof the CTC has been postponed until after January 1, 2006 following theenactment of Royal Decree Law 5/2005 dated March 11, 2005, whichintroduced key reforms to boost productivity.

*White Paper on theregulatory framework reform for electricity production*

In November 2004, the Ministry of Industry,Tourism and Commerce commissioned an independent expert, Professor José IgnacioPérez Arriaga, to draft a White Paper on electricity generation intended toserve as a basis for the reform of the regulatory framework for the electricitysector.

The White Paper was presented in July 2005.Although its primary objective was the reform of the production market, it alsoaddressed other issues, such as the calculation of electricity rates and therelationship between distribution and supply. The main problems addressedinclude deficient regulations, market power in the wholesale market and adeficient rate calculation mechanism, i.e., one which does not completely covercosts.

The paper indicates that one of the most criticalissues is the lack of credibility with respect to electricity prices on thewholesale market. To solve this problem, the paper proposes the establishmentof regulated price contracts for part of the sector’s generation capacity. Oncethe market price is credible, the paper proposes the establishment ofadditional tariffs to allow all system costs to be recovered.

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The paper asserts that the Spanish electricitydistribution remuneration system is one of the most deficient in the world andrecommends it be modified to remunerate adequately the investment made bycompanies. It also proposes exchanging the current capacity payment mechanismfor a process which remunerates power plants for the capacity they caneffectively contribute to the system at moments of peak demand.

In relation to CTCs, thepaper acknowledges the right to recover investments made during the previousregulatory regime, with the same return recognized at that time. The paperfurther proposes a recalculation to establish those investments pendingrecovery and suggests different alternatives for their full recovery.

*Royal Decree-Law3/2006*

Royal Decree-Law 3/2006 modifies the order matchingprocess in the day-ahead and intra-day markets such that the energy acquired byelectricity distribution companies is offset by the sales of electricity byelectricity generation companies in the ordinary regime, when such companiesare within the same industrial group. The price that will be used to settlethese sales and purchases will eventually be set by the Spanish government as afunction of prevailing market prices, but provisionally such price has beenfixed at €42.35/MWh.

Effective as of March 2,2006, for purposes of the tariff deficit calculation, proceeds from sales ofelectricity by electricity generation companies in the ordinary regime will bereduced in an amount equal to the market value of the CO2 emission allowancesthat were allocated for free under the NAP. For purposes of the tariff deficitcalculation between January 1, 2006 and March 2, 2006, there will bea reduction, for each industrial group, of the tariff deficit to which suchgroup is entitled in an amount equal to the market value of emission allowancesgranted to such industrial group in this period.

*Royal Decree-Law4/2006*

OnFebruary 28, 2006, Royal Decree-Law 4/2006, ratified on February 24,2006, was published. This law modifies the duties of the CNE, specifically, itsfourteenth duty delineated in the Law of the Hydrocarbon Sector, which grantsthe CNE the power to authorize the acquisition of interest in any company orentity by a company which performs certain regulated activities. RD-Law 4/2006grants to the Spanish government an effective veto over certain takeovers ormaterial dispositions of assets. RD-Law 4/2006 expanded the CNE’s power toinclude:

·       Thepower to authorize the acquisition by a company, whether regulated or not, ofinterest in any company or entity which performs certain regulated activities(e.g., nuclear power plants, coal power plants particularly relevant to theconsumption of national coal, non-mainland electricity systems, storage ofnatural gas or transport of natural gas through international gas pipelineswith final destinations in Spanish territory).

·       Thepower to authorize the acquisition by any entity of more than 10% of thecapital stock of (or such interest as would yield a significant influence over)a company which, directly or through its subsidiaries, carries out any of theactivities described above.

·       Thepower to authorize any direct acquisition of assets needed to perform theactivities described above.

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The CNE may denyapproval of an acquisition for any of the following reasons:

·       Thepresence of significant risks or negative consequences, direct or indirect, tothe activities described above.

·       Protectionof the energy sector generally, and in particular, protection of sector-basedpolicy objectives. Special protection is given to strategic assets which areidentified as: basic gas networks, international gas pipelines, transportinstallations, non-mainland electricity systems, nuclear power plants and coalpower plants relevant to national coal consumption.

·       Thereasonable likelihood that the target company will be prevented from engagingin the activities referenced above as a result of similar or other activitiesconducted by the acquiring company.

·       Anyother reasons of public safety, including the safety and quality of theprovision of energy, security with respect to investment risk and security ofinfrastructure.

This new fourteenth dutywill apply to takeovers pending on the day of the publication of the RD-Law 4/2006(February 28, 2006), except where such takeovers had already obtainedauthorization of the CNE pursuant to the former and more limited fourteenthduty.

*Preliminary Plansfor the Transposition of the EU Directives of Electricity and Gas*

On February 24, 2006, the Consejo de Ministros(Ministry Advisory Board) approved the reports on the preliminary plans formodification of Law 54/1997 of the Electricity Sector and Law 34/1998 of theHydrocarbon Sector. The approval sought to effect the transposition intoSpanish law of the EU Directives2003/54/EU and 2003/55/EU regarding common standards for the internal marketsof electricity and gas, respectively. These two documents have been submittedto the State Advisory Board for review.

The preliminary planscontemplate the legal and functional separation of the activities of supply inthe regulated market and distribution. Under current Spanish legislation, these activities are performed by thedistribution companies. In addition, the preliminary plans contemplate theelimination of regulated tariffs, starting January 1, 2011 for the electricitysector, and January 1, 2008 for the natural gas sector, as well as the creationof “suppliers of last resort” which will begin their supply activities on thosedates. Suppliers of last resort are trading companies obliged to supplyelectricity to those customers who do not elect to choose their own supplier.

*Greenhouse GasEmission Allowance Trading*

Law 1/2005 regulates thetrade in greenhouse gas emission rights and other aspects prescribed byDirective 2003/87/EC, which in turn regulates the European emission tradingscheme. These regulations are intended to help induce a reduction of greenhousegas emissions in an economically efficient way, and thereby contribute to thefulfillment of Spain’s commitments under the Kyoto Protocol.

*National AllocationPlan 2005-2007 (NAP)*

Royal Decree 1866/2004was published in the OSB of September 6, 2004. This decree approves theNational Allocation Plan for the 2005-2007 period in accordance with Law1/2005 on Trade in Emissions. The Plan has the following basic principles:

·       Itsets an initial emission target of 400.7 million tons of carbon dioxideequivalent per year for Spain in the 2005-2007 period. This figureimplies a 0.2% reduction from the 401.3 million-ton volume of emissions in2002.

·       Inaddition, the plan calls for an effort to achieve additional reductions in the2008-2012 period, at the end of which emissions may not be more than 24%higher than in 1990. Bearing in mind the 

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estimate of 2% absorptionby sumps and the acquisition of credits on the international market amountingto 7%, that would permit the achievement of the Kyoto Protocol’s target forSpain, according to which the country’s emissions in the 2008-2012 periodcannot exceed those of 1990 by more than 15%.

·       Thedecree allows the electric power industry to produce an annual average of 94million tons of CO2 emissions in the 2005-2007 period. ThePlan allocates 89.7 million tons of CO2 per year, including 1 million tons for newentrants and 3.3 million tons for combined cycles involving cogeneration. Inaddition to the aforementioned 89.7 million tons, the decree provides for 1.6million tons of emissions for electric power production using steel industrygases.

·       Theallocation method is based on historic emissions in the 2000-2002 period,adjusted using geographic and technological criteria.

·       Newentrants: New combined cycle facilities not in operation prior to September 30,2004 and with the proper administrative authorizations will be allocatedemission rights without being treated as new entrants. Combined cyclefacilities not in operation at that date and not having administrativeauthorizations will be treated as new entrants and will have a reserve of 1million tons of CO2 per year.

·       So-calledbanking, i.e., the carryover of rights from the first allocation period (2005-2007)to the second (2008-2012), will not be allowed.

On January 21, 2005,the Cabinet approved the final allocation of individual emission rights amongthe country’s 957 facilities covered by Law 1/2005 on Trade in Emissions, aswell as the technical adjustments required by Royal Decree 1866/2004 to theNational Emission Rights Allocation Plan.

*Transposition of the directives on integratedpollution control and limitation of emissions by large-scale combustionfacilities in Spain*

Directive 2001/80/CE of October 23, 2001 wasincorporated into Spanish law through Royal Decree 430/2004 of March 12,2004. This decree introduces new rules limiting emissions of certainpollutants from large-scale combustion facilities and imposes certainconditions for control of atmospheric emissions from oil refineries.

According to Directive 2001/80/CE, the large-scalecombustion facilities of each member state must elect one of the following twoarrangements by January 1, 2008: either individual compliance with theDirective’s emission limits for SO2, NOx and particulates,or the adoption by the member state of a national emission reduction plan forthe entire set of facilities, providing for freedom of action by each one ofthem while ensuring the same reduction of emissions that would be achievedunder the first option. In both cases, facilities that undertake a writtencommitment to the proper authority of each member state, prior to June 30,2004, to refrain from operating for more than 20,000 operational hours between January 1,2008 and December 31, 2015 may be exempted from compliance with theemission requirements specified in the Directive.

Through Royal Decree 430/2004, Spain has elected toadopt a national emission reduction plan for the existing large-scalecombustion facilities. This solution will give it greater flexibility indealing with emissions.

Among the initiativestaken to complete Directive 96/61, on prevention and integrated control ofpollution, was the completion in 2004 of a draft document proposing the bestavailable techniques, to be used as a point of reference when granting renewalsor initial authorizations to large-scale combustion facilities. By Royal DecreeLaw 16/2002, Spain incorporated Directive 96/61 into Spanish law.

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*The wholesaleelectricity market*

On June 24, 2005 the General Energy Secretariatapproved a resolution which established operating procedures for generationprogramming and for resolving technical constraints, amending Royal Decree 2351/2004dated December 23, 2004. The most innovative aspect of this Royal Decreeis the presentation of specific procedures for resolving technical constraints,providing greater clarity and transparency to its operation.

In addition, France and Spain presented a jointproposal in 2005 for managing the interconnection capacity between the twocountries following a public consultation by their energy sector regulators.The proposal consists of carrying out auctions explicitly for theinterconnection capacity, with different timeframes, and creating a mechanismfor exchanging energy between the organized markets of both countries thatallows maximum energy to flow through the interconnection when there is a pricedifference between them.

Finally, RegulationITC/4112/2005 was published on December 30, 2005, establishing theapplicable regime for the exchange of electricity within the EU andinternationally.

*New treatment underthe special regime*

Royal Decree 436/2004 of March 12, 2004 waspublished on March 27, 2004 adopting methodology for updating and systematizingthe legal and economic regulatory framework governing electric power productionunder the special regime.

This Royal Decree is intended to establish a stableand predictable remuneration system for the production of electric power usingrenewable energy sources or cogenerators. It aims to make the investments inthis field predictable and stimulate job creation in these technologies in thecoming years. Under these new rules, the special regime is expected to satisfy12% of the country’s total power demand by the year 2010.

The new rules setforth the following objectives:

·       Improvethe classification of biomass plants, to encourage their development and permitsynergies with biofuel production plants.

·       Stimulatecogeneration.

·       Improvethe remuneration of photovoltaic solar facilities under 100 kW.

·       Adopta remuneration system for wind power that reflects the growth of installedcapacity, while balancing economic efficiency and environmental benefit.

·       Establisha system of incentives designed to restore the obligation for special regimeproducers of more than 10 MW to submit their production schedules, while makingthose producers liable for any deviations from those schedules.

·       Introducea procedure for review of rates, premiums, incentives and complements. TheRoyal Decree does not have retroactive effect and grants the currentlyoperating plants a transitional period, while providing that the multiyearreviews of premiums apply only to future investments.

These new rules seek to foster a steadily growingparticipation in the wholesale market by these facilities, through a specialincentive. The prescribed economic regime permits any facility operating underthe special regime to elect between assigning its power to the distributor at aregulated rate and selling to the wholesale market at the prevailing marketprice supplemented by a regulated premium.

The rate and premiums are expressed, in most cases, aspercentages of the average or reference rate.

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Royal Decree 1556/2005,which adopts the electric power rate schedule for 2006, and Royal Decree 2351/2004,which modifies the procedure for resolving technical restrictions and otherregulatory provisions affecting the electric power market, introduce changes inthe economic regime for facilities operating under the special regime.

*2005-2010Renewable Energy Plan*

In July 2005, the Ministry of Industry, Tourismand Commerce presented the 2005-2010 Renewable Energy Plan, whichcontemplates that these renewable energy sources’ share of the Spanish primaryenergy market will double, accounting for more than 30% of gross electricityconsumption in 2010.

The Plan details thecurrent state of renewable energy technology, their future development and theinvestment required to meet objectives, which it estimates at more than €23,000million. It also emphasizes that some energy sources, such as biomass, have notbeen developed as well as predicted in recent years and forecasts sharp growthin wind power, with growth of installed capacity to 20,000 MW in 2010.

*Economicrevitalization plan*

On February 25,2005 the Spanish Cabinet adopted a series of measures to foster productivitygrowth in the Spanish economy. The following are the principal measuresmandated by the Cabinet and affecting electricity and gas:

·       Measuresfacilitating free choice of electricity and gas supplier.

·       Studiesby the National Energy Commission (CNE) relating to costs attributable totariffs in the electricity and gas sectors, updated regulations governing thesemeasures and monitoring of deficits and self-supply.

·       Requiredguarantee deposits for the construction of generation plants, which will beforfeited if these facilities are not built.

·       Creationof secondary capacity markets for gas plants.

Royal Decree Law5/2005 of March 11, 2005, published in the Official State Bulletin (OSB)on March 14, 2005, introduces key reforms to stimulate productivity growthand improve public contracting. Royal Decree 942/2005 of July 29, 2005modifies certain provisions for hydrocarbons, and Royal Decree 1454/2005of December 2, 2005 modifies certain provisions affecting the electricitysector. Set forth below are some of the key characteristics of these newdecrees:

·       Delayin the final settlement for 2004 and modification of the different agents’contributions to the tariff deficit.

·       Changein the financing mechanism for nuclear waste. Prior to the new regulations, thesums required for treatment of nuclear waste were included in the tariff. UnderRoyal Decree Law 5/2005, the owners of nuclear plants must contribute theamounts necessary to finance waste treatment and dismantling costs attributableto the operation of nuclear power plants, based on the amount energy producedby their plants.

·       Creationof the legal status of dominant operator. A dominant operator is an operatingagent with a market share exceeding 10% in any of the following sectors:generation and supply of electricity; production and distribution of fuels; andproduction and supply of natural gas and liquefied petroleum gas. Dominantoperators in the electricity sector are forbidden to import energy from anysource outside the Iberian Electricity Market (MIBEL).

·       Restrictionof the role of the Market Operator to the management of the daily and intradailymarkets, while the Systems Operator is responsible for all the other markets,spinning and 

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non-spinningreserves, capacity payment, transmission constraints and imbalances, includingtheir economic management.

·       Modificationof various regulatory aspects of the production market to allow for the futuredevelopment of MIBEL.

·       Confirmationof the distribution market’s status as a natural monopoly.

·       Extensionof capacity payment to include production units governed by bilateralcontracts.

·       Grantingof exclusive rights to authorizations for natural gas distribution facilities,avoiding the construction of redundant or unnecessary facilities in the samegeographic area.

·       Regulationof changes in natural gas supply, setting the conditions for the return oflarge customers from the deregulated to the regulated market.

Reform Law 24/2005 dated November 18,2005 is intended to boost productivity. This new Law proposes to extendhigh-voltage tariffs until January 1, 2010. In addition, it provides thatgas sector settlements are to be carried out by the CNE, and that all gasinstallations, including regasification plants, are to be subject to mandatoryplanning. Finally, the Law proposes the use of biomass as a secondary fuel inthermal plants, with incentives to foster their use.

*National Program ofReforms in Spain*

The Spanish government has issued a National ReformProgram (PNR), which sets forth fundamental political and economic goals forthe period 2005-2010. This program responds to the agreements of theEuropean Council which met in March 2005.

The PNR, which has beenreferred to the EU, establishes as its goals greater competition, improvedregulation, efficiency of public administration and competitiveness. Theprogram also includes the development of a new method of remuneration of thedistribution of electricity.

*Regulation of theSpanish Gas Sector*

The regulatory frameworkfor the Spanish gas industry is based on Law 38/1998, on Hydrocarbons, furtherdeveloped by Royal Decrees 949/2001 and 1434/2002. The first of those decreesregulates third party access to gas facilities and establishes an integratedeconomic system for the natural gas industry. The second decree regulatestransport, distribution, marketing, supply and procedures for authorizingnatural gas facilities.

*Variation of gasrates*

The variable term for gas rates is reviewed atquarterly intervals if the cost of raw materials varies by more than 2%. In2005 this led to the publication of two resolutions by the Directorate Generalof Energy and Mining, as well as Regulation ITC/3321/2005 dated October 25,2005. This Regulation establishes a surcharge on the cost of raw materials of €0.0814/kWhfor six quarters (from the third week of October 2005 until the tariffupdate in April 2007) due to the expectation that sales to year-end in theregulated market would exceed the forecasts made at the beginning of the year.

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Thecost of raw materials affects energy rates, which increased from January toOctober 2005 as set forth in the table below:

| ** **                      | ** ** | **Regulation  ITC/104/2005 of  Jan. 28** | ** ** | **Regulation  ITC/3321/2005  of Oct. 25** | ** ** | **Increase %** | ** ** |
|---------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------|------------|
| ** **                      | ** ** | **Prices in **€/kWh                 | ** ** |
| Group 1 (large-scale consumers) |       |                                               | 1.5048     |                                                |       |                | 2.0332     |   |   |   | 35.1 | % |   |
| Group 2 (industrial consumers)  |       |                                               | 1.5837     |                                                |       |                | 2.1114     |   |   |   | 33.3 | % |   |
| Group 3 (household consumers)   |       |                                               | 4.1093     |                                                |       |                | 4.6343     |   |   |   | 12.8 | % |   |
| Group 4 (interruptible)         |       |                                               | 1.5011     |                                                |       |                | 2.0198     |   |   |   | 34.6 | % |   |

 

Regulation ITC/102/2005 of January 28, 2005 setthe remuneration for distribution activity at €1,178million in 2005, 7.9% higher than in 2004. The estimated fixed remuneration fortransmission activities is €500.7 million for 2005, to which must beadded €55.2million for the variable term of regasification.

Regulation ITC/4101/2005of December 27, 2005 established the rates for natural gas andmanufactured pipeline gases, meter rental and connection rights for consumersconnected to networks with a supply pressure equal to or less than 4 bar. Additionalregulations include Regulation ITC/4100/2005, which established the tolls andfees levied for third-party access to gas facilities, and RegulationITC/4099/2005, which established remuneration for regulated gas activities.

*Grid code andsecurity of supply requirements*

On October 11, 2005, Regulation ITC/3126/2005dated October 5, 2005 was published, ratifying the grid code, orregulations governing the technical management of the gas system. The goal ofthese regulations is to promote the proper technical operation of the gassystem and to guarantee the continuity, quality and security of the natural gassupply.

The grid code governs matters such as coordinationprocedures for the operation and maintenance of plants supplying the gastransmission system, control procedures for the flow of gas to and from thenational gas system, the use of international gas interconnections, measures tobe adopted in the event of emergencies and shortages and procedures to be followedin the event of system imbalances.

Also on October 11,2005, Regulation ITC/3283/2005 ratified the rules governing the disclosureduties of those entities required to maintain minimum stocks of fuel products,including liquefied gases from oil and natural gas, and inspection facilitiesfor strategic reserves of oil products.

*Regulation inPortugal*

Portugal’s Ministry of the Economy announced theliberalization of the electric power market in June 2003, to beaccomplished through an opening of the market to non-residential consumers on January 1,2004, with total liberalization as of July 1, 2004. According to thePortuguese Regulatory Authority (ERSE), those clients using “normal low voltage”which, to date and due to technical shortages in the system, have not becomeeligible for participation in the liberalized market, will be able to do sofrom September 4, 2006.

The country has also regulated the termination of thePower Purchase Agreements (PPAs) between the generators and the NationalElectric Power Grid (REN), and, as a result, it has introduced an arrangementto recover the costs for maintenance of the contractual balance (CMCB),equivalent to Spain’s Cost of Transition to Competition (CTC).

The European Commission authorized this recovery arrangementon September 22, 2004 and it was authorized in final form by thePortuguese government on November 11, 2004, through Decree-Law 12/2005,published in the Journal of the Republic on January 7, 2005.

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The Decree provides that every generator having a PPA(i.e., a contract for wholesale sales to the REN) is entitled to receiverevenue equivalent to that provided under the contract. For these purposes, itis assumed that the average income in the Portuguese day-ahead market is €36/MWh,similar to the estimated figure in the Spanish electric power system fordetermination of the CTC; the difference will be offset by the CMCBarrangement.

The effectiveness of these PPAs is subject to theimplementation of the Iberian Electricity Market (MIBEL), which has not yetoccurred.

In addition, the Portuguese Regulatory Authority(ERSE) has adopted an electric power rate schedule for 2006. Rates willincrease 16.3% for industrial customers and 1.2% for household customers. Inthe insular regions of the Azores and Madeira, the rate increases will be 5.4%and 4.5%, respectively.

The Ministry of the Environment and Land Use publishedDecree-Law 233/2004 on December 14, 2004 which incorporates Directive2003/87/CE on trade in emission rights into national law. The PortugueseNational Allocation Plan has been approved by the European Commission.

In February 2006,three decrees were approved which enacted Directives on the Internal EnergyMarkets of electricity and gas into the Portuguese regulatory framework. These decreesare not expected to affect materially the Portuguese regulatory framework.

*The IberianElectric Power Market*

The provisional International Agreement creating theIberian Electric Power Market uniting the Kingdom of Spain and the Republic ofPortugal was published in the Official State Bulletin on June 1, 2004. Sincethen, a number of different agreementshave been established with the objective of rendering MIBEL operational.

The provisional International Agreement defines MIBELas a market system based on three contracting arrangements: bilateral contractingfor periods exceeding a year, contracting for specified time periods exceedingone day but no longer than a year, with defined products, and daily contractingthrough the daily market. The agreement also approves the use of marketarrangements for management of the interconnection.

At the XXISpanish-Portuguese Summit in November 2005, the Spanish and Portuguesegovernments determined that MIBEL would begin operating in July 2006. Thecountries also agreed to create a council of regulators to expedite regulatorycooperation and convergence between the two countries. To this end, Spain hasalready modified existing regulations to provide more equal rights for bothcountries’ operators and has proposed regulations for those matters not yetregulated, such as the creation of secondary energy markets.

***Regulation inEurope—EU regulation***

*Deregulation of theenergy market*

Throughout 2005 theEuropean Commission encouraged its member states to enact into their respectivenational laws Directives 2003/54 and 2003/55, which established common rules forthe internal gas and electricity markets, respectively. In July 2005 theCommission issued formal notice to 10 member states, including Spain, forfailing to enact these directives into their respective national laws.

*Annual report onthe implementation of the internal market for electricity and gas*

On November 15, 2005, the European Commissionissued a report on the progress of the implementation of the internal marketfor energy. In its report the Commission noted that, despite the successachieved during the initial period of market deregulation, further effort isrequired to ensure that 

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both consumers and theindustry fully benefit from deregulation. The Commission noted that nationalmarkets remain unintegrated, the level of concentration of the industry remainstoo high in certain member states and the liquidity of the gas markets remainslow.

Recommendations for thefuture include the complete enactment of EC directives by the respective memberstates, a country-by-country analysis of the regulatory landscape, thestrengthening of interconnections and cross-border trade, the separation ofregulated and non-regulated activities, the preparation of a charter forconsumers and the analysis of the impact of CO2 emissions trading on energy prices.

*DG competitionenquiry into the electricity and gas sectors*

In response to consumercomplaints regarding the lack of competition and increased energy prices inrecent years, the European Competition Directorate General began aninvestigation in June 2005 of the electricity and gas markets. Some of theissues noted by the European Commission in its annual report described abovewere also highlighted by the Directorate General when it published, on November 15,2005, its preliminary conclusions. Its conclusions emphasize insufficientderegulation of the market, high levels of concentration, insufficientseparation of transmission and distribution activities, development of newinterconnections, lack of information on wholesale markets and distortions inpricing. The final report is expected in spring 2006.

*Access to naturalgas transmission networks*

On September 25,2005, Regulation 1775/2005, issued by the European Parliament and Council, waspublished. The goal of this regulation is to ensure proper operation of theinternal gas market by establishing non-discriminatory rules governingaccess conditions to the natural gas transmission networks, taking into accountthe characteristics of national and regional markets.

*National AllocationPlans and market for emissions allowance*

The emission allowance market began to operateofficially on January 1, 2005, although forward transactions had alreadybeen carried out in 2004. The official beginning was accompanied by a reductionin prices from approximately €8-9/tCO2 during much of 2004 to €6-7/tCO2 in 2005. With the final approval of mostNational Allocation Plans by the European Commission, the price has risen tothe vicinity of €20/tCO2.

Member states are in theprocess of preparing their NAPs for the period 2008-2012. The NAPs areexpected to be submitted to the European Commission and approved by July 2006.

*Security of supply*

On June 28, 2005, the European Parliamentapproved the Directive on Security of Electricity Supply, pursuant to whichmember states must establish transparent, stable and non-discriminatorypolicies to guarantee the supply of electricity in a manner compatible with theinternal electricity market.

Following the InformalSummit of Heads of State and Governments held in October 2005, the EUPresidency launched an initiative to achieve greater coordination among memberstates in the arena of establishing energy policy. As a result, the EnergyCommissioner required that the Green Paper on Security of Supply, originallyprepared in 2000, be updated and presented in 2006. The European Commissionpublished the Green Paper on March 8, 2006. It is intended to help theEuropean Union develop a framework for a common, coherent European EnergyPolicy for secure, competitive and sustainable energy.

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*Energy savings*

In June 2005 the EC adopted the Green Paper onEnergy Efficiency, which confirms the increase in oil prices and the EU’sdependence on imported energy (70% of energy needs are forecast to be coveredby imports in 2005-2030). The Green Paper proposes a wide range ofinitiatives, including the creation of national energy efficiency programs andthe improvement of tariff and taxation systems in accordance with the “polluter pays” principle.

In December 2005, the draft Energy EfficiencyDirective was adopted. This indicative Directive requires member states toachieve energy savings of 9% in 2008-2017 at an average rate of 1% peryear. Member states must present action plans showing the measures they proposeto implement to achieve this target. Once these plans have been studied, the ECmay request additional measures to replace those that deviate from the settargets and may even revise the objectives of these programs.

Within the framework ofthis Directive, a more consistent billing system will be established based onreal energy consumption. Energy consumption will be measured by smart metersthat will be installed in all new buildings and during the refurbishment oflarge buildings.

*EU Communication onrenewable energy sources*

On December 7, 2005 the EU approved aCommunication aimed at analyzing the implementation of the Directive onrenewable energy sources and the aid systems for renewable energies adopted bythe member states.

In this Communication theEC proposes greater cooperation between countries that have adopted the sameaid system—for example, compensation for renewable energies paid in Germany,France and Spain, and the system of “green certificates” in the Scandinaviancountries—and, secondly, optimizing these aid systems by improving theirstability, reducing administrative obstacles, improving access to the networks,promoting new technological developments and effecting greater compatibilitywith internal energy markets.

*Aid plan for coalmining*

On December 21, 2005 the Commission membersapproved the aid package granted to the Spanish coal industry for the period2003-2005.

The EC had previously opened an investigation into theRestructuring Plan for the Spanish coal industry, questioning the legality ofcertain of the measures contained in the Plan. The approval of the aid packagesuggests that the information submitted by the Spanish government in responseto the investigation is sufficient to demonstrate that the aid granted complieswith EU regulations.

The coal-assistance proposalin the EU Mining Plan of 2006-2010 has been submitted to the EUauthorities for approval.

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***Regulationin Europe—countries in which we operate***

Variousregulatory changes have taken place in the European countries in which weoperate, the highlights of which are outlined below.

*Italy*

*Liberalizationof the market and rates.*   Theprocess of liberalization of the Italian energy market continues. Law 239 hasbeen published, restructuring the Italian electricity sector and stating that,as of July 1, 2004, all consumers, except households, are eligible, whichaffects some 7 million customers. The complete liberalization of the market isset for July 1, 2007.

From January 1,2005, the Italian Regulator, through Resolution 253/04 and successivemodifications thereof, has authorized active participation on the market,allowing wholesalers and large customers to buy energy from the Italian PowerExchange. The Italian Power Exchange is comprised of the following markets:

·       Energymarket:   Prior-day market and adjustment market with valuation of offersat the marginal price of the system.

·       Marketfor “dispatching services” (reserves and real-time dispatching) with “pay asbid” valuation of offers.

·       Capacitymarket with remuneration criteria fixed by the Regulator.

In 2005 the Transmission System Operator confirmed themechanism of remuneration for operators who offer capacity during criticalperiods of national demand (Capacity Payment). This Capacity Payment consistsof a fixed and a variable component, depending on expected remuneration foroperators still operating on the regulated market.

*Costs of transition to competence.*   Law-Decree8/6/2004, published on June 23, 2005, establishes the sums that thegenerators will receive by virtue of costs of transition to competence for theyears 2000, 2001, 2002, and 2003. The Law-Decree grants to the generators atotal amount of €850million for the period 2000-2003, of which Endesa Italia will receive €169million relating to CMCBs, to be collected in the period from 2005 to 2009. TheEuropean Commission approved this mechanism in December 2004.

*National Plan for Allocation of EmissionAllowances.*   Since January 1, 2005, theEmission Trading System has been in place in Italy, pursuant to the EuropeanDirective 2003/87/EC. On February 23, 2005, the European Commissionapproved the National Plan for Allocation of CO2 Emission, assigning Endesa Italia S.p.A. atotal of 33.9 million tons of CO2 for the 2005-2007 period.

*Electricgrid operator.*   On November 1, 2005, theprocess of integrating the national electric grid’s (GRTN) property andmanagement concluded with the acquisition by Terna S.p.A. of the scheduling,development and network services of GRTN S.p.A.

*France*

France continues to be oneof the European countries furthest behind in the process of energyliberalization.

On July 1, 2004,approximately 2.5 million electricity customers became eligible in France, as aresult of the liberalization of the entire nonhousehold market, representingapproximately 70% of the consumption of electricity. The total liberalizationof the market will occur on July 1, 2007.

Law 2004-803, of August 9,2004, corresponding to the European Directives for the markets for electricityand gas, changed the charters of the French state-owned electricity and gascompanies, *Électricité de France* (EdF) and *Gaz de France* (GdF), respectively, and turned them into stockcompanies. 

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The lawintroduced measures addressed to separating the management activities of theelectricity and gas networks from other businesses, and established thetransformation of RTE, the administrator of the electricity transport network,into a stock company whose capital will be wholly owned by EdF, the Frenchgovernment or other public agencies.

On July 13, 2005 theLaw of Energetic Orientation 2005/781 was approved. This law sets the goals andenergy policies to be undertaken by France, complementing the currentlegislation on demand management, renewable energies, electric network qualityand distribution of electricity. The law sets certain measures assuringsufficient investment in generation and networks to guarantee the quality andsafety of the electricity supply.

The National Plan ofAllocation of CO2 Emission was set for the period 2005-2007by Decree No. 2005-190 of February 25, 2005. The allocationgranted to Snet in this period amounts to 6.8 million tons of CO2.

***Regulation in Latin America***

There are distinctregulations in the Latin American countries in which we operate, the highlightsof which are outlined below:

*Generation.**  *These are generally liberalized markets in whichprivate agents freely make investment decisions, based on the indicativeinformation furnished by the authorities, except in Brazil where newrequirements for generation capacity are defined by the State and theseinvestments are developed through a system of energy auctions.

In the Latin Americancountries there is a centralized dispatch based on variable costs of productionthat seeks optimal use of generation resources. These variable costs, dependingon the country, are partially dollarized. These costs are audited and determinethe marginal price of generation, except in Colombia, where the dispatch isbased on bid prices.

*Distribution.**  *In the five countries in which the Group operates,the sale price to non-liberalized customers is regulated and based on thepurchase price to the generators, plus a component for the added value of thedistribution activity (AVD). Periodically, this value is revised by the Statethrough tariff process revisions (4-5 years, depending on the country).

In the case of Argentina,the purchase price of the distributor, usually revised quarterly, was notadjusted during 2005. In Brazil, purchase prices result from energy auctionsand existing contracts. In Colombia, the purchase price is obtained in open andpublic bidding with the generators, but the transmission of energy to the endconsumer reflects the efficiency of the distributors as a group arranging priceswith the generators.

*Liberalizedcustomers.*   The limits on making free contractsfor supply in each country are as follows:

| **COUNTRY** | ** ** | ** ** | ** ** | **MW (MINIMUM)** | ** ** |
|-------------|------------|------------|------------|-----------------------|------------|
| Chile       |       |       | 2.0        | *                     |       |
| Argentina   |       |       | 0.03       |                  |       |
| Colombia    |       |       | 0.1        |                  |       |
| Peru        |       |       | 1.0        |                  |       |
| Brazil      |       |       | 3.0        |                  |       |

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*                    According tothe law the reduction should take place two years after law approbation, whichoccurred on March 14, 2004. Therefore, as of March 2006, theeligibility limit was lowered to 0.5 MW.

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*Limits on integration and concentration.  *Ingeneral, vertical integration is permitted if the operations have separateadministrations. In Argentina, however, there are restrictions on generators ordistributors being majority shareholders of transport companies. In Peru, apermit is required for those companies that hold more than 5% of a particularbusiness segment to gain an equity stake in a company in another segment. InColombia, the companies created after 1994 cannot become vertically integrated,and there are restrictions on generators or distributors being majorityshareholders in transport companies. In Brazil, the integration of generationand distribution is limited to 30%. In Chile, the new “Corta” Law, approvedduring 2004, places limits on generating or distributing companies having anequity stake in transport companies and limits the participation by transportcompanies in the generation and distribution sectors.

As for concentration, in Argentina there is no setlimit on horizontal concentration. The law limits itself merely to defendingthe conditions of competition, expressly prohibiting transactions that implyunfair competition or abuse of a dominating market position. In the case ofconsolidations or mergers between agents in the same segment, the rules requirepermission from the regulator. In Brazil, there are limits on concentration forboth generation and distribution, both on the national level and for theelectricity subsystem. On the national level, a 20% concentration is permittedin both segments; for the electricity subsystem, the limit is 35% in thenorthern and northeastern subsystems and 25% in the south-southeastern andcenter-western subsystems. In Peru, on the other hand, there is no limit onconcentration; one merely needs to obtain a permit from the authorities toacquire another company if the resulting company’s holdings would exceed 15% ofthe particular segment. In Chile, there is no limit at present. In Colombia,the maximum value of horizontal concentration is limited to 25% of the sector.

*Access to the network.*   InArgentina, Brazil, Colombia and Peru, the right of access and the toll oraccess price are regulated by the authority. In Chile, these prices are set bya regulated system similar to that of the other Latin American countries.

*Chilean RegulatoryFramework*

*Electricity Systems.*   Chile’selectricity industry is organized into four separate electricity systems, themost important of which is the Sistema Interconectado Central (CentralInterconnected System) (SIC), which covers the region that includes more than90% of Chile’s population. The second most important system is the SistemaInterconectado del Norte Grande (Large Northern Interconnected System) (SING),which covers the northern mining region of Chile. The other two systems arelocated in the southern region of Chile, providing electricity to remote areaswithout significant consumption.

*Regulation.  *The primaryregulations in Chile are Electricity Law DFL No. 1 of 1982 and Regulation347. In April 2005, an initiative known as “Short Law II” was approved bythe Senate. This initiative aims to incentivize investment in generation and toprovide stable, long term pricing based on long term energy contracts amonggenerators and distributors based on a bidding process. Prior to thisinitiative, pricing was defined entirely by regulation with revision every sixmonths. During the transition period, March 2005 through December 2008,distributors which could not obtain a contract in the past may settle atmarginal cost. As a result of this initiative, it is expected that prices inthe long term will allow investment in GNL plants.

*Activities.*   Production,transmission and distribution activities are legally separated in Chile. Productionand distribution companies may supply electricity to eligible (unregulated)consumers (i.e., consumers with an installed capacity of at least 2 MW). Production,transmission, distribution and sale to consumers with maximum consumptioncapacity less than 2 MW are regulated.

*Distribution Tariffs.  *Theregulated distribution tariffs are set every four years. The  price to end customers is set as the sum ofthe prices of generation (bare price) and the regulated distribution charge oradded value for distribution (AVD). The AVD allows for efficient operatingcosts, as well as a return on a standard value of investment. The current ratestook effect on November 1, 2004.

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*Regulatory Bodies.  *Thefollowing are the primary regulatory bodies in Chile and their respectivefunctions:

·       TheMinistry of Economy sets the regulated prices for distribution and generationand grants definitive concessions.

·       The*Comisión Nacional de Energía* (NationalEnergy Commission) (CNE) is a technical agency with ministerial rank that,among other things, develops and coordinates the plans, policies and rules forgoverning the Chilean energy sector, advises governmental agencies on allmatters related to energy and conducts technical studies to determine theregulated prices.

·       The*Superintendencia de Electricidad y Combustibles*(Superintendent of Electricity and Fuel) (SEC) is the agency responsible foroversight.

·       TheCDECs, industry groups which represent generation and transmission companies,are responsible for coordinating the operation of the interconnected systems inorder to guarantee the safety of service, minimize cost operations and granteasements to the lines of transportation. In addition, they are responsible forvaluing the transfers of energy and power between their member generation andtransmission companies. There are currently two CDECs: the CDEC for the CentralInterconnected System and the CDEC for the Great Northern InterconnectedSystem, CDEC-SIC and CDEC-SING, respectively.

·       *The Committee of Experts:*   Created by the Short Law I,its primary duty is to resolve disputes in the sector.

*Limits on Property.***  **In Chile, there are no maximum limits on vertical orhorizontal integration in the electricity industry.

*ColombianRegulatory Framework*

*Electricity Systems.  *Themain electricity system in Colombia is known as the *SistemaInterconectado Nacional* (National Interconnected System) (SIN). Otherisolated systems supply electricity to rural areas.

*Regulation.  *Law No. 142of 1994 provides the broad regulatory framework for the provision ofresidential public services, including electricity, and Law No. 143 of1994 (the Colombian Electricity Law) provides the regulatory framework for thegeneration, trading, transmission and distribution of energy. The detailedregulations of the electricity industry are promulgated by the *Comisión de Regulación de Energía y Gas*(Energy and GasRegulatory Commission) (CREG).

*Activities.  *Production,transmission, distribution and supply of electricity are legally separated inColombia. The sellers, which may be generators, distributors or independents,are permitted to sell electricity to eligible and ineligible customers. Eligiblecustomers are those with a maximum demand greater than 100 kW. Thetransmission, distribution and sale of electricity to ineligible customers areregulated activities. The purchasing mechanism of the buyers of energy involvesopen and public bidding, which is subsequently reflected in the purchase cost,taking the average for all purchases of the rest of the sellers to the segmentof ineligible customers. Sale to eligible customers is a liberalized activity.

*Distribution Tariffs.  *Thedistribution tariffs in Colombia are set for periods of five years, accordingto the average cost recognized for the distribution activity and depending onthe voltage levels. For the period 2003-2007, the methodology has defineda formula for repayment of a new replacement value plus operating andmaintenance costs, producing a certain mean-weighted cost of capital.

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*Regulatory Bodies.  *Thefollowing are the principal regulatory bodies in Colombia and their respectivefunctions:

·       *Ministerio de Minas y Energía*(Ministry of Mines and Energy)(MME) is primarily oriented to defining and maintaining the conditions foradequate functioning of the market, for which it has regulatory and basicplanning authority.

·       *Superintendencia de Servicios Públicos y Domiciliarios*,Superintendancy of Public and Residential Services (SSPD) is an oversightagency.

·       *Comisión de Regulación de Energía y Gas*, Energy and GasRegulatory Commission (CREG) is the regulatory arm of the MME. Its directorateis presided over by the Minister of Mines and Energy and is composed of eightmembers, of whom three are government representatives and five are independentexperts. The decisions by this entity are adopted by majority, although anaffirmative vote of at least one of the government’s representatives isrequired.

·       *Consejo Nacional de Operación*(National Operations Council)(CNO) is responsible for guaranteeing the secure, reliable and economicoperation of the national interconnected system. The CNO is comprised ofrepresentatives from the generation, distribution and transport sectors.

·       *Centro Nacional de Despacho* (National Dispatch Center)(CND), together with the *Centros Regionales deDespacho* (Regional Dispatch Centers) (CRD), is responsible for theplanning, oversight and control of the integrated operation of the resourcesfor generation, interconnection and transmission over the short term.

*Limitations on Ownership.  *InColombia, horizontal concentration is limited to the following percentages. Generation:25% of nominal capacity of the system (allowing for interconnection capacity)and commercialization: 25% of energy sales to end users in the SIN. Recentlythe limit of 25% for distribution was eliminated.

The percentage share of a company is calculated basedon the market share achieved from direct and indirect ownership of companiesactive in the market. In addition, the government establishes a power band thatdetermines the maximum capacity which any generating company is allowed tocontrol in Colombia. In the last calculation for 2003, the band was set at4,250 MW.

With regard to vertical integration, the *Empresas de Servicio Público*(Public Service Companies) (ESP)formed prior to Law No. 143 and already vertically integrated as of thedate of its promulgation can continue to be integrated, but with separateadministrations for each type of business.

ESPs formed after Law No. 143was issued can simultaneously carry on the activities of generation-supply ordistribution-supply, respectively. In addition, these companies may notintegrate (or must integrate subject to existing limits) the activities ofgeneration-transmission, generation-distribution, transmission-distribution,and transmission-supply. Integration between generators and distributors ispermitted provided the stake of either company in the capital stock of theother does not exceed 25%. The government is not restricted from participationin any of the activities of the sector.

*ArgentineRegulatory Framework*

*Electricity Systems.  *Argentina’selectricity industry is organized into two separate electricity systems, themost important of which is the *Sistema Argentino deInterconexión*(Argentine Interconnection System) (SADI), whichincludes approximately 96% of the country’s installed capacity. The secondsystem, the *Sistema Patagónico* (Patagonian System),is located in the southern region of the country. Connection of the two systemsthrough a 500 kV line is expected to be completed in 2006.

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*Regulation.  *The electricitysector in Argentina is regulated primarily pursuant to Law No. 24,065(Electrical Energy Code), in effect since 1992. The *CompañíaAdministradora del Mercado Eléctrico Mayorista*(AdministrativeCompany of the Wholesale Electricity Market) (CAMMESA) is responsible for theoperation of the wholesale electricity market in Argentina.

*Activities.  *Production,transmission, distribution and supply activities are legally separated inArgentina. There are three categories of eligible customers that may freelynegotiate contracts with electricity suppliers, depending on their peak demand:the *Grandes Usuarios Mayores* (Major LargeUsers) (GUMAs) (maximum demand equal to or greater than 1000 kW and minimumenergy consumption of 4.38 GWh), the *Grandes Usuarios Menores*(Minor Large Users) (GUMEs) (maximum demand equal to or greater than 30 kW andless than 2000 kW), and the *Grandes UsuariosParticulares* (Particular Large Users) (GUPAs) (maximum demand equalto or greater than 30 kW and less than 100 kW). GUMAs have the obligation tocontract at a minimum 50% of their demand, and may buy the remainder on the spotmarket. GUMEs and GUPAs must contract 100% of their demand with a generator ormerchant recognized by the *Mercado EléctricoMayorista* (Wholesale Electricity Market) (MEM).

*Distribution Tariffs.  *Thedistribution tariffs for regulated customers are set every five years as thesum of the costs of generation (wholesale market) and the costs ofdistribution, in an effort to reflect the marginal costs of the network. Forelectricity, a initial period of ten years was set. The first tariff revisionwas scheduled to occur in 2002, but due to the promulgation by the Argentinegovernment in January 2002 of Law No. 25,561, on public emergency andreform of the exchange rate system, which modified the dollar-peso parity, thetariff revision for public services has been suspended. To mitigate thisdisequilibrium, Law No. 25,561 also provided for a renegotiation of theconcession contracts for the public services, assigning this task to theMinistry of Economy and to the Ministry of Federal Planning, Public Investmentand Services, through the *Unidad de Renegociación yAnálisis de los Contratos de Servicios Públicos* (Unit forRenegotiation and Analysis of Public Services Contracts) (Uniren). An agreementwas reached with Uniren and was signed on August 29, 2005. This agreementestablishes a Transitional Tariff Regulation effective November 1, 2005,with an increase in the average distribution tariff of no more than 15%,submits for the approval of the authorities the payment of dividends during theperiod of Transitional Tariff Regulation and includes other provisions relatedto investments and quality of service. Additionally, the agreement establishesan Integral Tariff Review for the period between the signing date of the Letterof Understanding and June 30, 2006. This process will set the new tariffregulations that will come into force on August 1, 2006****for a period of five years, under the authority of theNational Electricity Regulatory Entity, in accordance with Law No. 24,065.

*Regulatory Bodies.  *Thefollowing are the principal regulatory bodies in Argentina and their respectivefunctions:

The *Secretaría de Energía*(Energy Secretary) (SE) promulgates regulations that establish the proceduresfor load dispatching and economic transactions of the Argentine wholesale electricitymarket.

The *Ministerio dePlanificación* and *Ministerio deEconomía*, throughthe *Unidad de Renegociación y Análisis de los Contratosde Servicios Públicos* (Unit for Renegotiation and Analysis of PublicServices Contracts), is in charge of the renegotiation of concession contracts.

The *Ente Nacional Regulador dela Electricidad* (National Electricity Regulating Agency) (ENRE) is adecentralized agency, responsible for ensuring the compliance of transmissionand distribution companies with the obligations set forth in the concessioncontracts granted by the Argentine national executive branch, and with thegeneral rules of the Argentine regulatory framework for the electricityindustry. In connection with these responsibilities, the ENRE promulgates regulationsnecessary to implement control mechanisms, imposes penalties and approvestariffs applicable to concessionaires.

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*CompañíaAdministradora del Mercado Eléctrico Mayorista (Administrative Company of theWholesale Electricity Market ) (CAMMESA) is responsible for the operation ofthe wholesale electricity market in accordance with the directives issued bythe Energy Secretariat. CAMMESA performs load dispatching and clears commercialtransactions for energy and power.*

*Limits on Property.  *InArgentina, transmission companies that hold concessions cannot buy or sellelectricity. Generation companies, distribution companies and large users ofelectricity cannot own or be majority shareholders of transmission companies. Inorder for two or more transmission or distribution companies to merge, theymust obtain authorization from ENRE. ENRE must also authorize purchases ofshares of distribution and transmission companies by other distribution andtransmission companies, respectively. Suppliers may sell up to 5% of the annualenergy demand in the electricity market.

*Economic Emergency Measures.  *InJanuary 2002, the Argentine government adopted Law No. 25,561, onpublic emergency and reform of the exchange rates system. This law did notderogate the Electrical Energy Code, but it did introduce changes in theoverall functioning of the Argentine economy and, in particular, introducedsignificant financial and economic disequilibrium into public servicescompanies. Indeed, this law establishes that the rates for public services andlocal contracts shall be in Argentine pesos and authorizes the ArgentineNational Executive Branch to renegotiate concession contracts with privatizedcompanies. As of the date of this annual report, distribution companies havereached agreements with respect to their concession contracts with theArgentine government.

*Foninvemen.*   Inmid-2004, the Energy Secretary resolved to create a fund (Foninvemen)earmarked for financing the necessary investments to increase the supply ofelectrical capacity in the wholesale electricity market, inviting the privateelectricity generators to participate. The government is committed to graduallyrestore the prices and regulatory framework of the Argentine wholesaleelectricity market and to pay its debts to the generators as a consequence ofthe emergency economic measures adopted in January 2002. In turn, thegeneration companies are committed to participate in the fund, contributing theamounts set forth in Section 4(c) of Resolution 406/2003, with 65% ofthe debt between January 1, 2004 and December 31, 2006. With thisfund, two combined cycles of 800 MW each are expected to be built, enteringinto commercial operation by the end of 2007. Together with other generationcompanies, in October 2005 we accepted the terms and conditions and agreedto participate in Foninvemen.

*Brazilian RegulatoryFramework*

*Electricity Systems.  *Brazil’selectricity industry is organized into one large, interconnected electricitysystem, known as *Sistema Interconectado Nacional*(NationalInterconnected System) (the “Brazilian SIN”), which is comprised of thesouthern, southeastern, central-western, northeastern and part of the northernregions of Brazil. In addition, there are several other small, isolatedelectricity systems.

*Regulation.  *The regulatoryframework for the electricity sector in Brazil is comprised of several articlesfrom Brazil’s constitution, ancillary laws and rules and regulationspromulgated by the Ministry of Mines and Energy. Brazil’s regulatory frameworkfor the electricity sector has been modernized by Law Nos. 8,987 and 9,074 of1995 (each pertaining to the public services concession contracts), Law No. 9,427of 1996 (which created the *Agencia Nacional deEnergía Elétrica*, or ANEEL) and Law No. 10,433 of 2002 (whichrestructured the wholesale energy market).

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On March 16,2004, the Brazilian Senate approved two laws (Nos. 10,847 and 10,848)confirming provisional measures MP 155 and 154 of December 2003. In thesummer of 2004, the State introduced a new regulatory model for thecommercialization of the Brazilian electricity industry, involving sweepingchanges in each of its segments: generation, transmission and distribution. Thebasic features of the new regulatory model are:

·       Biddingon energy contracts in the short, medium, and long term (between 15 and 35years for new energy, and between 3 and 15 for existing energy) is encouraged,with differentiated treatment. Existing energy is that of power stations andpresent day merchants which will compete for present day energy that is beingdiscounted; the quantity of existing energy will be defined as a function ofthe assured energy which the Energy Research Corporation (EPE) determines to benot a new requirement. The new energy is that needed to supply the growth ofthe market, in which the agents will compete for the new generation projectsdetermined by the government. During 2005, four existing energy auctions andone new energy auction occurred.

·       Thereis no change in the marginal system of setting short-term prices on the spotmarket. The dispatch will continue to be done in order of merit, using declaredand audited variable costs.

·       Thedistributors are obligated to contract all their requirements through thebidding process. The rate transfer price for the distributors will bedetermined on the basis of the price of these bidding processes. The purchaseof energy directly from related companies (direct self-dealing) will beeliminated unless achieved through the bidding process.

·       Themethodology for setting distribution rates will remain unchanged, except forcorrecting the existing distortions in the pass-through of unmanageable costs,which is favorable to this business.

·       TheState will play a greater role in the agencies and the development ofregulations. As a result, the State will bear the responsibility for aguaranteed energy supply in the event of a shortage resulting from defectiveplanning.

This new regulatory model will be implemented over atransition period which will last until 2008.

In relation to the electricity interconnection betweenBrazil and Argentina, the governments of the two countries signed a FrameworkAgreement in December 2005 whereby they undertook to ease regulationsduring the period they have defined as transitional, which will last until theend of 2008. This transitional easing of regulations will permit thecontractual adjustments necessary for sector players to mitigate the impact ofthe emergency measures adopted in the past.

*Activities:*   Production,transmission, distribution, and commercialization activities (the latter ofwhich is minimally developed) are legally separated in Brazil. Eligiblecustomers in Brazil are currently those customers who demand 3,000 kW or moreannually. In accordance with the model for deregulation of the Brazilian energysector established in 1995, existing concession contracts held by distributionand generation companies were divided into three contracts: one for thepurchase and sale of energy, one for the use of the transmission system and onefor interconnection. According to this model, the defined contracted capacityof electricity companies is to decrease by 25% annually as of 2003. Thesebundles of energy are to be publicly auctioned.

*Distribution Tariffs.  *Distributiontariffs charged to regulated customers in Brazil are based on a system ofmaximum tariffs that a distribution company may charge and are established uponapproval of each distribution company’s respective concession contract. Thetariffs are subject to periodic review every four or five years based on amodel company and are updated annually subject to approval from ANEEL. Brazilianregulators carried out the most recent periodic tariff review in 2003.

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*Regulatory Bodies.  *Thefollowing are the present principal regulatory bodies in Brazil and theirrespective functions. These entities and their functions may change as the newmodel is implemented during the transition period:

·       The*Agencia Nacional de Energía Eléctrica*(National Agency for Electric Power) (ANEEL) is responsible for regulation andoversight of the energy sector and has the power to grant concessions. ANEEL isan arm of the *Ministerio de Minas y Energía*(Ministry of Mines and Energy) (MME) and has decentralized authority forpurposes of oversight and administrative management, with branch offices ineach Brazilian state.

·       The*Operador Nacional del Sistema* (NationalSystem Operator) (ONS) is a private, nonprofit corporation in which concessionholders and eligible customers participate as members with voting rights andconsumer representatives participate as members without voting rights. The ONSis responsible for the coordination and supervision of the generation andtransmission of energy in the Brazilian SIN.

The followingagencies will be created during implementation of the new regulatory model:

·       The *Empresa de PesquisaEnergética* (EPE) will be responsible for the planning anddevelopment of the growth of the Brazilian electricity sector.

·       The*Comité de Monitoramiento del Sector Eléctrico*(CMSE) will monitor the Brazilian electricity sector.

·       The*Cámara de Comercialización de Energía Eléctrica*(CCEE) will replace the *Mercado Atacadista deEnergía*, which processes all energy purchase and sale activities throughbilateral contracts and short-term transactions. The CCEE will be the solepurchaser of energy.

*Limitations on Property.*   Thevarious segments of the Brazilian electricity sector have been legallyseparated. As a result, electrical distribution companies are subject toownership limitations and are effectively vertically deintegrated. Distributioncompanies can not perform other electricity-related activities or have director indirect holdings in the capital stock of other distribution companies. Similarly,generation companies can not be affiliated with or controlled by distributioncompanies. Companies must deintegrate in compliance with the new legalrequirements before the end of September 2005, and in cases where this isnot possible, an extension may be requested. In the particular case of Ampla,which was sold by a small generation facility, the company missed the September deadlineby two months but was not required to request an extension because it dulynotified ANEEL.

*Peruvian RegulatoryFramework*

*Electricity System.*   ThePeruvian electricity industry is organized into a national interconnectedelectricity system known as *Sistema EléctricoInterconectado Nacional* (the “SEIN”) and other isolated systems thatprovide electricity to rural areas. Currently, SEIN is prepared to supplyenergy across a tie line to Ecuador, but the commercial and operativeagreements remain under negotiation.

*Regulation.  *The maincomponents of the Peruvian regulatory framework are Law No. 25,844 of 1992(Law on Electricity Concessions), its corresponding regulation (Supreme DecreeNo. 009-93 EM) and Law No. 26,876 of 1997 (Antimonopoly and Anti-Oligopolyon the Electricity Sector).

*Activities.  *Production,transmission and distribution activities are legally separated in Peru. Productionand distribution companies may supply electricity to eligible customers. Theeligibility threshold is 1,000 kW. The transmission, distribution and sale ofelectricity to eligible customers are regulated activities, while the supply toeligible customers is liberalized.

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*Distribution Tariffs.  *Distributiontariffs are set every four years based on a charge for value added fromdistribution (VAD) which takes into account certain distribution costs based ona distribution company with model efficiency. End customers are subject to thebar price plus the VAD. A review of the distribution tariffs began in July 2004and took effect in November 2005.

*Regulatory Bodies.*   Thefollowing are the principal regulatory bodies in Peru and their respectivefunctions:

·       The*Ministerio de Energía y Minas* (Ministry of Energy andMines) defines Peru’s energy policies, regulates matters pertaining to theenvironment and grants, monitors and terminates licenses, authorizations andconcessions for generation, transmission and distribution activities.

·       The*Organismo Supervisor de Inversión en Energía*(OSINERG)is the regulatory and oversight body and reports to the Presidency of theCouncil of Ministers. It oversees compliance with legal and technicalregulations related to electrical and hydrocarbon activities, as well asenvironmental conservation in connection with the development of theseactivities. OSINERG also publishes the regulated tariffs.

·       The*Comité de Operación Económica del Sistema*(COES) coordinates the centralized dispatch of electricity, operates the spotmarket and the power transfers market and prepares the studies which serve as abasis for the annual busbar (node) tariff calculations. The board is comprisedof eight representatives of generation companies with more than 1% of theinstalled capacity of the system and which supply more than 15% of the energyproduced. The board also includes one representative of the principaltransmission system. Participation on the board of the COES by any economicgroup is limited to two members.

·       TheAntimonopoly Commission is overseen by the *Instituto de Defensa alConsumidor y la Propiedad Intelectual* (Institute for Defense of theConsumer and Intellectual Property) (INDECOPI).

*Limits on Property.  *Authorizationis required for the horizontal integration of generation, transmission anddistribution activities which result in a market share equal to or greater than15%. Authorization is required for the vertical integration of generation,transmission and distribution activities which result in a market share greaterthan or equal to 5%, either before or after the integration.

*Reform of the Peruvian Electricity Sector.*   ThePeruvian electricity sector was reformed in 2005, culminating in a Project Lawentered in the Congress at the end of 2005. The Ministry of Energy and Mines,OSINERG and electricity agents are analyzing the main aspects of the reform,which include allowance of auctions in the long term, COES reform and transmissionremuneration.

**C.**               ORGANIZATIONALSTRUCTURE

We have organizedEndesa giving priority to our core business, consisting of the generation,transmission, distribution and retailing of electricity, gas and the provisionof related services. We have established three major lines of business, eachbased on a geographical area:

·       Spainand Portugal, which are managed as an integrated market;

·       Restof Europe; and

·       LatinAmerica.

Although we treat each geographical segment as asingle vertically integrated activity, for the purpose of greater transparencywithin our Spain and Portugal and Latin America segments, Generation andDistribution are treated as secondary segments. Each of Generation andDistribution includes related retailing activity. In the Rest of Europe, wehave a presence only in Generation.

We operate through thefollowing wholly-owned subsidiaries in our principal lines of business:

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*Spain and Portugal*

Endesa Generación, S.A. (“Endesa Generación”) operatesour generation and mining assets and conducts our renewable energies andcogeneration operations.

Endesa Red, S.A. (“Endesa Red”) conducts our regulatedelectricity transmission and distribution activities, as well as our supplyactivities under the tariff system, through Endesa Distribución Eléctrica,S.L., and provides commercial support to our energy companies through EndesaOperaciones y Servicios Comerciales, S.L. Our natural gas distribution isconducted through Endesa Gas S.A. (“Endesa Gas”) and other natural gasdistribution companies in which Endesa Gas holds stakes.

Endesa Energía, S.A.(“Endesa Energía”) conducts marketing activities in the deregulated market inSpain.

*Rest of Europe*

Endesa Europa, S.L.(“Endesa Europa”) was created to consolidate our presence in Europe and to takeadvantage of the organic growth of the markets in which we operate (other thanSpain and Portugal), centralizing the administration and management of ourinvestee companies in Europe. Our European investee companies are EndesaItalia, Snet and Soprolif (France).

Endesa Energía, S.A.(“Endesa Energía”) conducts marketing activities in the deregulated market in Europe.

*Latin America*

Endesa Internacional, S.A.(“Endesa Internacional”) concentrates our presence in the Latin America market.Endesa Internacional integrates our stakes in, among other investees, Enersis,S.A. (“Enersis”) and Endesa Chile, S.A. (“Endesa Chile”).

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Our consolidated financialstatements do not record any results from transactions between companies withinthe Endesa Group.

**D.**              PROPERTY,PLANTS AND EQUIPMENT

See “—Business Overview”.

**ITEM 4A.       UNRESOLVED STAFF COMMENTS**

None.

**ITEM 5.          OPERATING AND FINANCIAL REVIEW ANDPROSPECTS**

**A.**                OPERATINGRESULTS

The following discussionof our operating results, financial condition and prospects is based on ouraudited consolidated financial statements included in this annual report. Suchaudited consolidated financial statements have been prepared in accordance withIFRS. For a reconciliation of net income (loss) and stockholders’ equity toU.S. GAAP and a discussion of the significant differences between U.S. GAAP andIFRS, see Note 29 to our consolidated financial statements.

**Overview**

We are the largestelectricity company in Spain in terms of installed capacity and market share ingeneration and distribution, with a presence in Italy, France, Portugal andNorth Africa, and one of the largest private electricity companies in LatinAmerica. Our core business is energy. We are also involved in activitiesrelated to our core energy business such as renewable energies and cogenerationand the distribution and supply of natural gas.

***Spain and Portugal***

Full deregulation of the Spanish electricity marketfrom January 1, 2003, and decisions by the Spanish government concerning,among others, ratemaking methodology, the treatment of nonmainland systems andthe assignment of rate shortfall collection rights, has increased regulatorycertainty in recent years.

In 2005 we invested a total of €799million in the generation business under the ordinary regime, of which €375million was earmarked for the construction of new generating facilities incombined cycle plants. We continue to have a generating capacity that iscapable of producing all the power required by our own markets through thebalanced use of the various technologies available, which we believe providesus with a competitive advantage over other operators.

We invested an aggregate of €1,389million in our domestic distribution business in 2005, which represents a 28.9%increase compared to 2004. 89.6%, or €2,382 million, of ourtotal investment in Spain and Portugal represents investment in tangible assetsto develop or enhance electricity generation and distribution facilities tomaintain our leadership position in the Spanish market, meeting increasingdemand while simultaneously enhancing service quality. The breakdown of thisinvestment reflects the considerable effort made by us to improve our supplyquality, with investment in distribution facilities accounting for 58.3% of thetotal investment in tangible assets in 2005. We also increased capitalexpenditure significantly to expand our generation capacity. In particular, theconversion of group 4 at the As Pontes plant, the construction of the Colón(400 MW) and As Pontes (800 MW) combined cycle facilities and capacityincreases in renewables activity were significant steps taken in 2005.

We had a market share in 2005 of 38.1% in generationin ordinary regime and 43.1% in terms of power sold to end customers in Spain.

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In 2005, we continued togrow in the natural gas market in Spain and Portugal, in which we had 580,625end users at December 31, 2005.

***Europe***

We believe that we now have a presence in thosecountries in the Southern European region, namely Italy and France, which weconsider to be of strategic value.

Endesa continues toimplement, with positive economic results, its business plan according to schedule,especially in relation to the generating facility repowering program, which weexpect will lead to a substantial increase in the volume of production throughthe use of more efficient technologies.

***Latin America***

In Latin America, although market conditions remainchallenging, we have begun to see signs of an improving economic cycle, withhigher GDP growth, notable increases in electricity demand and greater monetarystability. We believe our operating results reflect these improving conditionsand lead us to view the short term future of our operations in Latin Americaoptimistically.

We had 14,095 MW of installed capacity and more than11.2 million customers in Latin America at December 31, 2005.

In short, in 2005, ourLatin American business benefited from the improvement of the economy in theregion and the increase in demand for electricity in the countries in which wehave a presence, making a positive contribution to our results, with a soundoperating performance and a much stronger financial position.

**Factors ImpactingOur Business**

Our results of operations, financial condition andbusinesses have been and will continue to be affected by certain factors thatare beyond our control.

Our electricity business, which constitutes our corebusiness, is carried out through various business lines: generation,distribution, transmission and supply. Our strategy is to remain in all ofthese businesses.

Of these businesses, distribution and transmission areregulated activities in all of the countries in which we carry out distributionand transmission activities, while generation and supply are regulated incertain countries and liberalized in others. However, even in those countriesin which generation and supply activities are liberalized, electricity sectorregulation influences such activities.

Therefore, regulations and regulatory decisionssignificantly impact our businesses.

In the case of Spain, the principal regulatory impactarises out of the fixing of the electricity tariff for regulated customers.These tariffs apply to a significant part of the revenues generated in thissector and therefore affect the profitability of the companies operating insuch sector.

Royal Decree 1432/2002, which develops Article 94of Law 53/2002, has established a methodology for calculating tariffs for theperiod from January 1, 2003 until December 31, 2010, which hassignificantly increased regulatory certainty for operators in the Spanishelectricity system.

Macroeconomic conditions in the countries in which weoperate have a significant effect on our results of operations. For example,when a country experiences sustained economic growth, consumption ofelectricity by industrial and individual consumers increases. In addition,international prices for fuels significantly affects our cost base andtherefore, our profitability, although in certain cases regulators permit us topass on in whole or in part higher costs to end users through higher salesprices. Likewise, hydrological conditions affect our operations because asignificant part of our installed capacity 

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corresponds tohydroelectric plants, the utilization of which depends on the prevailing hydrologicalconditions.

Other factors such asvariations of the local currency of the countries in which we operate againstthe euro, in particular in Latin America, may have an impact on our results ofoperations in euro because a portion of our revenues and operating income insuch countries is denominated in the local currency.

**Factors Affectingthe Comparability of Our Results of Operations**

***Changes in the Composition of the Group***

*Year Ended December 31, 2005*

In May 2005, EndesaParticipadas, S.A. sold all the shares of Nueva Nuinsa, S.L., as a result ofwhich this company ceased to be fully consolidated.

In August 2005,Endesa Cogeneración y Renovables, S.A. (“ECyR”) acquired all the shares of thePortuguese renewable energy company Finerge-Gestao de Projectos Energéticos,S.A. (“Finerge”), as a result of which this company was fully consolidated fromSeptember 1, 2005.

*Year Ended December 31, 2004*

Since January 2004,ECyR, which includes cogeneration and renewable energies businesses, and thePortuguese investments accounted under the equity method, have beenorganizationally integrated within theSpanish electricity business. The sizes of these businesses, for purposes ofcomparison, are immaterial relative to our domestic electricity business.

In June 2004, EndesaParticipadas, S.A. sold its 50.55% investment in Netco Redes, as a result of whichthis company ceased to be fully consolidated.

In September 2004, wecompleted our acquisition of a 65% controlling interest in the French producerSnet when Endesa Europa acquired, in addition to its existing 30% stake, anadditional 35% interest in Snet. As a result of the acquisition of theadditional 35% interest, Snet, which had been accounted for previously by theequity method, was fully consolidated from September 2004 onwards.

**Transition to IFRS**

See note 28 to ourconsolidated financial statements for a reconciliation of our 2004 openingbalance sheet and our 2004 income statement from Spanish GAAP to IFRS, as wellas other information relating to our transition to IFRS from Spanish GAAP.

**Critical Accounting Policies**

The preparation of ourconsolidated financial statements requires us to make certain estimates,judgments and assumptions that we believe are reasonable based upon theinformation available under IFRS and U.S. GAAP. These estimates, judgments and assumptions affect the reported amountsof assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the periods presented.  We believe that of our significant accountingpolicies the following may involve a high degree of judgment: property, plantand equipment and other long-lived assets; goodwill; hedges of revenues inforeign currency; revenue recognition; provisions for contingencies; provisionsfor CO2 emission allowance costs; derivatives; anddefined benefit pension plans and other postretirement benefit plans.

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***Property, Plant andEquipment and Other Long-Lived Assets***

Under both IFRS and U.S.GAAP, property, plant and equipment and other long-lived assets are recorded atcost and are depreciated over their estimated useful lives. The estimateduseful lives of our generation and distribution facilities range from 25 to 65years. A significant variation in the estimated useful life of a materialamount of property, plant or equipment or other long-lived assets could have amaterial impact on our operating results in the period in which the estimate isrevised and subsequent periods.

At the time of theconversion of the Spanish GAAP financial statements to IFRS, we decided to applyan exception provided for in the IFRSs, such that the depreciated cost of theproperty, plant and equipment at January 1, 2004 was taken to be thedepreciated cost of the assets including the asset revaluations made inaccordance with the applicable legislation in the countries in which we operatethat had been accepted in the Spanish GAAP financial statements.

Additionally, under IFRS,property, plant and equipment and other long-lived assets are impaired when thecarrying amount of an asset exceeds the higher of the asset’s value-in-use(discounted present value of the asset’s expected future cash flows) and fairvalue less costs to sell. The impairment loss is based on the recoverableamount (the higher of the asset’s value-in-use and fair value less costs tosell). Under U.S. GAAP an impairment loss should be recognized when animpairment review indicates that the sum of future cash flows (undiscounted andwithout interest charges) expected to result from the use of the asset and itseventual disposition is less than the carrying amount of the asset. Animpairment loss is measured as the amount by which the carrying value of theasset exceeds its fair value. The determination of property, plant andequipment and other long-lived assets fair value is calculated on the basis ofthe future discounted cash flows to be generated by the assets, including theremuneration for the transition to competition. The factors considered in thedetermination of the fair value depend upon the company’s expected sale prices,demand in the electricity market, interest rates, exchange rates and otherfactors, all of which have a significant effect on the calculation.

The amount of property,plant or equipment or other long-lived asset impairment could have a materialadverse impact on our operating results in the period depending on theestimations made. At December 31, 2005 and December 31, 2004, ourdirectors considered that the book value of our revalued assets did not exceedtheir market value.

During 2004 we modifiedthe estimated useful life of our nuclear power stations from 30 to 40 years,effective January 1, 2004, which resulted in a €98million decrease in depreciation charges in 2004 from what would have been thecase absent such modification. We do not expect any further future materialchanges in the determination of the useful life of our property, plant andequipment, except for changes due to any unpredictable future technologydevelopment.

In light of the fact thatestimating the fair value of our property, plant and equipment takes intoconsideration various variables that are interconnected, it is not feasible topredict the likelihood of changes in such variables.

***Goodwill***

Goodwill arising onconsolidation represents the excess of the cost of acquisition over ourinterest in the fair value of the identifiable assets and liabilities of asubsidiary at the date of acquisition. The assets and liabilities acquired aremeasured provisionally at the date on which control is acquired, and the resultingvalue is reviewed in a maximum period of one year from the date of acquisition.Until the fair value of the assets and liabilities has been definitivelydetermined, the difference between the cost of acquisition and the carryingamount of the company acquired is recognized provisionally as goodwill.

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Goodwill acquired on orafter January 1, 2004 is measured at acquisition cost. Goodwill acquiredbefore January 1, 2004 is recognized at the carrying amount at December 31,2003, in accordance with our prior GAAP, Spanish GAAP. In both cases, since January 1,2004, goodwill has not been amortized, and at the end of each reporting periodgoodwill is reviewed for impairment (i.e., a reduction in its recoverableamount to below its carrying amount) and any impairment is written down. Therecoverability analysis of goodwill is performed systematically at the end ofeach year or whenever it is considered necessary to perform such an analysis.The recoverable amount is the higher of fair value less costs to sell andvalue-in-use. Value-in-use is taken to be the present value of the estimatedfuture cash flows. In calculating the recoverable amount of goodwill, we usedthe value-in-use approach in practically all cases, preparing the projectionsof future pre-tax cash flows on the basis of the budgets most recently approvedby our directors. These budgets include the best available estimates of theincome and costs of the cash-generating units using industry projections, pastexperience and future expectations. These projections cover the coming fiveyears and the flows for future years are estimated by applying reasonablegrowth rates that are consistent with growth rates of prior years.

Based on estimates of therevenues expected to be generated by the various investments made, as of December 31,2005, our directors considered that the goodwill recorded will be able to berecovered in full and no impairment is likely in a future period.

Effective January 1,2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142).The goodwill impairment test, which is based on fair value, is performed on areporting unit level. Goodwill on equity method investments continues to betested for impairment in accordance with Accounting Principles Board (“APB”)Opinion No. 18, The Equity Method of Accounting for Investments in CommonStock. The fair value of the reporting units for which goodwill has beenassigned was considered to be the best reasonably consistent measurement offair value measurements that included both income and market approaches, asexplained above. Goodwill in each operating segment will be tested forimpairment as of December 31 of every year.

In light of the fact thatanalyzing the impairment of our recorded goodwill requires a combination ofvarious assumptions and variables, it is very difficult to analyze thesensitivity of the projections to changes in any isolated variable on its own,since a change in one variable may have an effect on one or more of the othervariables used.

***Hedges of revenues in foreign currency***

In 2004 we established anew foreign currency cash flow hedge strategy in respect of our Latin Americarevenues that bear U.S. dollar currency risk because the electricity tariff isindexed to movements between the local currency and the U.S. dollar. This newstrategy reflects a detailed analysis of our future U.S. dollar revenue streamsin Latin America. Such analysis may change in the future due to new regulationslimiting the amounts of revenues tied to the U.S. dollar and future LatinAmerican electricity supply and demand conditions, both of which are risksinherent in our estimated revenue streams variables, and may change.

Under this new hedgestrategy, exchange gains or losses of the hedged item are recorded ascumulative translation adjustments and are reclassified into earnings in thesame period during which the hedged forecasted transaction affects earnings. UnderU.S. GAAP such foreign currency cash flow hedge strategy was not a permittedhedging strategy since the hedging instrument was a nonderivative financialinstrument.

We update our analysis ineach quarter considering all available relevant facts and circumstances inorder to evaluate any change in expected conditions.

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***Revenue recognition***

We generally recordrevenue for retail and wholesale energy sales under the accrual method.

Under both IFRS and U.S.GAAP, retail electricity and gas revenues are recognized when the commodity isprovided to customers on the basis of periodic cycle meter readings and includean estimated accrual for the value of the commodity consumed from the meterreading date to the end of the period. The unbilled revenue is estimated at theend of the period based on estimated daily consumption after the meter readdate to the end of the period. Estimated daily consumption is derived usinghistorical customer profiles adjusted for weather and other measurable factorsaffecting consumption.

We have not had anymaterial change, nor do we expect any future material changes, in ourestimation of unbilled revenues, except for any unpredictable futuresignificant change in supply and demand conditions.

***Provisions for contingences***

The current obligations atthe balance sheet date arising from past events which could give rise to a lossfor the Group, but for which we are unable to determine an amount or specifictiming, are recognized as provisions in the consolidated balance sheet at thepresent value of the most probable amount that we have determined we may haveto disburse to settle the obligation. In order to calculate the amounts werecord under “Provisions for Contingencies and Expenses”, it is necessary toevaluate and estimate the amounts that we may be required to pay in the future,including additional amounts in the form of taxes or pursuant to contractualobligations, or amounts owed in respect of the settlement of pending litigationor other contingent liabilities.

Our financial results maybe affected by judgments and estimates related to loss contingencies.Provisions are quantified on the basis of the best information available at thedate of preparation of the consolidated financial statements and on theconsequences of the event giving rise to the contingencies, and are reviewedand adjusted at the end of each year. Accruals for loss contingencies arerecorded when management determines that it is probable that an asset has beenimpaired or a liability has been incurred and that such economic loss can bereasonably estimated. Such determinations are subject to interpretations ofcurrent facts and circumstances, forecasts of future events and estimates ofthe financial impacts of such events.

We have not had any othermaterial change, nor do we expect any other future material changes, in ourestimation of recorded provisions for contingencies.

***Provision for CO***2 emission allowance costs

From 2005 onwards allEuropean Group companies that make CO2 emissions in their electricity generationactivity must deliver in the first few months of the subsequent year CO2 emission allowances equal to the volume ofemissions made during the year.

The obligation to deliveremission allowances for the CO2 emissions made during the year is recognizedas a short-term provision under the heading “Current Trade and Other Payables”in the consolidated balance sheet, and the related cost was recorded as OtherVariable Procurements and Services in the consolidated income statement. Thisobligation is measured at the same amount as that at which the CO2 emission allowances to be delivered to coverthis obligation are recognized under Intangible Assets in the consolidatedbalance sheet. If at the consolidated balance sheet date we do not hold all theCO2 emission allowances required to cover theemissions made, the cost and the provision for this portion is recognized onthe basis of the best estimate of the price that we will have to pay to acquirethem. When a more accurate estimate does not exist, the estimated acquisitionprice for the allowances not held by us is the market price at the date of theconsolidated balance sheet.

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***Derivatives***

We enter into financialinstruments, including options, swaps, futures, forwards and other contractualcommitments, primarily to manage market risks related to changes in interestrates and foreign currency exchange rates, as well as changes in commodityprices, including costs of fuel for generation of power.

Under IFRS, derivativesare initially recognized at acquisition cost in the consolidated balance sheetand the required value adjustments are subsequently made to reflect their fairvalue at all times. Gains and losses from these changes are recognized in theconsolidated income statement, unless the derivative has been designated as ahedge which is highly effective, in which case it is recognized in theconsolidated income statement, netting off the effects under the same headingin the consolidated income statement, in the case of Fair Value Hedges. Changesin the fair value of the Cash Flow Hedges, in respect of the effective portionof the hedges, are recognized under Equity—Unrealized Asset and LiabilityRevaluation Reserve, transferring this accumulated amount to the consolidatedincome statement to the extent that the underlying has an impact on theconsolidated income statement in relation to the hedged risk, netting off theeffects under the same heading in the consolidated income statement. Finally,changes in fair value of Hedges of a net investment in a foreign operation arerecognized, in respect of the effective portion of these hedges, net of therelated tax effect, as Translation Differences in equity, and are transferredto the consolidated income statement when the hedged investment is disposed of.Derivatives embedded in other financial instruments are treated as separatederivatives when their risks and characteristics are not closely related tothose of the host contracts and the host contracts are not carried at fairvalue with unrealized gains or losses reported in the consolidated incomestatement.

Under U.S. GAAP, theaccounting for these financial instruments is similar to IFRS, and they areaccounted for in accordance with Statement of Financial Accounting Standards(SFAS) No. 133, “Accounting for Derivative Instruments and HedgingActivities” and, prior to October 26, 2002, Emerging Issues Task Force(EITF) Issue No. 98-10, “Accounting for Contracts Involved in EnergyTrading and Risk Management Activities.” The majority of financial instrumentsentered into by us are derivatives as defined in SFAS No. 133. SFAS No. 133requires the recognition of derivatives in the balance sheet, the measurementof those instruments at fair value and the recognition in earnings of changesin the fair value of derivatives.

We document designatedcommodity, debt-related and other hedging relationships, including the strategyand objectives for entering into such hedge transactions and the relatedspecific firm commitments or forecasted transactions. We apply hedge accountingin accordance with SFAS No. 133 for these non-trading transactions, providedthat the occurrence of the underlying transactions remains probable.Effectiveness is assessed based on changes in cash flows of the hedges ascompared to changes in cash flows of the hedged items.

Pursuant to SFAS No. 133,the normal purchase or sale exception and the cash flow hedge designation areelections that can be made by management if certain strict criteria are met anddocumented. As these elections can reduce the volatility in earnings resultingfrom fluctuations in fair value, results of operations could be materiallyaffected by such elections. Financial instruments entered into in connectionwith indebtedness to manage interest rate and foreign currency exchange raterisks are generally accounted for as cash flow hedges in accordance with SFAS No. 133.

The majority of financialinstruments entered into by us are for the purpose of managing interest rateand foreign currency risk or optimizing margins in meeting the energy demandsof customers are derivatives and will continue to be subject to SFAS No. 133.

Generally, liquidfinancial instruments are supported by broker quotes and frequent tradingactivity. Illiquid financial instruments have little or no market information,and their fair value is estimated through market modeling techniques.

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The fair values ofderivatives are calculated on the basis of current interest rates and forwardexchange rates, and on the fuel or electricity prices currently prevailing inthe forward markets. These variables present an inherent risk of change overtime due to future market conditions, but can be easily obtained. At eachreporting period we evaluate these derivatives based upon present marketconditions and adjust their respective amounts accordingly.

In addition, thosederivatives assigned in an economic hedge strategy may have their assignationdiscontinued, which could impact the accounting treatment of such derivatives. Hedgeassignation may change if the underlying hedge item ceases to exist or wedecide to discontinue such hedge strategy based on present market conditions.In each reporting period we evaluate all hedges relationships of all thosederivatives that were assigned into an economic hedge relationship in order toproceed with any necessary adjustment.

***Defined benefit pension plans and other postretirementbenefit plans***

Under both IFRS and U.S.GAAP, reported costs of providing defined pension benefits and otherpostretirement benefits are dependent upon numerous factors, assumptions andestimates. For example, these costs are impacted by actual employeedemographics (including age, compensation levels and employment periods), thelevel of contributions made to the plan and earnings on plan assets. The assetsof the externalized pension plans are primarily made up of equity and fixedincome investments. Changes made to the provisions of the plan may also impactcurrent and future pension costs. Fluctuations in actual equity market returnsas well as changes in general interest rates may result in increased ordecreased pension costs in future periods. Pension costs may also besignificantly affected by changes in key actuarial assumptions, includinganticipated rates of return on plan assets and the discount rates used indetermining the projected benefit obligation and pension costs. Under IFRS, theactuarial losses and gains arising in the measurement of these liabilities andthose arising from changes in the fair value of the plan assets are recognizeddirectly under the heading “Equity—Retained Earnings” and are recognized underincome under U.S. GAAP.

Our liabilities forpensions and early retirements are recorded considering mathematical/actuarialmodels that consider many variables unrelated to each other.

Recorded pensions andother post-retirement benefit liabilities reflect our best estimate of thefuture cost of honoring our obligations under these benefit plans. Inaccounting for defined benefit plans, actuarial calculations are made. Thesecalculations contain key assumptions, which include: employee turnover,mortality and retirement ages, discount rates, expected returns on assets,future salary and benefit level. These assumptions change as market andeconomic conditions change and any change in any of these assumptions couldhave a material adverse effect on our reported results from operations.

In light of the fact thatthe interest rate variable is the one variable that has the greatest impact onour calculation and is the variable most susceptible to future changes, setforth below we have disclosed the impact of a 100 basis point change in theestimated interest rate used in the calculation of our liabilities for pensionsand early retirements:

Assuming a 1% decrease indiscount rate, our projected benefit obligation and projected accumulatedpost-retirement benefit obligation would increase by €334 millionto €4,008 millionfor the year ended December 31, 2005.

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**Results of Operations for the Year Ended December 31,2005 Compared with the Year Ended December 31, 2004**

Thetable below presents, for the periods indicated, the breakdown of our resultsof operations and the percentage variation from period to period. 

| ** **                                        | ** ** | ** **                                                     | ** ** | **2005**        | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------------|------------|-----------------|------------|
| ** **                                        | ** ** | ** **                                                     | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Latin** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | ** **                                                     | ** ** | **Domestic**    | ** ** | **Percentage** | ** ** | **European** | ** ** | **Percentage** | ** ** | **American** | ** ** | **Percentage** | ** ** | ** ** | ** ** | **Percentage** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **2004**                                                       | ** ** | **Electricity** | ** ** | **Change** | ** ** | **Electricity** | ** ** | **Change** | ** ** | **Electricity** | ** ** | **Change** | ** ** | **Other** | ** ** | **Change** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Total**                                                      | ** ** | **Business(1)** | ** ** | **from 2004** | ** ** | **Business** | ** ** | **from 2004** | ** ** | **Business** | ** ** | **from 2004** | ** ** | **Businesses** | ** ** | **from 2004** | ** ** | **Total** | ** ** |
| ** **                                        | ** ** | **(millions of euro, except percentages)** | ** ** |
| Operating  revenues                               |       | 13,665                                                         |       |            | 9,274      |   |   |   | 38.0 | % |   |   | 3,720 |   |   |   | 44.4 | % |   |   | 5,232 |   |   |   | 20.1 | % |   |   | 3 |   |   |   | (76.9 | )% |   | 18,229 |   |
| Sales                                             |       | 13,509                                                         |       |            | 8,761      |   |   |   | 31.8 | % |   |   | 3,598 |   |   |   | 40.7 | % |   |   | 5,149 |   |   |   | 19.8 | % |   |   | — |   |   |   | n.a |   |   | 17,508 |   |
| Other operating  income                           |       | 156                                                            |       |            | 513        |   |   |   | 622.5 | % |   |   | 122 |   |   |   | 542.1 | % |   |   | 83 |   |   |   | 38.3 | % |   |   | 3 |   |   |   | (50.0 | )% |   | 721 |   |
| Purchases and  Services                           |       | 6,292                                                          |       |            | 4,072      |   |   |   | 72.0 | % |   |   | 2,497 |   |   |   | 43.0 | % |   |   | 2,534 |   |   |   | 16.4 | % |   |   | — |   |   |   | (100.0 | )% |   | 9,103 |   |
| Energy Purchases  and Fuel consumption       |       | 5,080                                                          |       |            | 2,932      |   |   |   | 48.1 | % |   |   | 2,276 |   |   |   | 35.6 | % |   |   | 1,737 |   |   |   | 22.3 | % |   |   | — |   |   |   | n.a |   |   | 6,945 |   |
| Power transmission  Expenses                      |       | 520                                                            |       |            | 273        |   |   |   | 44.4 | % |   |   | 10 |   |   |   | (67.7 | )% |   |   | 368 |   |   |   | 22.7 | % |   |   | — |   |   |   | n.a |   |   | 651 |   |
| Other supplies and  service                       |       | 692                                                            |       |            | 867        |   |   |   | 337.9 | % |   |   | 211 |   |   |   | 486.1 | % |   |   | 429 |   |   |   | (6.1 | )% |   |   | — |   |   |   | (100.0 | )% |   | 1,507 |   |
| Gross margin                                      |       | 7,373                                                          |       |            | 5,202      |   |   |   | 19.5 | % |   |   | 1,223 |   |   |   | 47.4 | % |   |   | 2,698 |   |   |   | 23.8 | % |   |   | 3 |   |   |   | (72.7 | )% |   | 9,126 |   |
| Expenses  capitalized                             |       | (161                                                           | )          |            | (139       | ) |   |   | 4.5 | % |   |   | (9 | ) |   |   | (10.0 | )% |   |   | (22 | ) |   |   | 22.2 | % |   |   | — |   |   |   | — |   |   | (170 | ) |
| Personnel expenses                                |       | 1,393                                                          |       |            | 1,041      |   |   |   | 5.7 | % |   |   | 161 |   |   |   | 40.0 | % |   |   | 337 |   |   |   | 18.3 | % |   |   | 8 |   |   |   | 0.0 | % |   | 1,547 |   |
| Other operating  expenses                         |       | 1,620                                                          |       |            | 1,034      |   |   |   | 0.6 | % |   |   | 184 |   |   |   | (3.2 | )% |   |   | 505 |   |   |   | 29.2 | % |   |   | 6 |   |   |   | (45.5 | )% |   | 1,729 |   |
| Gross operating  income/(loss)                    |       | 4,521                                                          |       |            | 3,266      |   |   |   | 32.1 | % |   |   | 887 |   |   |   | 65.8 | % |   |   | 1,878 |   |   |   | 23.4 | % |   |   | (11 | ) |   |   | (37.5 | )% |   | 6,020 |   |
| Depreciation and  amortization                    |       | 1,675                                                          |       |            | 1,002      |   |   |   | (3.7 | )% |   |   | 269 |   |   |   | 63.0 | % |   |   | 502 |   |   |   | 7.3 | % |   |   | 3 |   |   |   | 50.0 | % |   | 1,776 |   |
| Operating  income/(loss)                          |       | 2,846                                                          |       |            | 2,264      |   |   |   | 58.1 | % |   |   | 618 |   |   |   | 67.0 | % |   |   | 1,376 |   |   |   | 30.6 | % |   |   | (14 | ) |   |   | (40.0 | )% |   | 4,244 |   |
| Financial  income/(loss)                          |       | (1,147                                                         | )          |            | (609       | ) |   |   | 24.0 | % |   |   | (64 | ) |   |   | 3.2 | % |   |   | (524 | ) |   |   | (3.0 | )% |   |   | (55 | ) |   |   | 1.9 | % |   | (1,252 | ) |
| Net financial  income/(loss)                      |       | (1,087                                                         | )          |            | (602       | ) |   |   | 20.2 | % |   |   | (63 | ) |   |   | 0.0 | % |   |   | (540 | ) |   |   | 19.2 | % |   |   | (52 | ) |   |   | (25.7 | )% |   | (1,257 | ) |
| Currency  translation  adjustment                 |       | (60                                                            | )          |            | (7         | ) |   |   | (170.0 | )% |   |   | (1 | ) |   |   | (200.0 | )% |   |   | 16 |   |   |   | 118.4 | % |   |   | (3 | ) |   |   | (118.8 | )% |   | 5 |   |
| Income (loss) from  associated companies          |       | 79                                                             |       |            | 44         |   |   |   | (4.4 | )% |   |   | 9 |   |   |   | (10.0 | )% |   |   | 6 |   |   |   | (62.5 | )% |   |   | 8 |   |   |   | 14,3 | % |   | 67 |   |
| Income/(loss) from  other investment              |       | 40                                                             |       |            | 6          |   |   |   | (73.9 | )% |   |   | — |   |   |   | — |   |   |   | 6 |   |   |   | n.a. |   |   |   | (10 | ) |   |   | (158.8 | )% |   | 2 |   |
| Income/(loss) from  disinvestment                 |       | 195                                                            |       |            | 96         |   |   |   | 35.2 | % |   |   | 84 |   |   |   | n.a. |   |   |   | 14 |   |   |   | 600.0 | % |   |   | 1,292 |   |   |   | 959.0 | % |   | 1,486 |   |
| Consolidated  income  (loss) before taxes         |       | 2,013                                                          |       |            | 1,801      |   |   |   | 66.6 | % |   |   | 647 |   |   |   | 103.5 | % |   |   | 878 |   |   |   | 65.0 | % |   |   | 1,221 |   |   |   | n.a. |   |   | 4,547 |   |
| Corporate income  tax                             |       | 352                                                            |       |            | 434        |   |   |   | 250.0 | % |   |   | 104 |   |   |   | (8.8 | )% |   |   | 168 |   |   |   | 66.3 | % |   |   | 84 |   |   |   | n.a. |   |   | 790 |   |
| Net income/(loss)                                 |       | 1,661                                                          |       |            | 1,367      |   |   |   | 42.8 | % |   |   | 543 |   |   |   | 166.2 | % |   |   | 710 |   |   |   | 64.7 | % |   |   | 1,137 |   |   |   | n.a. |   |   | 3,757 |   |
| Minority interests                                |       | 408                                                            |       |            | 9          |   |   |   | (87.0 | )% |   |   | 118 |   |   |   | 237.1 | % |   |   | 448 |   |   |   | 47.4 | % |   |   | — |   |   |   | n.a. |   |   | 575 |   |
| Income/(loss)  attributable to the parent company |       | 1,253                                                          |       |            | 1,358      |   |   |   | 52.9 | % |   |   | 425 |   |   |   | 151.5 | % |   |   | 262 |   |   |   | 106.3 | % |   |   | 1,137 |   |   |   | n.a. |   |   | 3,182 |   |

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(1)                Includes generation, distribution, supply, services,corporate structure and intercompany adjustments.

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Thefollowing table shows net sales, operating income/(loss) and net income/(loss)for 2005 by principal lines of business.

| ** **                           | ** ** | **Net Sales**               | ** ** | **Operating  Income/  (Loss)** | ** ** | **Net  Income/  (Loss)** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|--------------------------|------------|
| ** **                           | ** ** | **(millions of euro)** | ** ** |
| Domestic  electricity business       |       |                             | 8,761      |                           |       |                     | 2,264      |   |   |   | 1,358 |   |   |
| Generation                           |       |                             | 6,658      |                           |       |                     | 1,802      |   |   |   | 1,198 |   |   |
| Distribution                         |       |                             | 1,824      |                           |       |                     | 479        |   |   |   | 199 |   |   |
| Supply                               |       |                             | 3,818      |                           |       |                     | (56        | ) |   |   | (54 | ) |   |
| Corporate structure and Services     |       |                             | (3,539     | )                              |       |                     | 39         |   |   |   | 15 |   |   |
| European  electricity business       |       |                             | 3,598      |                           |       |                     | 618        |   |   |   | 425 |   |   |
| Latin American  electricity business |       |                             | 5,149      |                           |       |                     | 1,376      |   |   |   | 262 |   |   |
| Other businesses                     |       |                             | —     |                           |       |                     | (14        | ) |   |   | 1,137 |   |   |
| Total                                |       |                             | 17,508     |                           |       |                     | 4,244      |   |   |   | 3,182 |   |   |

 

***Operating Revenues***

Operating revenuesincreased 33.4% to €18,229 million in 2005from €13,665million in 2004 principally due to a 44.4% increase in operating revenues fromour European electricity business to €3,720 million in 2005 from€2,576million in 2004, a 38.0% increase in operating revenues from our domesticelectricity business to €9,274 million in 2005 from €6,719million in 2004 and a 20.1% increase in operating revenues from our LatinAmerican electricity business to €5,232 million in 2005 from€4,357million in 2004.

***Operating Expenses***

Operating expensesincreased 44.7% to €9,103 million in 2005 from€6,292million in 2004 principally due to a 72.0% increase in operating expenses ofour domestic electricity businesses to €4,072 million in 2005 from€2,367million in 2004, a 43.0% increase in operating expenses of our Europeanelectricity business to €2,497 million in 2005 from €1,746million in 2004 and a 16.4% increase in operating expenses of our LatinAmerican electricity business to €2,534 million in 2005 from€2,177million in 2004.

***Operating Income***

Operating income increased49.1% to €4,244 million in 2005 from €2,846million in 2004 principally due to a 67.0% increase in operating income of ourEuropean electricity business to €618 million in 2005 from €370million in 2004, a 58.1% increase in operating income of our domesticelectricity business to €2,264 million in 2005 from €1,432million in 2004 and a 30.6% increase in operating income of our Latin Americanelectricity business to €1,376 million in 2005 from €1,054million in 2004.

***Operating Resultsby Business***

*Domestic Electricity Business*

As a result of the following, operating income fromour domestic electricity business increased 58.1% to €2,264million in 2005 from €1,432 million in 2004.

*Net Sales of Energy.*   Netsales of energy from our domestic electricity business increased 31.8% to €8,761million in 2005 from €6,648 million in 2004.

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Thefollowing table shows a breakdown of sales of energy from our domesticelectricity business for 2004 and 2005.

| ** **                                    | ** ** | **2004**                         | ** ** | **2005** | ** ** | **Percentage   Change** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|----------|------------|------------------------------|------------|
| ** **                                    | ** ** | **(millions of euro)** | ** ** |
| Mainland generation under ordinary regime:    |       |                             |       |     |       |                         |       |   |   |
| Sales to deregulated  customers               |       | 1,247                            |       | 1,487    |       |                         | 19.2       | % |   |
| Supply to the Spanish  market operator (OMEL) |       | 1,891                            |       | 3,012    |       |                         | 59.3       | % |   |
| Generation from renewables/CHP                |       | 121                              |       | 240      |       |                         | 98.3       | % |   |
| Regulated revenues from distribution          |       | 1,564                            |       | 1,602    |       |                         | 2.4        | % |   |
| Non-mainland generation                       |       | 1,004                            |       | 1,548    |       |                         | 54.2       | % |   |
| Coal CTCs                                     |       | 75                               |       | 22       |       |                         | (70.7      | )% |   |
| Technology CTCs                               |       | 118                              |       | —   |       |                         | (100.0     | )% |   |
| Supply to deregulated customers outside Spain |       | 170                              |       | 220      |       |                         | 29.4       | % |   |
| Regulated revenues from gas distribution      |       | 36                               |       | 39       |       |                         | 8.3        | % |   |
| Gas supply                                    |       | 160                              |       | 326      |       |                         | 103.8      | % |   |
| Other                                         |       | 262                              |       | 265      |       |                         | 1.1        | % |   |
| Total                                         |       | 6,648                            |       | 8,761    |       |                         | 31.8       | % |   |

 

The increase in net sales of energy by our domesticelectricity business in 2005 was mainly due to a 19.2% increase in sales toderegulated customers to €1,487 million in 2005 from€1,247million in 2004; a 59.3% increase in supply to the Spanish market operator(OMEL) to €3,012million in 2005 from €1,891 million in 2004; a 98.3% increase ingeneration from renewables/CHP to €240 million in 2005 from €121million in 2004; a 54.2% increase in non-mainland generation to €1,548million in 2005 from €1,004 million in 2004 and a 103.8% increasein gas supply to €326million in 2005 from €160 million in 2004, offset in part by a70.7% decrease in coal CTCs to €22 million in 2005 from €75million in 2004; and the absence of technology CTCs in 2005 compared to €118million in 2004.

*MainlandGeneration under Ordinary Regime.*   Salesof energy generated by Endesa in the Spanish mainland under the ordinary regimeincreased 43.4% to €4,499million in 2005 from €3,138 million in 2004, principally as aresult of:

·       growthin our sales to the energy pool. Our sales to the pool totaled €4,940million in 2005, 67.1% higher than in 2004 due to a 79.6% rise in the averagepool price, including the capacity payment. The increase in fuel costs,expenses associated with the CO2 emission rights deficit and lower utilizationrates at hydroelectric plants caused by the Spanish drought in 2005 were themain factors driving this increase; and

·       theincrease in the average energy pool price in 2005, including capacity payments,to €60.6/MWh,compared to €33.8/MWhin 2004. Our supply and generation subsidiaries acquired energy from the poolfor a total of €1,928million. These purchases were offset by power sold by Endesa to the pool. Themarkets and time bands were the same in both cases so that the purchase pricematched the selling price. Sales to the pool were offset by purchases made byour supply and generation subsidiary. Therefore, sales to the pool recorded inthe consolidated income statement for 2005 totaled €3,012million.

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Thefollowing table shows the breakdown of energy produced by us and the Spanishelectricity sector on the Spanish mainland by type of generating facility for2004 and 2005.

| ** **                                     | ** ** | **Endesa** | ** ** | **Spanish  Electricity Sector** | ** ** |
|------------------------------------------------|------------|------------|------------|--------------------------------------|------------|
| **Type of Generating Facility** | ** ** | ** ** | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** |
| Nuclear                                        |       | 31.7       | %          | 29.6                                 | %          | 30.8 | % | 27.0 | % |
| Coal                                           |       | 46.1       | %          | 47.7                                 | %          | 37.3 | % | 36.3 | % |
| Hydroelectric                                  |       | 12.8       | %          | 9.6                                  | %          | 14.7 | % | 9.0 | % |
| Fuel Oil/Gas                                   |       | 2.0        | %          | 3.1                                  | %          | 2.8 | % | 4.2 | % |
| CCGT                                           |       | 7.5        | %          | 10.0                                 | %          | 14.4 | % | 23.6 | % |
| Total                                          |       | 100.0      | %          | 100.0                                | %          | 100.0 | % | 100.0 | % |
|                                                |            |            |            |                                      |            |  |  |  |  |  |  |

 

The preceding table reflects the mix of generatingcapacity we possess in the Spanish mainland, which we believe provides us withstable sources of energy. We believe that our mix of generating capacity in theSpanish mainland is not particularly susceptible to hydrological conditions andwill enable us to substitute energy generated at our coal-fired plants fordecreases in energy generated at our hydroelectric facilities instead ofresorting to our fuel oil and gas facilities, which are more costly than our coalfacilities when costs are measured per KWh generated.

*Renewables/CHP generation.*   Revenuesfrom sales of renewable/CHP energy generated by consolidated companies totaled €240million, 98.3% more than in 2004, due to higher sales prices and higherinstalled capacity, driving operating income from the generation business to €100million, up 185.7% from 2004.

*Distribution.*   Revenuesfrom regulated distribution activities were €1,602 million in 2005, anincrease of 2.4% compared to 2004. We supplied 64,095 GWh to customers in theregulated Spanish market in 2005. Inaccordance with IFRS, however, turnover from this business was not booked asrevenue, as the distribution business’ sole income is the remuneration providedfor under the electricity tariff scheme. Remaining sales correspond to costsincurred and passed on to customers.

*Non-mainland generation.*   Salesfrom non-mainland systems totaled €1,548 million in 2005,including compensation for stranded costs from these systems, an increase of54.2% compared to 2004 (€1,004 million).

We have included an item of income of €212million in 2005, relating to the compensation for the additional costs of thenonmainland systems in the period from 2001 to 2004. By recognizing thisamount, we have reflected in our financial statements an asset for an amount withrespect to which the CNE submitted a favorable report to the Ministry ofIndustry. In addition, revenues of €177 million were recordedcorresponding to additional compensation for the amounts included in the 2005tariff to cover the stranded costs recorded for that year. This amount wascalculated using the same methodology as that used by the CNE in its report forcalculating stranded costs for the period 2001-2004.

*CTCRevenues.*   Our CTC revenuesdecreased 88.6% to €22million in 2005 from €193 million in 2004. The table below setsforth a breakdown of our CTC revenues for 2004 and 2005.

| ** **                | ** ** | **Year Ended  December 31,** | ** ** | **Percentage** | ** ** |
|---------------------------|------------|----------------------------------------|------------|----------------|------------|
| **Type of CTC** | ** ** | ** **                             | ** ** | **2004**       | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                | ** ** | **(millions of euro)**       | ** ** | ** **     | ** ** |
| Technology                |       |                                   | 118        |           |       |   | — |   |   |   | (100.0 | )% |   |
| Coal                      |       |                                   | 75         |           |       |   | 22 |   |   |   | (70.7 | )% |   |
| Total                     |       |                                   | 193        |           |       |   | 22 |   |   |   | (88.6 | )% |   |
|                           |            |                                        |            |                |            |  |  |  |  |  |  |  |  |  |  |

 

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*Supply to deregulatedcustomers.*   Sales toderegulated customers in the Spanish market totaled €1,605 million in 2005, anincrease of 23.6% compared to 2004. Of this amount, €1,487 million correspondedto the mainland deregulated market and €118 million to thenon-mainland market. Revenues from sales to deregulated European markets otherthan Spain were €220million in 2005, an increase of 29.4% compared to 2004. The number ofderegulated customers were approximately 998,000 and 554,000 as ofDecember 31, 2005 and 2004, respectively.

Regulated revenues in 2005 were not sufficient tooffset system costs, generating an estimated deficit of €3,580million. According to the provisions of Royal Decree Law 5/2005 of March 11,2005, we must contribute 44.16% of the total amount of this deficit (€1,581million). Our accounts at December 31, 2005 include a financial asset of €1,581million to reflect our right to recover our share of the regulated revenuedeficit.

*Gas distribution and supply.*   Revenuesfrom gas sales in the deregulated market in 2005 totaled €326million, representing growth of 103.8% on 2004. Revenues from regulated gasdistribution totaled €39 million, an increase of 8.3% compared to2004.

*OperatingExpenses.*   The table belowsets forth the breakdown of operating expenses of our domestic electricitybusiness for 2004 and 2005 and the percentage variation from year to year.

| ** **                     | ** ** | **Year Ended  December 31,** | ** ** | **Percentage** | ** ** |
|--------------------------------|------------|----------------------------------------|------------|----------------|------------|
| ** **                     | ** ** | **2004**                               | ** ** | **2005**       | ** ** | **Change** | ** ** |
| ** **                     | ** ** | **(millions of euro)**       | ** ** | ** **     | ** ** |
| Purchases and  services        |       | 2,367                                  |       | 4,072          |       |   | 72.0 | % |   |
| Energy purchases               |       | 434                                    |       | 875            |       |   | 101.6 | % |   |
| Fuel consumption               |       | 1,546                                  |       | 2,057          |       |   | 33.1 | % |   |
| Power transmission expenses    |       | 189                                    |       | 273            |       |   | 44.4 | % |   |
| Other supplies and services    |       | 198                                    |       | 867            |       |   | 337.9 | % |   |
| Personnel  expenses            |       | 985                                    |       | 1,041          |       |   | 5.7 | % |   |
| Other operating  expenses      |       | 1,028                                  |       | 1,034          |       |   | 0.6 | % |   |
| Depreciation and  amortization |       | 1,040                                  |       | 1,002          |       |   | (3.7 | )% |   |
| Total                          |       | 5,420                                  |       | 7,149          |       |   | 31.9 | % |   |

 

Operating expenses of our domestic electricitybusiness increased 31.9% to €7,149 million in 2005 from€5,420million in 2004.

Purchases increased72.0% to €4,072 million in 2005 from €2,367million in 2004 was principally due to the following factors:

·       Expenses for other supplies and services totaled €867 million in 2005,up €669million on 2004. This increase reflects the booking of expenses of €522million in connection with rights acquired to cover the CO2 emissions made in 2005, which totaled 51.9million tons (40.4 million tons for mainland and 11.5 million tons fornon-mainland emissions). The net effect ofrevenues and expenses booked in 2005 to cover CO2 emissionswas €185million, corresponding to an estimated rights deficit of 8.5 million tons;

·       Fuel consumption amounted to €2,057 million in 2005, an increase of 33.1%from 2004. This increase was due to higher fuel-oil production in 2005 (higherunit costs than other technologies) triggered by the drought and to ageneralized increase in raw material prices in the international markets. Thesehigher costs were offset by our proactive fuel purchasing management policywhich resulted in below-market purchasing prices; and

·       Energy purchases increased by €441 million, or 101.6%, compared to 2004. Themain component of this line item relates to transactions carried out on thewholesale generation market. This increase 

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inpower purchases is linked to the 79.6% rise in the average energy pool price. Thebalance relates to gas purchases to supply deregulated customers, which rose asa result of the 18.7% increase in sales to these customers and the rising priceof gas.

Personnel expenses increased 5.7% to €1,041million in 2005 from €985 million in 2004. These expenses include €34million for estimated costs in connection with layoffs contemplated in the Spanishgovernment’s 2006-2012 Mining Plan, and €12 million for employeetariff provisions. Absent these items, personnel expenses were virtuallyunchanged.

Depreciation andamortization costs decreased 3.7% in 2005 to €1,002million in 2005 from €1,040 million in 2004.

*European Electricity Business*

Operating income from our European electricity businessincreased 67.0% to €618 million in 2005 from €370million in 2004. Operating revenues from our European electricity businessincreased 44.4% to €3,720million in 2005 from €2,576 million in 2004. Operating expenses ofour European electricity business increased 40.4% to €3,111million in 2005 from €2,216 million in 2004.

The remaining operatingincome of this business relates substantially to the operating income of EndesaItalia. Endesa Italia’s operating revenues increased 33.5% in 2005 to €2,242million from €1,680million in 2004, principally due to a 17.8% increase in the amount of energysold to 30,911 GWh (including 7,549 GWh of energy acquired from third partiesat a cost of €292million). Endesa Italia generated 23,362 GWh in 2005, which represents a12.0% increase compared to 2004. The increase in generation was principally dueto an increase of 5,428 GWh in CCGT production. The cost of fuel increased €241million, principally due to higher fuel prices and the increase inthermoelectric production.

*Latin AmericanElectricity Business*

Operating income from our Latin American electricitybusiness increased 30.6% to €1,376 million in 2005 from€1,054million in 2004. Operating revenues from our Latin American electricitybusiness increased 20.1% to €5,232 million in 2005 from€4,357million in 2004, while operating expenses of our Latin American electricitybusiness increased 16.8% to €3,878 million in 2005 from€3,321million in 2004.

In the discussion of the operating revenues andoperating income of our operations in Latin America that follows, we haveprovided such results as reported in accordance with IFRS and, in certaincases, excluding the impact of exchange rate fluctuations. Year-on-yearcurrency exchange rate movements will influence our reported results to agreater or lesser extent, and therefore they are identified as part of theanalysis to make clear their impact on the overall growth or decline in ourLatin American operations. 

 

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Thetable below sets forth a breakdown of operating income (loss) and operatingrevenues from our Latin American electricity business for 2004 and 2005. 

| ** **                     | ** ** | **Operating Income**                                      | ** ** | **Operating Revenues** | ** ** |
|--------------------------------|------------|----------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                     | ** ** | **2004**                                                       | ** ** | **2005**                    | ** ** | **Percentage  Change** | ** ** | **2004** | ** ** | **2005** | ** ** | **Percentage  Change** | ** ** |
| ** **                     | ** ** | **(millions of euro, except percentages)** | ** ** |
| Generation                     |       | 632                                                            |       | 722                         |       |   | 14.2 | % |   | 1,906 |   | 2,303 |   |   | 20.8 | % |   |
| Distribution and  Transmission |       | 538                                                            |       | 723                         |       |   | 34.4 | % |   | 3,319 |   | 3,809 |   |   | 14.8 | % |   |
| Other                          |       | (116                                                           | )          | (69                         | )          |   | n.a. |   |   | (868 | ) | (880 | ) |   | (1.4 | )% |   |
| Total                          |       | 1,054                                                          |       | 1,376                       |       |   | 30.6 | % |   | 4,357 |   | 5,232 |   |   | 20.1 | % |   |

 

Thefollowing table shows operating income and operating revenues from generationin each country for 2004 and 2005.

| ** ** | ** ** | **Operating Income**                                      | ** ** | **Operating Revenues** | ** ** |
|------------|------------|----------------------------------------------------------------|------------|-----------------------------|------------|
| ** ** | ** ** | **2004**                                                       | ** ** | **2005**                    | ** ** | **Percentage  Change** | ** ** | **2004** | ** ** | **2005** | ** ** | **Percentage  Change** | ** ** |
| ** ** | ** ** | **(millions of euro, except percentages)** | ** ** |
| Chile      |       |                                                           | 179        |                        |       |   | 248 |   |   |   | 38.5 | % |   | 781 |   | 1,054 |   |   | 35.0 | % |   |
| Colombia   |       |                                                           | 178        |                        |       |   | 183 |   |   |   | 2.8 | % |   | 362 |   | 400 |   |   | 10.5 | % |   |
| Argentina  |       |                                                           | 101        |                        |       |   | 66 |   |   |   | (34.7 | )% |   | 278 |   | 313 |   |   | 12.6 | % |   |
| Brazil     |       |                                                           | 84         |                        |       |   | 111 |   |   |   | 32.1 | % |   | 194 |   | 231 |   |   | 19.1 | % |   |
| Peru       |       |                                                           | 90         |                        |       |   | 114 |   |   |   | 26.7 | % |   | 291 |   | 305 |   |   | 4.8 | % |   |
| Total      |       |                                                           | 632        |                        |       |   | 722 |   |   |   | 14.2 | % |   | 1,906 |   | 2,303 |   |   | 20.8 | % |   |

 

Thefollowing table shows net output figures in Latin America by country for 2004and 2005.

| ** ** | ** ** | **2004**  | ** ** | **2005**   | ** ** | **Percentage Change** | ** ** |
|------------|------------|-----------|------------|------------|------------|----------------------------|------------|
| ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** |
| Chile      |       | 16,797    |       | 18,764     |       |                       | 11.7       | % |   |
| Colombia   |       | 11,881    |       | 11,864     |       |                       | (0.1       | )% |   |
| Argentina  |       | 15,884    |       | 16,154     |       |                       | 1.7        | % |   |
| Brazil     |       | 4,889     |       | 4,213      |       |                       | (13.8      | )% |   |
| Peru       |       | 5,655     |       | 6,895      |       |                       | 21.9       | % |   |
| Total      |       | 55,106    |       | 57,890     |       |                       | 5.1        | % |   |

 

Operating income from the Chilean generation businessamounted to €248 million in 2005, a 38.5% increasecompared to 2005. In 2005, Chilean generation was impacted by the gas supplyproblems affecting the thermal plants, which required substituting gas withmore expensive liquid fuels. For our subsidiaries, however, this was more thanoffset by the 11.7% increase in energy generated from hydro plants, principallydue to the Ralco plant joining the grid in September 2004 and to increasesin node prices (payments by the distribution company to the generation company)and derivatives prices deriving from the change in the power source prompted bythe gas supply crisis.

Operating income from the Colombian generationbusiness amounted to €183 million in 2005, a2.8% increase compared to 2004. The increase was principally due to thepositive impact of the strong Colombian peso versus the euro (18.25%appreciation of the year-end exchange rate from 2004).

Operating income from the Argentine generationbusiness amounted to €66 million in 2005, a34.7% decrease compared to 2004 due to the gas supply problems which increasedfuel costs considerably (by 48.5%), as generators were forced to substitute gaswith more expensive liquid fuels. As a result, although volume sales ofelectricity rose by 1.7%, margins narrowed.

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Operating income from the Brazilian generationbusiness amounted to €111 million, a 32.1%increase compared to 2004, though electricity generation in Brazil fell 13.8%due to the gas supply problems affecting Endesa Fortaleza. This decrease ingeneration was offset by favorableexchange rate movements (33.4% appreciation of the year-end exchange rate from2004), together with positive price trends and lower fuel consumption.

Operating income from the Peruvian generation businessamounted to €114 million, a 26.7% increase compared to2004, due to increased hydro output which drove a €35million reduction in the cost of fuel. Generation sales were €299 million in 2005, 3.5% more than in 2004. The effect ofthe lower prices caused by higher rainfall levels was offset by a 21.9% rise inpower generated. 

Thefollowing table shows operating income and operating revenues from distributionand transmission in each country for 2004 and 2005.

| ** ** | ** ** | **Operating Income**                                      | ** ** | **Operating Revenues** | ** ** |
|------------|------------|----------------------------------------------------------------|------------|-----------------------------|------------|
| ** ** | ** ** | **2004**                                                       | ** ** | **2005**                    | ** ** | **Percentage  Change** | ** ** | **2004** | ** ** | **2005** | ** ** | **Percentage  Change** | ** ** |
| ** ** | ** ** | **(millions of euro, except percentages)** | ** ** |
| Chile      |       |                                                           | 147        |                        |       |   | 168 |   |   |   | 14.3 | % |   | 658 |   | 850 |   |   | 29.2 | % |   |
| Colombia   |       |                                                           | 139        |                        |       |   | 165 |   |   |   | 18.7 | % |   | 529 |   | 606 |   |   | 14.6 | % |   |
| Argentina  |       |                                                           | 62         |                        |       |   | 46 |   |   |   | (25.8 | )% |   | 392 |   | 457 |   |   | 16.6 | % |   |
| Brazil     |       |                                                           | 150        |                        |       |   | 300 |   |   |   | 100.0 | % |   | 1,473 |   | 1,595 |   |   | 8.3 | % |   |
| Peru       |       |                                                           | 40         |                        |       |   | 44 |   |   |   | 10.0 | % |   | 267 |   | 301 |   |   | 12.7 | % |   |
| Total      |       |                                                           | 538        |                        |       |   | 723 |   |   |   | 34.4 | % |   | 3,319 |   | 3,809 |   |   | 14.8 | % |   |

 

The following table shows the amount of electricitysold in Latin America by country for 2004 and 2005.

| ** ** | ** ** | **2004**  | ** ** | **2005**   | ** ** | **Percentage Change** | ** ** |
|------------|------------|-----------|------------|------------|------------|----------------------------|------------|
| ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** |
| Chile      |       | 11,317    |       | 11,851     |       |                       | 4.7        | % |   |
| Colombia   |       | 9,656     |       | 10,094     |       |                       | 4.5        | % |   |
| Argentina  |       | 13,322    |       | 14,018     |       |                       | 5.2        | % |   |
| Brazil     |       | 13,769    |       | 14,753     |       |                       | 7.1        | % |   |
| Peru       |       | 4,250     |       | 4,530      |       |                       | 6.6        | % |   |
| Total      |       | 52,314    |       | 55,246     |       |                       | 5.6        | % |   |

 

Operating income in the Chilean distribution businessamounted to €168 million, a 14.3% increase compared to2004. This increase was due mainly to growthin sales volume to meet higher demand, offsetting decreased margins caused bythe most recent rate revision.

Operating income in theColombian distribution business amounted to €165million, a 18.7% increase compared to 2004. This rise was due to a 10.5%increase in sales (to €400 million), which was sufficient to coverthe higher costs of buying electricity and a stronger Colombian peso versus theeuro (18.3% appreciation of the year-end exchange rate from 2004).

Operating income in theArgentine distribution business amounted to €38million, a 24.0% decrease compared to 2004. This was largely because the 2004 figuresincluded one-time compensation of €10 million relating toprior litigation.****The remaining decrease was due tolarger energy purchases and fixed costs, which were not offset by higher sales.The tariff revision was revised effective November 2005 and imposed a 23%increase on certain non-residential users.

Operating income in theArgentine transmission business amounted to €8million, a 33.3% decrease compared to 2004.

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Operating income from theBrazilian distribution business amounted to €262million, a 172.9% increase compared to 2004, due to higher revenues from electricity sales which more than covered costincreases. Sales in distribution increased by €461million (53.7%) in 2005 as a result of enhanced generation price pass-through tocustomers, and, to a lesser extent, higher energy sales volumes.

Operatingincome from the Brazilian transmission business amounted to €38 million, €16 million lower than in 2004, due to gas supplyrestrictions and the resulting difficulties in finding available electricity inArgentina to export to Brazil.

Operating income from thePeruvian distribution business amounted to €44million, a 10.0% increase compared to 2004, due to a €36million rise in sales versus 2004 to €298 million, compared to an increase of just € 22 million inelectricity costs. 

***Financial Income (Loss), Net***

Financial loss, netincreased 9.2% to €1,252 million in 2005 from€1,147million in 2004, principally due to increased financial expenses. Financialexpenses, mainly consisting of interest expenses, increased 15.6% to €1,257 million in 2005.

Specifically,the fall in long term interest rates between December 31, 2004 and December 31,2005 meant that pension obligations and redundancy programs were calculated ata discount rate of 3.588%, instead of the 4% applied at the close of 2004. Thisrequired a higher provision for pension obligations and redundancy programs (€111 million) to bebooked as a financial expense in 2005. Financial expenses for 2005 also include€60million related to preferred shares issued by a finance subsidiary, which in2004, when IAS 32 was not in force, were treated as minority interests and,therefore, the cost was not registered as a financial expense. 

***Income (Loss) from Associated Companies***

Our share in the income ofcompanies carried by the equity method was €67million in 2005 compared with €79 million in 2004. 

***Income (Loss) from divestitures***

Income from divestitures,net of losses was €1,486 million in 2005compared with €195million in 2004. 

Themain items comprising this line item in 2005 were the following: 

·       €1,273million capital gain from the sale of Auna (a 27.7% stake);

·       €48million capital gain from the sale of Sidec;

·       €24million capital gain from the sale of Endesa Italia S.p.A.;

·       €16million capital gain from the sale of Nueva Nuinsa, S.L.; and

·       €12million capital gain from the sale of Lydex Lyonnaise Des Eaux Casablanca.

The main itemscomprising this line item in 2004 were the following: 

·       €102million capital gain from the sale of the 11.64% interest in Aguas deBarcelona;

·       €14million capital gain from the sale of Senda Ambiental, S.A.; and

·       €8 million capital gainfrom the sale of Netco Redes, S.A.

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*Disposal of Auna*

In 2005, we sold our 27.7%stake in the Spanish telecoms operator Auna for €2,221 million,obtaining a net capital gain of €1,115 million.****

The stake was sold to FranceTelecom pursuant to an agreement signed on July 29, 2005, which wasformalized on November 8, 2005 after being approved by the Europeanauthorities. 

On December 30, 2005 we soldto Deutsche Bank our remaining 5.01% stake in Auna for €378 million.  Pursuant to the liquidity mechanism in thesale agreement, we retain the upside in the value of the shares. In the first saleof these shares which takes place on or after November 8, 2008, whether byDeutsche Bank or a subsequent holder of the shares, we have the right toreceive 90% of the sale price in excess of €361 million, capitalized annually at arate of 4.5%.  The net capital gain onthis sale was €171 million, although this will not bebooked until the first quarter of 2006, because as of December 31, 2005 theperiod for Auna’s shareholders to exercise their pre-emptive subscriptionrights had not expired. 

*Other disposals*

Our asset disposal strategyremained unchanged in 2005, generating gross capital gains of €213 million inaddition to the gains from the sale of Auna. 

The main disposal in 2005 (otherthan our sale of our stake in Auna) was the sale of 100% of Smartcom to Mexicanoperator América Móvil for $505 million (€408 million),resulting in a gross capital loss of €3 million (and an after-tax gain of €51 million).

Wealso continued to dispose of real estate assets, generating an aggregate €122 million, with agross capital gain of €105 million.

***Corporate IncomeTax***

Our corporate income tax expense increased 124.4% to €790million in 2005 from €352 million in 2004, due to substantiallyincreased pre-tax income.

Our corporate income taxexpense in 2005 was 17.4% of our consolidated income before tax and in 2004 was17.5%. Of our corporate income tax expense in 2005, €434million related to our domestic electricity business, €168million related to our Latin American electricity business, €104million related to our European electricity business and €84million related to our other businesses.

***Minority Interests***

Income attributed tominority interests was €575 million in 2005compared with income attributed to minority interests of €408million in 2004. This increase was due in part to our increase in net incomeprior to minority interest, which more than offset the treatment of ourpreference shares in 2005 as debt (versus treatment of our preference shares in2004 as minority interest).

***Net Income***

As a result of theforegoing, net income increased 153.9% to €3,182million in 2005.

**U.S. GAAPReconciliation**

Our consolidated financial statements have beenprepared in accordance with IFRS, which differs in certain significant respectsfrom U.S. GAAP. Our net income for 2005 and 2004 under IFRS was €3,757million and €1,661million, respectively, and under U.S. GAAP was €2,753 million and €1,454million, respectively. Our stockholders’ equity at December 31, 2005 and2004 under IFRS was €16,327million and €14,133million, respectively, and under U.S. GAAP was €12,010 million and €9,373million, respectively. 

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Under U.S. GAAP,stockholders’ equity consists only of equity corresponding to the shareholdersof the parent company. Under IFRS equity includes the equity corresponding tothe shareholders of both the parent company and the minority interests. 

The principaldifferences between IFRS and U.S. GAAP with respect to our consolidatedfinancial statements, in addition to the one explained above, relate to:

·       1996legal restatement;

·       eliminationin all previous presented periods prior to January 1, 2004 all inflationadjustments recorded as part of the depreciated cost of the property, plant andequipment in Foreign Subsidiaries;

·       goodwilland business combinations;

·       treatmentof pension plans and early retirements;

·       revenuerecognition;

·       accountingfor certain investments in equity securities; 

·       derivativeinstruments and hedging activities;

·       currencytranslation adjustment; 

·       saleand leaseback involving real estate; and

·       transactiongain or losses in intercompany’s transactions.

See Note 29 to ourconsolidated financial statements for a complete description of theseadjustments.

**New U.S. AccountingPronouncements**

*Statements ofFinancial Accounting Standards No. 153: Exchanges of Nonmonetary Assets*

In December 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement No. 153, “Exchangesof Nonmonetary Assets” (“SFAS No. 153”), effectively amending AccountingPrinciples Board (“APB”) Opinion No. 29, “Accounting for NonmonetaryTransactions”. SFAS No. 153 eliminates the exception for nonmonetaryexchanges of similar productive assets and replaces it with a general exceptionfor exchanges of nonmonetary assets that do not have commercial substance. SFASNo. 153 is effective for nonmonetary asset exchanges occurring in fiscalperiods beginning after June 15, 2005. Endesa does not anticipate that theadoption of this Statement will have a material effect on its financialposition, results of operations or cash flows. 

*Statements ofFinancial Accounting Standards No. 154: Accounting Changes and ErrorCorrections*

In May 2005, the FASBissued Statement No. 154, “Accounting Changes and Error Corrections” (“SFASNo. 154”), replacing APB Opinion No. 20 and FASB Statement No. 3.SFAS No. 154 requires retrospective application to prior periods’financial statements of changes in accounting principles, unless impracticable.The Statement defines retrospective application as the application of adifferent accounting principle to prior accounting periods as if that principlehad always been used and redefines restatement as revising previously issuedfinancial statements to reflect the correction of an error. SFAS No. 154also requires that retrospective application of a change in accountingprinciple be limited to the direct effects of the change. Indirect effects of achange in accounting principle should be recognized in the period of theaccounting change. The new standard is effective for accounting changes made infiscal years beginning after December 15, 2005. Endesa does not anticipatethat the adoption of this Standard will have a material effect on its financialposition, results of operations or cash flows.

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*Accounting for Certain Hybrid Financial Instruments anamendment of FASB Statements No. 133 and 140*

On February 2006 the FASB issued Statement ofFinancial Accounting Standards No. 155 Accounting for Certain HybridFinancial Instruments an amendment of FASB Statements No. 133 and 140 thatamends FASB Statements No. 133, Accounting for Derivative Instruments andHedging Activities, and No. 140, Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities. This Statement resolvesissues addressed in Statement 133 Implementation Issue No. D1, “Applicationof Statement 133 to Beneficial Interests in Securitized Financial Assets.” 

This Statement permitsfair value remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation, clarifies whichinterest-only strips and principal-only strips are not subject to therequirements of Statement 133, establishes a requirement to evaluate interestsin securitized financial assets to identify interests that are freestandingderivatives or that are hybrid financial instruments that contain an embeddedderivative requiring bifurcation, clarifies that concentrations of credit riskin the form of subordination are not embedded derivatives and amends Statement140 to eliminate the prohibition on a qualifying special purpose entity fromholding a derivative financial instrument that pertains to a beneficialinterest other than another derivative financial instrument. This Statement iseffective for all financial instruments acquired or issued after the beginningof an entity’s first fiscal year that begins after September 15, 2006.Earlier adoption is permitted as of the beginning of an entity’s fiscal year,provided the entity has not yet issued financial statements, includingfinancial statements for any interim period for that fiscal year. The Companydoes not anticipate that the adoption of this new statement at the requiredeffective date will have a significant effect in its results of operations,financial position or cash flows.

*The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments*

On November 2, 2005,the FASB issued Financial Staff Position (“FSP”) FAS 115-1 and FAS 124-1, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments,” which nullifies certain requirements of Emerging Issues TaskForce (“EITF”) Issue No. 03-1, “The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments” and supersedes EITFAbstracts Topic No. D-44, “Recognition of Other-Than-Temporary ImpairmentUpon the Planned Sale of a Security whose Cost Exceeds Fair Value.” Theguidance in this FSP will be applied to reporting periods beginning after December 15,2005. Endesa does not expect that the adoption of this guidance will have amaterial effect on its financial position, results of operations or cash flows.

*Determining the Amortization Period for LeaseholdImprovements Purchased after Lease Inception or Acquired in a BusinessCombination*

At the EITF meetings heldon June 15 and 16, 2005 and on September 15, 2005, the EITF discussedIssue 05-6, “Determining the Amortization Period for Leasehold ImprovementsPurchased after Lease Inception or Acquired in a Business Combination” (“EITF05-6”), and determined the appropriate amortization periods for leaseholdimprovements either acquired in a business combination or which were notpreexisting and were placed in service significantly after, and notcontemplated at, the beginning of the lease term. This Issue is effective forleasehold improvements (that are within the scope of this Issue) that arepurchased or acquired in reporting periods beginning after June 29, 2005. Endesadoes not anticipate that the adoption of EITF 05-6 will have a material effecton its financial position, results of operations or cash flows.

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*Accounting forServicing of Financial Assets*

Summary of Statement No. 156“Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140”This Statement amends FASB Statement No. 140, Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities, with respectto the accounting for separately recognized servicing assets and servicingliabilities. This Statement requires an entity to recognize a servicing assetor servicing liability each time it undertakes an obligation to service afinancial asset by entering into a servicing contract in certain situations,requires all separately recognized servicing assets and servicing liabilitiesto be initially measured at fair value, if practicable and permits an entity tochoose either of subsequent measurement methods for each class of separatelyrecognized servicing assets and servicing liabilities. An entity should adoptthis Statement as of the beginning of its first fiscal year that begins after September 15,2006. Earlier adoption is permitted as of the beginning of an entity’s fiscalyear, provided the entity has not yet issued financial statements, includinginterim financial statements, for any period of that fiscal year. The Companydoes not anticipate that the adoption of this new statement at the requiredeffective date will have a significant effect in its results of operations,financial position or cash flows.

**B.   LIQUIDITYAND CAPITAL RESOURCES**

***Liquidity***

In 2005 and 2004, we usedcash provided by operating activities, external borrowings (including availablelines of credit) and proceeds from the disposal of assets, capital increase atour subsidiaries and the issuance of preference shares to manage our liquidity.We used these sources of liquidity primarily for capital expenditures andinvestments. Our management believes that the funding available to us fromthese and other sources will be sufficient to satisfy our working capital and debtservice requirements for the foreseeable future.

***Cash Flow Analysis***

Our cash and cash equivalents were €2,614million at December 31, 2005 and €2,178 million at December 31,2004. The increase in cash and cash equivalents in 2005 was due to cash providedby operating activities of €3,362 million, of which €718million was used in investing activities and €2,326 million was used infinancing activities. The remaining cash inflow is due to changes in exchangerates. 

As a percentage of total assets, cash and cashequivalents were 4.7% at December 31, 2005 compared with 4.6% at December 31,2004. 

Thefollowing table sets forth our consolidated cash flows for 2004 and 2005. 

| ** **                                 | ** ** | **Year Ended  December 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **(millions  of euro)**           | ** ** |
| Net cash provided  by operating activities |       | 3,648                                  |       | 3,362 |   |
| Net cash used in  investing activities     |       | 1,836                                  |       | 718 |   |
| Net cash used in  financing activities     |       | 1,703                                  |       | 2,326 |   |

 

*OperatingActivities*

Our cash provided byoperating activities decreased 7.8% to €3,362million in 2005 from €3,648 million in 2004. This decrease wasprimarily due to an increase in net working capital of €1,434million, partially offset by a 125.9% increase in income before taxes to €4,547million in 2005 from €2,013 million in 2004.

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*InvestingActivities*

Our cash used in investingactivities amounted to €718 million in 2005 ascompared with €1,836million in cash used in investing activities in 2004, which was primarily dueto a 435.0% increase in proceeds from disposal of investments to €3,702million in 2005 from €692 million in 2004.

*FinancingActivities*

Our net cash used in financing activities was €2,326million in 2005 compared with net cash used in financing activities of €1,703million in 2004, primarily due to higher repayments of long-term debt.

In 2005 and 2004 our primary financing activities haveinvolved a variety of short-and medium-term financial instruments, principallybonds and debentures, commercial paper and borrowings from financialinstitutions. The amount of bonds and debentures payable by Endesa wasapproximately €12,039 million at December 31,2005, and €12,027million at December 31, 2004. The amount of borrowings from financialinstitutions payable by Endesa was €6,553 million at December 31,2005, and €6,043million at December 31, 2004. The amount of other financial liabilitieswas €1,026million at December 31, 2005, and €1,186 million at December 31,2004. The value of outstanding preference shares was €1,419million at December 31, 2005. Since IASs 32 and 39 were not applied as of December 31,2004, the preference shares were classified under Equity—Minority Interests asof such date.

At December 31, 2005,our net financial liabilities of €12.9 billion wereprimarily in euro (70.3%). The average interest rate of our outstandingindebtedness was 5.46% for 2005. The average interest rate of our domesticelectricity business was 4.03% in 2005, the average interest rate of our LatinAmerican electricity business was 8.53%, the average interest rate of ourEuropean electricity business was 3.60% and the average interest rate of ourother businesses was 4.20% in 2005. Approximately 89% of our financialliabilities was at fixed and hedged rates at December 31, 2005. 

***Capital Expenditures and Investments***

Thefollowing table sets forth our capital expenditures and other capitalinvestments for 2004 and 2005.

| ** **                                            | ** ** | **  2004  **         | ** ** | **  2005  ** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **(in millions of euro)** | ** ** |
| **Capital  Expenditures:**                            |       |                                     |       |                             |       |   |   |   |   |
| Power stations                                        |       |                                     | 1,116      |                             |       |   | 1,294 |   |   |
| Distribution  facilities                              |       |                                     | 1,329      |                             |       |   | 1,779 |   |   |
| Other                                                 |       |                                     | 120        |                             |       |   | 186 |   |   |
| **Total capital expenditures**                        |       |                                     | 2,565      |                             |       |   | 3,259 |   |   |
| **Investments:**                                      |       |                                     |       |                             |       |   |   |   |   |
| **Total other investments**                           |       |                                     | 884        | (1)                              |       |   | 381 | (2) |   |
| **Total  capital expenditures and other investments** |       |                                     | 3,449      |                             |       |   | 3,640 |   |   |

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(1)          Includes mainly a €121million investment to acquire an additional interest in Snet, a €261million investment to acquire an additional interest in Auna and a €187million capital subscription in Smartcom.

(2)          Includes mainly a €151million investment to acquire 100% of Finerge and a €27 million purchase ofminority shareholders’ interests in Sodelif-Bialystock and San Isidro.

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*Planned CapitalExpenditures*

Pursuantto the 2005-2009 Strategic Plan, we invested €3,640million in our businesses in 2005. For the period 2005-2009 we expect to investa total of approximately €14.6 billion in our businesses, broken downas follows (billions of euro): 

| Spain and  Portugal                      |   | 10.3 |   |
|------------------------------------------|--------|------|--------|
| Generation                               |   | 5.8  |   |
| Distribution                             |   | 4.3  |   |
| Supply                                   |   | 0.2  |   |
| Other countries  in Europe               |   | 1.8  |   |
| Development of new generating capacity   |   | 1.4  |   |
| Maintenance investments                  |   | 0.4  |   |
| Latin America                            |   | 2.5  |   |
| Development of new generating capacity   |   | 0.5  |   |
| Distribution and maintenance investments |   | 2.0  |   |
| Total                                    |   | 14.6 |   |

 

We expect to invest approximately 71% of the totalinvestment in the Spanish and Portuguese electricity business. With thisinvestment, we expect to increase our installed capacity substantially and torevamp our electricity distribution infrastructures so as to improve thesecurity and quality of our supply.

Approximately 12% of the total investment is expectedto be allocated to the business in other European countries and the remaining17% is expected to be invested in the Latin American electricity business.

See “Forward-LookingStatements”.

***Debt Reduction***

In 2005, we reduced our net financial debt (defined asshort and long term debt *minus* cash andshort term financial deposits, netted of derivatives measurement) by €417million to €18,281million at December 31, 2005, a decrease of 2.2% with respect to January 1,2005.

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Thefollowing table sets forth a reconciliation of net financial debt, a non-IFRSmeasure which our management uses to measure our liquidity, and the consolidateddebt figure on our consolidated balance sheet. We believe that net financialdebt provides investors with a better understanding of our liquidity positionand requirements, if any, we may have for external financing. The figures for2004 in the following table have been prepared in accordance with IFRS, exceptthat we have applied the exception provided for under IFRS, whereby we need notapply IAS 32 (Financial Instruments: Disclosure and Presentation) and IAS 39(Financial Instruments: Recognition and Measurement). The application of IAS 32and IAS 39 at January 1, 2005 led to a rise in net financial debt to €18,698million at January 1, 2005 from €17,078 million atDecember 31, 2004, mainly due to the reclassification of preference shares.Preference shares, which are shares of subsidiaries held by third parties, hadbeen classified as minority interests prior to January 1, 2005 and werereclassified as a financial liability effective January 1, 2005.

| ** **                              | ** ** | **At December 31**             | ** ** |
|-----------------------------------------|------------|------------------------------------------|------------|
| ** **                              | ** ** | **2004**                                 | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(in millions of euro)** | ** ** |
| Long term debt                          |       | 17,715                                   |       | 18,587 |   |
| Short term debt                         |       | 1,541                                    |       | 2,450 |   |
| Cash and short  term financial deposits |       | (2,178                                   | )          | (2,614 | ) |
| Derivatives  measurement                |       | —                                   |       | (142 | ) |
| Net financial debt                      |       | 17,078                                   |       | 18,281 |   |
| Consolidated debt  on our balance sheet |       | 19,256                                   |       | 21,037 |   |

 

Despite the increase inindebtedness, in 2005 our financial leverage improved due to the offsettingimpact of the increase in shareholders’ equity. The debt/equity plus minorityinterests ratio dropped from 120.8% at December 31, 2004 to 112.0% at December 31,2005. The debt/equity plus minority interests ratio at January 1, 2005 was151.2%. Furthermore, the ratio of net financial debt to operating income improvedsignificantly from 6.0 in 2004 to 4.31 in 2005. The ratio of net financial debtto operating income at January 1, 2005 was 6.6.

***FinancingObligations***

Our financial debt was €21.04billion at December 31, 2005, an increase of €1.78 billion compared withfinancial debt of €19.26billion at December 31, 2004.

Thefollowing table sets forth the amortization schedule for our consolidated debtat December 31, 2005:

| ** **                 | ** ** | **2006**                         | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Subsequent  Years** | ** ** | **Total** | ** ** |
|----------------------------|------------|----------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-----------------------|------------|-----------|------------|
| ** **                 | ** ** | **(millions of euro)** | ** ** |
| Debentures and  bonds      |       | 815                              |       | 168      |       | 569      |       | 2,534    |       | 1,639    |       |                  | 4,661      |      |       | 10,386 |   |
| Notes payable              |       | 489                              |       | —   |       | —   |       | —   |       | 671      |       |                  | —     |      |       | 1,160 |   |
| Loans and credits          |       | 939                              |       | 635      |       | 426      |       | 361      |       | 3,367    |       |                  | 779        |      |       | 6,507 |   |
| Suppliers,  Leasing, Other |       | 185                              |       | 267      |       | 175      |       | 181      |       | 89       |       |                  | 127        |      |       | 1,024 |   |
| Preference Shares          |       | —                           |       | —   |       | —   |       | —   |       | —   |       |                  | 1,419      |      |       | 1,419 |   |
| Derivatives                |       | 22                               |       | 12       |       | 17       |       | 72       |       | 6        |       |                  | 412        |      |       | 541 |   |
| Total                      |       | 2,450                            |       | 1,082    |       | 1,187    |       | 3,148    |       | 5,772    |       |                  | 7,398      |      |       | 21,037 |   |

 

***Capital Resources***

In the past, our main sources of liquidity have beenour cash flows from operations, bank financing, issuances of commercial paperand debt securities and the proceeds from our divestment plan. As of 

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December 31, 2005,total available liquidity (except for available liquidity at the Enersis level)was approximately €6,338 million, consistingof approximately €4,266million available in unused credit lines, of which approximately €93million will expire by the end of 2006 and approximately €4,173million will expire thereafter, and approximately €2,072 million in cash andliquid investments. Any future downgrades of our credit ratings by ratingagencies will not preclude us from using any of our existing credit lines.

The following is adiscussion of certain material financing transactions entered into by Endesa,S.A. or its wholly-owned subsidiaries.

*Short-TermBorrowings*

We have short-termrevolving credit facilities in an aggregate amount of €103million, €10million of which was used at December 31, 2005. Interest in respect of anyborrowings under these credit facilities is at a floating rate (EURIBOR)****plus an average margin of 17 basis points.

*Commercial Paper*

In 1998, our wholly-ownedfinance subsidiary, International Endesa B.V., established a commercial paperprogram under which it may issue up to an aggregate principal amount of $2billion. At December 31, 2005, an aggregate principal amount of €988million was outstanding under this commercial paper program.

*Domestic Paper*

We may issue up to anaggregate principal amount of €2.0 billion under ourdomestic paper program. At December 31, 2005 an aggregate principal amountof €128million was outstanding under this domestic paper program.

*Medium Term NoteProgram*

In 1995, International Endesa B.V. established amedium-term note program under which it may issue up to an aggregate principalamount of €10 billion of medium term notes. The notesissued under this program have maturities between two and 40 years. At December 31,2005, an aggregate principal amount of €5,298 million wasoutstanding under this medium term note program.

In 2004, we establishedEndesa Capital, S.A. In April 2005, Endesa Capital S.A. realized the firsttwo private placements for imports of €36 million and ¥3,000million, at 12 and 10 years, respectively. The Japanese Yen issuance wasimmediately swapped to euro such that we do not assume the exchange rate riskfor this type of issuance.

*Long-termBorrowings*

We had long term revolving credit facilities of €5,330million at December 31, 2005, €3,850 million at December 31,2004 and €3,801million at December 31, 2003 of which approximately €4,173million were unused at December 31, 2005, €2,640.4 million wereunused at December 31, 2004 and €3,506 million were unusedat December 31, 2003. These credit facilities have an average maturityperiod of 4 years and 3 months. Interest in respect of any borrowings underthese credit facilities is at a floating rate (EURIBOR or LIBOR) plus anaverage spread of 19 basis points. Our credit facilities may serve as backstops for our short-term obligations, including commercial and domestic paperand domestic borrowings. The above numbers include the syndicated revolvingcredit facility of €1,500million formalized on April 22, 2005, with 38 financial institutions. Theinitial maturity is 5 years. The total syndicated amount reaches €2,000million, in two tranches: the first, a loan for €500 million, and thesecond, a revolving credit facility, for €1,500 million.

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In 2005, we renegotiated the terms and conditions oflong-term bilateral credit facilities worth a total of €3,758million with 13 financial institutions, with an initial maturity date of 5years. The renegotiation resulted in certain cost reductions.

To finance the investmentsin distribution planned for 2005-2006, in September 2005 we formalized aloan from Banco Europeo de Inversiones for €600million. As of December 31, 2005, we had obtained €300 million,and we obtained the remaining €300 million in the firstquarter of 2006.

*Preference Shares*

On March 28, 2003 ourwholly-owned subsidiary, Endesa Capital Finance, LLC, issued €1.5billion in preference shares. Endesa guaranteed these securities as to paymentof dividends, liquidation preference and redemption amount. Payments ofdividends to holders of these securities will be made quarterly and the amountof such payments will be linked to EURIBOR with a minimum interest rate of 4%and a maximum of 7%. The preference shares are perpetual, subject to an optionfor early redemption by Endesa Capital Finance, LLC 10 years after the issuancedate.

***Covenants in ourIndebtedness***

As ofthe date of this annual report, our credit ratings are as follows: 

| **Credit Agency**           | ** ** | ** ** | ** ** | **Long-Term** | ** ** | **Short-Term** | ** ** | **Outlook** | ** ** |
|----------------------------------|------------|------------|------------|---------------|------------|----------------|------------|-------------|------------|
| Standard &  Poor’s |       |       | A          |          |       |           | A-1        |        |       | Watch  Negative |   |
| Moody’s                     |       |       | A3         |          |       |           | P-2        |        |       | Negative |   |
| Fitch Ratings                    |       |       | A+         |          |       |           | F1         |        |       | Watch Negative |   |

 

Our financial debt contains customary covenants forcontracts of this nature. Except as described below, we do not have in ourfinancing contracts any triggers involving financial ratios that wouldaccelerate the maturity dates of our debt or trigger any other contractualobligation on our part. Approximately €566 million of our debtwith the European Investment Bank could require additional guarantees in theevent that Moody ́s or Standard & Poor ́s change their respective viewsregarding our credit rating. In addition, in relation to debt obligations of €333million, a drop in our rating below Baa2/BBB would require the renegotiation ofthe terms and conditions of such debt obligations.

Most of the contracts governing indebtedness to thirdparties of the companies consolidated with Endesa’s renewable energies subsidiary,ECyR, and of certain Latin American subsidiaries include customary projectfinance covenants relating to the maintenance of certain financial ratios. Thesecontracts also require that all assets assigned to the projects be pledged infavor of the creditors. The outstanding balance of our third party debt thatincludes such covenants amounted to €405 million at December 31,2005.

As is customary, a significant portion of Enersis’ andEndesa Chile’s financial indebtedness is subject to cross-default provisions,such that if a subsidiary of Enersis or Endesa Chile defaulted on a paymentobligation or other commitment, such a default could trigger an acceleration inpayment of a significant part of the indebtedness of Enersis or Endesa Chile,as the case may be. In general, these cross-default provisions would betriggered by a default in respect of debt principal in excess of US$ 30 million.In addition, many of these agreements also contain cross-accelerationprovisions under certain circumstances, such as certain governmental actions,insolvency proceedings and judicial asset expropriations. The financialindebtedness of Endesa, S.A. does not contain cross-default clauses whichrelate to debt of our Latin American subsidiaries.

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At December 31, 2005, neither Endesa, S.A. norany of our major subsidiaries was in breach of the financial or other covenantscontained in agreements governing financial indebtedness, which could triggeran acceleration in payment of such indebtedness.

Our directors believe thatthe existence of these acceleration triggers will not alter the current/non-currentclassification in the consolidated balance sheet included elsewhere in thisannual report on Form 20-F.

***Guarantees Provided***

At December 31, 2005,we provided guarantees to third parties of €187million in connection with our business activities.

***Recent FinancingTransactions***

The mostsignificant financial transactions performed in 2005 in the capital and bankingmarkets by us and our directly-owned investees, excluding Enersis, some ofwhich have been mentioned previously, are as follows:

·       InSeptember 2005, we entered into an agreement to borrow €600million from the European Investment Bank to finance our investments in thedistribution business planned for 2005-2006. As of December 31, 2005, €300million were already formalized and withdrawn, while the remaining €300million were formalized and withdrawn in the first quarter of 2006. The totalaverage life of the outstanding loans is 7.6 years.

·       InJuly 2005, Proyectos Eólicos Valencianos S. A. (55% owned by Endesa)obtained project financing of €331 million for theconstruction and operation of wind farms in the region of Valencia. Thefinancing was obtained through a syndicated loan with 10 financialinstitutions, maturing in 18 years.

·       InApril 2005, we took out a syndicated loan for €2,000 million with 38entities. The loan is structured in two tranches: a €500 million loan and €1,500million in credit. Both tranches have a maturity of five years with a singlerepayment on maturity and an option to extend each maturity for a further yearduring both the first and the second year.

·       InApril 2005, we renegotiated our long-term credit facilities for anaggregate amount of €3,758 million,extending the maturities from 3.5 to 5 years, with the option to extend themfor two more years via options executable by the banks in a similar way as thefacility described above.

·       InMarch 2005, Endesa Italia obtained a syndicated loan amounting to €700million. This loan matures in 5 years with a single repayment and includes thepossibility of extending its maturity in the first and second year.

·       InJanuary 2005, Etevensa, Endesa Internacional’s Peruvian subsidiary, closeda $135 million financing transaction, which was subsequently increased to $170million, to finance the conversion of the fuel power plant into a combinedcycle and to refinance debt. The debt matures in 2013.

Below we provide adescription of the most significant financial transactions we carried out in2005 through our investees in Chile, Brazil, Argentina, Colombia and Peru.

·       InBrazil, in April 2005 Ampla signed a five-year loan for BRL 45 million,and in June 2005, Ampla obtained a six-year loan with the Banco Nacionalde Desarrollo (BNDES) for BRL 165 million.

·       InArgentina, in September 2005 Costanera arranged a syndicated loan of $30million with a maximum maturity of four and a half years, and Edesur refinancedanother $15 million, three-year loan.

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·       InColombia, in February 2005 Emgesa issued Colombian bonds amounting to COP210,000, million maturing in ten years.

·       In Peru, between June andNovember 2005, Edegel issued Peruvian new sol denominated debt for a totalamount of PES 105 million in three tranches maturing in three, four and fiveyears. Edegel also issued US dollar denominated debt on the local capitalmarket for a total amount of $20 million, maturing in seven years.

***Transactions withUnconsolidated Special Purpose Entities***

As of the date of thisannual report on Form 20-F, we had no material transactions withnon-consolidated special purpose entities or majority-owned subsidiaries thatare not included in our consolidated financial statements or any other interestin or relationship with any other special purpose entities that are notreflected in our consolidated financial statements.

***Interest Rate andForeign Currency Exchange Rate Risk***

We are exposed to varioustypes of market risk in the normal course of business, including the impact ofinterest rate changes, changes in equity, investment prices and foreigncurrency exchange rate fluctuations. To manage this exposure, we employ riskmanagement strategies including the use of derivatives such as interest rateswap agreements, foreign currency forwards and currency swap agreements. As of December 31,2005, approximately 89% of our net financial liabilities was at fixed andhedged rates. We do not hold financial derivatives for trading purposes. See “Item11. Quantitative and Qualitative Disclosures About Market Risk”.

**C.   RESEARCHAND DEVELOPMENT, PATENTS AND LICENSES, ETC.**

Endesa conductsenvironmental research and development projects primarily in connection withdeveloping renewable energy sources, clean combustion and improvements inelectrical lines. Research and Development expenses amounted to €42million and €22million in 2005 and 2004, respectively.

**D.   TRENDINFORMATION**

For information on theprincipal trends and uncertainties affecting our results of operations,financial condition and businesses, see “Item 3. Key Information—Risk Factors”,“Item 4. Information on the Company—Business Overview” “Item 4. Information onthe Company—Electricity Business in Spain”, “Item 4. Information on the Company—ElectricityBusiness in Latin America”, “Item 4. Information on the Company—Regulation” and“—Operating Results” and “—Liquidity and Capital Resources”.

**E.   OFF-BALANCESHEET ARRANGEMENTS**

None.

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**F.   TABULARDISCLOSURE OF CONTRACTUAL OBLIGATIONS**

***ContractualObligations***

Thefollowing table sets forth our contractual obligations as of December 31,2005 for the years indicated below, including, as appropriate, certainestimates as described in the footnotes to the table below: 

| ** **                                                                         | ** ** | **Less than  1 year**  | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|-----------|------------|
| ** **                                                                         | ** ** | **(millions of euro)** | ** ** |
| Long-term and  short-term debt obligations(1)                                      |       |                             | 3,068      |               |       |               | 3,273      |                             |       |      | 9,621      |   |   |   | 9,033 |   |   | 24,995 |   |
| Capital (Finance)  lease obligations                                               |       |                             | 18         |               |       |               | 115        |                             |       |      | 89         |   |   |   | 85 |   |   | 307 |   |
| Operating lease  obligations                                                       |       |                             | 47         |               |       |               | 73         |                             |       |      | 71         |   |   |   | 202 |   |   | 393 |   |
| Purchase  obligations(2)                                                           |       |                             | 3,325      |               |       |               | 6,854      |                             |       |      | 4,321      |   |   |   | 15,864 |   |   | 30,364 |   |
| Other long-term  liabilities reflected in the primary financial statements(3) |       |                             | 377        |               |       |               | 634        |                             |       |      | 570        |   |   |   | 1,595 |   |   | 3,176 |   |
| Total                                                                              |       |                             | 6,835      |               |       |               | 10,949     |                             |       |      | 14,672     |   |   |   | 26,779 |   |   | 59,235 |   |

----

(1)          The amount ofobligations includes the projected effect of debt servicing together with theestimated interest due on fixed rate debt based on the gross face value of thedebt before derivatives at year-end. No non-accrued interest due on variablerate debt has been included.

(2)          Includes principallypayments under long-term supply contracts. Due to the fact that our obligationsunder these contracts are satisfied through delivery of physical units, we haveused forward market prices at December 31, 2005 to estimate ourobligations.

(3)          Includes:

a.                 Obligations inrespect of our workforce restructuring plans. The amount related thereto (€2,209million) was recorded as a provision in our consolidated balance sheet as of December 31,2005.

b.                Obligationsassumed in connection with pensions and other post-employment benefits for anamount of €826million that were recognized as provisions in our December 31, 2005balance sheet.

c.                 Estimated futureannual contributions to pension plans for 2006 (€45 million). It does notinclude any other future annual contributions to pension plans for subsequentyears because we consider that such contributions are not contractualobligations as of December 31, 2005 in light of the fact that we have notcommitted to pay such amounts as of such date. Such contributions will be partof the remuneration of the employees as a component of their salaries and thefinal amount will depend on the evolution of the staff and their basic wages.

The contractualobligations set forth in the table above reflect mainly those agreements andobligations, that in the ordinary course of our operations, are customary andnecessary in light of the activities in which we engage. In particular, many ofthe obligations set forth above are designed to ensure adequate supplies ofcombustibles used in our operations or otherwise to seek medium- to long-termsuccess of our business through medium- to long-investments and/or contractualobligations to electricity supply in Latin America. We believe that ouroperating revenues will be sufficient to satisfy our obligations set forthabove, as well as our other operating costs and remuneration our shareholders.

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**G.   [Reserved]**

**ITEM 6.**                             DIRECTORS,SENIOR MANAGEMENT AND EMPLOYEES

**A.   DIRECTORSAND SENIOR MANAGEMENT**

Thefollowing table sets forth the names of the members of our Board of Directorsat April 30, 2006, their current positions with us, the year they were appointedto the board, the year in which their current term expires and their principalpositions outside Endesa. 

| **Name**                                             | ** ** | ** **                            | ** ** | **Position**  | ** ** | **Year First   Appointed** | ** ** | **Current   Term   Expires**                                                                                                                                                                                                                         | ** ** | **Present   Principal Occupations   Outside Endesa** |
|------------------------------------------------------|------------|---------------------------------------|------------|---------------|------------|----------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|
| Manuel Pizarro  Moreno(1)(2)                         |       | Chairman                              |       | 1996; 2002(3) |       | 2009                       |       | Deputy Chairman, Bolsa  de Madrid; Deputy Chairman, Bolsas y Mercados Españoles, Sociedad Holding de  Mercados y Sistemas Financieros, S.A.                                                                                                     |
| Rafael Miranda  Robredo(1)(2)                        |       | Director and Chief  Executive Officer |       | 1997          |       | 2009                       |       | Chairman, Eurelectric                                                                                                                                                                                                                                |
| Alberto Alonso  Ureba(1)(4)                          |       | Director                              |       | 1998          |       | 2007                       |       | Director,  Zeltia, S.A.; Director, Lazarejo, S.L., Director Neuropharma, S.A.                                                                                                                                                                        |
| Miguel Blesa de la Parra  (1)(5)                     |       | Director                              |       | 2000          |       | 2009                       |       | Chairman, Caja Madrid;  Chairman, Corporación Financiera Caja Madrid; Chairman, Fundación Caja  Madrid; Chairman, Altae Banco; Deputy Chairman, Iberia, L.A.E., S.A.; Deputy  Chairman Confederación Española de Cajas de Ahorro |
| José María Fernández  Cuevas(1)(4)(6) |       | Director                              |       | 1998          |       | 2007                       |       | Secretary Non-Director, CLINER, S.A.; Manager, Seguridad Vial ADA.                                                                                                                                                                                   |
| José Manuel  Fernández-Norniella(1)(4)     |       | Director                              |       | 1998          |       | 2007                       |       | Director, Iberia, LAE, S.A.                                                                                                                                                                                                                          |
| Rafael González-Gallarza Morales(4)(7)          |       | Director                              |       | 1998          |       | 2007                       |       | Director, Pernod Ricard Paris, S.A.; Chairman, Prensa Malagueña, S.A.                                                                                                                                                                           |

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| Juan Ramón Quintás Seoane (4)(7) |   | Director                                     |   | 2004 |     | 2008     |   | Chairman and Managing Director, Confederación Española de Cajas de Ahorro  (CECA); Director, CASER Grupo Asegurador; Director, LICO Corporación, S.A.; Director, Ahorro Corporación ; Deputy  Chairman, Agrupación Europea de Cajas de Ahorros; Member, Comisión Gestora  del Fondo de Garantía de Depósitos en Cajas de Ahorro. |
|-------------------------------------------------|--------|----------------------------------------------|--------|------|----------|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Francisco Javier Ramos Gascón(4)(6)        |   | Director                                     |   | 2001 |     | 2009     |   | Notary for Madrid; Director, Sociedad Rectora de la Bolsa de Madrid S.A;  Chairman, Araluz de Inversiones, S.A. SICAV                                                                                                                                                                                                                                                    |
| Alberto Recarte  Garcia-Andrade(4)(6)           |   | Director                                     |   | 2005 |     | 2009     |   | Deputy Chairman and Managing Director, CENTUNION, Española de Coordinación  Técnica y Financiera, S.A.; Director, Caja de Madrid; Director, Corporación  Caja de Madrid; Chairman, Libertad Digital Newspaper                                                                                                                                        |
| Manuel Ríos Navarro  (4)(7)                |   | Director                                     |   | 1998 |     | 2007     |   | Deputy Chairman and  Managing Director, Industrias Peleteras, S.A., Inpelsa                                                                                                                                                                                                                                                                                              |
| Juan Rosell Lastortras  (4) (7)            |   | Director                                     |   | 2005 |     | 2009     |   | Director, Aguas de  Barcelona, S.A.; Director, Inmobiliaria Colonial, S.A.; Director, Applus  Servicios Tecnológicos, S.L.                                                                                                                                                                                                                                          |
| José Serna Masiá(4)(6)                |   | Director                                     |   | 2000 |     | 2008     |   | Notary for Barcelona.                                                                                                                                                                                                                                                                                                                                                    |
| Salvador Montejo Velilla(8)(9)                  |   | Secretary General and Secretary to the Board |   | 1999 | * * | * * |   |                                                                                                                                                                                                                                                                                                                                                                     |

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(1)          Member of the ExecutiveCommittee of the Board of Directors.

(2)          Director with aprofessional and permanent link to Endesa.

(3)          Date of appointment asChairman of Endesa, S.A. by the Board of Directors.

(4)          Director with noprofessional link to Endesa and not appointed by a particular shareholder.

(5)          Director appointed asrepresentative of Caja Madrid.

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(6)          Member of the Audit andControl Committee.

(7)          Member of theAppointments and Compensation Committee.

(8)          Non-Director.

(9)          Secretary of theExecutive Committee of the Board of Directors, the Audit and Control Committeeand the Appointments and Compensation Committee

Those directors next to whose name footnote (4) appears,may only be reelected for two terms.

The following table setsforth the names of our executive officers, their current positions with us, thenumber of years at their positions, the number of years with the Endesa Group,their areas of experience at the Endesa Group and their business experience outsideEndesa Group during the past five years. Each executive officer is appointedfor an indefinite term.

| **Name**                                | ** ** | ** **                                       | ** ** | **Position** | ** ** | **Number of   Years at   Position** | ** ** | **Number of   Years at   Endesa   Group** | ** ** | **Areas of   Experience at   Endesa Group**                                          | ** ** | **Business   Experience   Outside   Endesa Group   during Past   5 Years** |
|-----------------------------------------|------------|--------------------------------------------------|------------|--------------|------------|-------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|
| Manuel Pizarro Moreno                   |       | Chairman                                         |       | 5            |       |                                | 10         |                                      |       | Deputy Chairman and Director                                                         |       | Chairman, Ibercaja                                                         |
| Rafael Miranda Robredo                  |       | Chief Executive Officer                          |       | 9            |       |                                | 18         |                                      |       | Chief Executive Officer                                                              |       |                                                                       |
| Salvador Montejo Velilla                |       | General Secretary and Secretary to the Board     |       | 7            |       |                                | 7          |                                      |       |                                                                                 |       |                                                                       |
| José Damián Bogas Gálvez |       | Executive Vice-President—Spain and Portugal |       | 9            |       |                                | 24         |                                      |       | General management electricity business                                              |       |                                                                       |
| Luis Rivera Novo                        |       | Executive Vice-President—Latin America      |       | 4            |       |                                | 8          |                                      |       | General management planning and resources                                            |       |                                                                       |
| Jesús Olmos Clavijo                |       | General Manager—Endesa Europa               |       | 2            |       |                                | 25         |                                      |       | Management in Chairman Office, International  projects and technological development |       |                                                                       |
| Francisco de Borja Acha  Besga          |       | Senior Vice-President—Legal Affairs         |       | 8            |       |                                | 8          |                                      |       | Legal department                                                                     |       |                                                                       |
| José Luis Palomo Álvarez      |       | Chief Financial Officer                          |       | 14           |       |                                | 14         |                                      |       | Chief Financial Officer                                                              |       |                                                                       |

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| Carlos Torres Vila          |   | Senior Vice-President Strategy             |   | 4  |   |   | 4  |   |   | Strategy                                  |   | Partner, McKinsey & Co. |
|-----------------------------|--------|--------------------------------------------|--------|----|--------|--------|----|--------|--------|-------------------------------------------|--------|----------------------------------|
| Germán Medina Carrillo |   | Senior Vice-President—Human Resources |   | 18 |   |   | 19 |   |   | Human resources                           |   |                             |
| Gabriel Castro Villalba     |   | Senior Vice-President—Communication   |   | 8  |   |   | 8  |   |   | Communications                            |   |                             |
| Antonio Pareja Molina       |   | Senior Vice-President—Services        |   | 2  |   |   | 19 |   |   | General management planning and resources |   |                             |

 

**B.   COMPENSATION**

***Board of Directors***

Article 40 of Endesa’s Articles of Associationprovides that:

“The compensation of the Directors will consist of thefollowing items: a fixed monthly fee and participation in profits. Theaggregate annual compensation of the Board of Directors in respect of theforegoing items shall be 0.1 percent of consolidated profit, as approved by theShareholders’ Meeting, provided that the Board of Directors may reduce thispercentage in such fiscal years as it deems appropriate. The foregoing iswithout prejudice to the provisions of paragraph 3 of this Article withrespect to attendance fees.”

“The Board of Directors shall make all determinationswith respect to the distribution of said amount as between the foregoing itemsand as between Directors when, as and how it determines in its full discretion.”

“The members of the Board of Directors will alsoreceive fees for meetings attended of the Board of Directors and any committeesthereof. The amount of these fees will not exceed such amount as, in accordancewith the preceding paragraphs, can be established within such limits.”

“The compensation contemplated in the precedingparagraphs for service as a Director shall be compatible with such othercompensation as may be due to the Directors for any other executive or advisoryfunctions that, as the case may be, he or she renders to the company beyond thesupervisory and decision-making functions arising from their service asDirectors, such other functions being subject to the legal requirements theretoapplicable.”

“In accordance with section 130 of the SpanishCompanies Law, Directors may receive compensation constituting participation inthe company’s profits to the extent legal and statutory reserve requirementshave been met and shareholders have been accorded a dividend of at least 4percent of consolidated profit.”

Accordingly, Endesa’s directors receive compensationfor their service on Endesa’s Board of Directors, and in some cases for theirservice on the board of directors of Endesa’s subsidiaries. In 

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addition, directors thatare also executive officers of Endesa receive compensation for their employmentwith the company.

In 2004 and 2005, Endesa’s directors received a fixedmonthly fee amounting to €4,006.74 and an attendancefee of €2,003.37for each meeting attended of the Board of Directors, the Executive Committee,the Nominations and Compensation Committee and the Audit and Control Committee.

The following charts setforth the compensation received by each member of the Board of Directors in2004 and 2005:

**FixedCompensation**

| ** **                                  | ** ** | **2004**   | ** ** | **2005**             | ** ** |
|---------------------------------------------|------------|------------|------------|----------------------|------------|
| **Name**                                    | ** ** | ** ** | ** ** | **as Director** | ** ** | **as Executive  Officer** | ** ** | **as Director** | ** ** | **as Executive  Officer** | ** ** |
| ** **                                  | ** ** | **(euro)** | ** ** | **(euro)**           | ** ** |
| Manuel Pizarro  Moreno(1)                   |       |       | 48,081     |                 |       |   | 784,145 |   |   |   | 48,081 |   |   |   | 1,200,000 |   |   |
| Rafael Miranda  Robredo                     |       |       | 48,081     |                 |       |   | 712,860 |   |   |   | 48,081 |   |   |   | 1,080,000 |   |   |
| Alberto Alonso  Ureba                       |       |       | 48,081     |                 |       |   | — |   |   |   | 48,081 |   |   |   | — |   |   |
| Miguel Blesa de  la Parra                   |       |       | 48,081     |                 |       |   | — |   |   |   | 48,081 |   |   |   | — |   |   |
| Rafael Español  Navarro(2)             |       |       | 48,081     |                 |       |   | — |   |   |   | 24,040 |   |   |   | — |   |   |
| José María  Fernández Cuevas |       |       | 48,081     |                 |       |   | — |   |   |   | 48,081 |   |   |   | — |   |   |
| José Manuel  Fernández Norniella  |       |       | 48,081     |                 |       |   | — |   |   |   | 48,081 |   |   |   | — |   |   |
| José Fernández  Olano(2)          |       |       | 48,081     |                 |       |   | — |   |   |   | 24,040 |   |   |   | — |   |   |
| Rafael  González-Gallarza Morales      |       |       | 48,081     |                 |       |   | — |   |   |   | 48,081 |   |   |   | — |   |   |
| Francisco Núñez  Boluda(3)        |       |       | 48,081     |                 |       |   | — |   |   |   | 48,081 |   |   |   | — |   |   |
| José Luis Oller  Ariño(2)         |       |       | 48,081     |                 |       |   | — |   |   |   | 24,040 |   |   |   | — |   |   |
| Juan Ramón  Quintás Seoane(4)     |       |       | —     |                 |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Francisco Javier  Ramos Gascón         |       |       | 48,081     |                 |       |   | — |   |   |   | 48,081 |   |   |   | — |   |   |
| Alberto Recarte  García-Andrade(5)     |       |       | —     |                 |       |   | — |   |   |   | 28,047 |   |   |   | — |   |   |
| Manuel Ríos  Navarro                   |       |       | 48,081     |                 |       |   | — |   |   |   | 48,081 |   |   |   | — |   |   |
| Juan Rosell  Lastortras(5)                  |       |       | —     |                 |       |   | — |   |   |   | 28,047 |   |   |   | — |   |   |
| José Serna Masiá                  |       |       | 48,081     |                 |       |   | — |   |   |   | 48,081 |   |   |   | — |   |   |
|                                        |       |       | 673,134    |                 |       |   | 1,497,005 |   |   |   | 657,105 |   |   |   | 2,280,000 |   |   |
| Total                                       |       |       | 2,170,139  |                 |       |   | 2,937,105 |   |   |
|                                             |            |            |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          In all Endesa groupcompanies, the fixed salary of the executive chairman is 10 percent greaterthan the fixed salary of the chief executive officer.

(2)          Term expired on May 27,2005.

(3)          Term expired on February 25,2006.

(4)          Does not acceptcompensation other than attendance fees.

(5)          Joined the Board ofDirectors on May 27, 2005.

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**VariableCompensation**

| ** **                                  | ** ** | **2004**   | ** ** | **2005**             | ** ** |
|---------------------------------------------|------------|------------|------------|----------------------|------------|
| **Name**                                    | ** ** | ** ** | ** ** | **as Director** | ** ** | **as Executive  Officer** | ** ** | **as Director** | ** ** | **as Executive  Officer** | ** ** |
| ** **                                  | ** ** | **(euro)** | ** ** | **(euro)**           | ** ** |
| Manuel Pizarro  Moreno                      |       | 14,806     |       |                 | 560,429    |   |   | 14,806 |   |   | 829,323 |   |   |
| Rafael Miranda  Robredo(1)                  |       | 14,806     |       |                 | 596,173    |   |   | 14,806 |   |   | 711,272 |   |   |
| Alberto Alonso  Ureba                       |       | 14,806     |       |                 | —     |   |   | 14,806 |   |   | — |   |   |
| Miguel Blesa de  la Parra(2)                |       | —     |       |                 | —     |   |   | — |   |   | — |   |   |
| Rafael Español  Navarro(3)             |       | 14,806     |       |                 | —     |   |   | 14,806 |   |   | — |   |   |
| José María  Fernández Cuevas |       | 14,806     |       |                 | —     |   |   | 14,806 |   |   | — |   |   |
| José Manuel  Fernández Norniella  |       | 14,806     |       |                 | —     |   |   | 14,806 |   |   | — |   |   |
| José Fernández  Olano(3)          |       | 14,806     |       |                 | —     |   |   | 14,806 |   |   | — |   |   |
| Rafael  González-Gallarza Morales      |       | 14,806     |       |                 | —     |   |   | 14,806 |   |   | — |   |   |
| Francisco Núñez  Boluda(4)        |       | 14,806     |       |                 | —     |   |   | 14,806 |   |   | — |   |   |
| José Luis Oller  Ariño(3)         |       | 14,806     |       |                 | —     |   |   | 14,806 |   |   | — |   |   |
| Juan Ramón  Quintás Seoane(5)     |       | —     |       |                 | —     |   |   | — |   |   | — |   |   |
| Francisco Javier  Ramos Gascón         |       | 14,806     |       |                 | —     |   |   | 14,806 |   |   | — |   |   |
| Alberto Recarte  García.-Andrade(6)    |       | —     |       |                 | —     |   |   | — |   |   | — |   |   |
| Manuel Ríos  Navarro                   |       | 14,806     |       |                 | —     |   |   | 14,806 |   |   | — |   |   |
| Juan Rosell  Lastortras(6)                  |       | —     |       |                 | —     |   |   | — |   |   | — |   |   |
| José Serna Masiá                  |       | 14,806     |       |                 | —     |   |   | 14,806 |   |   | — |   |   |
| Total                                       |       | 192,478    |       |                 | 1,156,602  |   |   | 192,478 |   |   | 1,540,595 |   |   |
|                                        |       | 1,349,080  |       |                 | 1,733,073  |   |   |
|                                             |            |            |            |                      |            |  |  |  |  |  |  |  |  |  |  |

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(1)          The total variable compensation of Mr. Miranda was €640,191in 2004 and €750,113in 2005. These amounts have been reduced by €44,018 and €38,841,respectively, in respect of amounts received for attendance at meetings of theboard of directors of Endesa subsidiaries.

(2)          Doesnot accept compensation other than fixed compensation and attendance fees.

(3)          Term expired on May 27, 2005.

(4)          Term expired on February 25,2006.

(5)          Does not acceptcompensation other than attendance fees.

(6)          Joinedthe Board of Directors on May 27, 2005.

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**Attendance Fees(for Endesa)**

| **Name**                                    | ** ** | ** ** | ** ** | **2004**   | ** ** | **2005** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| ** **                                  | ** ** | **(euro)** | ** ** | **(euro)** | ** ** |
| Manuel Pizarro  Moreno                      |       | 82,138     |       | 106,179    |       |
| Rafael Miranda  Robredo                     |       | 82,138     |       | 106,179    |       |
| Alberto Alonso  Ureba                       |       | 80,135     |       | 104,175    |       |
| Miguel Blesa de  la Parra                   |       | 64,108     |       | 94,158     |       |
| Rafael Español  Navarro(1)             |       | 50,085     |       | 34,057     |       |
| José María  Fernández Cuevas |       | 82,138     |       | 106,179    |       |
| José Manuel  Fernández Norniella  |       | 82,138     |       | 96,162     |       |
| José Fernández  Olano(1)          |       | 46,078     |       | 32,054     |       |
| Rafael  González-Gallarza Morales      |       | 42,071     |       | 54,091     |       |
| Francisco Nuñez  Boluda(2)             |       | 54,091     |       | 58,098     |       |
| Juan Ramón  Quintás Seoane        |       | 46,078     |       | 64,108     |       |
| José Luis Oller  Ariño(1)         |       | 56,094     |       | 36,061     |       |
| Francisco Javier  Ramos Gascón         |       | 56,094     |       | 60,101     |       |
| Alberto Recarte  García.-Andrade(3)    |       | —     |       | 24,040     |       |
| Manuel Ríos  Navarro                   |       | 50,084     |       | 54,091     |       |
| Juan Rosell  Lastortras(3)                  |       | —     |       | 20,034     |       |
| José Serna Masiá                  |       | 56,094     |       | 62,104     |       |
| Total                                       |       | 929,564    |       | 1,111,871  |       |

----

(1)          Term expired on May 27,2005.

(2)          Term expired on February 25,2006.

(3)          Joinedthe Board of Directors as of May 27, 2005.

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**AttendanceFees(for Subsidiary Companies)**

| **Name**                                    | ** ** | ** ** | ** ** | **2004**   | ** ** | **2005** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| ** **                                  | ** ** | **(euro)** | ** ** | **(euro)** | ** ** |
| Manuel Pizarro  Moreno                      |       | —     |       | —     |       |
| Rafael Miranda  Robredo                     |       | 70,895     |       | 89,755     |       |
| Alberto Alonso  Ureba                       |       | —     |       | —     |       |
| Miguel Blesa de  la Parra                   |       | —     |       | —     |       |
| Rafael Español  Navarro(1)             |       | 22,038     |       | 31,778     |       |
| José María  Fernández Cuevas |       | 35,887     |       | 21,136     |       |
| José Manuel  Fernández Norniella  |       | 37,703     |       | 43,118     |       |
| José Fernández  Olano(1)          |       | 20,034     |       | 30,288     |       |
| Rafael  González-Gallarza Morales      |       | 18,031     |       | 18,032     |       |
| Francisco Nuñez  Boluda(2)             |       | 20,034     |       | 18,030     |       |
| Juan Ramón  Quintás Seoane        |       | —     |       | —     |       |
| José Luis Oller  Ariño(1)         |       | 22,037     |       | 11,019     |       |
| Francisco Javier  Ramos Gascón         |       | 22,037     |       | 22,037     |       |
| Alberto Recarte  García.-Andrade(3)    |       | —     |       | 8,013      |       |
| Manuel Ríos  Navarro                   |       | 20,034     |       | 22,038     |       |
| Juan Rosell  Lastortras(3)                  |       | —     |       | 2,400      |       |
| José Serna Masiá                  |       | 22,037     |       | 22,037     |       |
| Total                                       |       | 310,767    |       | 339,681    |       |

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(1)          Term expired on May 27,2005.

(2)          Term expired on February 25,2006.

(3)          Joinedthe Board of Directors on May 27, 2005.

**OtherCompensation**

| **Name**                        | ** ** | ** ** | ** ** | **2004**   | ** ** | **2005** | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|----------|------------|
| ** **                      | ** ** | **(euro)** | ** ** | **(euro)** | ** ** |
| Manuel Pizarro  Moreno          |       | 5,271      |       | 4,444      |       |
| Rafael Miranda  Robredo         |       | 34,865     |       | 21,014     |       |
| Rafael Español  Navarro(1) |       | 6,599      |       | 7,021      |       |
| Total                           |       | 46,735     |       | 32,479     |       |

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(1)          Termexpired on May 27, 2005.

**Advancesand Loans**

| **Name**                   | ** ** | ** ** | ** ** | **2004**   | ** ** | **2005** | ** ** |
|----------------------------|------------|------------|------------|------------|------------|----------|------------|
| ** **                 | ** ** | **(euro)** | ** ** | **(euro)** | ** ** |
| Rafael Miranda  Robredo(1) |       | 495,379    |       | 435,379    |       |

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(1)          These advances weregranted prior to the enactment of the Sarbanes-Oxley Act in July 2002 andtheir terms have not been modified since such date.

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**PensionFund Contributions**

| **Name**                   | ** ** | ** ** | ** ** | **2004**   | ** ** | **2005** | ** ** |
|----------------------------|------------|------------|------------|------------|------------|----------|------------|
| ** **                 | ** ** | **(euro)** | ** ** | **(euro)** | ** ** |
| Manuel Pizarro  Moreno     |       | 235,652    |       | 236,655    |       |
| Rafael Miranda  Robredo(1) |       | 4,319,378  |       | 2,122,182  |       |

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(1)          Thesepayments were made on the same terms as premiums paid to cover Endesa’s futurepension obligations to other employees meeting the required age and senioritycriteria. Of the amounts stated for 2004 and 2005, €3,904,381 and €1,389,000,respectively, represent premiums paid to cover the company’s obligation tocontribute to Mr. Miranda’s pension in future periods.

**LifeInsurance Premiums**

| **Name**                | ** ** | ** ** | ** ** | **2004**   | ** ** | **2005** | ** ** |
|-------------------------|------------|------------|------------|------------|------------|----------|------------|
| ** **              | ** ** | **(euro)** | ** ** | **(euro)** | ** ** |
| Manuel Pizarro  Moreno  |       | 46,253     |       | 119,509    |       |
| Rafael Miranda  Robredo |       | 93,219     |       | 85,206     |       |
| Other directors         |       | 85,994     |       | 120,798    |       |

 

In addition, Endesa hasestablished an early retirement plan in which the chief executive officerparticipates under the same terms as other employees of Endesa meeting the sameage and seniority criteria. The amount of Endesa’s contingent obligation undersuch plan to the chief executive officer was €5,864,605in 2004 and €10,369,336in 2005. The amount of the Company’s contingent obligation to each employeeunder this plan is recalculated each year to reflect such employee’sthen-current salary and decreases each year such employee remains with the company.

***Executive Officers***

*General*

Endesa’s compensation policyaims to be competitive with the leading companies in the energy sector in Spainand other countries in Europe. Pursuant to their contracts with the company,Endesa’s executive officers are generally entitled to receive fixedcompensation, variable compensation and other benefits.

Endesa’s senior management consists of 10 executiveofficers in addition to Mr. Pizarro and Mr. Miranda (whosecompensation and benefits are disclosed above under ‘‘—Board of Directors’’).These are:
| Name                                    | ** ** | ** **                                                 | ** ** | **Title** |
|-----------------------------------------|------------|------------------------------------------------------------|------------|-----------|
| Salvador Montejo Velilla                |       | General Secretary and  Secretary to the Board of Directors |
| José Damián Bogas Gálvez |       | Executive Vice  President—Spain and Portugal          |
| Luis Rivera Novo                        |       | Executive Vice  President—Latin America               |
| Jesús Olmos Clavijo                |       | Executive Vice  President—Europe                      |
| Francisco de Borja Acha  Besga          |       | Senior Vice  President—Legal Advisor                  |
| José Luis Palomo Álvarez      |       | Chief Financial Officer                                    |
| Carlos Torres Vila                      |       | Senior Vice  President—Strategy                       |
| Germán Medina Carrillo             |       | Senior Vice  President—Human Resources                |
| Gabriel Castro Villalba                 |       | Senior Vice  President—Communications                 |
| Antonio Pareja Molina                   |       | Senior Vice President—Services                        |

 

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The aggregate compensation of these 10 executiveofficers in 2005 and 2004 was as follows:

| ** **             | ** ** | **2004**   | ** ** | **2005**  | ** ** |
|------------------------|------------|------------|------------|-----------|------------|
| ** **             | ** ** | **(euro)** | ** ** |
| Fixed  compensation    |       | 3,311,430  |       | 3,860,276 |       |
| Variable  compensation |       | 2,218,709  |       | 2,543,799 |       |
| Board attendance  fees |       | 146,764    |       | 167,806   |       |
| Other                  |       | 195,537    |       | 156,575   |       |
| Total                  |       | 5,872,440  |       | 6,728,456 |       |

 

The aggregate other benefits received by these 10executive officers in 2005 and 2004 were as follows:

| ** **               | ** ** | **2004**   | ** ** | **2005**  | ** ** |
|--------------------------|------------|------------|------------|-----------|------------|
| ** **               | ** ** | **(euro)** | ** ** |
| Advances(1)              |       | 1,196,217  |       | 1,196,217 |       |
| Loans(2)                 |       | 1,668,525  |       | 1,648,525 |       |
| Pension contributions(3) |       | 2,068,073  |       | 4,129,835 |       |
| Life insurance premiums  |       | 218,480    |       | 367,494   |       |
| Total                    |       | 5,151,295  |       | 7,342,071 |       |

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(1)          Thisfigure represents outstanding advances owed to Endesa as of December 31,2005. These advances, which bear no interest, were granted prior to theenactment of the Sarbanes-Oxley Act in July 2002 and their terms have notbeen modified since such date.

(2)          Thisfigure represents outstanding loans owed to Endesa as of December 31,2005. These loans, which bear interest at EURIBOR plus 0.5%, were granted priorto the enactment of the Sarbanes-Oxley Act in July 2002 and their termshave not been modified since such date.

(3)          Thisfigure includes pension contributions made to cover the Company’s obligation tocontribute to these executive officers’ pensions in future periods. Thesepayments were made on the same terms as premiums paid to cover Endesa’s futurepension obligations to other employees meeting the required age and senioritycriteria.

Inaddition, Endesa has established an early retirement plan in which certain ofits executive officers participate on the same terms as other employees ofEndesa meeting the same age and seniority criteria. The amount of Endesa’scontingent obligation under such plan to certain of the 10 executive officersidentified above was €5,857,669 in 2004 and €22,769,061 in 2005.The increase in 2005 relative to the previous year is due largely to a rise inthe number of executive officers eligible for early retirement as of 2005. Theamount of our contingent obligation to each employee under this plan decreaseseach year such employee remains with the Company.

*Severance Arrangements withExecutive Officers*

Endesa has granted all of theexecutive officers referred to above identical “guarantee clauses,” whichentitle the executive officer to a severance payment in the event hisemployment with Endesa is terminated as well as an additional payment asconsideration for a non-competition covenant. We believe that these guaranteeclauses are consistent with market practice among large publicly-tradedcompanies in Spain. The guarantee clauses entitle the executive officer toreceive a severance payment equal to three times his or her annual compensation(calculated as described below) in the event the employment relationship isterminated: (1) by mutual agreement between the executive officer andEndesa; (2) by a unilateral decision of the executive officer based on agross and willful breach by Endesa of its obligations to the executive officeror a change in the executive officer’s position that renders it void ofsubstance; or (3) by Endesa without cause.

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Forpurposes of these guarantee clauses, annual compensation means the relevantofficer’s fixed compensation in the then-current year plus the average of theofficer’s variable compensation in the immediately preceding two years. Theguarantee clauses provide that the executive officer is not entitled to anyseverance payment in the event the employment relationship is terminated byEndesa for cause or by the executive officer without cause. The guaranteeclause also entitles the executive officer to receive an additional paymentequal to his or her fixed compensation in the most recently completed fiscalyear as consideration for the officer’s covenant not to compete with Endesa fortwo years following termination of employment. This additional payment is dueregardless of the circumstances in which the executive officer’s employment isterminated.

**C.**               BOARDPRACTICES

***CorporateGovernance***

Spanish corporate law provides that a company’s Boardof Directors is responsible for the management, administration andrepresentation of a company in all matters concerning the business of acompany, subject to the provisions of the company’s bylaws (*estatutos*) and the powers conferred by stockholders’resolutions.

The Board ofDirectors of Endesa, S.A., in addition to the bylaws described in more detailunder “Additional Information—Memorandum and Articles of Association”, hasadopted other regulations and policies that guide our corporate governanceprinciples. The most important of these regulations and policies are thefollowing:

·       TheBoard Regulations, approved by the board on October 28, 2003.

·       TheInternal Regulations on Conduct in Securities Markets, approved by the board onMay 27, 2003.

·       TheRules on Corporate Integrity, approved by the board on March 25,2003.

The Board Regulations regulate the organization andfunctioning of the Board of Directors in accordance with Article 36 of ourbylaws. They are based on three concepts: promoting transparency in the conductof our governing bodies and in all our activities, fostering effective businessmanagement and the assumption of responsibilities by senior management and theBoard of Directors vís à vís our stockholders.

The Internal Regulations on Conduct in SecuritiesMarkets determine the rules of conduct that must be followed by members ofthe Board of Directors, senior management and other managers and employees who,due to the nature of their job responsibilities, may have access to sensitiveor confidential information, with a view to contributing to transparency and tothe protection of investors. They are based on the principles of impartiality,good faith, placing general interests before one’s own and care and diligencein using information and acting in the securities markets.

The Rules on Corporate Integrity, which comprisethe Charter Governing Senior Management, the Charter Governing Executives andthe Employees’ Code of Conduct, develop our principles and values, establishthe rules governing dealings with customers and suppliers, and establishthe principles that should be followed by employees in their work: ethicalconduct, professionalism and confidentiality. They also establish thelimitations and define the incompatibilities of our executives and seniorexecutives arising from their status as such.

We believe that, as set out in the above regulationsand rules, our core principles of transparency, respect for stockholders’rights, the duty of care and loyalty of the directors and the establishment of rules forthe functioning of the corporate bodies encourage stockholder participation indecision-making processes to the fullest extent permitted by applicable law.

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In addition to the rules and regulations adoptedby the board, the Stockholders’ Meeting Regulations, approved at theStockholders’ Meeting held on June 19, 2003, as modified at theStockholders’ Meeting held on April 2, 2004, also serve an important rolein corporate governance. The objective of the Stockholders’ Meeting Regulationsis to promote the participation of the stockholders in the Stockholders’Meeting by suitably arranging for mechanisms to provide them with informationand encourage them to contribute to decision-making in the Company byexercising their rights to participate in debates and to vote.

All of the documentsdescribed in this Item 6.C are available on our website, www.endesa.es, whichdoes not form part of this annual report on Form 20-F.

***Compliance with SECListing Standards Relating to Audit Committees***

We have established thoseprocedures required under Rule 10-A-3 of the SecuritiesExchange Act of 1934, including adoption of procedures whereby employees mayconfidentially and anonymously submit to an ethics mailbox concerns regardingquestionable accounting or auditing matters, and procedures with respect to thereceipt, retention and treatment of complaints received by Endesa regardingaccounting, internal accounting controls or auditing matters. Additionalprocedures established in compliance with Rule 10-A-3 includeauthorization of the Audit and Control Committee to engage independent counseland other advisers, and the establishment of appropriate funding therefor.

***Compliance withNYSE Listing Standards on Corporate Governance***

On November 4, 2003,the SEC approved new rules proposed by the New York Stock Exchange (NYSE)intended to strengthen corporate governance standards for listed companies.NYSE-listed non-U.S. companies may, in general, follow their home countrycorporate governance practices in lieu of most of the new NYSE corporategovernance requirements. The NYSE rules, however, require that non-U.S.companies disclose any significant ways in which their corporate governancepractices differ from U.S. companies under the NYSE listing standards. In compliancetherewith, the following is a summary of the significant differences betweenour corporate governance practices and those applicable to U.S. companies underthe NYSE listing standards.

*Independence of theDirectors on the Board of Directors*

Under the NYSE corporate governance rules, a majorityof the Board of Directors must be composed of independent directors, theindependence of whom is determined in accordance with highly detailed rules promulgatedby the NYSE. Spanish law does not contain any such rule; however, under Spanishpractice there are generally three types of directors: executive directors,directors *dominicales* appointed by an individualstockholder due to the size of its shareholding, and external directors. TheBoard of Directors of Endesa, S.A. has a majority of non-executive directors. Wehave not determined whether or not the directors on the Endesa, S.A. boardwould be considered independent under NYSE rules. We note, however, that 10 outof the 13 members of our Board of Directors are external in accordance withapplicable corporate bylaws; that is, they do not have any professional linkwith Endesa, S.A. other than through their membership on the Board of Directorsand they were not appointed by any particular shareholder due to the size ofsuch shareholder’s interest in Endesa, S.A.

In addition, in light ofthe recommendations of the Aldama Committee and of the European Union withrespect to external directors, our “type (b)” directors (external directorsunder our bylaws) have made formal declarations of adherence to the minimumprinciples set forth in these recommendations. Furthermore, the Board ofDirectors has made an express declaration that eight directors are independent.

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*Independence of theDirectors on the Audit Committee*

Under the NYSE corporategovernance rules, as of July 31, 2005, all members of the audit committeemust be independent. Independence is determined in accordance with highlydetailed rules promulgated by the NYSE. The Audit and Control Committee ofthe Board of Directors of Endesa, S.A. is composed of four directors. Thecomposition of the Audit and Control Committee is indicated in the initialtable under “—Directors and Senior Management”. We have determined that (i) eachmember of the committee is independent in accordance with the definition ofindependence for Audit Committee membership under SEC rules andregulations and (ii) three of the committee’s four members are independentin accordance with Spanish practice.

*Compensation andNomination Committees*

In accordance with theNYSE corporate governance rules, all U.S. companies listed on the NYSE musthave a compensation committee and a nominations committee and all members ofsuch committees must be independent in accordance with highly detailed rules promulgatedby the NYSE. Under Spanish law, these committees are not required, though thereis a non-binding recommendation for listed companies in Spain to so have thesecommittees and for them to be composed of a majority of non-executivedirectors. Endesa, S.A. satisfies this non-binding recommendation. Thecomposition of the Appointments (i.e., Nomination) and Compensation Committeeis indicated in the initial table under “—Directors and Senior Management”.

*Separate Meetingsfor Independent Directors*

In accordance with theNYSE corporate governance rules, independent directors must meet periodicallyoutside of the presence of the executive directors. Under Spanish law, thispractice is not contemplated and as such, the independent directors on the Boardof Directors of Endesa, S.A. do not meet outside of the presence of theexecutive directors or directors *dominicales*.

***Committees of theBoard of Directors***

*The Audit andControl Committee*

The Audit andControl Committee is composed of four directors. It performs, among others, thefollowing functions:

·       supervisionof our actions to ensure their transparency, with a special focus on thetransparency of the information provided to stockholders and the securitiesmarkets and good corporate governance, and to avoid any trading on insideinformation;

·       formulationof the proposal for the selection of the external auditors and the terms oftheir appointment;

·       preparationof the financial statements and management report to be presented to the Boardof Directors;

·       formulationof the policies and procedures necessary to assure compliance with laws and theapplicable internal rules; and

·       supervisionof our internal control systems and the accounting principles and practicesused in the preparation of our financial statements.

José Serna Masiá was appointed chairman of thiscommittee on May 12, 2006.

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The composition of theAudit and Control Committee is indicated in the initial table under “—Directorsand Senior Management”. See “Item 16.A Audit Committee Financial Expert” foradditional information regarding the Audit and Control Committee.

*Appointments andCompensation Committee*

The Appointmentsand Compensation Committee is composed of four directors. It performs, amongothers, the following functions:

·       informingthe Board of Directors on the appointment of senior managers;

·       proposingthe remuneration framework and approving the remuneration of the directors andcompensation plans for the senior management of Endesa and its subsidiaries;and

·       assessingpromotion and recruiting policies of executive officers.

Manuel Ríos Navarro was appointed chairman of thiscommittee on May 12, 2006.

The composition of theAppointments (i.e., Nomination) and Compensation Committee is indicated in theinitial table under “—Directors and Senior Management”.

**D.**              EMPLOYEES

At December 31, 2005, Endesa had 27,204employees, which represents an increase of 0.2% from the number of employees atDecember 31, 2004. Of those employees, 12,734 were located in Spain andPortugal and 14,470 were located outside Spain and Portugal compared with12,982 and 14,171, respectively, at December 31, 2004.

At December 31,2005, there were two types of staff-reduction and workforce-rationalizationprocedures in progress:

(1)         Collective redundancyprocedures approved by the former companies before the corporate restructuringin 1999. The employees were entitled, based on the collective redundancyprocedure approved at each company, to take early retirement between the agesof 50 and 55, in the period from 1998 to 2005, and an extension to 2007 wasapproved. The total number of employees to whom these procedures apply is4,908, substantially all of whom are no longer in the employment of the Group.

(2)         Voluntary redundancy planapproved in 2000. The employees are entitled to take voluntary redundancy atthe age of 60, provided that they have reached the age of 50 before December 31, 2005,and that they have at least ten years of service at that date. Employees agedbetween 50 and 60 are also entitled to take voluntary redundancy provided thatthere is an agreement between the employee and the company concerned. The totalnumber of employees to whom this plan applies is 4,659, of whom 1,600 arecurrently in pre-retirement.

The table below shows Endesa’s employment levels atthe dates indicated. For a discussion of personnel costs, see “Item 5.Operating and Financial Review and Prospects”.

Thefollowing table sets forth the number of employees in and outside of Spain andPortugal at the dates indicated:

| ** **                                  | ** ** | **At December 31,** | ** ** |
|---------------------------------------------|------------|-------------------------------|------------|
| ** **                                  | ** ** | **2004**                      | ** ** | **2005** | ** ** |
| Total employees  in Spain and Portugal      |       | 12,982                        |       | 12,734 |   |
| Total employees  outside Spain and Portugal |       | 14,171                        |       | 14,470 |   |
| Total                                       |       | 27,153                        |       | 27,204 |   |

 

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The increase in employees outside Spain wasprincipally due to labor regularization in Argentina and Colombia and thenumber of special projects carried out in Chile and Brazil.

Thefollowing tables provide a breakdown of our employees by main category ofactivity and geographic distribution at December 31, 2005.

| **Employees in Spain and Portugal** | ** ** | ** ** | ** ** | **Number** | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|
| Managerial staff                                        |       |       | 436        |       |       |
| Mid-level staff                                         |       |       | 6,003      |       |       |
| Clerical staff  and other workers                       |       |       | 6,295      |       |       |
| Total                                                   |       |       | 12,734     |       |       |

 

| **Employees outside Spain and Portugal** | ** ** | ** ** | ** ** | **Number** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|
| Managerial staff                                             |       |       | 297        |       |       |
| Mid-level staff                                              |       |       | 3,594      |       |       |
| Clerical staff  and other workers                            |       |       | 10,579     |       |       |
| Total                                                        |       |       | 14,470     |       |       |

 

*Spain and Portugal*

In Spain and Portugal, ournon-management personnel are represented by a total of seven unions, three ofwhich currently maintain general representation for 97% of our non-managementemployees. The three representative unions negotiate collective bargainingagreements relating to salary and benefits with companies belonging to theEndesa Group through negotiating committees composed of representatives of eachsuch union. While we have experienced work stoppages for short periods oftime, we have never experienced a work interruption having a material effect onour results of operations.

In May 2004, wesigned a general framework collective bargaining agreement which applied to 20of our subsidiaries, affecting a total of 13,176 employees. This agreement wentinto effect in the year 2003 and will expire on December 31, 2007.

For information withrespect to our pension and benefit plans, see Notes 15 and 18 to ourconsolidated financial statements. Our pension and benefit plans are fullyfunded. As required by Spanish law, we transferred our pension and benefitsplans to independent pension funds in 2002.

*Italy*

A collective bargainingagreement for electricity sector workers, which includes the employees atEndesa Italia, expired in July 2005. Negotiations are still ongoingbetween Assoelettrica and the workers’ unions, relating to economic and otherissues. On February 3, 2005, Endesa Italia signed an agreement regardingperformance rewards relating to the results of the company with its employees. Theresults of 2005 are in the evaluation phase. Endesa Italia is engaged in discussionsunder the direction of the Industry Minister (Ministero Attività Produttive)relating to rights to strike in the electricity sector.

*Latin America*

Our Latin Americansubsidiaries are party to various collective bargaining agreements.

*Chile*

Enersis is a party to twocollective bargaining agreements that expire in June and December 2007,respectively. All collective bargaining agreements with employees of Chilectratook effect in December 2004 and are scheduled to expire in December 2008.Endesa-Chile signed an agreement with the engineers’ union in December 2003,which agreement will expire in December 2006. Our collective 

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bargainingagreements with our electro-mechanical, technical and administrative personnelterminate in June and December 2008. In December 2004, we signedtwo collective bargaining agreements with the employees of CAM Chile, whichwill expire in December 2007 and December 2008, respectively, and wealso have a collective bargaining agreement with Empresa Distribuidora deProductos Eléctricos S.A. (Diprel) that expired in December 2005. On January 1,2006 we began negotiations for the renewal of Diprel agreement. As of the dateof this report, negotiations are ongoing.

*Argentina*

In October 2004 wesigned two collective bargaining agreements with the employees of Edesur. However,those agreements have not yet been registered with government authorities andare therefore not yet effective. We expect these agreements will be registeredand become effective in 2006.

Costanera is also a partyto two collective bargaining agreements. The first agreement was scheduled tobe finalized in April 2005. Although the negotiation process has notbegun, the parties are operating under the terms of the agreement. The secondagreement, which had been scheduled to expire in October 2005, iscurrently under negotiation. In 2005, we updated the clauses of the latteragreement relating to the macroeconomic figures but retained other contractualterms.

Another collectivebargaining agreement (El Chocon’s) has no fixed expiration date.

*Brazil*

Coelce is a party to acollective bargaining agreement that is scheduled to expire in October 2006.Cachoeira Dourada is a party to two collective bargaining agreements, both ofwhich expire in April 2006 and 2007, respectively. Ampla is a party tocollective bargaining agreements that are scheduled to expire in September 2007.These agreements establish salaries, productivity bonuses, individualperformance evaluations and general working conditions. Brazilian law stipulatesthat collective bargaining agreements may not be for more than two years.

*Colombia*

Codensa has two collectivebargaining agreements that expire in December 2007. Typically, collectivebargaining agreements have two-year terms; however, there are no legalrestrictions on the maximum duration of such agreements. Emgesa is a party to acollective bargaining agreement signed on September 21, 2005, that expireson December 1, 2007.

*Peru*

Edelnor is a party tothree collective bargaining agreements that expire in December 2008.Edegel is a party to a collective bargaining agreement that expired in December 2005but was renewed in January 2006.

**E.**               SHAREOWNERSHIP

None of our directors and executive officersbeneficially owns ordinary shares representing one percent or more of our sharecapital. At April 30, 2006, the members of our Board of Directors directlyowned an aggregate of 135,126 of our ordinary shares and indirectly owned anaggregate of 48,982 of our ordinary shares, representing a total of approximately0.018% of our outstanding capital stock, as shown in the table below.

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Thefollowing table sets forth individual ownership of Endesa Ordinary Shares as ofApril 30, 2006 by each member of the Board of Directors:

| **Name**                                   | ** ** | ** ** | ** ** | **Number of   Ordinary Shares  Held  Directly** | ** ** | **Number of   Ordinary Shares  Held  Indirectly** | ** ** | **Total Number  of Ordinary  Shares Held** | ** ** |
|--------------------------------------------|------------|------------|------------|----------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Manuel Pizarro Moreno(1)                   |       |       | 100,004    |                                                           |       |                                                             | —     |                                                      |       |   | 100,004 |   |   |
| Rafael Miranda Robredo(2)                  |       |       | 7,585      |                                                           |       |                                                             | —     |                                                      |       |   | 7,585 |   |   |
| Alberto Alonso Ureba                       |       |       | —     |                                                           |       |                                                             | —     |                                                      |       |   | — |   |   |
| Miguel Blesa de la Parra(3)                |       |       | 600        |                                                           |       |                                                             | —     |                                                      |       |   | 600 |   |   |
| José María Fernández Cuevas |       |       | —     |                                                           |       |                                                             | —     |                                                      |       |   | — |   |   |
| José Manuel Fernández-Norniella  |       |       | —     |                                                           |       |                                                             | —     |                                                      |       |   | — |   |   |
| Rafael González-Gallarza Morales      |       |       | 3,300      |                                                           |       |                                                             | —     |                                                      |       |   | 3,300 |   |   |
| Juan Ramón Quintás Seoane        |       |       | 1,525      |                                                           |       |                                                             | —     |                                                      |       |   | 1,525 |   |   |
| Francisco Javiér Ramos Gascón    |       |       | 992        |                                                           |       |                                                             | 8,779      |                                                      |       |   | 9,771 |   |   |
| Alberto Recarte  García.-Andrade      |       |       | 250        |                                                           |       |                                                             | 21,100     |                                                      |       |   | 21,350 |   |   |
| Manuel Ríos Navarro                   |       |       | 3,889      |                                                           |       |                                                             | 8,583      |                                                      |       |   | 12,472 |   |   |
| Juan Rosell Lastortras                     |       |       | 5          |                                                           |       |                                                             | 10,000     |                                                      |       |   | 10,005 |   |   |
| José Serna Masiá                 |       |       | 16,976     |                                                           |       |                                                             | 520        |                                                      |       |   | 17,496 |   |   |
| Total                                      |       |       | 135,126    |                                                           |       |                                                             | 48,982     |                                                      |       |   | 184,108 |   |   |

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(1)          Mr. Pizarro is amember of the Board of Directors as well as Executive Chairman of Endesa.

(2)          Mr. Miranda is amember of the Board of Directors as well as Chief Executive Officer of Endesa.

(3)          Mr. Blesa is alsothe executive chairman of *Caja de Ahorros y Monte dePiedad de Madrid* (“Caja Madrid”), which, as of March 21, 2006,beneficially owned 105,197,057 Endesa ordinary shares (or approximately 9.94%of Endesa’s total share capital).

Thefollowing table sets forth individual ownership of Endesa Ordinary Shares as ofMarch 31, 2006 by each of Endesa’s executive officers (other thanMr. Pizarro and Mr. Miranda, whose share ownership is disclosed inthe preceding table):

| **Name**                                 | ** ** | **Number of  Ordinary Shares  Held  Directly** | ** ** | **Number of  Ordinary Shares  Held  Indirectly** | ** ** | **Total Number of  Ordinary Shares Held** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| José Damián Bogas  Gálvez |       |                                                     | 7,438      |                                                       |       |                                                          | —     |   |   |   | 7,438 |   |   |
| Luis Rivera Novo                         |       |                                                     | 3,015      |                                                       |       |                                                          | —     |   |   |   | 3,015 |   |   |
| Jesús Olmos  Clavijo                |       |                                                     | 7,108      |                                                       |       |                                                          | —     |   |   |   | 7,108 |   |   |
| José Luis Palomo  Álvarez      |       |                                                     | 8,300      |                                                       |       |                                                          | —     |   |   |   | 8,300 |   |   |
| Salvador Montejo  Velilla                |       |                                                     | 860        |                                                       |       |                                                          | —     |   |   |   | 860 |   |   |
| Francisco de  Borja Acha Besga           |       |                                                     | 1,000      |                                                       |       |                                                          | —     |   |   |   | 1,000 |   |   |
| Carlos Torres  Vila                      |       |                                                     | 731        |                                                       |       |                                                          | —     |   |   |   | 731 |   |   |
| Germán Medina  Carrillo             |       |                                                     | 7,573      |                                                       |       |                                                          | —     |   |   |   | 7,573 |   |   |
| Gabriel Castro  Villalba                 |       |                                                     | 4,479      |                                                       |       |                                                          | —     |   |   |   | 4,479 |   |   |
| Antonio Pareja  Molina                   |       |                                                     | 4,479      |                                                       |       |                                                          | —     |   |   |   | 4,479 |   |   |
| Total                                    |       |                                                     | 44,983     |                                                       |       |                                                          | —     |   |   |   | 44,983 |   |   |

 

To the knowledge ofEndesa, no director or executive officer of Endesa currently holds any optionsto purchase Endesa ordinary shares or Endesa ADSs.

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**ITEM 7.**                             MAJORSHAREHOLDERS AND RELATED PARTY TRANSACTIONS

**A.   MAJORSHAREHOLDERS**

Allshareholders have the same voting rights. In accordance with applicable Spanishlaw, the following have reported to the Comisión Nacional del Mercado deValores (CNMV) that they beneficially own more than 5% of our share capital. 

| **Title of Class** | ** ** | ** **                                                 | ** ** | **Identity of Person or Group** | ** **  | **Number of Ordinary  Shares Beneficially  Owned** | ** ** | **Percent of Class** | ** ** |
|------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|-------------|-------------------------------------------------------------------|------------|--------------------------------|------------|
| Ordinary shares              |       | Caja de Ahorros y Monte de Piedad  de Madrid (Caja Madrid) |       |                                                | 105,197,057 |                                                              |       |                           | 9.936      | % |   |
| Ordinary shares              |       | Chase  Nominees LTD(1)                                     |       |                                                | 60,683,704  |                                                              |       |                           | 5.732      | % |   |
| Ordinary shares              |       | AXA(2)                                                     |       |                                                | 56,646,095  |                                                              |       |                           | 5.350      | % |   |
| Ordinary shares              |       | State Street Bank and  Trust(3)                            |       |                                                | 53,339,905  |                                                              |       |                           | 5.038      | % |   |

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(1)          OnMarch 26, 2003, the financial institution Santander Central Hispano, S.A.notified the Spanish National Securities Market Commission, as a declarant withrespect to Chase Nominees, Ltd., of a holding of 60,683,704 shares, equal to5.732% of the Endesa’s ordinary share capital.

Chase Nominees, Ltd. isrequired to notify its holding in Endesa as a listed entity as a result of itsparticipation as an interposed person (Article 3.1 of Royal Decree377/1991) since it acts for the account of its customers, none of whom are inturn required to notify a significant holding in Endesa if regard is only hadto the shareholding position the ownership of which Chase Nominees, Ltd. has onrecord.

(2)          On September 8,2005, AXA, S.A. notified the Spanish National Securities Markets Commission ofa significant holding of 56,646,095 shares of Endesa, representing 5.350% ofEndesa’s ordinary share capital. This shareholding is divided up as follows:4,639,809 shares (0.438%) directly held and 52,006,286 shares (4.912%)indirectly held, of which AXA IM directly owns 0.432%, AXA ROSENBERG0.739% and ACM 3.741%.

(3)          OnFebruary 2, 2005, State Street Bank & Trust Co. notified theSpanish National Securities Markets Commission of a significant holding of53,339,905 shares of Endesa, representing 5.038% of Endesa’s ordinary sharecapital. The financial institution is a party under an obligation to givelegally required notice of significant holdings in Endesa, although since itowns the holding as an interposed person acting on behalf of its customers (Article 3.1of Royal Decree 377/1991), State Street Bank & Trust Co. has, in itscapacity as a custodian, given notice that none of its customers is, in turn,under an obligation to notify any significant holding since they do not possessholdings exceeding 5% or multiples thereof (customers not resident in taxhavens) or exceeding 1% (customers resident in tax havens) in Endesa.

**B.   RELATEDPARTY TRANSACTIONS**

We have not entered into any transactions with membersof our Board of Directors, executive officers, senior management or anyshareholders with representatives on our Board of Directors that are unusual intheir nature or conditions or that are material to us.

In the ordinary course of our business, our principalshareholder, Caja Madrid, has extended loans, guarantees and other services toEndesa, S.A. and our affiliates. We believe that all such loans, guarantees andother services we have received have been entered into on arms-length terms andconditions.

In addition, in the ordinary course of our business,we have occasionally made loans to or guaranteed the obligations of companiesnot consolidated by us, but over which we have a significant influence. We 

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believe that all suchloans and guarantees have been entered into on arms-length terms andconditions. At December 31, 2005 we had €269million outstanding under such loans. At December 31, 2005 we hadguarantees outstanding of €187 million in respect of the obligations ofsuch companies.

The aggregate amount ofadvances and loans granted to our executive officers (including executiveofficers who are also members of our Board of Directors) outstanding at December 31,2005 was €3,280,121. Of this outstanding amount, €1,741,327accrue interest at Euribor plus 0.5% and €1,538,794 areinterest-free.

**ITEM 8.**                             FINANCIALINFORMATION

**A.   CONSOLIDATEDSTATEMENTS AND OTHER FINANCIAL INFORMATION**

**FinancialStatements**

See Item 18 for our consolidatedfinancial statements.

**Legal Proceedings**

In 2002, EdF International (“EdF”) commenced an actionagainst Endesa Internacional, S.A., Repsol YPF, S.A. and YPF, S.A. beforethe Arbitration Court of the International Chamber of Commerce, Paris, France. EdFpetitioned the court to require Endesa Internacional, S.A. to pay to it $256million plus interest, a petition which was increased to $407 million, arisingout of EdF’s purchase of the respective interests of Endesa Internacional andYPF, S.A. in two Argentine companies, Easa and Edenor. Endesa Internacional iscontesting this claim and has counterclaimed in an amount of $58 million. Themost recent hearing occurred in October 2005.

There are five court proceedings currently in progressagainst Endesa Distribución Eléctrica relating to forest fires in Cataluña, anadministrative penalty for power cuts in Barcelona, and a contract disputerelating to the construction of electricity facilities in the Canary Islands. Ourestimated aggregate liability under these claims, certain of which we maysettle, is €61 million.

The Spanish State Auditing Agency issued an adversereport on certain subsidies****received byEncasur. Depending on the outcome of discussions we are having with thisagency, we may be required to repay grants amounting to approximately €37million.

The reform of the Local Finances Law in Spain,effective from January 1, 2003, modified the air, surface and subsurfacecharge for occupying the local public domain and included electricity retailersas parties liable to pay this charge, even though electricity retailers do notown the electricity distribution systems occupying the local public domain. TheSupreme Court confirmed that the electricity retailers were subject to such acharge even before the above-mentioned reform was adopted. The lawsuits total €7.4million, although the maximum contingency in this respect amounts to €77.2million.

SUNAT, the tax authority in Peru, has questioned thetax effects of the asset revaluation which took place in Endesa’s subsidiaryEdegel S.A. (“Edegel”) as a result of its spinoff in 1996. With respect to theissues under discussion, Edegel obtained favorable court decisions at the twocorresponding administrative tax courts (Tribunal Arbitral and Tribunal Fiscal).SUNAT has reviewed the asset valuations and issued revised assessments for theperiod 1996 to 2001. Edegel accepted the revised assessments in part and haspaid 13 million Peruvian new sols (US$ 4 million). Edegel is appealing theremaining assessments totaling 106 million Peruvian new sols (approximately US$33 million). Our economic interest in Edegel is 13.78%.

The Brazilian Customs Administration (“DECEX”) hasquestioned the application of a special tax reduction for imported assetsthrough the customs of the federal states of Rio de Janeiro and Rio Grande doSul, previously awarded in 1998 to our subsidiary CIEN. At December 31,2005, CIEN had provisions of €110 million in respect offederal taxes and related interest under discussion. On December 15, 2004,the 

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tax authorities in Brazilruled that CIEN is liable for 187 million Brazilian Reais (approximately US$ 87million) for taxes, interest accrued and fines on account of the goods importedthrough the state of Rio de Janeiro, and such ruling has been appealed beforethe Administrative Court. We are awaiting final resolution of theadministrative procedure.

Our Brazilian subsidiary Ampla Energía e Servicios,S.A. (“Ampla”, formerly known as Cerj) won an injunction in 1996 against theFederal Government of Brazil, which stated that Ampla was not obliged to paythe *Contribuicao para o Financiamento da SeguridadeSocial* (contributions to the social security system). This tax isbased on revenues earned from the provision of electric power services. TheCourt of Appeal reaffirmed the prior court’s decision and stated it was finaland in 1997 the Federal Government of Brazil brought an “Acao Rescisoria”. Thisis a special claim based on strict statutory authorization that allows theCourt to nullify the prior final judgment and retry the case. After thefavorable ruling by the Federal Court of Appeals of the Second Circuit—Rio deJaneiro, it is likely that the Federal Government will appeal it to the SupremeCourt in Brasilia. The amount in dispute is approximately 406 million BrazilianReais (US$ 187 million). No date has been scheduled for the decision.

Until December 31, 1996, we and our subsidiariespaid corporate income tax within the Consolidated Tax Group, whose controllingcompany is the Sociedad Estatal de Participaciones Industriales (“SEPI”). Thecorporate income tax law establishes that companies that leave the Group mustapply deductions that have not been used by the Group in the manner and to thesame extent as their contribution to the deductions. Pursuant to thisprovision, the Tax and Financial Inspector concluded that Endesa and UniónEléctrica de Canarias, S.A. (Unelco) were entitled to take certain deductionsin 1997 and thereafter in respect of certain investments that they made from1992 to 1996. Nevertheless, subsequent to such resolution, and as a consequenceof the audits conducted by SEPI, the Tax and Financial Inspector initiatedproceedings on behalf of the SEPI Group in 1996 in respect of deductions takenin whole or in part by Endesa and Unelco that were generated by Endesa Groupcompanies from 1992 to 1996. On June 14, 2001, the Ministry of Economy andFinance approved certain resolutions declaring unduly adverse the Tax andFinancial Inspector’s conclusions in respect of Endesa’s and Unelco’sproceedings, whereby it recognized their right to apply the deductionsgenerated in the aforementioned years. Proceedings for judicial review as a resultof the aforementioned decisions were instituted at the National AppellateCourt, which dismissed the tax authorities’ case. The tax authorities haveappealed to the Spanish Supreme Court.

Separately, the Tax and Financial Inspector initiatedproceedings against Endesa in which it challenged Endesa’s right to takecertain deductions generated in 1992 to 1996. All of the assessments, exceptfor one in which no decision has been rendered, have been adjudged null andvoid by the Central Economic-Administrative Tribunal.

Lastly, the National Appellate Court ruled null andvoid the SEPI assessment of 1996 in which the tax credits deductions weretaken. SEPI has****appealed this ruling with theSpanish Supreme Court.

The total amount of deductions at issue in the aboveproceedings is €136 million.

The Spanish tax authorities have challenged theapplicability of certain tax incentives corresponding to the Endesa tax group,the maximum contingency for which amounts to €31million.

In 2005 the Brazilian tax authorities notified Amplaof a tax assessment for 406 million Brazilian Reais (US$ 206 million). Theauthorities consider that the special tax regime, under which interest receivedby subscribers of Ampla’s 1998 fixed rate notes is exempt from tax in Brazil,is not applicable. Ampla has appealed this assessment.

Ampla is also awaiting a ruling by the Federal Courtof Appeals of the Second Circuit—Rio de Janeiro, on its right to offset its taxliabilities on earnings generated from 1998 onwards with tax losses 

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accrued in 1993, 1995 and1996 without such offset being limited to the 30% of the period tax basis. Theamount subject to discussion is 219 million Brazilian Reais (US$ 102 million).

Public Emergency and Regime Reform Law 25561, enactedby the Argentine authorities on January 6, 2002, rendered void certainconditions of the concession agreement of our subsidiary Edesur. Law 25561 alsorequired public service concession agreements to be renegotiated within areasonable period of time in order to adapt them to the new regime.

Edesur did not renegotiate the agreement, promptingits Chilean corporate stockholders, subsidiaries of Endesa, to file a requestfor arbitration in 2004 pursuant to the Treaty on the Promotion and Protectionof Chilean and Argentinean Investments with the International Center for theSettlement of Investment Disputes (“ICSID”). The arbitration is in progress,though in 2005 the parties negotiated an agreement which, if ultimatelyapproved by the Argentine parliament and the Argentine government, could, ifcertain conditions are met, lead to the suspension of these arbitrationproceedings.

Gas Natural SDG, S.A. has filed with the BarcelonaCommercial Courts a statement of claim against Endesa and the members of ourBoard of Directors in which, among other matters, it alleges that certaindecisions by Endesa violate Article 14 of the Royal Decree relating toTender Offers, including the distribution of dividends arising from thedivestiture in Auna, certain asset disposals and acquisitions (e.g., theongoing process of the Dolna Odra acquisition and disposal of certain realestate assets) and our current advertising campaign.

On April 4, 2006, the Madrid Commercial CourtNo. 3 resolved, at our request, to suspend temporarily Gas Natural’spublic tender offer for 100% of our capital stock, and also to suspend theeffectiveness of a contract between Gas Natural and Iberdrola, S.A. relating todisposals of certain of our assets should Gas Natural acquire Endesa. Pursuantto the Law of Civil Judgment, we were required to present an estimate of thedamages or losses we may incur or that may be incurred by the companiesaffected by the suspension. We were required to post €1,000million as a bond relating to these possible damages or losses. Neither theestimate nor the amount of assets we have posted will determine the existenceor quantity of eventual damages or losses that could be derived from thisprocess.

Separately, Endesa has appealed the Spanish Council ofMinisters’ antitrust authorization of the Gas Natural offer and has asked theSpanish Supreme Court to enjoin Gas Natural's offer. On May 10, 2006,Endesa was notified that the Spanish Supreme Court temporarily suspended theauthorization until the Court considers Endesa's claim and renders a decision.The suspension of the offer is provisional, and we cannot determine if or whenthe Gas Natural offer will be permanently enjoined. As a condition to thesuspension, a €1,000 million bondmust be posted relating to possible damages or losses that may be incurred bythe companies affected by the suspension, but the Spanish Supreme Court hasaccepted the bond already posted by Endesa with the Madrid Commercial CourtNo. 3 in Madrid provided that the bonding entities agree to extend thebond’s effects to the Spanish Supreme Court’s procedure. Neither the estimatenor the amount of assets posted will determine the existence or quantity ofeventual damages or losses that could be derived from this process.

Our Board of Directors believes that the provisionsrecorded in our consolidated balance sheet are sufficient to cover probable orcertain liabilities in connection with current litigation, arbitrationproceedings and other transactions described above. In light of the nature ofthe risks covered by these provisions, it is not possible to determine withcertainty our future liabilities with respect to these or other matters.

There are no other legalproceedings to which we are a party that are material to us. However, at December 31,2005, we had a total provision of €5,097 million, of which €2,209million relates to coverage for future liabilities related to our restructuringplans carried out as a consequence of the transition to a more competitivemarket, principally liabilities relating to the termination of certaincategories of 

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employees,and €826million relates to coverage of pensions and similar obligations. Of theremaining amount, €1,650million of the provision relates to other provisions, including litigation andtermination benefits, and €412 million relates to facility closurecosts.

**Dividend Policy**

As in previous years, we expect to declare an interimdividend and a final dividend. The interim dividend is normally paid on thefirst business day of the year, following approval by the Board of Directors. Thefinal dividend is normally paid on the first business day of July, followingapproval by the shareholders of our financial statements and management reportat our general meeting of shareholders, which is required to be held during thefirst half of the year.

We expect to apply a dividend policy that givesmaximum priority to returns for our shareholders through the followingcriteria, provided that our financial figures enable application of this policy:growth of 12% in the dividend with a charge to ordinary activities anddistribution of 100% of the gains obtained on the divestment of non-strategicassets.

Payment of a total gross dividend of €2.40per share out of the profit for 2005 was approved at the Annual General Meetingheld on February 25, 2006, resulting in a total dividend of €2,541million. This payment is in line with the approved dividend policy, as itincludes the total net gains obtained in 2005 on the sale of non-strategicassets, which totaled €1,341 million. The dividend proposed, afterdiscounting the component derived from the net gains on asset sales, is 53.5%higher than that paid out of the profit for 2004.

Thefollowing table sets forth the interim, final and total dividends paid byEndesa per ordinary share in respect of each year indicated. 

| ** **                                 | ** ** | **euro per ordinary share** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| **Year Ended December 31,** | ** ** | ** **                                 | ** ** | **Interim** | ** ** | **Final** | ** ** | **Total** | ** ** | **% Increase  from Prior  Year** | ** ** |
| 2001                                       |       | 0.2640                                     |       | 0.4185 |   | 0.6825 |   |   | 5.0 | % |   |
| 2002                                       |       | 0.2640                                     |       | 0.4185 |   | 0.6825 |   |   | 0.0 | % |   |
| 2003                                       |       | 0.2640                                     |       | 0.4390 |   | 0.7030 |   |   | 3.0 | % |   |
| 2004                                       |       | 0.2720                                     |       | 0.4662 |   | 0.7382 |   |   | 5.0 | % |   |
| 2005                                       |       | 0.3050                                     |       | 2.0950 |   | 2.4000 |   |   | 225.1 | % |   |
|                                            |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

Our rate of income distribution was 79.9% in 2005compared with 56.7% in 2004.

Dividends payable byEndesa to holders of our ordinary shares or ADSs not residing in Spain for taxpurposes and not operating through a permanent establishment in Spain aresubject to Spanish withholding tax at the rate of 15%, subject to reductionpursuant to applicable tax treaties. See “Item 10. Additional Information—Taxation—SpanishTax Consideration—Taxation of Dividends”.

**ITEM 9.**                             THEOFFER AND LISTING

**A.   OFFER ANDLISTING DETAILS**

**Market PriceInformation**

Endesa’s ordinary shares are currently listed on theSpanish stock exchanges in Madrid, Bilbao, Barcelona and Valencia (“Spanishstock exchanges”) and are traded on the Automated Quotation System of the Spanishstock exchanges. Endesa’s ordinary shares are also listed on the Santiago OffShore Stock Exchange in Chile.

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Endesa’s ADSs representing ordinary shares of Endesaare listed on the New York Stock Exchange. Each Endesa ADS represents oneordinary share of Endesa. Effective on May 18, 2000, Citibank, N.A. becameEndesa’s depositary issuing the ADRs evidencing the Endesa ADSs. Endesa’sticker symbol on the New York Stock Exchange is “ELE”.

Thetable below sets forth, for the periods indicated, the reported high and lowclosing sales prices per Endesa ADS on the New York Stock Exchange. 

| ** **                                | ** ** | **Per ADS**                | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **High**                        | ** ** | **Low** | ** ** |
| ** **                                | ** ** | **(in U.S. dollars)** | ** ** |
| **2001**                                  |       | 19.44                           |       | 14.70 |   |
| **2002:**                                 |       |                            |       |   |   |
| First Quarter                             |       | 15.84                           |       | 14.37 |   |
| Second Quarter                            |       | 15.77                           |       | 13.65 |   |
| Third Quarter                             |       | 14.40                           |       | 8.77 |   |
| Fourth Quarter                            |       | 12.15                           |       | 9.00 |   |
| **2003:**                                 |       |                            |       |   |   |
| First Quarter                             |       | 12.83                           |       | 11.24 |   |
| Second Quarter                            |       | 17.12                           |       | 12.54 |   |
| Third Quarter                             |       | 16.42                           |       | 15.39 |   |
| Fourth Quarter                            |       | 19.10                           |       | 15.43 |   |
| **2004:**                                 |       |                            |       |   |   |
| First Quarter                             |       | 20.44                           |       | 17.28 |   |
| Second Quarter                            |       | 19.60                           |       | 17.31 |   |
| Third Quarter                             |       | 19.38                           |       | 17.95 |   |
| Fourth Quarter                            |       | 23.51                           |       | 19.09 |   |
| **2005:**                                 |       |                            |       |   |   |
| First Quarter                             |       | 23.40                           |       | 21.85 |   |
| Second Quarter                            |       | 22.92                           |       | 21.63 |   |
| Third Quarter                             |       | 26.90                           |       | 21.98 |   |
| Fourth Quarter                            |       | 28.26                           |       | 24.08 |   |
| Month ended October 31               |       | 27.01                           |       | 24.37 |   |
| Month ended November 30              |       | 28.26                           |       | 24.08 |   |
| Month ended December 31              |       | 26.65                           |       | 25.26 |   |
| **2006:**                                 |       |                            |       |   |   |
| First Quarter                             |       | 33.64                           |       | 26.30 |   |
| Month ended January 31               |       | 28.84                           |       | 26.30 |   |
| Month ended February 28              |       | 33.63                           |       | 28.72 |   |
| Month ended March 31                 |       | 33.64                           |       | 31.76 |   |
| Second Quarter                            |       |                            |       |   |   |
| Month ended April 30                 |       | 33.35                           |       | 32.03 |   |
| Month ended May  31 (through May 15) |       | 34.33                           |       | 33.02 |   |

 

At December 31, 2005, approximately 2.14% of ourordinary shares were held in the form of ADSs by 185 holders of record. Thenumber of ADSs outstanding was 22,676,060 at December 31, 2005.

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Thetable below sets forth, for the periods indicated, the reported high and lowclosing sales prices per Endesa ordinary share on the Automated QuotationSystem, which is the principal market for the ordinary shares. Such prices havealso been translated into dollars at the Noon Buying Rate on the respectivedates of such quotations. See “Item 3. Key Information—Exchange Rates”regarding exchange rates applicable during the periods set forth below.

| ** **                                     | ** ** | **Per Ordinary Share** | ** ** | **Per Ordinary Share** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **High**                         | ** ** | **Low**                          | ** ** | **High** | ** ** | **Low** | ** ** |
| ** **                                     | ** ** | **(in euro)**               | ** ** | **(in U.S. dollars)**  | ** ** |
| **2001**                                       |       | 20.26                            |       | 16.05                            |       | 18.63 |   | 14.60 |   |
| **2002:**                                      |       |                             |       |                             |       |   |   |   |   |
| First Quarter                                  |       | 17.86                            |       | 16.46                            |       | 15.55 |   | 14.41 |   |
| Second Quarter                                 |       | 17.45                            |       | 14.13                            |       | 15.35 |   | 13.97 |   |
| Third Quarter                                  |       | 14.62                            |       | 8.95                             |       | 14.43 |   | 8.78 |   |
| Fourth Quarter                                 |       | 12.28                            |       | 9.06                             |       | 12.19 |   | 8.93 |   |
| **2003:**                                      |       |                             |       |                             |       |   |   |   |   |
| First Quarter                                  |       | 12.05                            |       | 10.04                            |       | 12.74 |   | 11.07 |   |
| Second Quarter                                 |       | 14.88                            |       | 11.46                            |       | 17.28 |   | 12.50 |   |
| Third Quarter                                  |       | 14.53                            |       | 13.27                            |       | 16.15 |   | 15.46 |   |
| Fourth Quarter                                 |       | 15.34                            |       | 13.06                            |       | 19.03 |   | 15.42 |   |
| **2004:**                                      |       |                             |       |                             |       |   |   |   |   |
| First Quarter                                  |       | 16.18                            |       | 14.01                            |       | 19.96 |   | 18.38 |   |
| Second Quarter                                 |       | 16.06                            |       | 14.46                            |       | 18.98 |   | 18.05 |   |
| Third Quarter                                  |       | 15.68                            |       | 14.57                            |       | 19.47 |   | 18.09 |   |
| Fourth Quarter                                 |       | 17.29                            |       | 15.27                            |       | 23.41 |   | 20.67 |   |
| **2005:**                                      |       |                             |       |                             |       |   |   |   |   |
| First Quarter                                  |       | 18.05                            |       | 16.74                            |       | 15.24 |   | 14.13 |   |
| Second Quarter                                 |       | 19.41                            |       | 16.63                            |       | 16.39 |   | 14.04 |   |
| Third Quarter                                  |       | 22.30                            |       | 17.96                            |       | 18.82 |   | 15.16 |   |
| Fourth Quarter                                 |       | 22.78                            |       | 20.20                            |       | 19.23 |   | 17.05 |   |
| Month ended October 31                    |       | 22.78                            |       | 20.20                            |       | 27.32 |   | 24.23 |   |
| Month ended November 30                   |       | 22.26                            |       | 20.38                            |       | 26.24 |   | 24.03 |   |
| Month ended December 31                   |       | 22.44                            |       | 21.47                            |       | 26.57 |   | 25.42 |   |
| **2006:**                                      |       |                             |       |                             |       |   |   |   |   |
| First Quarter                                  |       | 28.35                            |       | 21.70                            |       | 33.86 |   | 26.38 |   |
| Month ended January 31                    |       | 23.70                            |       | 21.70                            |       | 28.81 |   | 26.38 |   |
| Month ended February 28                   |       | 28.35                            |       | 24.20                            |       | 33.81 |   | 28.86 |   |
| Month ended March 31                      |       | 27.89                            |       | 26.54                            |       | 33.86 |   | 32.22 |   |
| Second Quarter                                 |       |                             |       |                             |       |   |   |   |   |
| Month ended April 30                      |       | 27.20                            |       | 26.32                            |       | 34.34 |   | 33.23 |   |
| Month ended  May 31 (through May 15) |       | 26.86                            |       | 26.28                            |       | 34.62 |   | 33.87 |   |

 

**B.**   PLANOF DISTRIBUTION

Not applicable.

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**C.**   MARKETS

**Spanish SecuritiesMarket**

The Spanish securities market for equity securities(the “Spanish stock exchanges”) consists of the four stock exchanges located inMadrid, Barcelona, Bilbao and Valencia (the “local exchanges”), the majority ofthe transactions on which are conducted through the Automated Quotation System(Sistema de Interconexión Bursátil Español or “S.I.B.E.”).

At December 31, 2005,there were 113 companies listed with shares traded through the AutomatedQuotation System. The total market capitalization of these companies at December 31,2005 was approximately €855,310 billion (US$722,024 billion) and their reported trading volume for the year ended December 31,2005 was €848,209billion (US$ 716,029 billion).

**Automated QuotationSystem**

In April 1989, the Spanish stock exchanges beganto implement the Automated Quotation System, a system of computer-based tradingof securities that connects the four Spanish stock exchanges. During 2003, theAutomated Quotation System accounted for the majority of the total tradingvolume of equity securities on the Spanish stock exchanges. The remainingtransactions involving only the local exchanges, and not the AutomatedQuotation System, were carried out on the local stock exchanges.

The Automated Quotation System provides thosesecurities listed on it with a uniform continuous market that eliminatescertain of the differences among the local exchanges. The principal feature ofthe system is the computerized matching of buy and sell orders at the time ofentry of the order. Each order is executed as soon as a matching order is entered,but can be modified or canceled until executed. The activity of the market canbe continuously monitored by investors and brokers. The Automated QuotationSystem is quoted and regulated by *Sociedad de Bolsas, S.A.*(the “*Sociedad de Bolsas*”). All trades on theAutomated Quotation System must be placed through a brokerage firm, an officialstock broker, a dealer firm or a credit entity that is a member of a Spanishstock exchange.

In a pre-opening session held from 8:30 a.m. to9:00 a.m. each trading day, an opening price is established for eachsecurity traded on the Automated Quotation System based on a real-time auctionin which orders can be entered, modified or cancelled but are not executed.During this pre-opening session, the system continuously displays the price atwhich orders would be executed if trading were to begin. Market participantsonly receive information relating to the auction price (if applicable) andtrading volume permitted at the current bid and offer price. If an auction pricedoes not exist, the best bid and offer price, and associated volumes, areshown. The auction terminates with a random period of 30 seconds in which shareallocation takes place. Until the allocation process has finished, orderscannot be entered, modified or cancelled. In exceptional circumstances(including the inclusion of new securities on the Automated Quotation System)and after giving notice to the CNMV, the *Sociedadde Bolsas* may establish an opening price without regard to thereference price (the previous trading day’s closing price), alter the pricerange for permitted orders with respect to the reference price or modify thereference price.

The computerized trading hours are from 9:00 a.m.to 5:30 p.m. During the trading session, the trading price of a securityis permitted to vary up to a maximum so-called “static” range of the referenceprice, provided that the trading price for each trade of such security is notpermitted to vary in excess of a maximum so-called “dynamic” range with respectto the trading price of the immediately preceding trade of the same security. If,during the trading session, there exist matching bid and ask orders over asecurity within the computerized system which exceed any of the above “static”and “dynamic” ranges, trading on the security is automatically suspended and anew auction is held where a new reference price is set, and the “static” and “dynamic”ranges will apply over such reference price. The “static” and “dynamic” rangesapplicable to each particular security are set up and reviewed periodically bythe Sociedad de Bolsas.

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Between 5:30 p.m.and 8:00 p.m., trades may occur outside the computerized matching systemwithout prior authorization of the *Sociedad de Bolsas*,at a price within the range of 5% above the higher of the average price andclosing price for the day and 5% below the lower of the average price andclosing price for the day, if there are no outstanding bids or offers, as thecase may be, on the system matching or bettering the terms of the proposedoff-system transaction, and if the trade involves more than €300,000and more than 20% of the average daily trading volume of the stock during thepreceding three months. These trades must also relate to individual orders fromthe same person or entity and be reported to the *Sociedad de Bolsas* before 8:00 p.m. At any time tradesmay take place (with the prior authorization of the *Sociedad deBolsas*) at any price if:

·       thetrade involves more than €1.5 million and more than 40% of the averagedaily trading volume of the stock during the preceding three months;

·       thetransaction relates to a merger or spin-off of a listed company ;

·       thetransaction relates to the reorganization of a group of companies;

·       thetransaction is executed for the purpose of settling litigation or completing acomplex set of contracts; or

·       ifthe *Sociedad de Bolsas* finds anotherappropriate cause.

Information with respectto computerized trades between 9:00 a.m. and 5:30 p.m. is made publicimmediately, and information with respect to trades outside the computerizedmatching system is reported to the *Sociedad de Bolsas*by the end of the trading day and published in the *Boletín deCotización* (the “Stock Exchange Official Gazette”) and on thecomputer system by the beginning of the next trading day.

**Clearance andSettlement System**

Transactions carriedout on the Spanish stock exchanges are cleared and settled through Iberclear(the “Securities Clearing and Settlement Service”). Only members of the systemare entitled to use it, and membership is restricted to authorized members ofthe Spanish stock exchanges, the Bank of Spain (when an agreement, approved bythe Spanish Ministry of Economy, is reached with Iberclear) and, with theapproval of the CNMV, other brokers not members of the Spanish stock exchanges,banks, savings banks and foreign settlement and clearing systems. Iberclear isowned by *Bolsas y Mercados Españoles,Sociedad Holding de Mercados y Sistemas Financieros, S.A.* (SpanishExchanges and Markets, Holding Company of Markets and Financial Systems, S.A.),a newly incorporated holding company which holds a 100% interest in each of theSpanish official secondary markets and settlement systems. See “—Integration ofthe Spanish Official Organized Secondary Markets and Clearing and SettlementSystems into a Single Holding Company”. The clearance and settlement system andits members are responsible for maintaining records of purchases and salesunder the book entry system. Shares of listed Spanish companies are held inbook-entry form. Iberclear, which manages the clearance and settlement system,maintains a registry reflecting the number of shares held by each of its memberentities on its own behalf as well as the number of shares held on behalf ofthird parties. Each member entity, in turn, maintains a registry of the ownersof such shares. Spanish law considers the legal owner of the shares to be:

·       themember entity appearing in the records of Iberclear as holding the relevantshares in its own name; or

·       theinvestor appearing in the records of the member entity as holding the shares.

Iberclear has approved regulations introducing theso-called “T+3 Settlement System” by which the settlement of any transactionsmust be made within three business days following the date on which thetransaction was carried out.

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Obtaining legal title to shares of a company listed ona Spanish stock exchange requires the participation of an official Spanishstockbroker, broker-dealer or other entity authorized under Spanish law torecord the transfer of shares. To evidence title to shares, at the owner’srequest the relevant member entity must issue a certificate of ownership. Ifthe owner is a member entity, Iberclear is in charge of the issuance of thecertificate with respect to the shares held in the member entity’s name.However, Spanish Law 24/1988, as amended by Law 37/1998, which implements aEuropean Union directive, allows, in specified circumstances, for the transferof ownership of shares of a company listed on a Spanish stock exchange withoutcomplying with one or more of the requirements described above, thoughsecondary legislation required to implement this law in Spain has not beenenacted as of this date.

Brokerage commissions arenot regulated. Brokers’ fees, to the extent charged, will apply upon transferof title of shares from Citibank, N.A. (the “Depositary”) to a holder ofAmerican Depositary Receipts (“ADRs”) in exchange for such American DepositaryShares (“ADSs”), and upon any later sale of such shares by such holder.Transfers of ADSs do not require the participation of an official stockbroker. TheDeposit Agreement, as amended and restated as of May 18, 2000 (the “DepositAgreement”), provides that holders depositing shares with the Depositary inexchange for ADSs or withdrawing shares in exchange for ADSs will pay the feesof the official stockbroker or other person or entity authorized under Spanishlaw applicable both to such holder and to the Depositary.

**Securities MarketLegislation**

The SecuritiesMarkets Act was enacted in 1988 with the purpose of reforming the organizationand supervision of the Spanish securities markets. This legislation and theregulation implementing it

·       establishedan independent regulatory authority, the CNMV, to supervise the securitiesmarkets;

·       establisheda framework for the regulation of trading practices, tender offers and insidertrading;

·       requiredstock exchange members to be corporate entities;

·       requiredcompanies listed on a Spanish stock exchange to file annual audited financialstatements and to make public quarterly financial information;

·       establishedthe legal framework for the Automated Quotation System;

·       exemptedthe sale of securities from transfer and value added taxes;

·       deregulatedbrokerage commissions; and

·       providedfor transfer of shares by book entry or by delivery of evidence of title.

On February 14, 1992, Royal Decree No. 116/92established the clearance and settlement system and the book entry system, andrequired that all companies listed on a Spanish stock exchange adopt the bookentry system.

In November 1998, the Securities Markets Act wasamended by Law 37/1998, which implements two EU directives into Spanish law. Thefirst is Directive 93/22/CE, relating to investment services in securities,which was later amended by Directive 95/26/CE of the European Parliament andCouncil. The second is Directive 97/9/CE of the European Parliament andCouncil, relating to investor compensation systems.

The first directive modifies the Securities MarketsAct by introducing the principle of “community passport” or “single license”pursuant to which a services company authorized by a Member State of theEuropean Union can provide investment services and related activities in Spainby offering its services or establishing itself as a branch. This modificationpermits the direct admission of certain entities into the stock exchange area. Thesecond directive enlarges the scope of the Securities Markets Act by extending 

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the controls applicable tonegotiable instruments to a broader list of financial instruments, such asfinancial exchange contracts, swaps, options, futures or installment financialcontracts.

Other modificationsunder Law 37/1998 include:

·       revocationof the Sociedades and Agencias de Valores’ monopoly in keeping the book entryrecords for the securities not admitted for trading on official markets;

·       considerationof the secondary official markets as regulated markets, and amendments to therequirements for admission and exclusion of securities for trading on officialsecondary markets;

·       amendmentto the rules granting access to the capital stock of governing companiesof stock exchanges;

·       newregulation of several aspects concerning the Spanish Government SecuritiesMarket;

·       delimitingthe functions and conditions under which investment companies can operate inthe markets;

·       incorporationof the Investments Guarantee Fund in order to indemnify investors in caseswhere insolvency and bankruptcy proceedings of investment services companiesmay cause cash or securities conferred to them by an investor to becomeunavailable;

·       increaseof the CNMV’s inspection, sanctioning and supervisory powers; and

·       severalamendments to different laws such as the Stock Companies Act, the Companies TaxAct and the Collective Investment Institutions Act.

As a necessary response to the challenges resultingfrom the globalization of the financial markets, the Law 44/2002 (*Ley de Medidas de Reforma del Sistema Financiero*) has beenpassed in order to update the current Spanish financial legislation by, amongother issues, amending the Securities Markets Act. The main objectives of thereform are (i) to facilitate the integration of the financial markets; (ii) toincrease their transparency and competitiveness; and (iii) to enhanceconsumer protection in the financial services sector.

One of the main objectives of the reform is increasingmarket transparency and efficiency in the protection of investors through theimprovement of the accuracy and reliability of corporate disclosures madepursuant to securities laws. Included amongst such public disclosures areaccounting and financial statements and audit reports. In this regard, inresponse to the recently publicized international scandals and in line with theSarbanes-Oxley Act in the United States, the new reform has seized theopportunity to update the regulation of audit activities in Spain and, inparticular, to impose the obligation on all Spanish listed companies to createan Audit Committee. The reform also deals specifically with the disclosure oftransactions with related parties (both individuals and corporations) whereconflicts of interest may arise.

In response to the public’s growing intolerance forinsider-dealing and information abuses (and the unfair profits resultingtherefrom), the provisions applicable to these matters have also been updated,particularly with regard to transactions with related parties (both individualsand corporations) where conflicts of interest may arise.

Regarding disclosure obligations the reform sets forththat information will be deemed “relevant” if the disclosure of suchinformation (i) may reasonably have a foreseeable effect on any investorwith regard to the purchase or transfer of securities or financial instruments;and (ii) consequently, may significantly alter the market price of suchsecurities or financial instruments. Therefore, information must reasonablyaffect the decisions made by an investor with general professional knowledgeand have a certain degree of specificity in order to have an impact on aninvestment decision. Relevant information should be disclosed to the market assoon as possible by filing a written prior notice with the CNMV and by means ofa public 

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disclosure on the Internetwebsites of the issuers of the negotiable securities involved. The length ofthe period during which the relevant information must be published on theInternet websites shall be determined by the CNMV.

In this regard, it should be noted that the priorityconferred upon the CNMV implies that issuers of securities intending todistribute any material information to financial analysts, institutionalinvestors, or the media, must previously have provided such information to theCNMV for the purposes of registering it as a relevant fact (*hecho relevante*). In addition, and according to the fulldisclosure principle, it should be noted that any relevant fact or relevantinformation disclosed must be accurate, complete, reliable and, whenappropriate, quantified, in order to avoid misleading or false news which maydistort the price of the relevant securities.

Notwithstanding the above, should the relevant issuerof securities consider that the disclosure of material information may affectits legitimate interests, it may immediately request from the CNMV thedischarge of its disclosure obligation. The CNMV may exempt the issuer from theaforementioned obligations if it considers that such disclosure may causeserious detriment to the relevant issuer, provided that the non-disclosure ofthe material information is unlikely to mislead the public with regard toessential facts and circumstances, the knowledge of which is essential toevaluate the relevant securities.

In order to prevent any leaking of information thatmay result in insider-dealing, and to safeguard the confidentiality of theinformation until the CNMV discloses it to the public, the reform imposescertain obligations on issuers during the preliminary operations andnegotiations prior to any legal or financial transaction, such as, amongothers: (i) limiting the number of individuals dealing with the relevantinformation; (ii) informing them about their confidentiality duties; (iii) maintaininga duly updated register of the persons having access to the relevantinformation and the dates on which they had such access; and (iv) supervisingthe evolution of the market price of their securities.

The reform also sets fortha set of rules regarding inside information and adopts certain measuresfor the purposes of increasing market efficiency and transparency with regardto investment analysts and entities rendering investment services or givingadvice in connection with investments in the securities markets. It has madesignificant amendments to strengthen the rules of conduct within thesecurities market.

**Trading by Endesaand its Subsidiaries in Endesa Ordinary Shares**

The Spanish Corporations Law dated December 22,1989 (the “Spanish Corporations Law”) prohibits the purchase by Endesa and itssubsidiaries of Endesa ordinary shares in the secondary market except inlimited circumstances. Such a purchase of ordinary shares must be authorized bythe general meeting of stockholders of Endesa and, in the case of a purchase ofEndesa ordinary shares by a subsidiary of Endesa, also by a general meeting ofshareholders of the subsidiary. The ordinary shares so purchased have noeconomic or voting rights while held by the Endesa Group and have no votingrights while held by Endesa’s subsidiaries. The purchaser must create reservesequal to the purchase price of any Endesa ordinary shares that are purchasedand, if a subsidiary is the acquirer, the reserve must also be recorded by theparent company. The total number of Endesa ordinary shares held by Endesa andits subsidiaries may not exceed 5% of the total capital of the Endesa Group. AtDecember 31, 2005, as well as December 31, 2004 the balance of ourowned ordinary shares was zero. See Note 13.1 to our consolidated financialstatements for information relating to transactions by Endesa in its ownordinary shares.

Royal Decree 377/1991 onthe Reporting of Relevant Holdings and Acquisition of Treasury Stock providesthat any holding of its own equity stock by a company or by its affiliatesequaling 1% or more of the capital stock must be reported to the CNMV withinseven business days.

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**D.   SELLINGSHAREHOLDERS**

Not applicable.

**E.   DILUTION**

Not applicable.

**F.   EXPENSESOF THE ISSUE**

Not applicable.

**ITEM 10.**                      ADDITIONALINFORMATION

**A.   SHARECAPITAL**

Not applicable.

**B.   MEMORANDUMAND ARTICLES OF ASSOCIATION**

The following summary of the current terms of thecapital stock of Endesa is not meant to be complete and is qualified byreference to our bylaws (*estatutos*).

Set forth below iscondensed information concerning the ordinary shares and a summary of certainprovisions of our bylaws in effect at the date hereof and of certainrequirements of Spanish law. This summary contains all material informationconcerning the Endesa ordinary shares but does not purport to be complete.References to provisions of the bylaws are qualified in their entirety byreference to the bylaws which have been filed as an exhibit to this annualreport.

**General**

The issued capital of Endesa at December 31, 2005was €1,270,502,540.40divided into a single series of 1,058,752,117 ordinary shares in book-entryform, with a nominal value of €1.20 each. All of theordinary shares are fully paid and non-assessable. Non-residents of Spain mayhold and vote ordinary shares subject to the restrictions set forth under “—ForeignInvestment and Exchange Control Regulations.”

We are registeredwith the Commercial Registry of Madrid (Spain). Our registration number at theCommercial Registry of Madrid is volume 323, folio 1, page 6,405. Ourbusiness objective, as described in Article 2 of the Articles ofAssociation, consists of:

·       variouscommercial and industrial activities in the electricity business sector;

·       theexploitation of all types of primary energy resources;

·       therendering of industrial services, especially telecommunications, water and gasservices; and

·       the management of thebusiness group, composed of shareholdings in other companies.

**Directors**

All members of the Board of Directors are elected byour shareholders at the annual general meeting of shareholders to servefour-year terms. After the initial four-year term, they may be re-elected forperiods of an equal term, save in the case of external directors (“type b” inour bylaws), who may only be re-elected for one additional second term.

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The articles ofassociation provide that no person over the age of 70 may be appointed to theBoard of Directors. The age limit for the position of Chief Executive Officeris 65, but the CEO may thereafter continue to serve as a director.

**Dividend andLiquidation Rights**

Our Board of Directors has normally declared aninterim dividend in the fourth quarter of each year. Payment of final dividendsis proposed by our Board of Directors and must be authorized by theshareholders at the annual general meeting. Holders of newly-issued ordinaryshares participate in such dividends for each year from the date agreed by thegeneral shareholders’ meeting. According to the Spanish corporations law andour bylaws, dividends may be paid out of profits or distributable reserves onlyif (1) the value of our net worth is not, and as a result of distributionwould not be, smaller than the capital stock and (2) the amount ofdistributable reserves is equal to or greater than the amount of any pendingamortization of start-up costs, certain research and development expenses andgoodwill. Pursuant to the deposit agreement dated as of May 18, 2000 withCitibank, N.A., as depositary, under which ADSs are issued, the depositary willreceive such dividends with respect to ordinary shares underlying the ADSs.

The right to a dividend lapses and reverts to us if itis not claimed within five years after it becomes due.

Upon a liquidation ofEndesa, stockholders would be entitled to receive pro rata any assets remainingafter the payment of our debts and taxes and expenses of the liquidation.

**Legal Reserve**

Under Spanish law, Endesais required to allocate 10% of each fiscal year’s profit to a legal reserve,until such reserve reaches at least 20% of Endesa’s capital stock. The legalreserve may only be allocated to offset losses if there are not other availablereserves sufficient for this purpose. Endesa’s legal reserve currently meetsthis 20% requirement.

**General Meetings**

Our annual general meetingof shareholders is required to be held in Madrid within the first six months ofeach fiscal year on a date fixed by our Board of Directors. Extraordinarymeetings may be called from time to time by our Board of Directors wheneverdeemed appropriate or at the request of shareholders representingfive percent of the outstanding share capital. Notices of all meetings arepublished in the Commercial Registry’s Official Gazette and in one of thenewspapers with a large circulation in the Madrid area at least 15 daysbefore the date fixed for the meeting or at least one month before the datefixed for the meeting if the agenda includes a proposal relating to a merger orsplit-up.

**Attendance andVoting at General Stockholders’ Meetings**

Record holders of at least 50 Endesa ordinary sharesmay attend general shareholders’ meetings. Holders of less than 50 Endesaordinary shares may join other shareholders in order to hold an aggregate of atleast 50 Endesa ordinary shares and may then appoint a representative to attendthe meeting and vote their ordinary shares. Only holders of record of ordinaryshares may attend the meeting.

The general shareholders’ meeting held on April 2,2004 approved certain amendments to our bylaws, including a revised Article 33(Right to Information) and a new Article 30 bis (Voting and proxiesthrough electronic communications), the latter of which responds to therequirement to adopt our bylaws to certain changes required by applicableSpanish legislation designed to improve corporate transparency and provideshareholders with additional manners of exercising their rights to vote theirshares.

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In May 2005, our Board of Directors decided topass, in accordance with the provisions of Article 30 bis of our corporatebylaws and Article 20 bis of the General Meeting Regulations, rules withrespect to long-distance voting and granting of proxy for the generalshareholders’ meeting held on May 27, 2005.

Proxies may be given only to individuals acting intheir individual capacity or to legal entities, must be in writing and arevalid only for a single meeting. A proxy may be revoked by written notice toEndesa prior to the meeting or by attendance by the shareholders at themeeting.

Only holders ofordinary shares

·       dulyregistered in the corresponding book entry record at least five days prior tothe day on which a meeting is scheduled to be held in the manner provided forin the notice with respect to the meeting; and

·       holdingthe corresponding card (*tarjeta de asistencia*)issued by the relevant entity which maintains records under the book-entrysystem (See “—Registration and Transfers”)

may attend and vote at the meeting.

Subject to the above, the depositary (or its nominee)is entitled to vote the ordinary shares underlying the ADSs. The depositagreement requires the depositary (or its nominee) to accept votinginstructions from holders of ADRs and to execute such instructions to theextent permitted by law.

In accordance with Spanish law, our bylaws providethat the quorum requirement for shareholders’ meetings is that established bylaw, which in turn provides that, on first call, a duly constituted ordinary orextraordinary general meeting of shareholders requires the presence in personor by proxy of shareholders representing at least 25% of the paid-in capital ofEndesa. On second call there is no quorum requirement. Consideration of suchextraordinary matters as modifications of our bylaws including changes in ourshare capital, bond issuances, merger, split-up, dissolution or changes incorporate form requires on first call the presence in person or by proxy ofshareholders representing at least 50% of the paid-in capital of Endesa, and onsecond call the presence in person or by proxy of shareholders representing atleast 25% of the paid-in capital. If on this second call, the shareholderspresent in person or by proxy represent less than 50% of the paid-in capital,the resolutions relating to extraordinary matters may be adopted only with thevote of shareholders representing two-thirds of the capital present orrepresented at such meeting. A resolution relating to an amendment to limitvoting rights requires the affirmative vote of a majority of the outstandingcapital entitled to vote at both first and second call.

Resolutions at general meetings are in all other casespassed by a simple majority of the votes cast. In general, resolutions passedby a general meeting are binding upon all shareholders. In certaincircumstances (such as change in corporate purpose or certain changes incorporate form), Spanish law gives dissenting or absent shareholders the rightto have their ordinary shares redeemed by Endesa at prices determined inaccordance with established  formulae.

Ordinary shares held by Endesa or subsidiaries ofEndesa are counted for purposes of determining quorums although they have novote.

At the general meeting ofshareholders of May 12, 1998, the shareholders passed a resolution tolimit the voting rights attaching to the ordinary shares such that theshareholders shall have the right to one vote for each ordinary share whichthey own or represent, except that no shareholder may exercise a number ofvotes which exceeds the number of votes which corresponds to 10% of the totalcapital stock with voting rights existing from time to time even though thenumber of ordinary shares held by such shareholder exceeds 10% of the capitalstock of Endesa. This limitation applies to the number of votes cast by any twoshareholding companies which belong to the same group of companies or to anytwo or more shareholding companies which are controlled by any one shareholder,whether the ordinary shares held by such companies are issued jointly orseparately. In spite of the limitations on voting rights, all of the ordinary 

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sharesbelonging to one holder, or to one group of companies or to one person and thecompanies which such person controls will be included together for the purposeof establishing whether a quorum is present for the carrying on of business atany general shareholders’ meeting. Modification or removal of such limitationsrequires a favorable vote of more than 50% of the outstanding capital stock ofthe company.

**Registration andTransfers**

Our ordinary shares are in book-entry form. Ordinaryshares are indivisible. Co-owners of one ordinary share must designate a singleperson to exercise their shareholders’ rights, but they shall be jointly andseverally liable to Endesa for all the obligations relating to their status asshareholders.

Iberclear, which manages the clearance and settlementsystem of the Spanish stock exchanges, maintains a registry reflecting thenumber of ordinary shares held by each of its member entities, as well as theamount of such shares held on behalf of beneficial owners. Each member entity,in turn, maintains a registry of the owners of such shares.

Transfers of ordinaryshares quoted on a Spanish stock exchange must be made through or with theparticipation of a member of a Spanish stock exchange that is an authorizedbroker or dealer (*Sociedad o Agencia de Valores*)by book-entry registry.

**Duty to Notify theGovernment of Certain Transactions and Resolutions**

In December 2000, the European Commission filed acomplaint against the Kingdom of Spain before the Justice Tribunal with respectto the requirement for government approval in connection with certaintransactions of Endesa and certain other Spanish companies. On May 13,2003, the Justice Tribunal rendered its opinion that Royal Decree 1113/1999, ofJune 25, among other laws and regulations, violated European Union law dueto the level and nature of discretion permitted the Spanish government inrelation to corporate decision-making. Nonetheless, the Tribunal affirmed thepossibility that certain authorization regimes would be permissible so long asthe regulatory powers were limited.

The Spanish government, in light of the aforementionedEC opinion, passed Law 62/2003, of December 30, pursuant to which theregulatory regime on corporate decision-making established by Law 5/1995,including the application of said regulation with respect to Endesa, S.A. andcertain of our affiliates was amended.

There are two principal changes to the regulatoryregime. First, the requirement for pre-approval by Spanish regulators has beenabolished and replaced with a pre-notification system which permits regulatoryaction post-decision or act, though it is important to note that such decisionsor acts may be suspended during the regulatory body’s review. Second, the newregulatory regime only permits administrative action in the event that thedecision or act implies significant risks or material effects, direct orindirect, on activities developed by companies, with the goal of guaranteeingthe adequate management and provision of services by the same, with certainobjective criteria established in the Law.

The following decisions or acts are expresslycontemplated in the applicable regulation so long as such decisions or actsimply a national effect: resolutions or acts relating to or in connection withthe acquisition, whether direct or indirect, of the shares of Endesa, S.A.,Endesa Generación, S.A., and Endesa Distribución Eléctrica, S.A. or othersecurities, interests or rights that could give the right, directly orindirectly, to subscribe for or acquire such shares, when such acquisition hasas a consequence the disposal of at least 10% of the share capital of Endesa,S.A. or the aforementioned affiliates. Nevertheless, in light of the fact thatEndesa, S.A. is a listed company, there is an express exemption foracquisitions of shares strictly of a financial nature that do not imply anyinterest in the management or control of Endesa, S.A.

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Transfer or encumbrance, in any form and under anytitle, of the stock or other securities held by Endesa, S.A. Endesa Generación,S.A., and Endesa Distribución Eléctrica, S.A. is also subject to theaforementioned regime.

Finally, the voluntary winding-up, spin-off or mergerof any of the aforementioned companies only requires the notification of suchevent to Spanish regulators.

In November 2005 the Spanish government presenteda bill to the Spanish parliament which, if passed, would abolish the aboveregulation.

Also, in February 2006the Spanish government passed Royal Decree-Law 4/2006, ratified by the Spanishparliament on February 24, 2006. This law modifies the duties of the CNE,specifically, its fourteenth duty delineated in the Law of the HydrocarbonSector. The CNE now has the power to authorize, among other things, a takeoverof a regulated company by a third party. See “Item 4. Information on theCompany—Regulation—Royal Decree-Law 4/2006”.

**ReportingRequirements**

Because Endesaordinary shares are listed on a Spanish stock exchange, agreements with respectto the acquisition or disposition of Endesa’s ordinary shares must be reportedwithin seven business days of the acquisition or disposal to Endesa, the CNMV,the relevant Spanish stock exchanges and, where the person or group effectingthe transaction is a non-Spanish resident, the Spanish Registry of ForeignInvestment, where:

·       inthe case of an acquisition, the acquisition results in that person or groupholding (x) 5% (or successive multiples thereof) of Endesa’s sharecapital, or (y) 1% (or successive multiples thereof) of Endesa’s sharecapital if the acquiror or a person acting on his behalf is a resident of a “taxhaven”; or

·       inthe case of a disposal, the disposal results in the existing holding of thatperson or group to fall below a threshold of (x) 5% (or successivemultiples thereof) of Endesa’s share capital, or (y) 1% (or successivemultiples thereof) if the person or group or a person acting on his or itsbehalf is a resident of a “tax haven”.

Any member of our Board of Directors must report toEndesa, the CNMV and the relevant Spanish stock exchanges, any percentage ornumber of shares and stock options held at the time of becoming a member of theboard. Endesa’s officers must report to the CNMV any acquisition of Endesa’sordinary shares or options if such transactions are part of a compensationplan.

Furthermore, any member ofour Board of Directors must similarly report any acquisition or disposal,regardless of size, of ordinary shares or stock options.

**Withholding Tax onDividends**

Dividends payable byEndesa to holders of ordinary shares or ADRs not residing in Spain for taxpurposes and not operating through a permanent establishment in Spain aresubject to a Spanish withholding tax at the rate of 15%, subject to reductionby applicable tax treaties. See “—Taxation—Spanish Tax Considerations.”

**Preemptive Rights**

Pursuant to the Spanishcorporations law, shareholders and holders of convertible bonds have preemptiverights to subscribe for any new shares issued by Endesa, including ordinaryshares, and for bonds convertible into shares. These preemptive rights may notbe available under special circumstances if rescinded by a resolution passed ata meeting of shareholders in accordance with Article 159 of Spanish 

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corporationslaw. Further, these preemptive rights, in any event, will not be available inthe event of an increase in capital to meet the requirements of a convertiblebond issue or a merger in which ordinary shares are issued as consideration. Thesepreemptive rights are transferable, are traded on the Automated QuotationSystem of the Spanish stock exchanges and may be of value to existingshareholders because the new ordinary shares may be offered for subscription atprices lower than prevailing market price. Ordinary shares issuable uponexercise of preemptive rights must be registered under the U.S. Securities Actof 1933, as amended, in order to be offered to holders of ADRs. If Endesadecided not to register such ordinary shares, the preemptive rights would notbe distributed to holders of ADRs. Pursuant to the deposit agreement, however,holders of ADRs are entitled to receive their proportionate share of proceeds,if any, from the sale by the depositary of any preemptive rights pertaining toholders of ADRs.

**C.   MATERIAL CONTRACTS**

None.

**D.   EXCHANGE CONTROLS**

**Foreign Investment and Exchange Control Regulations**

Under present Spanishregulations, foreign investors may transfer invested capital, capital gains anddividends out of Spain without limitation as to amount other than applicabletaxes. The Spanish stock exchanges and securities markets are open to foreigninvestors, although any foreign investment over 50% of the share capital of aSpanish company by an entity resident in a tax haven requires prior clearance fromthe Ministry of Economy. Any other purchase of shares by a foreign entity orindividual only requires that the Spanish authorities be notified of suchpurchase.

**E.   TAXATION **

**Material Tax Considerations**

The following is adiscussion of the material Spanish and U.S. federal income tax consequences toyou of the acquisition, ownership and disposition of the Endesa ADSs orordinary shares.

Thisdiscussion only applies to you if you are a beneficial owner of Endesa ADSs orordinary shares and you are either:

·       acitizen or resident of the United States for U.S. federal income tax purposes;

·       acorporation, or other entity taxable as a corporation for U.S. federal income taxpurposes, created or organized under the laws of the United States or anypolitical subdivision thereof; or

·       anestate or trust the income of which is subject to U.S. federal income taxwithout regard to its source.

The discussion of Spanishtax consequences below applies to you only if you are a non-resident of Spainand your ownership of Endesa ADSs or ordinary shares is not effectivelyconnected with a permanent establishment or fixed base in Spain.

You should consult yourown tax adviser regarding the particular tax consequences to you of owning anddisposing of Endesa ADSs or ordinary shares, including your eligibility for thebenefits of the treaty for the avoidance of double taxation between Spain andthe United States (the “Treaty”), the applicability or effect of any specialrules to which you may be subject, and the applicability and effect ofstate, local, foreign and other tax laws and possible changes in tax law.

For purposes of the Treatyand for U.S. federal income tax purposes, United States owners of ADSs willgenerally be treated as the owners of the ordinary shares represented by suchADSs. Accordingly, no gain or loss will be recognized if you exchange ADSs forthe underlying ordinary shares represented by those ADSs.

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**Spanish TaxConsiderations**

The following discussiondescribes the material Spanish tax consequences to U.S. persons describedherein of the acquisition, ownership and disposition of Endesa ADSs or ordinaryshares. This discussion is based upon the tax laws of Spain and regulationsthereunder, which are subject to change, possibly with retroactive effect.

***Taxation ofDividends***

Under Spanish law,dividends paid by a Spanish resident company to a holder of ordinary shares orADSs not residing in Spain for tax purposes and not operating through apermanent establishment in Spain are subject to an income tax withheld at thesource on the gross amount of dividends, currently at a 15% tax rate. This taxrate is the same as the rate established in the Treaty.

***Taxation of CapitalGains***

For Spanish tax purposes, income obtained by you fromthe sale of ADSs or ordinary shares of Endesa will be treated as capital gains.Spanish non-resident income tax is currently levied at a 35% tax rate oncapital gains obtained by persons not residing in Spain for tax purposes whoare not entitled to the benefit of any applicable treaty for the avoidance ofdouble taxation.

Notwithstanding the above,capital gains derived from the transfer of shares in an official Spanishsecondary stock market by any holder who is resident in a country that hasentered into a treaty for the avoidance of double taxation with Spaincontaining an “exchange of information” clause will be exempt from taxation inSpain. Under the Treaty, capital gains realized by you upon the disposition ofADSs or ordinary shares will not be taxed in Spain provided you have not held,directly or indirectly, 25% of the capital of Endesa during the 12 monthspreceding the disposition of the stock. You are required to establish that youare entitled to this exemption by providing to the relevant Spanish taxauthorities an IRS certificate of residence in the United States, together witha Spanish tax form 210.

***Spanish Wealth Tax***

Individuals not residingin Spain who hold ordinary shares or ADSs located in Spain are subject to theSpanish wealth tax (Spanish Law 19/1991), which imposes a tax on propertylocated in Spain on the last day of any year. The Spanish tax authorities maytake the view that all shares of Spanish corporations and all ADSs representingsuch shares are located in Spain for Spanish tax purposes. If such a view wereto prevail, non-residents of Spain who held shares or ADSs on the last day ofany year would be subject to the Spanish wealth tax for such year at marginalrates varying between 0.2% and 2.5% of the average market value of such sharesor ADSs during the last quarter of such year. In relation to this tax, theMinistry of Economy and Finance will publish the average market value of suchshares for the fourth quarter of the year.

***Spanish Inheritanceand Gift Taxes***

Transfers of ordinary shares or ADSs on death or bygift are subject to Spanish inheritance and gift taxes (Spanish Law 29/1987) ifthe transferee is a resident in Spain for tax purposes, or if the ordinaryshares or ADSs are located or exercisable in Spain at the time of death orgift, regardless of the residence of the beneficiary. In this regard, theSpanish tax authorities may determine that all shares of Spanish corporationsand all ADSs representing such shares are located in Spain for Spanish taxpurposes. The applicable tax rate, after applying all relevant factors, rangesbetween 0% and 81.6% for individuals.

Gifts granted tocorporations non-resident in Spain are subject to Spanish Non-Resident IncomeTax at a 35% tax rate on the fair market value of the ordinary shares as acapital gain. If the donee is a 

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U.S. corporation,the exclusions available under the Treaty described in the section “Taxation ofCapital Gains” above will generally be applicable.

***Expenses ofTransfer***

Transfers of ADSs orordinary shares will be exempt from any transfer tax or value-added tax. Additionally,no stamp duty will be levied on such transfers.

**United States TaxConsiderations **

***General***

The following describes the material U.S. federalincome tax consequences of the acquisition, ownership and disposition of EndesaADSs or ordinary shares by the U.S. persons described herein. The discussion isbased on the tax laws of the United States, including the Internal Revenue Codeof 1986, as amended (the “Code”), its legislative history, final, temporary andproposed regulations, published rulings and court decisions, as well as on theTreaty, all as currently in effect and all subject to change at any time,perhaps with retroactive effect.

This discussiondeals only with Endesa ADSs or ordinary shares held by you as capital assetsand does not address the tax treatment of persons that are subject to specialtreatment under the U.S. income tax laws. Persons subject to special treatmentinclude, but are not limited to:

·       banks,financial institutions, securities dealers or traders and insurance companies;

·       tax-exemptentities;

·       investorsliable for the alternative minimum tax;

·       investorsthat hold the Endesa ADSs or ordinary shares as part of straddles, hedgingtransactions or conversion transactions;

·       U.S.holders that have an office or other fixed place of business or “tax home”outside the United States;

·       personswho own ADSs or ordinary shares indirectly through partnerships or otherpass-through entities;

·       personswhose functional currency is not the U.S. dollar for U.S. federal income taxpurposes;

·       personswho acquired Endesa ordinary shares pursuant to the exercise of an employeestock option or otherwise as compensation; and

·       personsowning directly, indirectly or by attribution 10% or more of any class of stockof Endesa.

Moreover, the effect of any applicable U.S. state orlocal tax laws is not discussed herein.

This discussion assumesthat we are not, and will not become, a passive foreign investment company (a “PFIC”)for U.S. federal income tax purposes, as described more fully below. Thisdiscussion also assumes that each obligation of the deposit agreement betweenus, Citibank, N.A., as depositary, and all holders of Endesa ADSs and anyrelated agreement will be performed in accordance with its terms and that therepresentations made by Citibank, N.A., as depositary, regarding thepre-release of Endesa ADSs are true. The U.S. Treasury has expressed concernsthat parties to whom ADSs are released may be taking actions that areinconsistent with the claiming of foreign tax credits. Such actions would alsobe inconsistent with the claiming of the reduced rate of tax applicable todividends received by certain noncorporate holders, as described below.Accordingly, the creditability of Spanish taxes, and the availability of thereduced tax rate for dividends received by certain noncorporate holders, eachas 

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describedbelow, could be affected by actions that may be taken by the parties to whomthe ADSs are released. 

***Ownership andDisposition of Endesa ADSs or Ordinary Shares***

*Taxation ofDividends*

Distributions (other than certain pro ratadistributions of ordinary shares) paid on ADSs or ordinary shares out ofcurrent or accumulated earnings and profits, as determined for U.S. federal taxpurposes, before reduction for any Spanish income tax withheld by us, will betaxable to you as foreign source dividend income and will not be eligible forthe dividends-received deduction generally allowed to U.S. corporations. Subjectto applicable limitations, and the discussion above regarding concernsexpressed by the U.S. Treasury, dividends paid to noncorporate holders intaxable years beginning before January 1, 2009 will be taxable at amaximum tax rate of 15%. Noncorporate holders should consult their own taxadvisers to determine the implications of the rules regarding thisfavorable rate in their particular circumstances. The amount of anydistribution of property other than cash will be the fair market value of theproperty on the date of distribution.

You will be required toinclude dividends paid in euro in income in an amount equal to their U.S.dollar amount calculated by reference to the exchange rate in effect on thedate the euro are received. If you hold ordinary shares, dividends are receivedon the date you receive the distribution. If you hold ADSs, that date is thedate Citibank, N.A., receives the dividend. If the euro are not converted intoU.S. dollars on the day they are received, you may be required to recognizeforeign currency gain or loss, which will be U.S. source ordinary income orloss, as the case may be, upon a subsequent sale or other disposition of theeuro.

*Effect of SpanishWithholding Taxes*

For U.S. federal income tax purposes, you will betreated as having received the gross amount of any dividend, including Spanishtaxes withheld by us, and then as having paid over the withheld taxes to theSpanish taxing authorities. As a result, the amount of income included in grossincome for U.S. federal income tax purposes by you in connection with suchpayments will be greater than the amount of cash actually received orreceivable by you.

Subject to generallyapplicable limitations and restrictions that may vary depending upon yourcircumstances and subject to the discussion above regarding concerns expressedby the U.S. Treasury, you will be entitled to a credit against your U.S.federal income tax liability for Spanish income taxes withheld by us. Thelimitation on foreign taxes eligible for credit is calculated separately forspecific classes of income. The rules governing foreign tax credits arecomplex and, therefore, we urge you to consult your tax adviser to determinewhether and to what extent a foreign tax credit would be available to you. Insteadof claiming a credit, you may, at your election, deduct such otherwisecreditable Spanish taxes in computing your taxable income, subject to generallyapplicable limitations under U.S. law.

*Sale or Exchange*

Upon a sale or exchange ofEndesa ADSs or ordinary shares, you will recognize capital gain or loss forU.S. federal income tax purposes equal to the difference, if any, between theamount realized on the sale or exchange and your adjusted tax basis in the ADSsor ordinary shares. This gain or loss will be long-term capital gain or loss ifyour holding period in the ADSs or ordinary shares exceeds one year. Any gainor loss generally will be U.S. source gain or loss. You should consult your owntax adviser about the treatment of capital gains, which may be taxed at lowerrates than ordinary income for non-corporate taxpayers, and capital losses, thedeductibility of which may be limited.

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*Passive ForeignInvestment Company Rules*

We believe that we werenot a PFIC for U.S. federal income tax purposes for our most recent taxableyear. However, since PFIC status depends upon the composition of a company’sincome and the market value of its assets, including, among others, equityinvestments in various entities, from time to time, there can be no assurancethat we will not be considered a PFIC for any taxable year. If we were a PFICfor any taxable year, certain adverse consequences could apply to you.

*Backup Withholdingand Other Reporting Requirements*

Payment of dividends andsales proceeds that are made within the United States or through certainU.S.-related financial intermediaries generally are subject to informationreporting and to backup withholding unless (i) you are a corporation orother exempt recipient or (ii) in the case of backup withholding, youprovide a correct taxpayer identification number and certify that you are notsubject to backup withholding. Any amounts withheld under the backupwithholding rules may be refunded (or credited against the beneficialowner’s U.S. federal income tax liability, if any), provided that the requiredinformation is furnished to the Internal Revenue Service. 

**F.   DIVIDENDSAND PAYING AGENTS**

Not applicable.

**G.   STATEMENTSBY EXPERTS**

Not applicable.

**H.   DOCUMENTSON DISPLAY**

Endesa files annualreports on Form 20-F with the SEC and furnishes periodic reports on Form 6-Kto the SEC. You may read and copy any of these reports at the SEC’s publicreference room in Washington, D.C. Please call the SEC at 1-800-SEC-0330for further information on the public reference rooms. You may also obtaincopies from the SEC’s website at http://www.sec.gov.

**I.   SUBSIDIARYINFORMATION**

Not applicable

**ITEM 11.**                      QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  

We are exposed to various types of market risk in thenormal course of our business, including the impact of changes in interestrates, foreign currency exchange rates, commodity prices and equity investmentprices. These changes may adversely affect our operating results and financialcondition. We seek to manage these risks through the use of derivativefinancial instruments and, in the case of exchange rate risk, by balancingasset- and liability-generating operations and collections and payments bycurrency to the extent possible.

In 2002, we formally approved our Global RiskManagement Policy that establishes the principles governing, and corporate bodyresponsible for, the management and control of risks. This policy is applicableto each of the companies that are majority-owned, controlled or managed byEndesa. The policy includes the establishment of the Risk Management Committeeresponsible for defining our global risk management policies and establishesthe limits on levels of risk for Endesa’s businesses and corporate bodies. Previously,our business and corporate bodies applied specific risk management policies,which are now fully coordinated by our Global Risk Management Policy.

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All of our derivativefinancial instruments are entered into for hedging purposes. We do not usederivative financial instruments for speculative purposes.

*Interest Rate Risk*

Our objective in managing interest rate risk is tomaintain a balance of fixed and variable debt that will lower our overallborrowing costs within reasonable risk parameters over a multi-year period. Weuse interest rate swaps and options to convert a portion of our debt portfoliofrom a floating rate to a fixed rate or from a fixed rate to a floating rate.

Thestructure of our debt at December 31, 2005, distinguishing between fixed-and floating-rate debt, was as follows:

| ** **                  | ** ** | **Fixed rate**              | ** ** | **Floating rate** | ** ** | **Total** | ** ** |
|-----------------------------|------------|----------------------------------|------------|------------------------|------------|-----------|------------|
| ** **                  | ** ** | **(millions of euro)** | ** ** |
| Bonds and debentures        |       |                             | 9,373      |                   |       |      | 752        |   |   | 10,125 |   |
| Commercial paper            |       |                             | 42         |                   |       |      | 1,659      |   |   | 1,701 |   |
| Bank debts and  other debts |       |                             | 894        |                   |       |      | 5,122      |   |   | 6,016 |   |
| Total                       |       |                             | 10,309     |                   |       |      | 7,533      |   |   | 17,842 |   |

 

In accordance with the requirements of this Item 11 ofForm 20-F, in order to show more fully our exposure to interest ratechanges, we present our debt in the table above, excluding the effect ofderivatives. For purposes of our consolidated financial statements, however, wecalculate our debt net of the effect of derivatives. See Note 16 to ourconsolidated financial statements.

Our floating rate debt isprincipally subject to fluctuations in the European Interbank Offered Rate(EURIBOR), the London Interbank Offered Rate (LIBOR) or the applicablereference rate when related to Latin American currencies.

*Foreign ExchangeRate Risk*

Our foreigncurrency exchange rate risk principally relates to:

·       ourlong-term debt portfolio that is denominated in, or swapped into, currenciesother than the euro and the U.S. dollar; and

·       ouroperations and substantial investments in countries outside of Spain,principally in Latin America. 

We have incurred foreign currency-denominated debtobligations in order to fund investments outside Spain, principally in LatinAmerica. Substantially all of such foreign debt obligations are denominated in,or swapped into, U.S. dollars and Latin American currencies.

In order to mitigate thepotential impact of currency exchange rate fluctuations, we hedge a portion ofthose risks through the use of derivative financial instruments, such as swaps,options and exchange rate forward contracts, and exchange rate insurance. 

*Foreign CurrencyTranslation*

Many of our subsidiariesare located outside the euro zone (principally in Latin America), and theirfunctional currency is their respective local currency. Because our reportingcurrency is the euro, the income statements of these subsidiaries aretranslated into euro for inclusion of the results of these subsidiaries in ourconsolidated financial statements. Period-to-period changes in the averageexchange rate for a particular country’s currency can significantly affect thetranslation into euro of both revenues and operating income denominated in suchcurrency. We have not hedged our accounting translation 

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exposureto foreign currency fluctuations relative to these investments, and the tablesbelow do not indicate the extent to which we would be affected by suchfluctuations. Effects from currency fluctuations on the translation of netasset amounts into euro are reflected in our equity position.

*Commodity PriceRisk*

We are exposed tocommodity price risk principally in connection with our electricity generationand supply business in Spain and Italy. In particular, we are exposed to marketprice risk for:

·       thepurchase of fuel (including fuel-oil, coal and natural gas) used to generateelectricity; and

·       thesale of a portion of the electricity that we generate in Spain and Italy.

We have entered into long-term revolving fuel supplycontracts in order to provide for the secure supply of fuel for our generationactivities in Spain. Because the prices under these contracts are not fixed, weenter into derivative contracts (primarily swaps) in order to manage the marketprice risk relating to our fuel requirements. At December 31, 2005, thefair value of our fuel oil purchases hedge position was positive €24million. This amount is not necessarily indicative of the value realized whensuch contracts settle.

We are also subject tocommodity price risk in connection with our energy trading activities, which weengage in mainly to hedge our exposure to commodity price risk and to fix theselling price of our electricity sales to final customers in Europe (outsideSpain). However, this risk was not material in 2004 or 2005 because these activitieswere not significant. At December 31, 2005, the fair value of our tradingportfolio (which includes purchases and sales of electricity) was €3million.

*Equity Price Risk*

We hold investmentsin equity securities. These securities are subject to risks due to changes inthe market values of such securities. We record such investments on ourconsolidated balance sheet depending on the category of the investment:

·       Held-to-maturity investments: investments that wehave the intention and ability to hold to the date of maturity, which are alsomeasured at amortized cost.

·       Financial assets at fair value through profit orloss: these include the held-for-trading financial assets and financial assetsthat are managed and assessed at fair value. 

·       Available-for-sale financial assets: these are theother financial assets that do not fall into the aforementioned categories,which relate substantially in full to equity investments . These assets arerecognized in the consolidated balance sheet at fair value when fair value canbe determined reliably. Since it is usually not possible to determine reliablythe fair value of investments in companies that are not publicly listed, whenthis is the case, such investments are measured at acquisition cost or at alower amount if there is evidence of impairment. 

·       Investments in companies over which we have jointcontrol with another company or over which we have significant influence areaccounted for using the equity method. In general, significant influence ispresumed to exist when the Group has an ownership interest of over 20%. Theequity method consists of recognizing the investment in the consolidated balancesheet at the Group’s share of net assets of the investee, adjusted, ifappropriate, by the effect of transactions with the Group, plus the unrealizedgains relating to the goodwill paid on acquisition of the company.

Weclassify as non-current assets held for sale property, plant and equipment,intangible assets or investments under the heading “Investments Accounted forUsing the Equity Method” for which, at the date of the consolidated balancesheet, active measures had been initiated to sell them and the sale is 

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expected to have been completed within 12 months fromthat date. These assets are measured at the lower of carrying amount and fairvalue less costs to sell.

We do not use derivativeinstruments, such as forward contracts, option contracts, interest rate swapsand forward rate agreements, to manage these market risks, nor do we hold orissue derivative or other financial instruments for trading purposes.

*Interest RateSensitivity Analysis*

The following tables provide information on ourfinancial instruments at December 31, 2005 and at December 31, 2004that are sensitive to interest rate fluctuations and include debt instruments,interest rate swaps and options. For debt commitments, the tables present themain cash flows and the resulting average weighted interest rates calculated byexpected maturity date. For swaps, the tables present the notional amounts andthe resulting weighted interest rates in accordance with the expected maturity.The notional amounts are used to calculate the contractual payments to beexchanged in accordance with the agreement. 

All existing financing and derivatives operations at December 31,2005 and at December 31, 2004 are described below, broken down byapplicable currencies, type of financing and interest rate benchmarks. Averageweighted interest rates are expressed as a margin applied to the benchmark rateindicated (weighted average spread shown in the tables). The informationadditionally presents the equivalent amount in euro to the correspondinginterest rate compounded by the benchmark rate and the weighted average spread.The exchange rates are those set by the European Central Bank as at the date ofeach table (or the immediately preceding business day if such date is not abusiness day). The cash flows of the instruments are denominated in thecurrency indicated. All of the commitments in foreign currencies appear both intables under the heading “Interest Rate Sensitivity” and in the tables underthe heading “Exchange Rate Sensitivity”.

Thefollowing symbols explain certain abbreviations used in the following tables:
| EQL     |   | Equity link (Equity  portfolio index)                |
|---------|--------|------------------------------------------------------|
| TAB     |   | Banking Active Rate—Chile                       |
| CDI     |   | Certificate of banks  deposit rate—Brazil       |
| DTF     |   | Fixed terms deposit  rate—Colombia              |
| VAC     |   | Constant purchase value  (inflation index)—Peru |
| TJLP    |   | Long term official  interest rate—Brazil        |
| CF BIRF |   | World Bank cost of  funds—World Bank            |
| FINEL   |   | Index of Brazilian  institution FINEL                |
| TR      |   | Rate of reference for  public debt—Brazil       |
| IGPM    |   | Market prices general  index—Brazil             |
| EIB     |   | European Investment Bank                             |
| MTN     |   | Medium Term Note                                     |

 

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**INTEREST-RATESENSITIVITY**

**December 31,2005**

| ** **                                  | ** ** | ** **                                               | ** ** | **Maturity Dates** | ** ** | **Fair Value  at  December 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|
| **Debt**                                    | ** ** | ** **                                               | ** ** | **Denominated in** | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Subsequent** | ** ** | **Total** | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | **(millions of euro, except rates)** | ** ** |
| **FLOATING RATE DEBT**                      | ** ** | ** **                                               | ** ** |                    | ** ** | ** **                                 |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Bank loans                                  |       | EURO                                                     |       |                    | 27         |                                       |       | 108 |   | 2 |   | 52 |   | 1,052 |   |   |   |   |   |   | 1,240 |   |   |   | 1,240 |   |   |
| Weighted average  spread—Euribor       |       |                                                     |       |                    | 0.2        | %                                          |       | 0.4 | % | 0.1 | % | 0.5 | % | 0.2 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| Structured loans                            |       | EURO                                                     |       |                    |       |                                       |       | 141 |   | 30 |   | 62 |   | 240 |   |   |   |   |   |   | 473 |   |   |   | 473 |   |   |
| Weighted average  spread—Euribor       |       |                                                     |       |                    |       |                                       |       | 0.3 | % | 0.3 | % | 0.4 | % | 0.4 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| EIB loans                                   |       | EURO                                                     |       |                    |       |                                       |       | 87 |   | 87 |   | 87 |   | 138 |   |   | 458 |   |   |   | 856 |   |   |   | 856 |   |   |
| Weighted average  spread—Euribor       |       |                                                     |       |                    |       |                                       |       | 0.2 | % | 0.2 | % | 0.2 | % | 0.2 | % |   | 0.2 | % |   |   |   |   |   |   |   |   |   |
| Credits                                     |       | EURO                                                     |       |                    | 56         |                                       |       | 10 |   |   |   | 24 |   | 1,476 |   |   |   |   |   |   | 1,566 |   |   |   | 1,566 |   |   |
| Weighted average  spread—Euribor       |       |                                                     |       |                    | 0.4        | %                                          |       | 0.3 | % |   |   | 0.1 | % | 0.2 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| Project financing                           |       | EURO                                                     |       |                    | 31         |                                       |       | 18 |   | 18 |   | 17 |   | 16 |   |   | 96 |   |   |   | 198 |   |   |   | 198 |   |   |
| Weighted average  spread—Euribor       |       |                                                     |       |                    | 1.2        | %                                          |       | 1.2 | % | 1.2 | % | 1.2 | % | 1.2 | % |   | 1.2 | % |   |   |   |   |   |   |   |   |   |
| Loans and  Reciprocal Credits               |       | EURO                                                     |       |                    | 1          |                                       |       | 0 |   |   |   |   |   |   |   |   |   |   |   |   | 1 |   |   |   | 1 |   |   |
| Weighted average  spread—Euribor       |       |                                                     |       |                    | 0.0        | %                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| MTN                                         |       | EURO                                                     |       |                    |       |                                       |       |   |   |   |   |   |   | 142 |   |   | 186 |   |   |   | 328 |   |   |   | 328 |   |   |
| Weighted average  spread—Euribor       |       |                                                     |       |                    |       |                                       |       |   |   |   |   |   |   | 0.3 | % |   | 0.8 | % |   |   |   |   |   |   |   |   |   |
| MTN                                         |       | EURO                                                     |       |                    |       |                                       |       | 80 |   |   |   |   |   |   |   |   |   |   |   |   | 80 |   |   |   | 80 |   |   |
| Weighted average  spread—EQL           |       |                                                     |       |                    |       |                                       |       | 0.0 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| MTN                                         |       | EURO                                                     |       |                    |       |                                       |       |   |   |   |   |   |   | 10 |   |   | 15 |   |   |   | 25 |   |   |   | 26 |   |   |
| Weighted average  spread—IRS—Euro |       |                                                     |       |                    |       |                                       |       |   |   |   |   |   |   | -0.6 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| MTN                                         |       | EURO                                                     |       |                    |       |                                       |       |   |   |   |   |   |   |   |   |   | 15 |   |   |   | 15 |   |   |   | 17 |   |   |
| Weighted average  spread—IRS—GBP  |       |                                                     |       |                    |       |                                       |       |   |   |   |   |   |   |   |   |   | 0.0 | % |   |   |   |   |   |   |   |   |   |
| Official Euro  loans                        |       | EURO                                                     |       |                    | 1          |                                       |       | 1 |   | 1 |   |   |   |   |   |   |   |   |   |   | 3 |   |   |   | 2 |   |   |
| Weighted average  spread—Euribor       |       |                                                     |       |                    | 0.9        | %                                          |       | 0.9 | % | 0.9 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| MTN                                         |       | EURO                                                     |       |                    |       |                                       |       |   |   |   |   |   |   |   |   |   | 90 |   |   |   | 90 |   |   |   | 101 |   |   |
| Weighted average  spread—IPC LINK      |       |                                                     |       |                    |       |                                       |       |   |   |   |   |   |   |   |   |   | 0.0 | % |   |   |   |   |   |   |   |   |   |
| Commercial paper                            |       | EURO                                                     |       |                    | 489        |                                       |       |   |   |   |   |   |   | 632 |   |   |   |   |   |   | 1,121 |   |   |   | 1,123 |   |   |
| Weighted average  spread—Euribor       |       |                                                     |       |                    | 0.0        | %                                          |       |   |   |   |   |   |   | 0.0 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| Other                                       |       | EURO                                                     |       |                    |       |                                       |       |   |   |   |   |   |   |   |   |   | 1,419 |   |   |   | 1,419 |   |   |   | 1,500 |   |   |
| Weighted average  spread—Euribor       |       |                                                     |       |                    |       |                                       |       |   |   |   |   |   |   |   |   |   | 0.0 | % |   |   |   |   |   |   |   |   |   |
| Bank loans                                  |       | USD                                                      |       |                    | 95         |                                       |       | 13 |   | 137 |   | 27 |   | 131 |   |   | 16 |   |   |   | 419 |   |   |   | 476 |   |   |
| Weighted average  spread—Libor         |       |                                                     |       |                    | 1.5        | %                                          |       | 3.1 | % | 1.9 | % | 2.3 | % | 0.9 | % |   | 3.1 | % |   |   |   |   |   |   |   |   |   |
| EIB loans                                   |       | USD                                                      |       |                    |       |                                       |       | 59 |   | 63 |   | 18 |   | 188 |   |   | 30 |   |   |   | 358 |   |   |   | 362 |   |   |
| Weighted average  spread—Libor         |       |                                                     |       |                    |       |                                       |       | 0.8 | % | 0.8 | % | 1.6 | % | 0.2 | % |   | 0.5 | % |   |   |   |   |   |   |   |   |   |
| Project financing                           |       | USD                                                      |       |                    | 13         |                                       |       | 13 |   | 13 |   | 13 |   | 13 |   |   | 20 |   |   |   | 82 |   |   |   | 104 |   |   |
| Weighted average  spread—Libor         |       |                                                     |       |                    | 4.0        | %                                          |       | 4.6 | % | 5.4 | % | 6.8 | % | 9.3 | % |   | 14.7 | % |   |   |   |   |   |   |   |   |   |
| MTN                                         |       | USD                                                      |       |                    |       |                                       |       |   |   |   |   | 8 |   |   |   |   |   |   |   |   | 8 |   |   |   | 10 |   |   |
| Weighted average  spread—Libor         |       |                                                     |       |                    |       |                                       |       |   |   |   |   | 1.8 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debenture                                   |       | USD                                                      |       |                    | 13         |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 13 |   |   |   | 8 |   |   |
| Weighted average  spread—Libor         |       |                                                     |       |                    | 2.0        | %                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Supply financing                            |       | USD                                                      |       |                    | 3          |                                       |       | 2 |   |   |   |   |   |   |   |   |   |   |   |   | 4 |   |   |   | 5 |   |   |
| Weighted average  spread—Libor         |       |                                                     |       |                    | 2.3        | %                                          |       | 2.3 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| MTN                                         |       | CZK                                                      |       |                    |       |                                       |       |   |   | 17 |   |   |   |   |   |   |   |   |   |   | 17 |   |   |   | 17 |   |   |
| Weighted average  spread—Pribor        |       |                                                     |       |                    |       |                                       |       |   |   | 0.2 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Local bonds                                 |       | BRL                                                      |       |                    |       |                                       |       |   |   | 104 |   |   |   |   |   |   |   |   |   |   | 104 |   |   |   | 116 |   |   |
| Weighted average  spread—CDI           |       |                                                     |       |                    |       |                                       |       |   |   | 1.2 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Local bonds                                 |       | BRL                                                      |       |                    | 4          |                                       |       | 4 |   | 4 |   | 4 |   | 4 |   |   | 8 |   |   |   | 26 |   |   |   | 29 |   |   |
| Weighted average  spread—CDI           |       |                                                     |       |                    | 116.0      | %                                          |       | 116.0 | % | 116.0 | % | 116.0 | % | 116.0 | % |   | 116.0 | % |   |   |   |   |   |   |   |   |   |
| Local bonds                                 |       | BRL                                                      |       |                    |       |                                       |       |   |   |   |   |   |   | 40 |   |   |   |   |   |   | 40 |   |   |   | 45 |   |   |
| Weighted average  spread—FINEL-IGPM    |       |                                                     |       |                    |       |                                       |       |   |   |   |   |   |   | 11.4 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| Bank loans                                  |       | BRL                                                      |       |                    | 3          |                                       |       | 22 |   |   |   | 25 |   |   |   |   |   |   |   |   | 49 |   |   |   | 72 |   |   |
| Weighted average  spread—CDI           |       |                                                     |       |                    | 1.9        | %                                          |       | 1.9 | % |   |   | 1.5 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Bank loans                                  |       | BRL                                                      |       |                    |       |                                       |       | 11 |   |   |   |   |   |   |   |   |   |   |   |   | 11 |   |   |   | 11 |   |   |
| Weighted average  spread—CDI           |       |                                                     |       |                    |       |                                       |       | 108.0 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Bank loans                                  |       | BRL                                                      |       |                    |       |                                       |       | 3 |   | 3 |   | 14 |   | 39 |   |   | 4 |   |   |   | 61 |   |   |   | 63 |   |   |
| Weighted average  spread—FINEL-IGPM    |       |                                                     |       |                    |       |                                       |       | 11.6 | % | 11.6 | % | 11.6 | % | 11.7 | % |   | 11.7 | % |   |   |   |   |   |   |   |   |   |
| Project financing                           |       | BRL                                                      |       |                    |       |                                       |       |   |   |   |   |   |   |   |   |   | 59 |   |   |   | 59 |   |   |   | 41 |   |   |
| Weighted average  spread—CDI           |       |                                                     |       |                    |       |                                       |       |   |   |   |   |   |   |   |   |   | 87.0 | % |   |   |   |   |   |   |   |   |   |
| Project financing                           |       | BRL                                                      |       |                    | 4.7        | %                                          |       | 4.7 | % | 5.0 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average  spread—FINEL-IGPM    |       |                                                     |       |                    | 36         |                                       |       | 25 |   | 34 |   | 27 |   | 17 |   |   | 3 |   |   |   | 140 |   |   |   | 144 |   |   |
| Official loans                              |       | BRL                                                      |       |                    | 1.9        | %                                          |       | 2.2 | % | 2.5 | % | 2.8 | % | 3.6 | % |   | 6.3 | % |   |   |   |   |   |   |   |   |   |
| Weighted average  spread—TJLP-TR-IGPM  |       |                                                     |       |                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Bank loans                                  |       | Other Currencies                                         |       |                    | 62         |                                       |       | 22 |   | 0 |   |   |   |   |   |   |   |   |   |   | 84 |   |   |   | 87 |   |   |
| Weighted average  spread—DTF-VAC-CF    |       |                                                     |       |                    | 5.1        | %                                          |       | 4.9 | % | 7.2 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Bonds                                       |       | Other Currencies                                         |       |                    | 18         |                                       |       | 17 |   |   |   | 106 |   |   |   |   | 1 |   |   |   | 140 |   |   |   | 150 |   |   |
| Weighted average  spread—DTF-VAC-CF    |       |                                                     |       |                    | 2.7        | %                                          |       | 2.8 | % |   |   | 3.0 | % |   |   |   | 1.1 | % |   |   |   |   |   |   |   |   |   |
| **TOTAL  FLOATING**                         | ** ** | ** **                                               | ** ** |                    | **866**    | ** **                                 |       | **650** | ** ** | **528** | ** ** | **479** | ** ** | **4,136** | ** ** |   | **2,415** | ** ** |   |   | **9,075** | ** ** |   |   | **9,301** | ** ** |   |
|                                             |            |                                                          |            |                         |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

143

----

**INTEREST-RATE SENSITIVITYDecember 31, 2005**

| ** **                     | ** ** | ** **                                               | ** ** | **Maturity Dates**      | ** ** | **Fair Value at  December 31,** | ** ** |
|--------------------------------|------------|----------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------|------------|
| **Debt**                       | ** ** | ** **                                               | ** ** | **Denominated in** | ** ** | **2006**                                  | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Subsequent** | ** ** | **Total** | ** ** | **2005** | ** ** |
| ** **                     | ** ** | **(millions of euro, except rates)** | ** ** |
| FIXED RATE DEBT      | ** ** | ** **                                               | ** ** | ** **              | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Debentures                     |       | EURO                                                     |       |                    |       |                                      |       |   |   |   |   | 42 |   |   | ** ** |   |   | 42 |   |   | 42 |   |   |
| Weighted average interest rate |       |                                                     |       |                    |       |                                      |       |   |   |   |   | 13.9 | % |   | ** ** |   |   |   |   |   |   |   |   |
| Debt instruments               |       | EURO                                                     |       |                    |       |                                      |       |   |   | 500 |   |   |   |   | ** ** |   |   | 500 |   |   | 534 |   |   |
| Weighted average interest rate |       |                                                     |       |                    |       |                                      |       |   |   | 4.2 | % |   |   |   | ** ** |   |   |   |   |   |   |   |   |
| Loans                          |       | EURO                                                     |       | 433                     |       | 80                                        |       |   |   |   |   | 40 |   |   | ** ** |   |   | 553 |   |   | 571 |   |   |
| Weighted average interest rate |       |                                                     |       | 4.1                     | %          | 7.6                                       | %          |   |   |   |   | 3.4 | % |   | ** ** |   |   |   |   |   |   |   |   |
| MTN                            |       | EURO                                                     |       |                    |       |                                      |       |   |   | 1,005 |   | 1,250 |   |   | 1,454 |   |   | 3,709 |   |   | 4,161 |   |   |
| Weighted average interest rate |       |                                                     |       |                    |       |                                      |       |   |   | 4.7 | % | 5.5 | % |   | 5.6 | % |   |   |   |   |   |   |   |
| Other                          |       | EURO                                                     |       | 154                     |       | 149                                       |       | 140 |   | 131 |   | 65 |   |   | 80 |   |   | 719 |   |   | 772 |   |   |
| Weighted average interest rate |       |                                                     |       | 5.0                     | %          | 5.0                                       | %          | 5.0 | % | 5.1 | % | 4.6 | % |   | 6.6 | % |   |   |   |   |   |   |   |
| MTN                            |       | GBP                                                      |       |                    |       |                                      |       |   |   |   |   |   |   |   | 584 |   |   | 584 |   |   | 656 |   |   |
| Weighted average interest rate |       |                                                     |       |                    |       |                                      |       |   |   |   |   |   |   |   | 6.1 | % |   |   |   |   |   |   |   |
| Bank loans                     |       | USD                                                      |       | 29                      |       | 30                                        |       | 21 |   | 4 |   | 1 |   |   | 7 |   |   | 91 |   |   | 92 |   |   |
| Weighted average interest rate |       |                                                     |       | 7.2                     | %          | 7.1                                       | %          | 6.9 | % | 5.9 | % | 6.0 | % |   | 6.0 | % |   |   |   |   |   |   |   |
| Supplier loans                 |       | USD                                                      |       | 28                      |       | 24                                        |       | 22 |   | 15 |   | 15 |   |   | 14 |   |   | 117 |   |   | 123 |   |   |
| Weighted average interest rate |       |                                                     |       | 7.4                     | %          | 7.4                                       | %          | 7.4 | % | 7.4 | % | 7.4 | % |   | 7.4 | % |   |   |   |   |   |   |   |
| Project financing              |       | USD                                                      |       | 27                      |       | 25                                        |       | 24 |   | 24 |   | 18 |   |   | 35 |   |   | 152 |   |   | 154 |   |   |
| Weighted average interest rate |       |                                                     |       | 6.1                     | %          | 6.1                                       | %          | 6.2 | % | 6.1 | % | 6.0 | % |   | 6.0 | % |   |   |   |   |   |   |   |
| MTN                            |       | USD                                                      |       |                    |       |                                      |       |   |   | 297 |   |   |   |   | 487 |   |   | 784 |   |   | 808 |   |   |
| Weighted average interest rate |       |                                                     |       |                    |       |                                      |       |   |   | 6.0 | % |   |   |   | 5.4 | % |   |   |   |   |   |   |   |
| International bonds            |       | USD                                                      |       | 434                     |       | 10                                        |       | 318 |   | 524 |   | 6 |   |   | 1,247 |   |   | 2,538 |   |   | 2,740 |   |   |
| Weighted average interest rate |       |                                                     |       | 7.8                     | %          | 7.9                                       | %          | 7.9 | % | 7.7 | % | 7.8 | % |   | 7.9 | % |   |   |   |   |   |   |   |
| Local bonds                    |       | USD                                                      |       | 25                      |       | 50                                        |       |   |   | 8 |   |   |   |   | 17 |   |   | 98 |   |   | 97 |   |   |
| Weighted average interest rate |       |                                                     |       | 7.8                     | %          | 7.5                                       | %          |   |   | 5.3 | % |   |   |   | 6.1 | % |   |   |   |   |   |   |   |
| Leasing                        |       | USD                                                      |       | 1                       |       | 1                                         |       | 1 |   | 1 |   | 1 |   |   | 35 |   |   | 40 |   |   | 35 |   |   |
| Weighted average interest rate |       |                                                     |       | 6.3                     | %          | 6.3                                       | %          | 6.3 | % | 6.3 | % | 6.3 | % |   | 6.3 | % |   |   |   |   |   |   |   |
| MTN                            |       | JPY                                                      |       | 36                      |       |                                      |       | 58 |   |   |   |   |   |   | 22 |   |   | 115 |   |   | 113 |   |   |
| Weighted average interest rate |       |                                                     |       | 0.7                     | %          |                                      |       | 1.1 | % |   |   |   |   |   | 1.5 | % |   |   |   |   |   |   |   |
| Local bonds                    |       | CLP-UF                                                   |       | 187                     |       | 3                                         |       | 4 |   | 4 |   | 132 |   |   | 206 |   |   | 535 |   |   | 579 |   |   |
| Weighted average interest rate |       |                                                     |       | 5.8                     | %          | 5.6                                       | %          | 5.6 | % | 5.6 | % | 5.6 | % |   | 6.1 | % |   |   |   |   |   |   |   |
| Project financing              |       | BRL                                                      |       | 4                       |       | 5                                         |       | 4 |   | 4 |   | 4 |   |   | 27 |   |   | 47 |   |   | 41 |   |   |
| Weighted average interest rate |       |                                                     |       | 9.6                     | %          | 9.8                                       | %          | 10.1 | % | 10.3 | % | 10.7 | % |   | 11.1 | % |   |   |   |   |   |   |   |
| Local bonds                    |       | BRL                                                      |       | 21                      |       | 7                                         |       | 3 |   | 3 |   | 3 |   |   | 9 |   |   | 45 |   |   | 42 |   |   |
| Weighted average interest rate |       |                                                     |       | 9.1                     | %          | 8.2                                       | %          | 8.6 | % | 8.7 | % | 8.8 | % |   | 8.8 | % |   |   |   |   |   |   |   |
| Bank loans                     |       | Other Currencies                                         |       | 25                      |       | 25                                        |       |   |   |   |   |   |   |   | ** ** |   |   | 49 |   |   | 50 |   |   |
| Weighted average interest rate |       |                                                     |       | 6.6                     | %          | 6.0                                       | %          |   |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   |   |
| Bonds                          |       | Other  Currencies                                        |       | 142                     |       | 15                                        |       | 31 |   | 54 |   | 60 |   |   | 333 |   |   | 634 |   |   | 701 |   |   |
| Weighted average interest rate |       |                                                     |       | 6.3                     | %          | 6.2                                       | %          | 6.2 | % | 6.2 | % | 6.1 | % |   | 6.0 | % |   |   |   |   |   |   |   |
| Other debt                     |       | Other  Currencies                                        |       | 7                       |       | 3                                         |       | 3 |   | 3 |   | 3 |   |   | 1 |   |   | 19 |   |   | 21 |   |   |
| Weighted average interest rate |       |                                                     |       | 4.5                     | %          | 1.8                                       | %          | 1.8 | % | 1.8 | % | 1.8 | % |   | 1.8 | % |   |   |   |   |   |   |   |
| **TOTAL FIXED**                | ** ** | ** **                                               | ** ** | **1,549**               | ** ** | **423**                                   | ** ** | **629** | ** ** | **2,574** | ** ** | **1,639** |   |   | **4,553** |   | ** ** | **11,368** | ** ** |   | **12,331** |   |   |
| **TOTAL  FIXED + FLOATING**    | ** ** | ** **                                               | ** ** | **2,415**               | ** ** | **1,073**                                 | ** ** | **1,157** | ** ** | **3,054** | ** ** | **5,775** |   |   | **6,968** |   | ** ** | **20,443** | ** ** |   | **21,631** |   |   |
|                                |            |                                                          |            |                         |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

144

----

**INTEREST-RATESENSITIVITY**

**December 31,2005**

| ** **                                  | ** ** | ** **                                               | ** ** | **Maturity Dates** | ** ** | **Fair Value at   December 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------|------------|
| ** **                                  | ** ** | **Denominated in**                                  | ** ** | **2006**                | ** ** | **2007**                                        | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Subsequent** | ** ** | **Total** | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | **(millions of euro, except rates)** | ** ** |
| **INTEREST RATE SWAPS**                     |       |                                                     |       |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Swap in Euro**                            |       |                                                     |       |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From variable to fixed                      |       |                                                     |       |                    |       | 547                                             |       | 328 |   | 110 |   | 1,229 |   |   | 99 |   |   |   | 3,708 |   |   | 6,022 |   |   | (222 | ) |   |
| Spread received—Euribor                |       |                                                     | EUR        |                    |       | 0.00                                            | %          | 0.11 | % | 0.00 | % | 0.03 | % |   | 0.00 | % |   |   | 0.13 | % |   |   |   |   |   |   |   |
| Rate paid                                   |       |                                                     | EUR        |                    |       | 3.59                                            | %          | 3.56 | % | 3.69 | % | 4.33 | % |   | 4.29 | % |   |   | 3.96 | % |   |   |   |   |   |   |   |
| From fixed to floating                      |       |                                                     |       |                    |       | 958                                             |       | 67 |   | 174 |   | 1,404 |   |   | 40 |   |   |   | 122 |   |   | 2,766 |   |   | 300 |   |   |
| Rate received                               |       |                                                     | EUR        |                    |       | 4.80                                            | %          | 6.23 | % | 6.74 | % | 5.02 | % |   | 3.37 | % |   |   | 6.15 | % |   |   |   |   |   |   |   |
| Spread paid—Euribor                    |       |                                                     | EUR        |                    |       | 0.70                                            | %          | 0.09 | % | -0.04 | % | 0.08 | % |   | 0.16 | % |   |   | 0.42 | % |   |   |   |   |   |   |   |
| From floating to floating                   |       |                                                     |       |                    |       | 240                                             |       | 75 |   | 30 |   |   |   |   |   |   |   |   |   |   |   | 346 |   |   | 2 |   |   |
| Spread received—Euribor                |       |                                                     | EUR        |                    |       | 0.35                                            | %          | 0.28 | % | 0.30 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—Euribor                    |       |                                                     | EUR        |                    |       | -0.10                                           | %          | -0.10 | % | -0.10 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to floating                   |       |                                                     |       |                    |       |                                            |       | 80 |   |   |   |   |   |   |   |   |   |   |   |   |   | 80 |   |   | 0 |   |   |
| Spread received—EQL                    |       |                                                     | EUR        |                    |       |                                            |       | 0.00 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—Euribor                    |       |                                                     | EUR        |                    |       |                                            |       | 0.25 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to floating                   |       |                                                     |       |                    |       |                                            |       |   |   |   |   |   |   |   | 90 |   |   |   |   |   |   | 90 |   |   | 11 |   |   |
| Spread received—IPCL                   |       |                                                     | EUR        |                    |       |                                            |       |   |   |   |   |   |   |   | 0.00 | % |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—Euribor                    |       |                                                     | EUR        |                    |       |                                            |       |   |   |   |   |   |   |   | 0.16 | % |   |   |   |   |   |   |   |   |   |   |   |
| From floating to floating                   |       |                                                     |       |                    |       |                                            |       |   |   |   |   |   |   |   | 10 |   |   |   | 15 |   |   | 25 |   |   | 1 |   |   |
| Spread received—IRS Euro               |       |                                                     | EUR        |                    |       |                                            |       |   |   |   |   |   |   |   | -0.61 | % |   |   | 0.00 | % |   |   |   |   |   |   |   |
| Spread paid—Euribor                    |       |                                                     | EUR        |                    |       |                                            |       |   |   |   |   |   |   |   | 0.28 | % |   |   | 0.34 | % |   |   |   |   |   |   |   |
| From floating to floating                   |       |                                                     |       |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   | 15 |   |   | 15 |   |   | 2 |   |   |
| Spread received—IRS GBP                |       |                                                     | EUR        |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   | 4.50 | % |   |   |   |   |   |   |   |
| Spread paid—Euribor                    |       |                                                     | EUR        |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   | 0.10 | % |   |   |   |   |   |   |   |
| **Interest  Rate Swap in Foreign Currency** |       |                                                     | ** ** |                    |       | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** |   |   | ** ** | ** ** |   |
| From fixed to floating                      |       |                                                     |       |                    |       | 42                                              |       | 50 |   | 59 |   | 5 |   |   | 6 |   |   |   | 37 |   |   | 199 |   |   | 2 |   |   |
| Spread received—Libor                  |       |                                                     | USD        |                    |       | 0.00                                            | %          | 0.00 | % | 0.00 | % | 0.00 | % |   | 0.00 | % |   |   | 0.00 | % |   |   |   |   |   |   |   |
| Rate paid                                   |       |                                                     | USD        |                    |       | 4.11                                            | %          | 4.17 | % | 4.31 | % | 4.69 | % |   | 4.69 | % |   |   | 4.69 | % |   |   |   |   |   |   |   |
| From fixed to  floating                     |       |                                                     |       |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rate received                               |       |                                                     | USD        |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—Euribor                    |       |                                                     | USD        |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From fixed to  floating                     | ** ** |                                                     |       |                    | ** ** |                                            |       |   |   |   |   |   |   | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   | ** ** | ** ** |   |   | ** ** |
| Rate received                               |       |                                                     | CHF        |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—Libor                      |       |                                                     | CHF        |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to  floating                  | ** ** |                                                     |       |                    | ** ** |                                            |       |   |   |   |   |   |   | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   | ** ** | ** ** |   |   | ** ** |
| Spread received—%CDI                   |       |                                                     | BRL        |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—%CDI                       |       |                                                     | BRL        |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to floating                   |       |                                                     |       |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread received—Libor                  |       |                                                     | USD        |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—Libor                      |       |                                                     | USD        |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to  fixed                     |       |                                                     |       |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread received—Libor                  |       |                                                     | EURO       |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rate paid                                   |       |                                                     | JPY        |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to  floating                  |       |                                                     |       |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread received—Euribor                |       |                                                     | EURO       |                    | ** ** |                                            |       |   |   |   |   |   |   | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   | ** ** | ** ** |   |   | ** ** |
| Spread paid—Libor                      |       |                                                     | USD        |                    | ** ** |                                            |       |   |   |   |   |   |   | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   | ** ** | ** ** |   |   | ** ** |
| From floating to floating                   |       |                                                     |       |                    | ** ** | 78                                              |       |   |   |   |   |   |   | ** ** |   |   | ** ** | ** ** |   |   | ** ** | 78 | ** ** | ** ** | 5 |   | ** ** |
| Spread received—Libor                  |       |                                                     | USD        |                    | ** ** | -0.01                                           | %          |   |   |   |   |   |   | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   | ** ** | ** ** |   |   | ** ** |
| Spread paid—Euribor                    |       |                                                     | EUR        |                    | ** ** | 0.06                                            | %          |   |   |   |   |   |   | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   | ** ** | ** ** |   |   | ** ** |
| From floating to  floating                  |       |                                                     |       |                    | ** ** |                                            |       |   |   |   |   |   |   | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   | ** ** | ** ** |   |   | ** ** |
| Spread received—EQL                    |       |                                                     | USD        |                    | ** ** |                                            |       |   |   |   |   |   |   | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   | ** ** | ** ** |   |   | ** ** |
| Spread paid—Euribor                    |       |                                                     | EUR        |                    | ** ** |                                            |       |   |   |   |   |   |   | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   | ** ** | ** ** |   |   | ** ** |
| From floating to  floating                  |       |                                                     |       |                    | ** ** |                                            |       |   |   |   |   |   |   | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   | ** ** | ** ** |   |   | ** ** |
| Spread received—Libor                  |       |                                                     | GBP        |                    | ** ** |                                            |       |   |   |   |   |   |   | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   | ** ** | ** ** |   |   | ** ** |
| Spread paid—Euribor                    |       |                                                     | EUR        |                    | ** ** |                                            |       |   |   |   |   |   |   | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   | ** ** | ** ** |   |   | ** ** |
| From fixed to fixed                         |       |                                                     |       |                    | ** ** | 38                                              |       | 38 |   | 38 |   |   |   | ** ** |   |   | ** ** | ** ** |   |   | ** ** | 114 | ** ** | ** ** | (11 | ) | ** ** |
| Rate received                               |       |                                                     | USD        |                    | ** ** | 4.08                                            | %          | 4.08 | % | 4.08 | % |   |   | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   | ** ** | ** ** |   |   | ** ** |
| Rate received                               |       |                                                     | EUR        |                    | ** ** | 4.38                                            | %          | 4.38 | % | 4.38 | % |   |   | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   | ** ** | ** ** |   |   | ** ** |
| From fixed to fixed                         |       |                                                     |       |                    | ** ** |                                            |       |   |   |   |   |   |   | ** ** |   |   | ** ** | ** ** | 624 |   | ** ** | 624 | ** ** | ** ** | (86 | ) | ** ** |
| Rate received                               |       |                                                     | GBP        |                    | ** ** |                                            |       |   |   |   |   |   |   | ** ** |   |   | ** ** | ** ** | 6.13 | % | ** ** |   | ** ** | ** ** |   |   | ** ** |

145

----

 

| Rate received                   |       |   | EUR     |   | ** ** |       |       |       |       |       |       |       |       | ** ** |       |   | ** ** | ** ** | 6.02       | %      | ** ** |       | ** ** | ** ** |       |       | ** ** |
|---------------------------------|------------|--------|---------|--------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|--------|------------|------------|------------|--------|------------|------------|------------|------------|------------|------------|------------|
| From floating to floating       |       |   |    |   | ** ** |       |       |       |       |       |       |       |       | ** ** |       |   | ** ** | ** ** |       |   | ** ** |       | ** ** | ** ** |       |       | ** ** |
| Spread received—Libor      |       |   | CHF     |   | ** ** |       |       |       |       |       |       |       |       | ** ** |       |   | ** ** | ** ** |       |   | ** ** |       | ** ** | ** ** |       |       | ** ** |
| Spread paid—Euribor        |       |   | EUR     |   |       |       |       |       |       |       |       |       |       |       |       |   |       |       |       |   |       |       |       |       |       |       |       |
| From fixed to floating          |       |   |    |   |       |       |       |       |       |       |       | 319        |       |       |       |   |       |       | 465        |   |       | 784        |       |       | 11         |       |       |
| Rate received                   |       |   | USD     |   |       |       |       |       |       |       |       | 6.00       | %          |       |       |   |       |       | 5.41       | %      |       |       |       |       |       |       |       |
| Spread paid—Euribor        |       |   | EUR     |   |       |       |       |       |       |       |       | 0.12       | %          |       |       |   |       |       | 0.43       | %      |       |       |       |       |       |       |       |
| From fixed to  floating         |       |   |    |   |       |       |       |       |       |       |       |       |       |       |       |   |       |       |       |   |       |       |       |       |       |       |       |
| Rate received                   |       |   | CZK     |   |       |       |       |       |       |       |       |       |       |       |       |   |       |       |       |   |       |       |       |       |       |       |       |
| Spread paid—Euribor        |       |   | EUR     |   |       |       |       |       |       |       |       |       |       |       |       |   |       |       |       |   |       |       |       |       |       |       |       |
| From floating to floating       |       |   |    |   |       |       |       |       |       | 17         |       |       |       |       |       |   |       |       |       |   |       | 17         |       |       | 1          |       |       |
| Rate received—Pribor       |       |   | CZK     |   |       |       |       |       |       | 0.23       | %          |       |       |       |       |   |       |       |       |   |       |       |       |       |       |       |       |
| Spread paid—Euribor        |       |   | EUR     |   |       |       |       |       |       | 0.29       | %          |       |       |       |       |   |       |       |       |   |       |       |       |       |       |       |       |
| From fixed to fixed             |       |   |    |   |       | 83         |       |       |       |       |       |       |       |       |       |   |       |       | 500        |   |       | 583        |       |       | (172       | )          |       |
| Rate received                   |       |   | USD     |   |       | 6.90       | %          |       |       |       |       |       |       |       |       |   |       |       | 7.39       | %      |       |       |       |       |       |       |       |
| Rate paid                       |       |   | UF      |   |       | 5.27       | %          |       |       |       |       |       |       |       |       |   |       |       | 6.62       | %      |       |       |       |       |       |       |       |
| From fixed to floating          |       |   |    |   |       | 43         |       | 1          |       | 1          |       |       |       |       |       |   |       |       |       |   |       | 45         |       |       | (15        | )          |       |
| Rate received                   |       |   | USD     |   |       | 5.49       | %          | 5.50       | %          | 5.50       | %          |       |       |       |       |   |       |       |       |   |       |       |       |       |       |       |       |
| Spread paid—% CDI          |       |   | BRL     |   |       | 88.19      | %          | 103.80     | %          | 103.80     | %          |       |       |       |       |   |       |       |       |   |       |       |       |       |       |       |       |
| From fixed to floating          |       |   |    |   |       | 0          |       | 8          |       |       |       |       |       |       |       |   |       |       |       |   |       | 8          |       |       | (4         | )          |       |
| Rate received                   |       |   | USD     |   |       | 7.48       | %          | 7.48       | %          |       |       |       |       |       |       |   |       |       |       |   |       |       |       |       |       |       |       |
| Spread paid—CDI            |       |   | BRL     |   |       | 3.25       | %          | 3.25       | %          |       |       |       |       |       |       |   |       |       |       |   |       |       |       |       |       |       |       |
| From fixed to floating          |       |   |    |   |       |       |       | 3          |       | 3          |       | 3          |       |       | 3          |   |       |       |       |   |       | 10         |       |       | (1         | )          |       |
| Rate received                   |       |   | USD     |   |       |       |       | 6.35       | %          | 6.35       | %          | 6.35       | %          |       | 6.35       | %      |       |       |       |   |       |       |       |       |       |       |       |
| Spread paid—IGPM           |       |   | BRL     |   |       |       |       | 11.40      | %          | 11.40      | %          | 11.40      | %          |       | 11.40      | %      |       |       |       |   |       |       |       |       |       |       |       |
| From fixed to floating          |       |   |    |   |       | 49         |       |       |       | 74         |       |       |       |       |       |   |       |       | 22         |   |       | 144        |       |       | (33        | )          |       |
| Rate received                   |       |   | JPY     |   |       | 0.70       | %          |       |       | 1.07       | %          |       |       |       |       |   |       |       | 1.51       | %      |       |       |       |       |       |       |       |
| Spread paid—Euribor        |       |   | EUR     |   |       | 0.32       | %          |       |       | 0.35       | %          |       |       |       |       |   |       |       | 0.25       | %      |       |       |       |       |       |       |       |
| From floating to fixed          |       |   |    |   |       | 42         |       |       |       |       |       |       |       |       |       |   |       |       |       |   |       | 42         |       |       | (21        | )          |       |
| Spread received                 |       |   | USD     |   |       | 1.50       | %          |       |       |       |       |       |       |       |       |   |       |       |       |   |       |       |       |       |       |       |       |
| Rate paid                       |       |   | UF      |   |       | 5.31       | %          |       |       |       |       |       |       |       |       |   |       |       |       |   |       |       |       |       |       |       |       |
| From floating to  floating      |       |   |    |   |       |       |       |       |       |       |       |       |       |       |       |   |       |       |       |   |       |       |       |       |       |       |       |
| Spread received—Libor      |       |   | USD     |   |       |       |       |       |       |       |       |       |       |       |       |   |       |       |       |   |       |       |       |       |       |       |       |
| Spread paid—CDI            |       |   | BRL     |   |       |       |       |       |       |       |       |       |       |       |       |   |       |       |       |   |       |       |       |       |       |       |       |
| **EXCHANGE  RATE FORWARDS**     | ** ** |   |    |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Forward                         |       |   | EUR/USD |   |       | 243        |       | 15         |       | 0          |       | 0          |       |       | 0          |   |       |       | 0          |   |       | 258        |       |       | (3         | )          |       |
| Forward                         |       |   | CLP/USD |   |       | 0          |       | 0          |       | 0          |       | 0          |       |       | 0          |   |       |       | 0          |   |       | 0          |       |       | (0         | )          |       |
| **INTEREST RATE OPTIONS**COLLAR |       |   |    |   |       | 102        |       | 14         |       | 75         |       | 100        |       |       |       |   |       |       | 100        |   |       | 391        |       |       | (2         | )          |       |
| Buy CAP—Euribor            |       |   | EUR     |   |       | 4.52       | %          | 6.00       | %          | 3.44       | %          | 5.40       | %          |       |       |   |       |       | 5.25       | %      |       |       |       |       |       |       |       |
| Sell Floor—Euribor         |       |   | EUR     |   |       | 2.04       | %          | 3.50       | %          | 2.15       | %          | 2.45       | %          |       |       |   |       |       | 3.04       | %      |       |       |       |       |       |       |       |
| CAP                             |       |   |    |   |       |       |       |       |       |       |       |       |       |       |       |   |       |       | 1,500      |   |       | 1,500      |       |       | 5          |       |       |
| Buy CAP—Euribor            |       |   | EUR     |   |       |       |       |       |       |       |       |       |       |       |       |   |       |       | 5.42       | %      |       |       |       |       |       |       |       |
| Sell CAP—Euribor           |       |   | EUR     |   |       |       |       |       |       |       |       |       |       |       |       |   |       |       | 6.82       | %      |       |       |       |       |       |       |       |
| Exchange rate COLLAR            |       |   |    |   |       | 71         |       |       |       |       |       | 50         |       |       | 33         |   |       |       |       |   |       | 154        |       |       | (0         | )          |       |
| Buy CAP—Libor              |       |   | USD     |   |       | 5.50       | %          |       |       |       |       | 5.50       | %          |       | 5.50       | %      |       |       |       |   |       |       |       |       |       |       |       |
| Sell Floor—Libor           |       |   | USD     |   |       | 3.50       | %          |       |       |       |       | 4.10       | %          |       | 4.51       | %      |       |       |       |   |       |       |       |       |       |       |       |
| **TOTAL**                       |       |   |    |   | ** ** | **2,536**  | ** ** | **680**    | ** ** | **581**    | ** ** | **3,110**  | ** ** | ** ** | **281**    |   | ** ** | ** ** | **7,108**  |   | ** ** | **14,296** | ** ** | ** ** | **(228**   | **)**      | ** ** |

 

146

----

**INTEREST-RATESENSITIVITYDecember 31, 2004**

| ** **                                        | ** ** | ** **                           | ** ** | **Maturity Dates**      | ** ** | **Fair  Value at  December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|
| **Debt**                                          | ** ** | ** **                           | ** ** | **Denominated in** | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Subsequent** | ** ** | **Total** | ** ** | **2004** | ** ** |
| ** **                                        | ** ** | **(millions of euro, except rates)** | ** ** |
| **FLOATING RATE DEBT**                            |       |                                 |       |                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Bank loans                                        |       | EURO                                 |       | 303                     |       | 604                                        |       | 147 |   | 38 |   | 87 |   |   | 2 |   |   |   | 1,179 |   |   |   | 1,179 |   |   |
| Weighted average spread—Euribor              |       |                                 |       | 0.3                     | %          | 0.3                                        | %          | 0.4 | % | 0.4 | % | 0.4 | % |   | 0.4 | % |   |   |   |   |   |   |   |   |   |
| Structured loans                                  |       | EURO                                 |       |                    |       | 240                                        |       | 141 |   | 30 |   |   |   |   |   |   |   |   | 412 |   |   |   | 412 |   |   |
| Weighted average spread—Euribor              |       |                                 |       |                    |       | 0.4                                        | %          | 0.3 | % | 0.3 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| EIB loans                                         |       | EURO                                 |       | 38                      |       | 51                                         |       | 87 |   | 87 |   | 87 |   |   | 245 |   |   |   | 594 |   |   |   | 594 |   |   |
| Weighted average spread—Euribor              |       |                                 |       | 0.4                     | %          | 0.4                                        | %          | 0.4 | % | 0.4 | % | 0.4 | % |   | 0.4 | % |   |   |   |   |   |   |   |   |   |
| Credits                                           |       | EURO                                 |       | 32                      |       | 107                                        |       | 4 |   | 1,070 |   |   |   |   |   |   |   |   | 1,213 |   |   |   | 1,213 |   |   |
| Weighted average spread—Euribor              |       |                                 |       | 0.4                     | %          | 0.4                                        | %          | 0.4 | % | 0.4 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Project financing                                 |       | EURO                                 |       | 16                      |       | 10                                         |       | 13 |   | 14 |   | 13 |   |   | 62 |   |   |   | 128 |   |   |   | 128 |   |   |
| Weighted average spread—Euribor              |       |                                 |       | 0.9                     | %          | 0.9                                        | %          | 0.9 | % | 0.8 | % | 0.8 | % |   | 0.8 | % |   |   |   |   |   |   |   |   |   |
| MTN                                               |       | EURO                                 |       |                    |       | 142                                        |       |   |   |   |   |   |   |   | 150 |   |   |   | 292 |   |   |   | 292 |   |   |
| Weighted average spread—Euribor              |       |                                 |       |                    |       | 0.1                                        | %          |   |   |   |   |   |   |   | 0.9 | % |   |   |   |   |   |   |   |   |   |
| MTN                                               |       | EURO                                 |       |                    |       |                                       |       | 80 |   |   |   |   |   |   |   |   |   |   | 80 |   |   |   | 80 |   |   |
| Weighted average spread—EQL                  |       |                                 |       |                    |       |                                       |       | 0.0 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| MTN                                               |       | EURO                                 |       |                    |       |                                       |       |   |   |   |   |   |   |   | 25 |   |   |   | 25 |   |   |   | 25 |   |   |
| Weighted average spread—IRS—Euro        |       |                                 |       |                    |       |                                       |       |   |   |   |   |   |   |   | (0.2 | )% |   |   |   |   |   |   |   |   |   |
| MTN                                               |       | EURO                                 |       |                    |       |                                       |       |   |   |   |   |   |   |   | 15 |   |   |   | 15 |   |   |   | 15 |   |   |
| Weighted average spread—IRS—GBP         |       |                                 |       |                    |       |                                       |       |   |   |   |   |   |   |   | 0.0 | % |   |   |   |   |   |   |   |   |   |
| MTN                                               |       | EURO                                 |       |                    |       |                                       |       |   |   |   |   |   |   |   | 90 |   |   |   | 90 |   |   |   | 90 |   |   |
| Weighted average spread—IPC LINK             |       |                                 |       |                    |       |                                       |       |   |   |   |   |   |   |   | 0.0 | % |   |   |   |   |   |   |   |   |   |
| Commercial paper                                  |       | EURO                                 |       | 1,659                   |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   | 1,659 |   |   |   | 1,659 |   |   |
| Weighted average spread—Euribor              |       |                                 |       | 0.0                     | %          |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Bank loans                                        |       | USD                                  |       | 233                     |       | 45                                         |       | 29 |   | 274 |   | 200 |   |   | 48 |   |   |   | 829 |   |   |   | 829 |   |   |
| Weighted average spread—Libor                |       |                                 |       | 0.6                     | %          | 0.8                                        | %          | 0.6 | % | 0.4 | % | 0.4 | % |   | 0.7 | % |   |   |   |   |   |   |   |   |   |
| EIB loans                                         |       | USD                                  |       | 37                      |       | 149                                        |       | 37 |   | 37 |   | 5 |   |   | 23 |   |   |   | 288 |   |   |   | 288 |   |   |
| Weighted average spread—Libor                |       |                                 |       | 0.2                     | %          | 0.0                                        | %          | 0.2 | % | 0.2 | % | 0.0 | % |   | 0.0 | % |   |   |   |   |   |   |   |   |   |
| MTN                                               |       | USD                                  |       |                    |       |                                       |       |   |   |   |   | 7 |   |   |   |   |   |   | 7 |   |   |   | 7 |   |   |
| Weighted average spread—Libor                |       |                                 |       |                    |       |                                       |       |   |   |   |   | 1.8 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| Credits                                           |       | JPY                                  |       |                    |       |                                       |       |   |   | 46 |   |   |   |   |   |   |   |   | 46 |   |   |   | 46 |   |   |
| Weighted average spread—Libor                |       |                                 |       |                    |       |                                       |       |   |   | 0.4 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Bank loans                                        |       | JPY                                  |       | 1                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   | 1 |   |   |   | 1 |   |   |
| Weighted average spread—Libor                |       |                                 |       | 0.8                     | %          |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| MTN                                               |       | CZK                                  |       |                    |       |                                       |       |   |   | 16 |   |   |   |   |   |   |   |   | 16 |   |   |   | 16 |   |   |
| Weighted average spread—Pribor               |       |                                 |       |                    |       |                                       |       |   |   | 0.2 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial paper                                  |       | GBP                                  |       | 1                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   | 1 |   |   |   | 1 |   |   |
| Weighted average spread—Libor                |       |                                 |       | 0.8                     | %          |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Local debentures and bonds                        |       | BRL                                  |       | 19                      |       | 37                                         |       | 24 |   |   |   |   |   |   |   |   |   |   | 80 |   |   |   | 80 |   |   |
| Weighted average spread—CDI                  |       |                                 |       | 4.0                     | %          | 4.0                                        | %          | 4.0 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Local debentures and bonds                        |       | BRL                                  |       | 3                       |       | 3                                          |       | 3 |   | 3 |   | 3 |   |   | 10 |   |   |   | 25 |   |   |   | 25 |   |   |
| Weighted average spread—CDI                  |       |                                 |       | 116.0                   | %          | 116.0                                      | %          | 116.0 | % | 116.0 | % | 116.0 | % |   | 116.0 | % |   |   |   |   |   |   |   |   |   |
| Bank loans                                        |       | BRL                                  |       | 81                      |       | 15                                         |       | 32 |   | 41 |   | 19 |   |   | 20 |   |   |   | 208 |   |   |   | 208 |   |   |
| Weighted average spread—CDI+                 |       |                                 |       | 2.0                     | %          | 1.7                                        | %          | 1.8 | % | 1.9 | % | 1.1 | % |   | 1.0 | % |   |   |   |   |   |   |   |   |   |
| Bank loans                                        |       | BRL                                  |       | 14                      |       | 10                                         |       | 14 |   |   |   | 8 |   |   | 17 |   |   |   | 62 |   |   |   | 62 |   |   |
| Weighted average spread—CDI*                 |       |                                 |       | 86.5                    | %          | 87.0                                       | %          | 87.0 | % |   |   | 87.0 | % |   | 87.0 | % |   |   |   |   |   |   |   |   |   |
| Bank loans                                        |       | Other  Currencies                    |       | 124                     |       | 21                                         |       | 18 |   |   |   |   |   |   | 0 |   |   |   | 164 |   |   |   | 164 |   |   |
| Weighted average spread—DTF—VAC—CF |       |                                 |       | 1.9                     | %          | 4.4                                        | %          | 4.8 | % |   |   |   |   |   | 4.8 | % |   |   |   |   |   |   |   |   |   |
| Debentures and bonds                              |       | Other  Currencies                    |       |                    |       | 11                                         |       | 20 |   |   |   | 89 |   |   |   |   |   |   | 120 |   |   |   | 120 |   |   |
| Weighted average spread—DTF—VAC—CF |       |                                 |       |                    |       | 3.0                                        | %          | 3.0 | % |   |   | 3.0 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| **TOTAL  FLOATING**                               | ** ** | ** **                           | ** ** | **2,560**               | ** ** | **1,445**                                  | ** ** | **648** | ** ** | **1,655** | ** ** | **518** | ** ** | ** ** | **707** |   | ** ** | ** ** | **7,533** |   | ** ** | ** ** | **7,533** |   |   |
|                                                   |            |                                      |            |                         |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

147

----

**INTEREST-RATESENSITIVITYDecember 31, 2004**

| ** **                          | ** ** | ** **                                               | ** ** | **Maturity Dates** | ** ** | **Fair  Value at  December 31,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|
| **Debt**                            | ** ** | ** **                                               | ** ** | **Denominated in** | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Subsequent** | ** ** | **Total** | ** ** | **2004** | ** ** |
| ** **                          | ** ** | **(millions of euro, except rates)** | ** ** |
| **FIXED  RATE DEBT**                |       |                                                     |       |                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Structured loans                    |       | EURO                                                     |       |                    |       |                                       |       |   |   |   |   |   |   |   |   | 62 |   |   |   |   |   | 62 |   |   | 71 |   |   |
| Weighted average interest rate      |       |                                                     |       |                    |       |                                       |       |   |   |   |   |   |   |   |   | 5.7 | % |   |   |   |   |   |   |   |   |   |   |
| Commercial paper                    |       | EURO                                                     |       |                    |       |                                       | 42         |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 42 |   |   | 41 |   |   |
| Weighted average interest rate      |       |                                                     |       |                    |       |                                       | 13.9       | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes                               |       | EURO                                                     |       |                    |       |                                       |       |   |   |   |   |   |   | 500 |   |   |   |   |   |   |   | 500 |   |   | 542 |   |   |
| Weighted average interest rate      |       |                                                     |       |                    |       |                                       |       |   |   |   |   |   |   | 4.2 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                               |       | EURO                                                     |       |                    |       |                                       | 433        |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 433 |   |   | 453 |   |   |
| Weighted average interest rate      |       |                                                     |       |                    |       |                                       | 4.1        | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| MTN                                 |       | EURO                                                     |       | 700                     |       |                                       | 1,250      |   |   |   | 30 |   |   |   |   | 1,005 |   |   | 1,417 |   |   | 4,402 |   |   | 4,941 |   |   |
| Weighted average interest rate      |       |                                                     |       | 5.1                     | %          |                                       | 5.5        | % |   |   | 5.3 | % |   |   |   | 4.7 | % |   | 5.8 | % |   |   |   |   |   |   |   |
| MTN                                 |       | GBP                                                      |       |                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   | 567 |   |   | 567 |   |   | 671 |   |   |
| Weighted average interest rate      |       |                                                     |       |                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   | 6.1 | % |   |   |   |   |   |   |   |
| Bank loans                          |       | USD                                                      |       | 69                      |       |                                       | 29         |   |   |   | 59 |   |   | 30 |   | 24 |   |   | 98 |   |   | 310 |   |   | 329 |   |   |
| Weighted average interest rate      |       |                                                     |       | 7.3                     | %          |                                       | 7.5        | % |   |   | 6.5 | % |   | 5.9 | % | 5.9 | % |   | 5.6 | % |   |   |   |   |   |   |   |
| MTN                                 |       | USD                                                      |       |                    |       |                                       |       |   |   |   |   |   |   |   |   | 257 |   |   |   |   |   | 257 |   |   | 287 |   |   |
| Weighted average interest rate      |       |                                                     |       |                    |       |                                       |       |   |   |   |   |   |   |   |   | 6.0 | % |   |   |   |   |   |   |   |   |   |   |
| International debentures  and bonds |       | USD                                                      |       |                    |       |                                       | 330        |   |   |   |   |   |   | 294 |   | 294 |   |   | 1,646 |   |   | 2,564 |   |   | 2,798 |   |   |
| Weighted average interest rate      |       |                                                     |       |                    |       |                                       | 7.8        | % |   |   |   |   |   | 7.9 | % | 8.0 | % |   | 7.2 | % |   |   |   |   |   |   |   |
| Local debentures and bonds          |       | USD                                                      |       | 15                      |       |                                       | 22         |   |   |   | 44 |   |   |   |   | 7 |   |   |   |   |   | 88 |   |   | 95 |   |   |
| Weighted average interest rate      |       |                                                     |       | 8.2                     | %          |                                       | 8.1        | % |   |   | 7.9 | % |   |   |   | 3.8 | % |   |   |   |   |   |   |   |   |   |   |
| MTN                                 |       | JPY                                                      |       |                    |       |                                       | 36         |   |   |   |   |   |   | 57 |   |   |   |   |   |   |   | 93 |   |   | 93 |   |   |
| Weighted average interest rate      |       |                                                     |       |                    |       |                                       | 0.7        | % |   |   |   |   |   | 1.1 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| Local debentures and bonds          |       | CLP                                                      |       | 16                      |       |                                       | 4          |   |   |   | 141 |   |   | 4 |   | 7 |   |   | 267 |   |   | 439 |   |   | 465 |   |   |
| Weighted average interest rate      |       |                                                     |       | 5.9                     | %          |                                       | 5.9        | % |   |   | 5.9 | % |   | 5.7 | % | 5.7 | % |   | 5.6 | % |   |   |   |   |   |   |   |
| Bank loans                          |       | BRL                                                      |       | 18                      |       |                                       | 17         |   |   |   | 8 |   |   | 6 |   | 5 |   |   | 18 |   |   | 73 |   |   | 54 |   |   |
| Weighted average interest rate      |       |                                                     |       | 9.0                     | %          |                                       | 8.7        | % |   |   | 8.1 | % |   | 8.4 | % | 8.5 | % |   | 8.6 | % |   |   |   |   |   |   |   |
| Local debentures and bonds          |       | BRL                                                      |       | 2                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 2 |   |   | 1 |   |   |
| Weighted average interest rate      |       |                                                     |       | 12.0                    | %          |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Bank loans                          |       | Other  Currencies                                        |       | 4                       |       |                                       | 2          |   |   |   | 2 |   |   | 2 |   | 2 |   |   | 5 |   |   | 17 |   |   | 11 |   |   |
| Weighted average interest rate      |       |                                                     |       | 1.8                     | %          |                                       | 1.8        | % |   |   | 1.8 | % |   | 1.8 | % | 1.8 | % |   | 1.8 | % |   |   |   |   |   |   |   |
| Debentures and bonds                |       | Other  Currencies                                        |       | 22                      |       |                                       | 127        |   |   |   | 13 |   |   | 22 |   | 27 |   |   | 250 |   |   | 462 |   |   | 439 |   |   |
| Weighted average interest rate      |       |                                                     |       | 6.3                     | %          |                                       | 6.3        | % |   |   | 6.2 | % |   | 6.3 | % | 6.2 | % |   | 6.2 | % |   |   |   |   |   |   |   |
| **TOTAL FIXED**                     | ** ** | ** **                                               | ** ** | **845**                 | ** ** | ** **                                 | **2,292**  |   | ** ** | ** ** | **297** |   | ** ** | **915** | ** ** | **1,691** | ** ** | ** ** | **4,269** |   | ** ** | **10,309** |   | ** ** | **11,291** |   |   |
| **TOTAL  FIXED + FLOATING**         | ** ** | ** **                                               | ** ** | **3,404**               | ** ** | ** **                                 | **3,738**  |   | ** ** | ** ** | **945** |   | ** ** | **2,570** | ** ** | **2,208** | ** ** | ** ** | **4,975** |   | ** ** | **17,842** |   | ** ** | **18,824** |   |   |
|                                     |            |                                                          |            |                         |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

148

----

**INTEREST-RATESENSITIVITYDecember 31, 2004**

| ** **                                 | ** ** | ** **              | ** **                                               | **Maturity Dates** | ** ** | **Fair Value at  December 31,** | ** ** |
|--------------------------------------------|------------|-------------------------|----------------------------------------------------------|-------------------------|------------|------------------------------------------------|------------|
| ** **                                 | ** ** | **Denominated in** | ** **                                               | **2005**                | ** ** | **2006**                                       | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Subsequent** | ** ** | **Total** | ** ** | **2004** | ** ** |
| ** **                                 | ** ** | ** **              | **(millions of euro, except rates)** | ** **              | ** ** |
| **INTEREST  RATE SWAPS**                   |       |                    |                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Swap in  Euro**                          |       |                    |                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to fixed                     |       |                    |                                                     |                    |       | 160                                            |       | 1,281 |   | 481 |   | 779 |   | 1,757 |   |   | 1,790 |   |   | 6,249 |   |   | (306.56 | ) |   |
| Spread  received—Euribor              |       |                    | EURO                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rate paid                                  |       |                    | EURO                                                     |                    |       | 4.54                                           | %          | 3.88 | % | 3.83 | % | 4.02 | % | 4.42 | % |   | 4.55 | % |   |   |   |   |   |   |   |
| From fixed to floating                     |       |                    |                                                     |                    |       | 712                                            |       | 900 |   | 30 |   |   |   | 1,219 |   |   | 705 |   |   | 3,566 |   |   | 362.14 |   |   |
| Rate received                              |       |                    | EURO                                                     |                    |       | 5.0                                            | %          | 4.6 | % | 5.3 | % |   |   | 4.7 | % |   | 6.3 | % |   |   |   |   |   |   |   |
| Spread  paid—Euribor                  |       |                    | EURO                                                     |                    |       | 0.1                                            | %          | (0.4 | )% | 0.3 | % |   |   | 0.4 | % |   | 0.1 | % |   |   |   |   |   |   |   |
| From floating to floating                  |       |                    |                                                     |                    |       |                                           |       | 240 |   | 75 |   | 30 |   |   |   |   |   |   |   | 346 |   |   | 0.0 |   |   |
| Spread  received—Euribor              |       |                    | EURO                                                     |                    |       |                                           |       | 0.35 | % | 0.29 | % | 0.3 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread  paid—Euribor                  |       |                    | EURO                                                     |                    |       |                                           |       | (0.1 | )% | (0.1 | )% | (0.1 | )% |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to floating                  |       |                    |                                                     |                    |       |                                           |       |   |   | 80 |   |   |   |   |   |   |   |   |   | 80 |   |   | (0.28 | ) |   |
| Spread  received—EQL                  |       |                    | EURO                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread  paid—Euribor                  |       |                    | EURO                                                     |                    |       |                                           |       |   |   | 0.25 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to floating                  |       |                    |                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   | 90 |   |   | 90 |   |   | 20.72 |   |   |
| Spread  received—IPCL                 |       |                    | EURO                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread  paid—Euribor                  |       |                    | EURO                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   | 0.16 | % |   |   |   |   |   |   |   |
| From floating to floating                  |       |                    |                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   | 25 |   |   | 25 |   |   | 1.20 |   |   |
| Spread  received—IRS Euro             |       |                    | EURO                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   | (0.242 | )% |   |   |   |   |   |   |   |
| Spread  paid—Euribor                  |       |                    | EURO                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   | 0.314 | % |   |   |   |   |   |   |   |
| From floating to floating                  |       |                    |                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   | 15 |   |   | 15 |   |   | 1.82 |   |   |
| Spread  received—IRS GBP              |       |                    | EURO                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread  paid—Euribor                  |       |                    | EURO                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   | 0.100 | % |   |   |   |   |   |   |   |
| **Interest Rate Swap in Foreign Currency** |       |                    |                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to fixed                     |       |                    |                                                     |                    |       | 32                                             |       | 32 |   | 32 |   | 32 |   |   |   |   |   |   |   | 128 |   |   | (1.63 | ) |   |
| Spread  received—Libor                |       |                    | USD                                                      |                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rate paid                                  |       |                    | USD                                                      |                    |       | 4.08                                           | %          | 4.13 | % | 4.08 | % | 4.08 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to floating                  |       |                    |                                                     |                    |       | 4                                              |       |   |   |   |   |   |   |   |   |   |   |   |   | 4 |   |   | 0.05 |   |   |
| Spread received—%  CDI                |       |                    | BRL                                                      |                    |       | 100.0                                          | %          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—% CDI                     |       |                    | BRL                                                      |                    |       | 80.0                                           | %          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to floating                  |       |                    |                                                     |                    |       |                                           |       | 78 |   |   |   |   |   |   |   |   |   |   |   | 78 |   |   | (4.96 | ) |   |
| Spread  received—Libor                |       |                    | USD                                                      |                    |       |                                           |       | -0.01 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread  paid—Euribor                  |       |                    | EUR                                                      |                    |       |                                           |       | -0.06 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to floating                  |       |                    |                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   | 568 |   |   | 568 |   |   | (82.65 | ) |   |
| Spread  received—Libor                |       |                    | GBP                                                      |                    |       |                                           |       |   |   |   |   |   |   |   |   |   | 6.13 | % |   |   |   |   |   |   |   |
| Spread  paid—Euribor                  |       |                    | EUR                                                      |                    |       |                                           |       |   |   |   |   |   |   |   |   |   | 6.02 | % |   |   |   |   |   |   |   |
| From fixed to fixed                        |       |                    |                                                     |                    |       | 38                                             |       | 38 |   | 38 |   | 38 |   |   |   |   |   |   |   | 152 |   |   | (28.71 | ) |   |
| Rate received                              |       |                    | USD                                                      |                    |       | 4.08                                           | %          | 4.08 | % | 4.08 | % | 4.08 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| Rate received                              |       |                    | EUR                                                      |                    |       | 4.38                                           | %          | 4.38 | % | 4.38 | % | 4.38 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| From fixed to floating                     |       |                    |                                                     |                    |       |                                           |       |   |   |   |   |   |   | 257 |   |   | 422 |   |   | 679 |   |   | (62.77 | ) |   |
| Rate received                              |       |                    | USD                                                      |                    |       |                                           |       |   |   |   |   |   |   | 6.00 | % |   | 5.41 | % |   |   |   |   |   |   |   |
| Spread  paid—Euribor                  |       |                    | EUR                                                      |                    |       |                                           |       |   |   |   |   |   |   | 0.115 | % |   | 0.43 | % |   |   |   |   |   |   |   |
| From floating to floating                  |       |                    |                                                     |                    |       |                                           |       |   |   |   |   | 16 |   |   |   |   |   |   |   | 16 |   |   | (0.11 | ) |   |
| Floating rate  received—Pribor        |       |                    | CZK                                                      |                    |       |                                           |       |   |   |   |   | 0.23 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread  paid—Euribor                  |       |                    | EUR                                                      |                    |       |                                           |       |   |   |   |   | 0.29 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| From fixed to fixed                        |       |                    |                                                     |                    |       |                                           |       | 73 |   |   |   |   |   |   |   |   | 440 |   |   | 514 |   |   | (66.27 | ) |   |
| Rate received                              |       |                    | USD                                                      |                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rate paid                                  |       |                    | UF                                                       |                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From fixed to floating                     |       |                    |                                                     |                    |       |                                           |       | 37 |   |   |   | 3 |   |   |   |   |   |   |   | 40 |   |   | (0.90 | ) |   |
| Rate received                              |       |                    | USD                                                      |                    |       |                                           |       | 7.48 | % |   |   | 7.49 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—% CDI                     |       |                    | BRL                                                      |                    |       |                                           |       | 118.50 | % |   |   | 141.39 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| From fixed to floating                     |       |                    |                                                     |                    |       | 11                                             |       |   |   | 7 |   |   |   |   |   |   |   |   |   | 19 |   |   | (1.97 | ) |   |
| Rate received                              |       |                    | USD                                                      |                    |       | 6.71                                           | %          |   |   | 10.19 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—CDI                       |       |                    | BRL                                                      |                    |       | 5.49                                           | %          |   |   | 4.43 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From fixed to floating                     |       |                    |                                                     |                    |       |                                           |       | 36 |   |   |   | 57 |   |   |   |   |   |   |   | 93 |   |   | (29.81 | ) |   |
| Rate received                              |       |                    | JPY                                                      |                    |       |                                           |       | 0.698 | % |   |   | 1.073 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread  paid—Euribor                  |       |                    | EURO                                                     |                    |       |                                           |       | 0.32 | % |   |   | 0.35 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to fixed                     |       |                    |                                                     |                    |       |                                           |       | 37 |   |   |   |   |   |   |   |   |   |   |   | 37 |   |   | (12.72 | ) |   |
| Spread received                            |       |                    | USD                                                      |                    |       |                                           |       | 1.50 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rate paid                                  |       |                    | UF                                                       |                    |       |                                           |       | 5.31 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **EXCHANGE RATE FORWARDS**                 |       |                    |                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Forward                                    |       |                    | EURO/USD                                                 |                    |       | 283                                            |       |   |   |   |   |   |   |   |   |   |   |   |   | 283 |   |   | 0.29 |   |   |
| Forward                                    |       |                    | UR/USD                                                   |                    |       | 62                                             |       |   |   |   |   |   |   |   |   |   |   |   |   | 62 |   |   | (0.47 | ) |   |
| **INTEREST RATE OPTIONS**                  |       |                    |                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| COLLAR                                     |       |                    |                                                     |                    |       | 2                                              |       | 202 |   | 14 |   |   |   | 100 |   |   |   |   |   | 318 |   |   | (2.88 | ) |   |
| Buy CAP—Euribor                       |       |                    | EURO                                                     |                    |       | 6.0                                            | %          | 4.9 | % | 6.00 | % |   |   | 5.9 | % |   |   |   |   |   |   |   |   |   |   |
| Sell Floor—Euribor                    |       |                    | EURO                                                     |                    |       | 3.5                                            | %          | 2.8 | % | 3.5 | % |   |   | 2.5 | % |   |   |   |   |   |   |   |   |   |   |
| CAP                                        |       |                    |                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   | 1,500 |   |   | 1,500 |   |   | 9.83 |   |   |
| Buy CAP—Euribor                       |       |                    | EURO                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   | 5.4 | % |   |   |   |   |   |   |   |
| Sell CAP—Euribor                      |       |                    | EURO                                                     |                    |       |                                           |       |   |   |   |   |   |   |   |   |   | 6.8 | % |   |   |   |   |   |   |   |
| Exchange Rate  COLLAR                      |       |                    |                                                     |                    |       |                                           |       | 457 |   |   |   |   |   |   |   |   |   |   |   | 457 |   |   | (3.92 | ) |   |
| Buy CAP—Libor                         |       |                    | USD                                                      |                    |       |                                           |       | 7.5 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sell Floor—Libor                      |       |                    | USD                                                      |                    |       |                                           |       | 4.7 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **TOTAL**                                  | ** ** | ** **              | ** **                                               | ** **              | ** ** | **1,303**                                      | ** ** | **3,411** | ** ** | **758** | ** ** | **956** | ** ** | **3,333** | ** ** | ** ** | **5,555** | ** ** | ** ** | **15,318** | ** ** | ** ** | **(210.55** | **)** | ** ** |

 

149

----

*Exchange RateSensitivity Analysis*

The following tables provide information regarding ourfinancial instruments and derivatives at December 31, 2005 and atDecember 31, 2004 that are sensitive to exchange rate fluctuations. Theseinclude bond instruments, currency swaps and exchange rate insurance. For debtcommitments, the tables present the main cash flows and the resulting averageinterest rate weighted by the expected maturity date. For swaps, the tablespresent the notional amounts and the resulting interest rate weighted by theexpected contractually agreed expiry (maturity) date.

For exchange rateinsurance, the tables show the notional amounts weighted by the expectedmaturity (contractual expiry) date. The notional amounts are used to calculatethe contractual payments to be exchanged in accordance with the agreement. Theaverage weighted interest rates are presented as a margin applied to thebenchmark rate indicated. Except where indicated, the information presents theequivalent amount in euro, since the euro is the currency in which Endesapresents its accounts. The exchange rates used are those fixed by the EuropeanCentral Bank as at the date of each table (or the immediately precedingbusiness day if such date is not a business day). The cash flows of theinstruments are denominated in the currency indicated. All of the commitmentsin foreign currencies appear in both the following tables and the tables underthe heading “Interest Rate Sensitivity” above.

150

----

**EXCHANGE RATE SENSITIVITYDecember 31, 2005**

| ** **                               | ** ** | ** **                                               | ** ** | **Maturity Dates** | ** ** | **Fair Value at  December 31, ** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------|------------|------------------------------------------------------|------------|
| **Debt**                                 | ** ** | ** **                                               | ** ** | **Denominated in** | ** ** | **2006**                                             | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Subsequent** | ** ** | **Total** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(millions of euro, except rates)** | ** ** |
| **FLOATING RATE DEBT**                   | ** ** |                                                     | ** ** | ** **              |       | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Bank loans                               |       |                                                     | USD        | ** **              |       | 95                                                   |       | 13 |   | 137 |   | 27 |   | 131 |   |   | 16 |   |   |   | 419 | ** ** |   |   | 476 | ** ** |   |
| Weighted average  spread—Libor      |       |                                                     |       | ** **              |       | 1.5                                                  | %          | 3.1 | % | 1.9 | % | 2.3 | % | 0.9 | % |   | 3.1 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| EIB loans                                |       |                                                     | USD        | ** **              |       |                                                 |       | 59 |   | 63 |   | 18 |   | 188 |   |   | 30 |   |   |   | 358 | ** ** |   |   | 362 | ** ** |   |
| Weighted average  spread—Libor      |       |                                                     |       | ** **              |       |                                                 |       | 0.8 | % | 0.8 | % | 1.6 | % | 0.2 | % |   | 0.5 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| Project financing                        |       |                                                     | USD        | ** **              |       | 13                                                   |       | 13 |   | 13 |   | 13 |   | 13 |   |   | 20 |   |   |   | 82 | ** ** |   |   | 104 | ** ** |   |
| Weighted average  spread—Libor      |       |                                                     |       | ** **              |       | 4.0                                                  | %          | 4.6 | % | 5.4 | % | 6.8 | % | 9.3 | % |   | 14.7 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| MTN                                      |       |                                                     | USD        | ** **              |       |                                                 |       |   |   |   |   | 8 |   |   |   |   |   |   |   |   | 8 | ** ** |   |   | 10 | ** ** |   |
| Weighted average  spread—Libor      |       |                                                     |       | ** **              |       |                                                 |       |   |   |   |   | 1.8 | % |   |   |   |   |   |   |   |   | ** ** |   |   |   | ** ** |   |
| Debentures                               |       |                                                     | USD        | ** **              |       | 13                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 13 | ** ** |   |   | 8 | ** ** |   |
| Weighted average  spread—Libor      |       |                                                     |       | ** **              |       | 2.0                                                  | %          |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** |   |   |   | ** ** |   |
| Supplier financing                       |       |                                                     | USD        | ** **              |       | 3                                                    |       | 2 |   |   |   |   |   |   |   |   |   |   |   |   | 4 | ** ** |   |   | 5 | ** ** |   |
| Weighted average  spread—Libor      |       |                                                     |       | ** **              |       | 2.3                                                  | %          | 2.3 | % |   |   |   |   |   |   |   |   |   |   |   |   | ** ** |   |   |   | ** ** |   |
| MTN                                      |       |                                                     | CZK        | ** **              |       |                                                 |       |   |   | 17 |   |   |   |   |   |   |   |   |   |   | 17 | ** ** |   |   | 17 | ** ** |   |
| Weighted average  spread—Pribor     |       |                                                     |       | ** **              |       |                                                 |       |   |   | 0.2 | % |   |   |   |   |   |   |   |   |   |   | ** ** |   |   |   | ** ** |   |
| Local bonds                              |       |                                                     | BRL        | ** **              |       |                                                 |       |   |   | 104 |   |   |   |   |   |   |   |   |   |   | 104 | ** ** |   |   | 116 | ** ** |   |
| Weighted average  spread—CDI        |       |                                                     |       | ** **              |       |                                                 |       |   |   | 1.2 | % |   |   |   |   |   |   |   |   |   |   | ** ** |   |   |   | ** ** |   |
| Local bonds                              |       |                                                     | BRL        | ** **              |       | 4                                                    |       | 4 |   | 4 |   | 4 |   | 4 |   |   | 8 |   |   |   | 26 | ** ** |   |   | 29 | ** ** |   |
| Weighted average  spread—CDI        |       |                                                     |       | ** **              |       | 116.0                                                | %          | 116.0 | % | 116.0 | % | 116.0 | % | 116.0 | % |   | 116.0 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| Local bonds                              |       |                                                     | BRL        | ** **              |       |                                                 |       |   |   |   |   |   |   | 40 |   |   |   |   |   |   | 40 | ** ** |   |   | 45 | ** ** |   |
| Weighted average  spread—FINEL-IGPM |       |                                                     |       | ** **              |       |                                                 |       |   |   |   |   |   |   | 11.4 | % |   |   |   |   |   |   | ** ** |   |   |   | ** ** |   |
| Bank loans                               |       |                                                     | BRL        | ** **              |       | 3                                                    |       | 22 |   |   |   | 25 |   |   |   |   |   |   |   |   | 49 | ** ** |   |   | 72 | ** ** |   |
| Weighted average  spread—CDI+       |       |                                                     |       | ** **              |       | 1.9                                                  | %          | 1.9 | % |   |   | 1.5 | % |   |   |   |   |   |   |   |   | ** ** |   |   |   | ** ** |   |
| Bank loans                               |       |                                                     | BRL        | ** **              |       |                                                 |       | 11 |   |   |   |   |   |   |   |   |   |   |   |   | 11 | ** ** |   |   | 11 | ** ** |   |
| Weighted average  spread—CDI*       |       |                                                     |       | ** **              |       |                                                 |       | 108.0 | % |   |   |   |   |   |   |   |   |   |   |   |   | ** ** |   |   |   | ** ** |   |
| Bank loans                               |       |                                                     | BRL        | ** **              |       |                                                 |       | 3 |   | 3 |   | 14 |   | 39 |   |   | 4 |   |   |   | 61 | ** ** |   |   | 63 | ** ** |   |
| Weighted average  spread—FINEL-IGPM |       |                                                     |       | ** **              |       |                                                 |       | 11.6 | % | 11.6 | % | 11.6 | % | 11.7 | % |   | 11.7 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| Project financing                        |       |                                                     | BRL        | ** **              |       |                                                 |       |   |   |   |   |   |   |   |   |   | 59 |   |   |   | 59 | ** ** |   |   | 41 | ** ** |   |
| Weighted average  spread—CDI*       |       |                                                     |       | ** **              |       |                                                 |       |   |   |   |   |   |   |   |   |   | 87.0 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| Project financing                        |       |                                                     | BRL        | ** **              |       | 18                                                   |       | 18 |   | 15 |   |   |   |   |   |   |   |   |   |   | 50 | ** ** |   |   | 47 | ** ** |   |
| Weighted average  spread—FINEL-IGPM |       |                                                     |       | ** **              |       | 4.7                                                  | %          | 4.7 | % | 5.0 | % | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| **TOTAL  FLOATING**                      | ** ** |                                                     | ** ** | ** **              |       | **261**                                              | ** ** | **206** | ** ** | **391** | ** ** | **238** | ** ** | **431** | ** ** |   | **138** | ** ** |   |   | **1,664** | ** ** |   |   | **1,790** | ** ** |   |
|                                          |            |                                                          |            |                         |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **

151

----

**EXCHANGE RATESENSITIVITYDecember 31, 2005**

| ** **                      | ** ** | ** **                                               | ** ** | **Maturity Date**  | ** ** | **Fair Value at  December 31,** | ** ** |
|---------------------------------|------------|----------------------------------------------------------|------------|-------------------------|------------|------------------------------------------------|------------|
| **Debt**                        | ** ** | ** **                                               | ** ** | **Denominated in** | ** ** | **2006**                                       | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Subsequent** | ** ** | **Total** | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **(millions of euro, except rates)** | ** ** |
| **FIXED RATE DEBT**             | ** ** | ** **                                               | ** ** | ** **              | ** ** |                                           | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| MTN                             |       | GBP                                                      |       |                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 584 |   |   |   | 584 | ** ** |   |   | 656 | ** ** |   |
| Weighted average  interest rate |       |                                                     |       |                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 6.1 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| Bank loans                      |       | USD                                                      |       | 29                      |       |                                           | 30         |   |   |   | 21 |   |   | 4 |   |   | 1 |   |   |   | 7 |   |   |   | 91 | ** ** |   |   | 92 | ** ** |   |
| Weighted average  interest rate |       |                                                     |       | 7.2                     | %          |                                           | 7.1        | % |   |   | 6.9 | % |   | 5.9 | % |   | 6.0 | % |   |   | 6.0 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| Supplier loans                  |       | USD                                                      |       | 28                      |       |                                           | 24         |   |   |   | 22 |   |   | 15 |   |   | 15 |   |   |   | 14 |   |   |   | 117 | ** ** |   |   | 123 | ** ** |   |
| Weighted average  interest rate |       |                                                     |       | 7.4                     | %          |                                           | 7.4        | % |   |   | 7.4 | % |   | 7.4 | % |   | 7.4 | % |   |   | 7.4 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| Project financing               |       | USD                                                      |       | 27                      |       |                                           | 25         |   |   |   | 24 |   |   | 24 |   |   | 18 |   |   |   | 35 |   |   |   | 152 | ** ** |   |   | 154 | ** ** |   |
| Weighted average  interest rate |       |                                                     |       | 6.1                     | %          |                                           | 6.1        | % |   |   | 6.2 | % |   | 6.1 | % |   | 6.0 | % |   |   | 6.0 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| MTN                             |       | USD                                                      |       |                    |       |                                           |       |   |   |   |   |   |   | 297 |   |   |   |   |   |   | 487 |   |   |   | 784 | ** ** |   |   | 808 | ** ** |   |
| Weighted average  interest rate |       |                                                     |       |                    |       |                                           |       |   |   |   |   |   |   | 6.0 | % |   |   |   |   |   | 5.4 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| International  bonds            |       | USD                                                      |       | 434                     |       |                                           | 10         |   |   |   | 318 |   |   | 524 |   |   | 6 |   |   |   | 1,247 |   |   |   | 2,538 | ** ** |   |   | 2,740 | ** ** |   |
| Weighted average  interest rate |       |                                                     |       | 7.8                     | %          |                                           | 7.9        | % |   |   | 7.9 | % |   | 7.7 | % |   | 7.8 | % |   |   | 7.9 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| Local bonds                     |       | USD                                                      |       | 25                      |       |                                           | 50         |   |   |   |   |   |   | 8 |   |   |   |   |   |   | 17 |   |   |   | 98 | ** ** |   |   | 97 | ** ** |   |
| Weighted average  interest rate |       |                                                     |       | 7.8                     | %          |                                           | 7.5        | % |   |   |   |   |   | 5.3 | % |   |   |   |   |   | 6.1 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| Leasing                         |       | USD                                                      |       | 1                       |       |                                           | 1          |   |   |   | 1 |   |   | 1 |   |   | 1 |   |   |   | 35 |   |   |   | 40 | ** ** |   |   | 35 | ** ** |   |
| Weighted average  interest rate |       |                                                     |       | 6.3                     | %          |                                           | 6.3        | % |   |   | 6.3 | % |   | 6.3 | % |   | 6.3 | % |   |   | 6.3 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| MTN                             |       | JPY                                                      |       | 36                      |       |                                           |       |   |   |   | 58 |   |   |   |   |   |   |   |   |   | 22 |   |   |   | 115 | ** ** |   |   | 113 | ** ** |   |
| Weighted average  interest rate |       |                                                     |       | 0.7                     | %          |                                           |       |   |   |   | 1.1 | % |   |   |   |   |   |   |   |   | 1.5 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| Local bonds                     |       | CLP-UF                                                   |       | 187                     |       |                                           | 3          |   |   |   | 4 |   |   | 4 |   |   | 132 |   |   |   | 206 |   |   |   | 535 | ** ** |   |   | 579 | ** ** |   |
| Weighted average  interest rate |       |                                                     |       | 5.8                     | %          |                                           | 5.6        | % |   |   | 5.6 | % |   | 5.6 | % |   | 5.6 | % |   |   | 6.1 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| Project financing               |       | BRL                                                      |       | 4                       |       |                                           | 5          |   |   |   | 4 |   |   | 4 |   |   | 4 |   |   |   | 27 |   |   |   | 47 | ** ** |   |   | 41 | ** ** |   |
| Weighted average  interest rate |       |                                                     |       | 9.6                     | %          |                                           | 9.8        | % |   |   | 10.1 | % |   | 10.3 | % |   | 10.7 | % |   |   | 11.1 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| Local bonds                     |       | BRL                                                      |       | 21                      |       |                                           | 7          |   |   |   | 3 |   |   | 3 |   |   | 3 |   |   |   | 9 |   |   |   | 45 | ** ** |   |   | 42 | ** ** |   |
| Weighted average  interest rate |       |                                                     |       | 9.1                     | %          |                                           | 8.2        | % |   |   | 8.6 | % |   | 8.7 | % |   | 8.8 | % |   |   | 8.8 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| Bank loans                      |       | Other Currencies                                         |       | 25                      |       |                                           | 25         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 49 | ** ** |   |   | 50 | ** ** |   |
| Weighted average  interest rate |       |                                                     |       | 6.6                     | %          |                                           | 6.0        | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** |   |   |   | ** ** |   |
| Bonds                           |       | Other Currencies                                         |       | 142                     |       |                                           | 15         |   |   |   | 31 |   |   | 54 |   |   | 60 |   |   |   | 333 |   |   |   | 634 | ** ** |   |   | 701 | ** ** |   |
| Weighted average  interest rate |       |                                                     |       | 6.3                     | %          |                                           | 6.2        | % |   |   | 6.2 | % |   | 6.2 | % |   | 6.1 | % |   |   | 6.0 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| Other debt                      |       | Other Currencies                                         |       | 7                       |       |                                           | 3          |   |   |   | 3 |   |   | 3 |   |   | 3 |   |   |   | 1 |   |   |   | 19 | ** ** |   |   | 21 | ** ** |   |
| Weighted average  interest rate |       |                                                     |       | 4.5                     | %          |                                           | 1.8        | % |   |   | 1.8 | % |   | 1.8 | % |   | 1.8 | % |   |   | 1.8 | % |   |   |   | ** ** |   |   |   | ** ** |   |
| **TOTAL  FIXED**                | ** ** | ** **                                               | ** ** | **962**                 | ** ** |                                           | **194**    | ** ** |   |   | **489** | ** ** |   | **938** | ** ** |   | **243** | ** ** |   |   | **3,020** | ** ** |   |   | **5,845** | ** ** |   |   | **6,251** | ** ** |   |
| **TOTAL  FIXED + FLOATING**     | ** ** | ** **                                               | ** ** | **1,223**               | ** ** |                                           | **399**    | ** ** |   |   | **880** | ** ** |   | **1,176** | ** ** |   | **674** | ** ** |   |   | **3,158** | ** ** |   |   | **7,509** | ** ** |   |   | **8,041** | ** ** |   |
|                                 |            |                                                          |            |                         |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

152

----

**EXCHANGERATE SENSITIVITY**

**December 31,2005**

| ** **                  | ** ** | ** **              | ** ** | ** **        | ** ** | **Fair**                              | ** ** |
|-----------------------------|------------|-------------------------|------------|-------------------|------------|---------------------------------------|------------|
| ** **                  | ** ** | ** **              | ** ** | ** **        | ** ** | **Value at**                     | ** ** |
| ** **                  | ** ** | ** **              | ** ** | **Maturity Date** | ** ** | **December 31,**                 | ** ** |
| ** **                  | ** ** | **Denominated in** | ** ** | **2006**          | ** ** | **2007**                              | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Subsequent** | ** ** | **Total** | ** ** | **2005** | ** ** |
| ** **                  |       |                    |       |              |       | **(millions  of euro, except rates)** |       |   |
| **EXCHANGE RATE SWAPS**     |       |                    |       |              |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to fixed      |       |                    |       |              |       | 42                                    |       | 50 |   | 59 |   | 5 |   | 6 |   |   | 37 |   |   |   | 199 |   |   |   | 2 |   |   |   |
| Spread received—Libor  |       |                    | USD        |              |       | 0.00                                  | %          | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % |   | 0.00 | % |   |   |   |   |   |   |   |   |   |   |
| Rate paid                   |       |                    | USD        |              |       | 4.11                                  | %          | 4.17 | % | 4.31 | % | 4.69 | % | 4.69 | % |   | 4.69 | % |   |   |   |   |   |   |   |   |   |   |
| From floating to floating   |       |                    |       |              |       | 78                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 78 |   |   |   | 5 |   |   |   |
| Spread received—Libor  |       |                    | USD        |              |       | -0.01                                 | %          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—Euribor    |       |                    | EUR        |              |       | 0.06                                  | %          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From fixed to fixed         |       |                    |       |              |       | 38                                    |       | 38 |   | 38 |   |   |   |   |   |   |   |   |   |   | 114 |   |   |   | (11 | ) |   |   |
| Rate received               |       |                    | USD        |              |       | 4.08                                  | %          | 4.08 | % | 4.08 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rate received               |       |                    | EUR        |              |       | 4.38                                  | %          | 4.38 | % | 4.38 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From fixed to fixed         |       |                    |       |              |       |                                  |       |   |   |   |   |   |   |   |   |   | 624 |   |   |   | 624 |   |   |   | (86 | ) |   |   |
| Rate received               |       |                    | GBP        |              |       |                                  |       |   |   |   |   |   |   |   |   |   | 6.13 | % |   |   |   |   |   |   |   |   |   |   |
| Rate received               |       |                    | EUR        |              |       |                                  |       |   |   |   |   |   |   |   |   |   | 6.02 | % |   |   |   |   |   |   |   |   |   |   |
| From fixed to floating      |       |                    |       |              |       |                                  |       |   |   |   |   | 319 |   |   |   |   | 465 |   |   |   | 784 |   |   |   | 11 |   |   |   |
| Rate received               |       |                    | USD        |              |       |                                  |       |   |   |   |   | 6.00 | % |   |   |   | 5.41 | % |   |   |   |   |   |   |   |   |   |   |
| Spread paid—Euribor    |       |                    | EUR        |              |       |                                  |       |   |   |   |   | 0.12 | % |   |   |   | 0.43 | % |   |   |   |   |   |   |   |   |   |   |
| From floating to floating   |       |                    |       |              |       |                                  |       |   |   | 17 |   |   |   |   |   |   |   |   |   |   | 17 |   |   |   | 1 |   |   |   |
| Rate received—Pribor   |       |                    | CZK        |              |       |                                  |       |   |   | 0.23 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—Euribor    |       |                    | EUR        |              |       |                                  |       |   |   | 0.29 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From fixed to fixed         |       |                    |       |              |       | 83                                    |       |   |   |   |   |   |   |   |   |   | 500 |   |   |   | 583 |   |   |   | (172 | ) |   |   |
| Rate received               |       |                    | USD        |              |       | 6.90                                  | %          |   |   |   |   |   |   |   |   |   | 7.39 | % |   |   |   |   |   |   |   |   |   |   |
| Rate paid                   |       |                    | UF         |              |       | 5.27                                  | %          |   |   |   |   |   |   |   |   |   | 6.62 | % |   |   |   |   |   |   |   |   |   |   |
| From fixed to floating      |       |                    |       |              |       | 43                                    |       | 1 |   | 1 |   |   |   |   |   |   |   |   |   |   | 45 |   |   |   | (15 | ) |   |   |
| Rate received               |       |                    | USD        |              |       | 5.49                                  | %          | 5.50 | % | 5.50 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—% CDI      |       |                    | BRL        |              |       | 88.19                                 | %          | 103.80 | % | 103.80 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From fixed to floating      |       |                    |       |              |       | 0                                     |       | 8 |   |   |   |   |   |   |   |   |   |   |   |   | 8 |   |   |   | (4 | ) |   |   |
| Rate received               |       |                    | USD        |              |       | 7.48                                  | %          | 7.48 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—CDI        |       |                    | BRL        |              |       | 3.25                                  | %          | 3.25 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From fixed to floating      |       |                    |       |              |       |                                  |       | 3 |   | 3 |   | 3 |   | 3 |   |   |   |   |   |   | 10 |   |   |   | (1 | ) |   |   |
| Rate received               |       |                    | USD        |              |       |                                  |       | 6.35 | % | 6.35 | % | 6.35 | % | 6.35 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—IGPM       |       |                    | BRL        |              |       |                                  |       | 11.40 | % | 11.40 | % | 11.40 | % | 11.40 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From fixed to floating      |       |                    |       |              |       | 49                                    |       |   |   | 74 |   |   |   |   |   |   | 22 |   |   |   | 144 |   |   |   | (33 | ) |   |   |
| Rate received               |       |                    | JPY        |              |       | 0.70                                  | %          |   |   | 1.07 | % |   |   |   |   |   | 1.51 | % |   |   |   |   |   |   |   |   |   |   |
| Spread paid—Euribor    |       |                    | EUR        |              |       | 0.32                                  | %          |   |   | 0.35 | % |   |   |   |   |   | 0.25 | % |   |   |   |   |   |   |   |   |   |   |
| From floating to fixed      |       |                    |       |              |       | 42                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 42 |   |   |   | (21 | ) |   |   |
| Spread received             |       |                    | USD        |              |       | 1.50                                  | %          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rate paid                   |       |                    | UF         |              |       | 5.31                                  | %          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **EXCHANGE  RATE FORWARDS** |       |                    |       |              |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Forward                     |       |                    | EUR/USD    |              |       | 243                                   |       | 15 |   | 0 |   | 0 |   | 0 |   |   | 0 |   |   |   | 258 |   |   |   | (3 | ) |   |   |
| Forward                     |       |                    | CLP/USD    |              |       | 0                                     |       | 0 |   | 0 |   | 0 |   | 0 |   |   | 0 |   |   |   | 0 |   |   |   | (0 | ) |   |   |
| **INTEREST  RATE OPTIONS**  |       |                    |       |              |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exchange rate—COLLAR   |       |                    |       |              |       | 71                                    |       |   |   |   |   | 50 |   | 33 |   |   |   |   |   |   | 154 |   |   |   | (0 | ) |   |   |
| Buy CAP—Libor          |       |                    | USD        |              |       | 5.50                                  | %          |   |   |   |   | 5.50 | % | 5.50 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sell Floor—Libor       |       |                    | USD        |              |       | 3.50                                  | %          |   |   |   |   | 4.10 | % | 4.51 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **TOTAL**                   |       |                    |       |              | ** ** | **690**                               | ** ** | **113** | ** ** | **172** | ** ** | **55** | ** ** | **40** | ** ** | ** ** | **558** |   | ** ** | ** ** | **1,627** |   | ** ** | ** ** | **(250** | **)** | ** ** |   |

 

153

----

**EXCHANGE RATE SENSITIVITY**

**December 31, 2004**

| ** **                                        | ** ** | ** **        | ** ** | ** **                           | ** ** | **Fair**              | ** ** |
|---------------------------------------------------|------------|-------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | ** **        | ** ** | ** **                           | ** ** | **Value at**     | ** ** |
| ** **                                        | ** ** | ** **        | ** ** | **Maturity Dates**                   | ** ** | **December 31,** | ** ** |
| **Debt**                                          | ** ** | ** **        | ** ** | **Denominated in**              | ** ** | **2005**              | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Subsequent** | ** ** | **Total** | ** ** | **2004** | ** ** |
| ** **                                        |       |              |       | **(millions of euro, except rates)** |       |
| **FLOATING RATE DEBT**                            |       |              |       |                                 |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Bank loans                                        |       | USD               |       |                                 | 233        |                  |       |   | 45 |   |   |   | 29 |   |   |   | 274 |   |   |   | 200 |   |   |   | 48 |   |   |   | 829 |   |   |   | 829 |   |   |
| Weighted average spread—Libor                |       |              |       |                                 | 0.6        | %                     |       |   | 0.8 | % |   |   | 0.6 | % |   |   | 0.4 | % |   |   | 0.4 | % |   |   | 0.7 | % |   |   |   |   |   |   |   |   |   |
| EIB Loans                                         |       | USD               |       |                                 | 37         |                  |       |   | 149 |   |   |   | 37 |   |   |   | 37 |   |   |   | 5 |   |   |   | 23 |   |   |   | 288 |   |   |   | 288 |   |   |
| Weighted average spread—Libor                |       |              |       |                                 | 0.2        | %                     |       |   | 0.0 | % |   |   | 0.2 | % |   |   | 0.2 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| MTN                                               |       | USD               |       |                                 |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 7 |   |   |   |   |   |   |   | 7 |   |   |   | 7 |   |   |
| Weighted average spread—Libor                |       |              |       |                                 |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 1.8 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Credits                                           |       | JPY               |       |                                 |       |                  |       |   |   |   |   |   |   |   |   |   | 46 |   |   |   |   |   |   |   |   |   |   |   | 46 |   |   |   | 46 |   |   |
| Weighted average spread—Libor                |       |              |       |                                 |       |                  |       |   |   |   |   |   |   |   |   |   | 0.4 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Bank loans                                        |       | JPY               |       |                                 | 1          |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1 |   |   |   | 1 |   |   |
| Weighted average spread—Libor                |       |              |       |                                 | 0.8        | %                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| MTN                                               |       | CZK               |       |                                 |       |                  |       |   |   |   |   |   |   |   |   |   | 16 |   |   |   |   |   |   |   |   |   |   |   | 16 |   |   |   | 16 |   |   |
| Weighted average spread—Pribor               |       |              |       |                                 |       |                  |       |   |   |   |   |   |   |   |   |   | 0.2 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debentures and bonds                              |       | GBP               |       |                                 | 1          |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1 |   |   |   | 1 |   |   |
| Weighted average spread—Libor                |       |              |       |                                 | 0.8        | %                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Local debentures and bonds                        |       | BRL               |       |                                 | 23         |                  |       |   | 40 |   |   |   | 27 |   |   |   | 3 |   |   |   | 3 |   |   |   | 10 |   |   |   | 106 |   |   |   | 106 |   |   |
| Weighted average spread—CDI                  |       |              |       |                                 | 3.0        | %                     |       |   | 2.9 | % |   |   | 2.2 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Bank loans                                        |       | BRL               |       |                                 | 81         |                  |       |   | 15 |   |   |   | 32 |   |   |   | 41 |   |   |   | 19 |   |   |   | 20 |   |   |   | 208 |   |   |   | 208 |   |   |
| Weighted average spread—CDI+                 |       |              |       |                                 | 2.0        | %                     |       |   | 1.7 | % |   |   | 1.8 | % |   |   | 1.9 | % |   |   | 1.1 | % |   |   | 1.0 | % |   |   |   |   |   |   |   |   |   |
| Bank loans                                        |       | BRL               |       |                                 | 14         |                  |       |   | 10 |   |   |   | 14 |   |   |   |   |   |   |   | 8 |   |   |   | 17 |   |   |   | 62 |   |   |   | 62 |   |   |
| Weighted average spread—CDI*                 |       |              |       |                                 | 86.5       | %                     |       |   | 87.0 | % |   |   | 87.0 | % |   |   |   |   |   |   | 87.0 | % |   |   | 87.0 | % |   |   |   |   |   |   |   |   |   |
| Bank loans                                        |       | Other  currencies |       |                                 | 124        |                  |       |   | 21 |   |   |   | 18 |   |   |   |   |   |   |   |   |   |   |   | 0 |   |   |   | 164 |   |   |   | 164 |   |   |
| Weighted average spread—DTF—VAC—CF |       |              |       |                                 | 1.9        | %                     |       |   | 4.4 | % |   |   | 4.8 | % |   |   |   |   |   |   |   |   |   |   | 4.8 | % |   |   |   |   |   |   |   |   |   |
| Debentures and bonds                              |       | Other  currencies |       |                                 |       |                  |       |   | 11 |   |   |   | 20 |   |   |   |   |   |   |   | 89 |   |   |   |   |   |   |   | 120 |   |   |   | 120 |   |   |
| Weighted average spread—DTF—VAC—CF |       |              |       |                                 |       |                  |       |   | 3.0 | % |   |   | 3.0 | % |   |   |   |   |   |   | 3.0 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **TOTAL  FLOATING**                               | ** ** | ** **        | ** ** | ** **                           | **513**    |                  | ** ** | ** ** | **290** |   | ** ** | ** ** | **177** |   | ** ** | ** ** | **417** |   | ** ** | ** ** | **331** |   | ** ** | ** ** | **118** |   | ** ** | ** ** | **1,847** |   | ** ** | ** ** | **1,847** |   |   |
|                                                   |            |                   |            |                                      |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

154

----

**EXCHANGE RATESENSITIVITYDecember 31, 2004**

| ** **                         | ** ** | ** **                                               | ** ** | **Maturity Dates** | ** ** | **Fair Value at  December 31,** | ** ** |
|------------------------------------|------------|----------------------------------------------------------|------------|-------------------------|------------|--------------------------------------|------------|
| **Debt**                           | ** ** | ** **                                               | ** ** | **Denominated in** | ** ** | **2005**                             | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Subsequent** | ** ** | **Total** | ** ** | **2004** | ** ** |
| ** **                         | ** ** | **(millions of euro, except rates)** | ** ** |
| **FIXED RATE DEBT**                |       |                                                     |       |                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| MTN                                |       | GBP                                                      |       |                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 567 |   |   |   | 567 |   |   |   | 671 |   |   |
| Weighted average interest rate     |       |                                                     |       |                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 6.1 | % |   |   |   |   |   |   |   |   |   |
| Bank loans                         |       | USD                                                      |       |                    | 69         |                                 |       |   | 29 |   |   |   | 59 |   |   |   | 30 |   |   |   | 24 |   |   |   | 98 |   |   |   | 310 |   |   |   | 329 |   |   |
| Weighted average interest rate     |       |                                                     |       |                    | 7.3        | %                                    |       |   | 7.5 | % |   |   | 6.5 | % |   |   | 5.9 | % |   |   | 5.9 | % |   |   | 5.6 | % |   |   |   |   |   |   |   |   |   |
| MTN                                |       | USD                                                      |       |                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 257 |   |   |   |   |   |   |   | 257 |   |   |   | 287 |   |   |
| Weighted average interest rate     |       |                                                     |       |                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 6.0 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |
| International debentures and bonds |       | USD                                                      |       |                    |       |                                 |       |   | 330 |   |   |   |   |   |   |   | 294 |   |   |   | 294 |   |   |   | 1,646 |   |   |   | 2,564 |   |   |   | 2,798 |   |   |
| Weighted average interest rate     |       |                                                     |       |                    |       |                                 |       |   | 7.8 | % |   |   |   |   |   |   | 7.9 | % |   |   | 8.0 | % |   |   | 7.2 | % |   |   |   |   |   |   |   |   |   |
| Local debentures and bonds         |       | USD                                                      |       |                    | 15         |                                 |       |   | 22 |   |   |   | 44 |   |   |   |   |   |   |   | 7 |   |   |   |   |   |   |   | 88 |   |   |   | 95 |   |   |
| Weighted average interest rate     |       |                                                     |       |                    | 8.2        | %                                    |       |   | 8.1 | % |   |   | 7.9 | % |   |   |   |   |   |   | 3.8 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |
| MTN                                |       | JPY                                                      |       |                    |       |                                 |       |   | 36 |   |   |   |   |   |   |   | 57 |   |   |   |   |   |   |   |   |   |   |   | 93 |   |   |   | 93 |   |   |
| Weighted average interest rate     |       |                                                     |       |                    |       |                                 |       |   | 0.7 | % |   |   |   |   |   |   | 1.1 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Local debentures and bonds         |       | CLP                                                      |       |                    | 16         |                                 |       |   | 4 |   |   |   | 141 |   |   |   | 4 |   |   |   | 7 |   |   |   | 267 |   |   |   | 439 |   |   |   | 465 |   |   |
| Weighted average interest rate     |       |                                                     |       |                    | 5.9        | %                                    |       |   | 5.9 | % |   |   | 5.9 | % |   |   | 5.7 | % |   |   | 5.7 | % |   |   | 5.6 | % |   |   |   |   |   |   |   |   |   |
| Bank loans                         |       | BRL                                                      |       |                    | 18         |                                 |       |   | 17 |   |   |   | 8 |   |   |   | 6 |   |   |   | 5 |   |   |   | 18 |   |   |   | 73 |   |   |   | 54 |   |   |
| Weighted average interest rate     |       |                                                     |       |                    | 9.0        | %                                    |       |   | 8.7 | % |   |   | 8.1 | % |   |   | 8.4 | % |   |   | 8.5 | % |   |   | 8.6 | % |   |   |   |   |   |   |   |   |   |
| Local debentures and bonds         |       | BRL                                                      |       |                    | 2          |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 2 |   |   |   | 1 |   |   |
| Weighted average interest rate     |       |                                                     |       |                    | 12.0       | %                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Bank loans                         |       | Other currencies                                         |       |                    | 4          |                                 |       |   | 2 |   |   |   | 2 |   |   |   | 2 |   |   |   | 2 |   |   |   | 5 |   |   |   | 17 |   |   |   | 11 |   |   |
| Weighted average interest rate     |       |                                                     |       |                    | 1.8        | %                                    |       |   | 1.8 | % |   |   | 1.8 | % |   |   | 1.8 | % |   |   | 1.8 | % |   |   | 1.8 | % |   |   |   |   |   |   |   |   |   |
| Debentures and bonds               |       | Other currencies                                         |       |                    | 22         |                                 |       |   | 127 |   |   |   | 13 |   |   |   | 22 |   |   |   | 27 |   |   |   | 250 |   |   |   | 462 |   |   |   | 439 |   |   |
| Weighted average interest rate     |       |                                                     |       |                    | 6.3        | %                                    |       |   | 6.3 | % |   |   | 6.2 | % |   |   | 6.3 | % |   |   | 6.2 | % |   |   | 6.2 | % |   |   |   |   |   |   |   |   |   |
| **TOTAL FIXED**                    | ** ** | ** **                                               | ** ** | ** **              | **145**    |                                 | ** ** | ** ** | **567** |   | ** ** | ** ** | **267** |   | ** ** | ** ** | **415** |   | ** ** | ** ** | **624** |   | ** ** | ** ** | **2,852** |   | ** ** | ** ** | **4,870** |   | ** ** | ** ** | **5,244** |   |   |
| **TOTAL  FIXED + FLOATING**        | ** ** | ** **                                               | ** ** | ** **              | **658**    |                                 | ** ** | ** ** | **858** |   | ** ** | ** ** | **444** |   | ** ** | ** ** | **832** |   | ** ** | ** ** | **955** |   | ** ** | ** ** | **2,970** |   | ** ** | ** ** | **6,717** |   | ** ** | ** ** | **7,091** |   |   |
|                                    |            |                                                          |            |                         |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

155

----

**EXCHANGE RATESENSITIVITYDecember 31, 2004**

| ** **                         | ** ** | ** **                                               | ** ** | **Maturity Dates** | ** ** | **Fair Value at  December 31, ** | ** ** |
|------------------------------------|------------|----------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------|------------|
| ** **                         | ** ** | **Denominated in**                                  | ** ** | **2005**                | ** ** | **2006**                                        | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Subsequent** | ** ** | **Total** | ** ** | **2004** | ** ** |
| ** **                         | ** ** | **(millions of euro, except rates)** | ** ** |
| **EXCHANGE RATE SWAPS**            |       |                                                     |       |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to fixed             |       |                                                     |       |                    |       | 32                                              |       | 32 |   | 32 |   | 32 |   |   |   |   |   |   |   |   | 128 |   |   |   | (1.63 | ) |   |
| Spread received—Libor         |       |                                                     | USD        |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rate paid                          |       |                                                     | USD        |                    |       | 4.08                                            | %          | 4.13 | % | 4.08 | % | 4.08 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to floating          |       |                                                     |       |                    |       | 4                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 4 |   |   |   | 0.05 |   |   |
| Spread received—% CDI         |       |                                                     | BRL        |                    |       | 100.0                                           | %          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—% CDI             |       |                                                     | BRL        |                    |       | 80.0                                            | %          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to floating          |       |                                                     |       |                    |       |                                            |       | 78 |   |   |   |   |   |   |   |   |   |   |   |   | 78 |   |   |   | (4.96 | ) |   |
| Spread received—Libor         |       |                                                     | USD        |                    |       |                                            |       | (0.01 | )% |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—Euribor           |       |                                                     | EURO       |                    |       |                                            |       | (0.06 | )% |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to floating          |       |                                                     |       |                    |       |                                            |       |   |   |   |   |   |   |   |   |   | 568 |   |   |   | 568 |   |   |   | (82.65 | ) |   |
| Spread received—Libor         |       |                                                     | GBP        |                    |       |                                            |       |   |   |   |   |   |   |   |   |   | 6.13 | % |   |   |   |   |   |   |   |   |   |
| Spread paid—Euribor           |       |                                                     | EURO       |                    |       |                                            |       |   |   |   |   |   |   |   |   |   | 6.02 | % |   |   |   |   |   |   |   |   |   |
| From fixed to fixed                |       |                                                     |       |                    |       | 38                                              |       | 38 |   | 38 |   | 38 |   |   |   |   |   |   |   |   | 152 |   |   |   | (28.71 | ) |   |
| Rate received                      |       |                                                     | USD        |                    |       | 4.08                                            | %          | 4.08 | % | 4.08 | % | 4.08 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rate received                      |       |                                                     | EURO       |                    |       | 4.38                                            | %          | 4.38 | % | 4.38 | % | 4.38 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From fixed to floating             |       |                                                     |       |                    |       |                                            |       |   |   |   |   |   |   | 257 |   |   | 422 |   |   |   | 679 |   |   |   | (62.77 | ) |   |
| Rate received                      |       |                                                     | USD        |                    |       |                                            |       |   |   |   |   |   |   | 6.00 | % |   | 5.41 | % |   |   |   |   |   |   |   |   |   |
| Spread paid—Euribor           |       |                                                     | EURO       |                    |       |                                            |       |   |   |   |   |   |   | 0.115 | % |   | 0.43 | % |   |   |   |   |   |   |   |   |   |
| From floating to floating          |       |                                                     |       |                    |       |                                            |       |   |   |   |   | 16.4 |   |   |   |   |   |   |   |   | 16 |   |   |   | (0.11 | ) |   |
| Floating Rate Received—Pribor |       |                                                     | CZK        |                    |       |                                            |       |   |   |   |   | 0.23 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—Euribor           |       |                                                     | EURO       |                    |       |                                            |       |   |   |   |   | 0.29 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From fixed to fixed                |       |                                                     |       |                    |       |                                            |       | 73 |   |   |   |   |   |   |   |   | 440 |   |   |   | 514 |   |   |   | (66.27 | ) |   |
| Rate received                      |       |                                                     | USD        |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rate Paid                          |       |                                                     | UF         |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From fixed to floating             |       |                                                     |       |                    |       |                                            |       | 37 |   |   |   | 3 |   |   |   |   |   |   |   |   | 40 |   |   |   | (0.90 | ) |   |
| Rate Received                      |       |                                                     | USD        |                    |       |                                            |       | 7.48 | % |   |   | 7.49 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—% CDI             |       |                                                     | BRL        |                    |       |                                            |       | 118.50 | % |   |   | 141.39 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From fixed to floating             |       |                                                     |       |                    |       | 11                                              |       |   |   | 7 |   |   |   |   |   |   |   |   |   |   | 19 |   |   |   | (1.97 | ) |   |
| Rate received                      |       |                                                     | USD        |                    |       | 6.71                                            | %          |   |   | 10.19 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—CDI               |       |                                                     | BRL        |                    |       | 5.49                                            | %          |   |   | 4.43 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From fixed to floating             |       |                                                     |       |                    |       |                                            |       | 35.8 |   |   |   | 57.3 |   |   |   |   |   |   |   |   | 93 |   |   |   | (29.81 | ) |   |
| Rate received                      |       |                                                     | JPY        |                    |       |                                            |       | 0.698 | % |   |   | 1.073 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Spread paid—Euribor           |       |                                                     | EURO       |                    |       |                                            |       | 0.32 | % |   |   | 0.35 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From floating to fixed             |       |                                                     |       |                    |       |                                            |       | 37 |   |   |   |   |   |   |   |   |   |   |   |   | 37 |   |   |   | (12.72 | ) |   |
| Spread received                    |       |                                                     | USD        |                    |       |                                            |       | 1.50 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rate Paid                          |       |                                                     | UF         |                    |       |                                            |       | 5.31 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **EXCHANGE  RATE FORWARDS**        |       |                                                     |       |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Forward                            |       |                                                     | EURO/USD   |                    |       | 283                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 283 |   |   |   | 0.29 |   |   |
| Forward                            |       |                                                     | UF/USD     |                    |       | 62                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 62 |   |   |   | (0.47 | ) |   |
| **INTEREST  RATE OPTIONS**         |       |                                                     |       |                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exchange Rate COLLAR               |       |                                                     |       |                    |       |                                            |       | 457 |   |   |   |   |   |   |   |   |   |   |   |   | 457 |   |   |   | (3.92 | ) |   |
| Buy CAP—Libor                 |       |                                                     | USD        |                    |       |                                            |       | 7.5 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sell Floor—Libor              |       |                                                     | USD        |                    |       |                                            |       | 4.7 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **TOTAL**                          |       |                                                     |       |                    | ** ** | **430**                                         | ** ** | **789** | ** ** | **78** | ** ** | **147** | ** ** | **257** | ** ** | ** ** | **1,430** |   | ** ** | ** ** | **3,130** |   | ** ** | ** ** | **(297** | **)** | ** ** |

 

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**ITEM 12.**                      DESCRIPTIONOF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

**PART II**

**ITEM 13.**                      DEFAULTS,DIVIDEND ARREARAGES AND DELINQUENCIES

None.

**ITEM 14.**                      MATERIALMODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

**ITEM 15.**                      CONTROLSAND PROCEDURES

As of December 31, 2005, Endesa, S.A., under thesupervision and with the participation of its management, including the ChiefExecutive Officer and the Chief Financial Officer, performed an evaluation ofthe effectiveness of its disclosure controls and procedures. Based on thisevaluation, Endesa, S.A.’s Chief Executive Officer and Chief FinancialOfficer concluded that Endesa, S.A.’s disclosure controls and procedures areeffective at the reasonable assurance level for gathering, analyzing anddisclosing the information that Endesa, S.A. is required to disclose in thereports it files under the Securities Exchange Act of 1934, within the timeperiods specified in the SEC’s rules and forms. Endesa S.A.’smanagement necessarily applied its judgment in assessing the costs and benefitsof such controls and procedures, which by their nature can provide onlyreasonable assurance regarding management’s control objectives.

There has been no change in Endesa, S.A.’s internalcontrols over financial reporting that occurred during the period covered bythis annual report that has materially affected, or is reasonably likely tomaterially affect, Endesa, S.A.’s internal control over financial reporting.

Endesa, S.A. is in theprocess of implementing a plan to align our internal control systems with therequirements established in Section 404 of the Sarbanes Oxley Act.Section 404 requires that, in addition to the annual audit, managementprepares a report on the design, maintenance and periodic evaluation of ourinternal control system for financial reporting, which is to be accompanied byan attestation report by our external auditor.

**ITEM 16.**                      RESERVED

Not applicable.

**ITEM 16A.**              AUDITCOMMITTEE FINANCIAL EXPERT

Our Board of Directors has determined that Mr. FranciscoJavier Ramos Gascón, a Director and a member of the Audit and ControlCommittee, satisfies the requirements to be considered an “audit committeefinancial expert” according to applicable SEC rules and regulations.

Our Board of Directors hasfurther determined that each member of our Audit and Control Committee isindependent in accordance with the definition of independence for AuditCommittee membership under SEC rules and regulations.

**ITEM 16B.**             CODEOF ETHICS

Endesa, S.A. has the Rules onCorporate Integrity, comprised of the Charter Governing Senior Management, theCharter Governing Executives and the Employees’ Code of Conduct. They establishthe 

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principlesthat guide their respective actions: ethical conduct, professional standardsand confidentiality. They also establish the limitations and define theconflicts of interest arising from their status as executives and seniorexecutives. Since March 25, 2003, we have not waived compliance with, normade any amendment to, the Rules on Corporate Integrity. The Rules onCorporate Integrity were filed as Exhibit 11.1 to our annual report on Form 20-Ffor the fiscal year ended December 31, 2003 filed on June 30, 2004and are incorporated by reference herein. The English translation of the Rules onCorporate Integrity were filed as Exhibit 11.2 to our annual report on Form 20-Ffor the fiscal year ended December 31, 2003 filed on June 30, 2004and are incorporated by reference herein.

**ITEM 16C.**             PRINCIPALACCOUNTANT FEES AND SERVICES

Thefollowing table provides information on the aggregate fees billed by ourprincipal accountants, Deloitte, S.L., as well as the other member firms ofDeloitte Touche Tohmatsu and their respective affiliates (including DeloitteConsulting) by type of service rendered for the periods indicated.

| **Services Rendered** | ** ** | ** **                        | ** ** | **2004** | ** ** | **2005** | ** ** | **Total** | ** ** |
|----------------------------|------------|-----------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| ** **                 | ** ** | **(thousands of euro)** | ** ** |
| Audit Fees                 |       | 6,374                             |       | 7,361    |       | 13,735   |       |
| Audit-Related  Fees(1)     |       | 1,601                             |       | 2,601    |       | 4,202    |       |
| Tax Fees(2)                |       | 312                               |       | 53       |       | 365      |       |
| All Other Fees(3)          |       | 390                               |       | 515      |       | 905      |       |
| Total                      |       | 8,677                             |       | 10,530   |       | 19,207   |       |

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(1)          In 2005, includes feesfor: assistance services rendered in relation with Endesa’s readiness plan tocomply with Sarbanes-Oxley’s section 404 requirements (€1,510,249);review of certain distribution investments (€405,083); several agreedupon procedures (€229,239);due diligence performed in Italy and Poland (€177,000); and otheraudit-related services (€279,776). In 2004, includes fees for:assistance services rendered in relation with Endesa’s readiness plan to complywith Sarbanes-Oxley’s section 404 requirements (€1,226,789); review ofcertain distribution investments (€268,034); and otheraudit-related services (€106,638).

(2)          In 2005, includes feespaid for tax consultancy work in Argentina, Chile and Spain (amounting to €38,585;€12,413and €2,407,respectively). In 2004, includes fees paid for tax consultancy work in Italy,Chile, Argentina, Colombia and Spain (amounting to €150,000; €81,456;€49,734;€27,970and €2,650,respectively).

(3)          In 2005, includes feesfor: collaboration in a project to update the model processes (€255,000);collaboration in a rules and procedures program project (€107,990);collaboration in a commercial procedures identification project (€48,400)and other minor services (€103,495). In 2004, includes fees for:services provided by Deloitte Consulting in connection with a project to reviewan application quality plan (€190,000); collaboration ina control access project (€128,500); and other minor services (€71,900).

The amounts included inthe table above and the related footnotes have been classified in accordancewith Public Company Accounting Oversight Board (PCAOB) guidance, which aredifferent in certain respects from the classifications made under ourconsolidated financial statements prepared in accordance with IFRS.

***Audit CommitteePre-Approval Policies and Procedures***

Endesa’s external auditors are appointed by itsshareholders at the annual shareholders’ meeting. Similarly, the shareholdersof our subsidiaries, which are located in countries where applicable law andregulation so establishes, appoint such subsidiaries’ external auditors.

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The Audit and Control Committee, through the corporateaudit department, manages appointment proposals, review of engagement letters,fee negotiations, quality control in respect of the services provided, reviewand control of independence issues and other related matters.

The Audit and Control Committee has a pre-approvalpolicy regarding the contracting of Endesa’s external auditor, or any affiliateof the external auditor, for professional services. The professional servicescovered by such policy include audit and non-audit services provided to Endesaor any of our subsidiaries reflected in agreements dated on or after May 6,2003.

Fees payable in connection with recurring auditservices are approved as part of our annual budget. Fees payable in connectionwith non-recurring audit services, once they have been analyzed by thecorporate audit department, are submitted to the Audit and Control Committeefor approval or denial.

The pre-approvalpolicy established by the Audit and Control Committee for non-audit services isas follows:

·       Thebusiness unit that has requested the service and the audit firm requested toperform the service must request that the corporate audit manager review thenature of the service to be provided.

·       Atthat point, the corporate audit department analyzes the request and requiresthe audit firm that has been requested to provide the service to issue acertificate signed by the partner responsible for the audit of our consolidatedfinancial statements****confirmingsuch audit firm’s independence.

·       Finally,the proposal is submitted to the Audit and Control Committee for approval ordenial.

All services described infootnotes (1), (2) and (3) to the table above were approved in linewith the procedure described immediately above since May 6, 2003.

**ITEM 16D.**            EXEMPTIONSFROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

[Reserved]

**ITEM 16E.**             PURCHASESFOR EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

**Issuer Purchase of Equity Securities**

| **Period**                      | ** ** | ** ** | ** ** | **(a) Total Number of  Shares (or Units)  Purchased** | ** ** | **(b) Average Price Paid  per Share (or Units)** | ** ** | **(c) Total Number of  Shares (or Units)  Purchased as Part of  Publicly Announced Plans  or Programs** | ** ** | **(d) Maximum Number (or  Approximate Dollar  Value) of Shares (or  Units) that May Yet Be  Purchased Under the  Plans or Programs** | ** **     |
|---------------------------------|------------|------------|------------|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|
| Jan. 1 – Jan. 31 |       |       | —     |                                                                           |       |                                                                           | —     |                                                                                                                                                           |       |                                                                                                                                                                                                            | not applicable |   |   |   | not applicable |   |   |
| Feb. 1 – Feb. 28 |       |       | —     |                                                                           |       |                                                                           | —     |                                                                                                                                                           |       |                                                                                                                                                                                                            | not applicable |   |   |   | not applicable |   |   |
| Mar. 1 – Mar. 31 |       |       | —     |                                                                           |       |                                                                           | —     |                                                                                                                                                           |       |                                                                                                                                                                                                            | not applicable |   |   |   | not applicable |   |   |
| Apr.1 – Apr. 30       |       |       | —     |                                                                           |       |                                                                           | —     |                                                                                                                                                           |       |                                                                                                                                                                                                            | not applicable |   |   |   | not applicable |   |   |
| May 1 – May 31   |       |       | —     |                                                                           |       |                                                                           | —     |                                                                                                                                                           |       |                                                                                                                                                                                                            | not applicable |   |   |   | not applicable |   |   |
| Jun. 1 – Jun. 30 |       |       | —     |                                                                           |       |                                                                           | —     |                                                                                                                                                           |       |                                                                                                                                                                                                            | not applicable |   |   |   | not applicable |   |   |
| July 1 – July 31 |       |       | 240,613    |                                                                           |       |                                                                           | €     | 17.91                                                                                                                                                          |       |                                                                                                                                                                                                            |           | not applicable |   |   |   | not applicable |   |   |
| Aug. 1 – Aug. 31 |       |       | 10,000     |                                                                           |       |                                                                           | €     | 17.94                                                                                                                                                          |       |                                                                                                                                                                                                            |           | not applicable |   |   |   | not applicable |   |   |
| Sept. 1 – Sept.  30        |       |       | —     |                                                                           |       |                                                                           | —     |                                                                                                                                                           |       |                                                                                                                                                                                                            | not applicable |   |   |   | not applicable |   |   |
| Oct. 1 – Oct. 31 |       |       | —     |                                                                           |       |                                                                           | —     |                                                                                                                                                           |       |                                                                                                                                                                                                            | not applicable |   |   |   | not applicable |   |   |
| Nov. 1 – Nov. 30 |       |       | —     |                                                                           |       |                                                                           | —     |                                                                                                                                                           |       |                                                                                                                                                                                                            | not applicable |   |   |   | not applicable |   |   |
| Dec. 1 – Dec. 31 |       |       | —     |                                                                           |       |                                                                           | —     |                                                                                                                                                           |       |                                                                                                                                                                                                            | not applicable |   |   |   | not applicable |   |   |

 

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**PART III**

**ITEM 17.**                      FINANCIALSTATEMENTS

The Registrant hasresponded to Item 18 in lieu of responding to this Item.

**ITEM 18.**                      FINANCIALSTATEMENTS

See Item 19(a) for alist of financial statements filed under Item 18.

**ITEM 19.**                      EXHIBITS

(a)          Listof Financial Statements
|                                                                                                                                                                              | ** ** | **Page** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Report of Deloitte, S.L. for Endesa, S.A. for the  years ended December 31, 2004 and 2005                                                                               |       | F-2      |
| Report of Ernst & Young LTDA. for Empresa  Nacional de Electricidad S.A.(Endesa Chile)  for the years ended December 31, 2004 and 2005                         |       | F-4      |
| Report of Deloitte & Co. S.R.L. for Endesa  Argentina S.A. for the years ended December 31, 2004 and 2005                                                      |       | F-5      |
| Report of Deloitte & Touche Ltda. for  Central Hidroeléctrica de Betania S.A. E.S.P. for  the years ended December 31, 2004 and 2005                      |       | F-6      |
| Report of Ernst & Young Auditores  Independentes S.S. for Companhia de Interconexão Energética (CIEN) for the  year ended December 31, 2004 and 2005 |       | F-7      |
| Report of Ernst & Young Auditores  Independentes S.S. for Companhia de Interconexão Energética (CIEN) for the  three months ended December 31, 2005  |       | F-8      |
| Report of Ernst & Young Auditores  Independentes S.S. for Central Geradora Termelétrica  Fortaleza for the three months ended December 31, 2005           |       | F-9      |
| Report of Ernst & Young Auditores  Independentes S.S. for Centrais Elétricas Cachoeira  Dourada S.A. for the three months ended December 31, 2005         |       | F-10     |
| Report of Deloitte & Touche Sociedad de  Auditores y Consultores Ltda. for  Endesa Brasil, S.A. for the three months ended December 31, 2005                   |       | F-11     |
| Consolidated  Balance Sheets as of December 31, 2004 and 2005                                                                                                           |       | F-13     |
| Consolidated  Statements of Income for the years ended December 31, 2004 and 2005                                                                                       |       | F-14     |
| Consolidated Cash Flow Statements for the years  ended December 31, 2004 and 2005                                                                                       |       | F-16     |
| Notes  to the Consolidated Financial Statements                                                                                                                              |       | F-17     |

 

(b)         Listof Exhibits
| 1.1  |   | Articles of Association, as amended.*                        |   |   |
|------|--------|--------------------------------------------------------------|--------|--------|
| 1.2  |   | Articles of Association,  as amended (English translation).* |   |   |
| 8.1  |   | List of Subsidiaries.                                        |   |   |
| 11.1 |   | Code of Ethics.*                                             |   |   |
| 11.2 |   | Code of Ethics (English  translation).*                      |   |   |
| 12.1 |   | Section 302 Chief Executive  Officer Certification.     |   |   |
| 12.2 |   | Section 302 Chief  Financial Officer Certification.     |   |   |
| 13.1 |   | Section 906  Certification.                             |   |   |

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*                    Incorporatedby reference to Endesa, S.A.’s annual report on Form 20-F for theyear ended December 31, 2003 filed with the Securities and ExchangeCommission on June 30, 2004.

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**SIGNATURES**

TheRegistrant certifies that it meets all of the requirements for filing on Form 20-Fand that it has duly caused and authorized the undersigned to sign this annualreport on its behalf.
|                    |   | **ENDESA, S.A.** |
|--------------------|--------|------------------|
|               |   | By:              | /s/ JOSÉ LUIS PALOMO ÁLVAREZ |
|               |   |             | Name: | José Luis  Palomo Álvarez |
|               |   |             | Title: | *Chief Financial Officer* |
| Date: May 17, 2006 |   |             |   |   |

 

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**INDEX TO ENDESA,S.A.’SCONSOLIDATED FINANCIAL STATEMENTS**
|                                                                                                                                                                               | ** ** | **Page** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Report of Deloitte, S.L.  for Endesa, S.A. for the years ended December 31, 2004 and 2005                                                                                |       | F-2      |
| Report of  Ernst & Young LTDA. for Empresa Nacional de Electricidad S.A.(Endesa  Chile)  for the years ended December 31, 2004 and 2005                         |       | F-4      |
| Report of  Deloitte & Co. S.R.L. for Endesa Argentina S.A. for the years ended  December 31, 2004 and 2005                                                      |       | F-5      |
| Report of  Deloitte & Touche Ltda. for Central Hidroeléctrica de Betania S.A.  E.S.P. for  the years ended December 31, 2004 and 2005                      |       | F-6      |
| Report of  Ernst & Young Auditores Independentes S.S. for Companhia de  Interconexão Energética (CIEN) for the year ended December 31, 2004 and  2005 |       | F-7      |
| Report of  Ernst & Young Auditores Independentes S.S. for Companhia de  Interconexão Energética (CIEN) for the three months ended December 31,  2005  |       | F-8      |
| Report of  Ernst & Young Auditores Independentes S.S. for Central Geradora  Termelétrica Fortaleza for the three months ended December 31, 2005            |       | F-9      |
| Report of  Ernst & Young Auditores Independentes S.S. for Centrais Elétricas Cachoeira  Dourada S.A. for the three months ended December 31, 2005          |       | F-10     |
| Report of Deloitte &  Touche Sociedad de Auditores y Consultores Ltda. for  Endesa Brasil, S.A. for the three months ended December 31, 2005                    |       | F-11     |
| Consolidated Balance Sheets  as of December 31, 2004 and 2005                                                                                                            |       | F-13     |
| Consolidated Statements of  Income for the years ended December 31, 2004 and 2005                                                                                        |       | F-14     |
| Consolidated Cash Flow Statements for the years ended  December 31, 2004 and 2005                                                                                        |       | F-16     |
| Notes  to the Consolidated Financial Statements                                                                                                                               |       | F-17     |

 

F-1

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** **

****

**PlazaPablo Ruiz Picasso, 1**

**TorrePicasso**

**28020Madrid**

**España**

**Tel.: +34915 14 50 00**

**Fax: +34915 14 51 80**

**         +34915 56 74 30**

**www.deloitte.es**

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board ofDirectors andShareholders of Endesa, S.A.:

1.                 We have auditedthe accompanying consolidated balance sheets of Endesa, S.A. and Subsidiaries(“the Company”) as of December 31, 2005 and 2004, and the related consolidatedstatements of income, cash flows and recognised income and expense for theyears then ended. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits. We did not audit the2005 and 2004 financial statements of Empresa Nacional de Electricidad, S.A.(Endesa Chile) and some of its Subsidiaries, which statements reflect totalassets constituting 11% and 11%, respectively, of consolidated total assets asof December 31, 2005 and 2004 and sales constituting 5% and 5%, respectively,of consolidated sales for the years ended December 31, 2005 and 2004,respectively. Those statements prepared in accordance with generally acceptedaccounting principles in Chile were audited by other auditors whose reportshave been furnished to us and our opinion, insofar as it relates to the amountsincluded for Empresa Nacional de Electricidad, S.A.—Endesa Chile and some ofits Subsidiaries on such basis of accounting is based solely on the reports ofsuch other auditors.

2.                 We conducted ouraudits in accordance with standards of the Public Company Accounting OversightBoard (United States of America). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatements. The Company is not required tohave, nor were we engaged to perform, an audit of its internal control overfinancial reporting. Our audits included consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures(including the conversion of the amounts in the financial statements of Endesa Chileand some of its Subsidiaries prepared in accordance with generally acceptedaccounting principles in Chile, to amounts in accordance with InternationalFinancial Reporting Standards adopted by the European Union and thereconciliation of such amount to accounting principles generally accepted inthe United States of America) in the consolidated financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatements presentation. We believe that our audits and the reports of theother auditors provide a reasonable basis for our opinion.

 

| Deloitte, S.L. Inscrita en el Registro  Mercantil de Madrid, Tomo 13.650, folio 188, sección 8, hoja M-54414.  inscription 96, C.I.F.: 8-79104469. Domicilio Social: Plaza Pablo Ruiz  Picasso, 1, Torre Picasso – 28020 Madrid |   | Member of**Deloitte Touche Tohmatsu** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|

 

F-2

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3.                 In our opinion,based on our audits and the reports of the other auditors, the consolidatedfinancial statements referred to above present fairly, in all materialrespects, the financial position of Endesa, S.A. and Subsidiaries as ofDecember 31, 2005 and 2004, and the results of their operations and their cashflows for the years then ended, in conformity with International FinancialReporting Standards adopted by the European Union (EU-IFRSs).

4.                 The consolidatedfinancial statements referred to above are the first that the Company hasprepared in accordance with the EU-IFRSs, which require, in general, thatfinancial statements present comparative information. In this regard, asrequired by IFRS 1, *First Time Adoption ofInternational Financial Reporting Standards*, for comparison purposesthe Parent’s directors present, in addition to the consolidated figures for2005 for each item in the consolidated balance sheet, consolidated incomestatement, consolidated cash flow statement, consolidated statement ofrecognised income and expense and notes to the consolidated financialstatements, the figures for 2004, which were obtained by applying the EU-IFRSin force at December 31, 2005. Accordingly, the figures for 2004 differ fromthose contained in the approved consolidated financial statements for 2004, whichwere prepared in accordance with the accounting principles generally acceptedin Spain in force in that year. The differences arising from the application ofEU-IFRS to the consolidated equity at January, 1 and December, 31 2004, and tothe Group’s consolidated net income for 2004 are detailed in Note 28 to theconsolidated financial statements referred to above. 

5.                 As indicated inNote 2.1 to the consolidated financial statements, the Company has changed itsmethod of accounting for Financial Instruments (application of InternationalAccounting Standards 32 and 39 as adopted by the European Union) on January 1,2005 onwards by applying the exception provided for in IFRS 1 adopted by theEuropean Union, without requiring that the comparative figures for 2004 berestated and, therefore, the figures for the two years should be comparedtaking this circumstance into account.

6.                 InternationalFinancial Reporting Standards adopted by the European Union vary in certainsignificant respects from accounting principles generally accepted in theUnited States of America (U.S. GAAP). Information relating to the nature andeffect of such differences is presented in Note 29 to the consolidatedfinancial statements. In prior years pursuant to Item 17 (c) (iv) (A) of Form 20-Fthe Company’s reconciliation from accounting principles generally accepted inSpain to U.S. GAAP excluded any adjustments attributable to the effect ofdifferences resulting from the accounting for inflation. The shareholders’equity and consolidated net income in accordance with accounting principlesgenerally accepted in the United States of America have been restated for theyear ended December 31, 2004, in order to remove the price-level adjustment asItem 17 (c) (iv) (A) of Form 20-F is no longer applicable as a result of theCompany’s adoption of EU-IFRSs (see Note 29.2.2).

Madrid, Spain

February 23, 2006, exceptfor Note 27 and 29, as to which the date is March 15, 2006

F-3

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****

**Reportof Independent Registered Public Accounting Firm(Translation of report originally issued in Spanish-See Note 2(a))**

To the Board of Directorsand shareholders ofEmpresa Nacional de Electricidad S.A. (Endesa-Chile):

We have audited theaccompanying consolidated balance sheets of Endesa-Chile and its Subsidiaries(the “Company”) as of December 31, 2004 and 2005, and the related consolidatedstatements of income, changes in shareholder’s equity and cash flows for eachof the two years in the period ended December 31, 2005. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits. We didnot audit the consolidated financial statements of certain subsidiaries, whichstatements reflect total assets representing 38.87 percent and 40.89 percent asof December 31, 2004 and 2005, respectively, and total revenues representing of38.78 percent and 37.39 percent for each of the two years in the periodended December 31, 2005, respectively. We also did not audit the financialstatements of certain investments accounted for under the equity method, whichrepresented 0.18 percent and 7.7 percent of total consolidated assets as ofDecember 31, 2004 and 2005, respectively, and the equity in their net resultsrepresented 0.74 percent and 11.7 percent of the consolidated net income foreach of the two years in the period ended December 31, 2005. Those statementswere audited by other auditors whose reports have been furnished to us, and ouropinion, insofar as it relates to the amounts included for those entities, isbased solely on the reports of the other auditors.

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. We were not engaged to perform an audit of the Company’sinternal control over financial reporting. Our audit included consideration ofinternal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. An auditalso includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits and the reports ofother auditors provide a reasonable basis for our opinion.

In ouropinion, based on our audits and the reports of other auditors, the financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of Endesa-Chile and subsidiaries at December31, 2004 and 2005, and the results of their operations and their cash flows foreach of the two years in the period ended December 31, 2005 in conformity withaccounting principles generally accepted in Chile, which differ in certainrespects from accounting principles generally accepted in the United States ofAmerica (see Note 32 to the consolidated financial statements). Also, in ouropinion, the related financial statement schedule, when considered in relationto the basic financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.
| ERNST & YOUNG LTDA.                                            |   |  |
|--------------------------------------------------------------------|--------|--|
|                                                                    |   |
| Santiago,  Chile                                                   |   |
| January  19, 2006                                                  |   |
| (Except  for Notes 30 and 32 for which the date is March 10, 2006) |
| Firma Miembro de Ernst & Young Global                          |

 

F-4

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the President and Boardof Directors of**Endesa Argentina S.A.:**

We have audited theconsolidated balance sheets of Endesa Argentina S.A. and Subsidiaries (the“Company”) as of December 31, 2004 and 2005 and the consolidated statements ofoperations and cash flows for the years then ended (none of which are presentedherein). These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financial statementsbased on our audits.

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. The Company is not required to have, nor were we engagedto perform, an audit of its internal control over financial reporting. Ouraudits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Endesa Argentina S.A. and subsidiaries as of December 31,2004 and 2005, and the results of their operations and their cash flows for theyears then ended in conformity with accounting principles generally accepted inChile.

Accounting principlesgenerally accepted in Chile vary in certain significant respects fromaccounting principles accepted in the United States of America. The applicationof the latter would have affected the determination of net income for the yearsended December 31, 2005 and 2004 and the determination of shareholders’ equityat December 31, 2004 and 2005, to the extent summarized in Note 39.
| **DELOITTE & Co. S.R.L** |       |
|------------------------------|------------|
| ****                         | ** ** |
| Carlos A.  Lloveras          |       |
| Buenos Aires,  March 7, 2006 |       |

 

*Deloitterefers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its memberfirms, and their respective subsidiaries and affiliates. As a Swiss Verein(association), neither Deloitte Touche Tohmatsu nor any of its member firms hasany liability for each other’s acts or omissions. Each of the member firms is aseparate and independent legal entity operating under the names “Deloitte,”“Deloitte & Touche,” “Deloitte Touche Tohmatsu,” or other related names.Services are provided by the member firms or their subsidiaries or affiliatesand not by the Deloitte Touche Tohmatsu Verein.*

F-5

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****

**Report of Independent Registered Public AccountingFirm**

To the Board of Directors and Shareholders of Central Hidroeléctrica de Betania S.A. E.S.P. and subsidiaries:

We have audited the consolidated balance sheets ofCentral Hidroeléctrica de Betania S.A. E.S.P. and subsidiaries (the “Company”)as of December 31, 2005 and 2004 and the related consolidated statements ofincome and cash flows for the years then ended, all expressed in thousands ofconstant Chilean pesos. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of CentralHidroeléctrica de Betania S.A. E.S.P. and subsidiaries as of December 31, 2005and 2004, and the results of their operations and their cash flows for theyears then ended in conformity with accounting principles generally accepted inChile.

Accounting principlesgenerally accepted in Chile vary in certain significant respects fromaccounting principles generally accepted in the United States of America. Theapplication of the latter would have affected the determination of net incomefor the years ended December 31, 2005 and 2004 and the determination ofshareholders’ equity at December 31, 2005 and 2004 to the extent summarized inNote 27.
|                                       |                                               |
|---------------------------------------|-----------------------------------------------|
| Carlos Eduardo Tovar                  |
| Bogotá, Colombia,  March 9, 2006 |
| DELOITTE &  TOUCHE LTDA.          | Una firma miembro de Deloitte Touche Tohmatsu |
|                                       |                                               |  |

 

F-6

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**Report ofIndependent Registered Public Accounting Firm**

To the Board of Directors and Shareholders ofCIEN—Companhia de Interconexao Energetica

We have audited the accompanying consolidated balancessheets of CIEN—Companhia de Interconexão Energética and its subsidiaries (the “Company”)as of December 31, 2005 and 2004, and the related consolidated statementsof income, changes in shareholders’ equity and cash flows for each of the yearsthen ended. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of CIEN—Companhia de InterconexãoEnergética and its subsidiaries at December 31, 2005 and 2004, and theresults of their operations and their cash flows for the years then ended, inconformity with accounting principles generally accepted in Chile, which differin certain respects from accounting principles generally accepted in the UnitedStates of America (see Note 24 to the financial statements).

| Rio de Janeiro, Brazil,  January 13, 2006 |
|------------------------------------------------|
| ERNST &  YOUNG                        |
| Auditores Independentes  S.S.                  |
| ****                                           |
| Claudio Camargo                                |
| Partner                                        |

 

F-7

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Shareholders of**CIEN—Companhia de Interconexão Energética**

We have audited the accompanying balance sheet of CIEN—Companhiade Interconexão Energética (the “Company”) as of December 31, 2005, andthe related statements of income, changes in shareholders’ equity and cashflows for the three-month period ended December 31, 2005. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

In ouropinion, the financial statement referred to above present fairly, in allmaterial respects, the financial position of CIEN—Companhia de InterconexãoEnergética at December 31, 2005, and the results of its operations and itscash flows for the three-month period ended December 31, 2005 inconformity with accounting principles generally accepted in Chile, which differin certain respects from accounting principles generally accepted in the UnitedStates of America (see Note 24 to the financial statements).

| Rio de Janeiro, Brazil,  January 13, 2006 |
|------------------------------------------------|
| ERNST &  YOUNG                        |
| Auditores Independentes  S.S.                  |
| ****                                           |
| Claudio Camargo                                |
| Partner                                        |

F-8

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Shareholders of **Central Geradora Termelétrica Fortaleza—CGTF**

We have audited the accompanying balance sheet ofCentral Geradora Termelétrica Fortaleza — CGTF (the “Company”) as of December31, 2005, and the related statements of income, changes in shareholder’s equityand cash flows for the three-month period ended December 31, 2005. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis of designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Central Geradora Termelétricafortaleza—CGTF as of December 31, 2005, and the results of its operations andits cash flows for the three-month period ended December 31, 2005 inconformity with accounting principles generally accepted in Chile, which differin certain respects from accounting principles generally accepted in the UnitedStates of America (see Note 22 to the financial statements).

| Rio de Janeiro, Brazil,  January 13, 2006 |
|------------------------------------------------|
| ERNST &  YOUNG                        |
| Auditores Independentes  S.S.                  |
| ****                                           |
| Claudio Camargo                                |
| Partner                                        |

F-9

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Shareholders of**Centrais Elétricas Cachoeira Dourada S.A.—CDSA**

We have audited the accompanying balance sheet ofCentrais Elétricas Cachoeira Dourada S.A.— CDSA (the “Company”) as of December 31,2005, and the related statements of income, changes in shareholders’ equity andcash flows for the three-month period ended December 31, 2005. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used and significantestimates made by management, and evaluating the overall financial statementpresentation. We believe that our audit provides a reasonable basis for ouropinion.

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Centrais Elétricas CachoeiraDourada S.A.—CDSA as of December 31, 2005, and the results of itsoperations and its cash flows for the three-month period ended December 31,2005 in conformity with accounting principles generally accepted in Chile,which differ in certain respects from accounting principles generally acceptedin the United States of America (see Note 21 to the financial statements).

| Rio de Janeiro, Brazil,  January 13, 2006 |
|------------------------------------------------|
| ERNST &  YOUNG                        |
| Auditores Independentes  S.S.                  |
| ****                                           |
| Claudio Camargo                                |
| Partner                                        |

 

F-10

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Shareholders of Endesa Brasil S.A.:

We have audited the accompanying consolidated balancesheet of Endesa Brasil S.A. and subsidiaries (the “Company”) as of December 31,2005, and the related consolidated statements of operations, shareholders’ equityand cash flows for the three month period then ended (expressed in constantChilean pesos) (none of which are presented herein). These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audit. We did notaudit the financial statements for the three month period ended December 31,2005 of certain of the Company’s consolidated subsidiaries, which statementsreflect total assets constituting 35.95% of consolidated total assets at December 312005 and total revenues constituting 9.92% of consolidated total revenues forthe three month period then ended. With respect to the consolidatedshareholders’ equity and net income information stated on the basis ofaccounting principles generally accepted in the United States of America (“U.S.GAAP”) in Note 24, these financial statements reflect total shareholders’equity constituting 48.04% of consolidated U.S. GAAP basis shareholders’ equityat December 31, 2005 and total net income constituting 12.25%, ofconsolidated U.S. GAAP basis net income for the three month period then ended.Such financial statements were audited by other auditors whose reports havebeen provided to us and our opinion, insofar as it relates to the amountsincluded for these companies, is based solely on the reports of such otherauditors.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit and the reports of the other auditors provide a reasonable basisfor our opinion. 

In our opinion,based on our audit and the reports of the other auditors, such consolidatedfinancial statements present fairly, in all material respects, the financialposition of Endesa Brasil S.A. and subsidiaries as of December 31, 2005,and the results of their operations, changes in their shareholders’ 

F-11

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equityand their cash flows for the three month period then ended, in conformity withaccounting principles generally accepted in Chile.

Accountingprinciples generally accepted in Chile vary in certain significant respectsfrom U.S. GAAP. The application of the latter would have affected thedetermination of net income for the three months period ended December 31,2005, and the determination of shareholders’ equity as of December 31,2005, to the extent summarized in Note 24 to the consolidated financialstatements.

|                     |
|---------------------|
| Santiago, Chile     |
| March 8, 2006. |

 

F-12

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**ENDESA, S.A. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS AT 31 DECEMBER 2004 AND 2005**

| ** **                                                  | ** ** | **Millions of Euros** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                  | ** ** | **31/12/2004**                  | ** ** | **31/12/2005** | ** ** |
| **ASSETS**                                                  | ** ** |                            | ** ** | ** ** |   |   | ** ** | ** ** |   |
| **NON-CURRENT  ASSETS**                                     | ** ** |                            | **39,693** | ** ** |   |   | **45,742** | ** ** |   |
| Property, plant  and equipment (Note 5)                     |       |                            | 28,910     | ** ** |   |   | 32,313 | ** ** |   |
| Investment  property (Note 6)                               |       |                            | 58         | ** ** |   |   | 71 | ** ** |   |
| Intangible assets  (Note 7)                                 |       |                            | 323        | ** ** |   |   | 863 | ** ** |   |
| Goodwill (Note 8)                                           |       |                            | 3,556      | ** ** |   |   | 4,278 | ** ** |   |
| Investments  accounted for using the equity method (Note 9) |       |                            | 2,191      | ** ** |   |   | 623 | ** ** |   |
| Non-current  financial assets (Note 10)                     |       |                            | 1,296      | ** ** |   |   | 4,134 | ** ** |   |
| Deferred tax  assets (Note 19)                              |       |                            | 3,359      | ** ** |   |   | 3,460 | ** ** |   |
| **CURRENT  ASSETS**                                         | ** ** |                            | **7,489**  | ** ** |   |   | **9,601** | ** ** |   |
| Inventories (Note  11)                                      |       |                            | 756        | ** ** |   |   | 812 | ** ** |   |
| Trade and other  receivables (Note 12)                      |       |                            | 4,382      | ** ** |   |   | 6,098 | ** ** |   |
| Current financial  assets                                   |       |                            | 64         | ** ** |   |   | 77 | ** ** |   |
| Cash and cash  equivalents                                  |       |                            | 2,178      | ** ** |   |   | 2,614 | ** ** |   |
| Other current  assets                                       |       |                            | 109        | ** ** |   |   | — | ** ** |   |
| **NON-CURRENT  ASSETS CLASSIFIED AS HELD FOR SALE**         | ** ** |                            | **—** | ** ** |   |   | **22** | ** ** |   |
| **TOTAL  ASSETS**                                           | ** ** |                            | **47,182** | ** ** |   |   | **55,365** | ** ** |   |
| **EQUITY  AND LIABILITIES**                                 | ** ** |                            | ** ** | ** ** |   |   | ** ** | ** ** |   |
| **EQUITY** (Note 13)                                   | ** ** |                            | **14,133** | ** ** |   |   | **16,327** | ** ** |   |
| Of the Parent                                               |       |                            | 8,728      | ** ** |   |   | 11,590 | ** ** |   |
| Of minority  interests                                      |       |                            | 5,405      | ** ** |   |   | 4,737 | ** ** |   |
| **NON-CURRENT  LIABILITIES**                                | ** ** |                            | **26,400** | ** ** |   |   | **28,630** | ** ** |   |
| Deferred income  (Note 14)                                  |       |                            | 1,535      | ** ** |   |   | 2,062 | ** ** |   |
| Long-term  provisions (Note 15)                             |       |                            | 4,394      | ** ** |   |   | 5,097 | ** ** |   |
| Bank borrowings  and other financial liabilities (Note 16)  |       |                            | 17,715     | ** ** |   |   | 18,587 | ** ** |   |
| Other non-current  payables                                 |       |                            | 1,032      | ** ** |   |   | 1,032 | ** ** |   |
| Deferred tax  liabilities (Note 19)                         |       |                            | 1,724      | ** ** |   |   | 1,852 | ** ** |   |
| **CURRENT  LIABILITIES**                                    | ** ** |                            | **6,649**  | ** ** |   |   | **10,408** | ** ** |   |
| Bank borrowings  and other financial liabilities (Note 16)  |       |                            | 1,541      | ** ** |   |   | 2,450 | ** ** |   |
| Current trade and  other payables                           |       |                            | 5,108      | ** ** |   |   | 7,958 | ** ** |   |
| **TOTAL EQUITY AND LIABILITIES**                            | ** ** |                            | **47,182** | ** ** |   |   | **55,365** | ** ** |   |

 

The accompanying Notes 1 to 29 are an integral part of the consolidated balance sheet at 31 December 2004 and 2005.

F-13

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**ENDESA, S.A. AND SUBSIDIARIESCONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2004 AND 2005**

| ** **                                                 | ** **   | **Millions of Euros** | ** ** |
|------------------------------------------------------------|--------------|---------------------------------|------------|
| ** **                                                 | ** **   | **31/12/2004**                  | ** ** | **31/12/2005** | ** ** |
| **REVENUE**  (Note 20)                                     | ** **   |                            | **13,665** | ** ** |   |   | **18,229** | ** ** |   |
| Sales                                                      |         |                            | 13,509     |   |   |   | 17,508 |   |   |
| Other operating income                                     |         |                            | 156        |   |   |   | 721 |   |   |
| **PROCUREMENTS  AND SERVICES**                             | ** **   |                            | **(6,292** | **)** |   |   | **(9,103** | **)** |   |
| Power purchased                                            |         |                            | (2,356     | ) |   |   | (3,367 | ) |   |
| Cost of fuel consumed                                      |         |                            | (2,724     | ) |   |   | (3,578 | ) |   |
| Transmission expenses                                      |         |                            | (520       | ) |   |   | (651 | ) |   |
| Other variable procurements and services                   |         |                            | (692       | ) |   |   | (1,507 | ) |   |
| **CONTRIBUTION  MARGIN**                                   | ** **   |                            | **7,373**  | ** ** |   |   | **9,126** | ** ** |   |
| Work on  non-current assets                                |         |                            | 161        |   |   |   | 170 |   |   |
| Staff costs                                                |         |                            | (1,393     | ) |   |   | (1,547 | ) |   |
| Other fixed  operating expenses                            |         |                            | (1,620     | ) |   |   | (1,729 | ) |   |
| **GROSS  PROFIT FROM OPERATIONS**                          | ** **   |                            | **4,521**  | ** ** |   |   | **6,020** | ** ** |   |
| Depreciation and  amortisation charge (Notes 5 and 7)      |         |                            | (1,675     | ) |   |   | (1,776 | ) |   |
| **PROFIT  FROM OPERATIONS**                                | ** **   |                            | **2,846**  | ** ** |   |   | **4,244** | ** ** |   |
| **FINANCIAL  LOSS** (Note 21)                              | ** **   |                            | **(1,147** | **)** |   |   | **(1,252** | **)** |   |
| Net finance costs                                          |         |                            | (1,087     | ) |   |   | (1,257 | ) |   |
| Exchange differences                                       |         |                            | (60        | ) |   |   | 5 |   |   |
| Result of companies accounted for using the equity  method |         |                            | 79         |   |   |   | 67 |   |   |
| Gain/(Loss) from  other investments                        |         |                            | 40         |   |   |   | 2 |   |   |
| Income from sale  of assets (Note 22)                      |         |                            | 195        |   |   |   | 1,486 |   |   |
| **PROFIT  BEFORE TAX**                                     | ** **   |                            | **2,013**  | ** ** |   |   | **4,547** | ** ** |   |
| Income tax (Note  19)                                      |         |                            | (352       | ) |   |   | (790 | ) |   |
| **PROFIT  FOR THE YEAR**                                   | ** **   |                            | **1,661**  | ** ** |   |   | **3,757** | ** ** |   |
| Parent                                                     | ** **   |                            | **1,253**  | ** ** |   |   | **3,182** | ** ** |   |
| Minority interests                                         |         |                            | 408        |   |   |   | 575 |   |   |
| ***BASIC EARNINGS PER SHARE (in  euros)***                 | *** *** | * *                        | ***1.19*** | *** *** | * * | * * | ***3.01*** | *** *** | * * |
| ***DILUTED  EARNINGS PER SHARE (in euros)***               | *** *** | * *                        | ***1.19*** | *** *** | * * | * * | ***3.01*** | *** *** | * * |

 

The accompanying Notes 1 to 29 are an integral part of the consolidated income statement for 2004 and 2005.

F-14

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**ENDESA, S.A. AND SUBSIDIARIESCONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSEFOR THE YEARS ENDED 31 DECEMBER 2004 AND 2005**

| ** **                                                                           | ** ** | **Millions of Euros** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                                                                           | ** ** | **Of the  Parent**         | ** ** | **Of Minority  Interests** | ** ** | **Total** | ** ** | **Of the  Parent** | ** ** | **Of Minority  Interests** | ** ** | **Total** | ** ** |
| **NET  PROFIT RECOGNISED DIRECTLY IN EQUITY**                                   | ** ** |                            | **37**     | ** ** |   |   | **186** | ** ** |   | **223** | ** ** |   | **727** | ** ** |   |   | **693** | ** ** |   | **1,420** | ** ** |
| In retained earnings                                                                 |       |                            | —     |   |   |   | — | ** ** |   | — |   |   | (209 | ) |   |   | — |   |   | (209 | ) |
| Actuarial losses on pension schemes (Note 15)                                   |       |                            | —     |   |   |   | — | ** ** |   | — |   |   | (323 | ) |   |   | — |   |   | (323 | ) |
| Tax effect                                                                           |       |                            | —     |   |   |   | — | ** ** |   | — |   |   | 114 |   |   |   | — |   |   | 114 |   |
| In asset and liability revaluation reserves                                          |       |                            | 57         |   |   |   | 38 | ** ** |   | 95 |   |   | 187 |   |   |   | 34 |   |   | 221 |   |
| Available-for-sale investments (Note 10)                                             |       |                            | —     |   |   |   | — | ** ** |   | — |   |   | 237 |   |   |   | — |   |   | 237 |   |
| Cash flow hedges (Notes 16 and 18)                                                   |       |                            | 57         |   |   |   | 38 | ** ** |   | 95 |   |   | (17 | ) |   |   | 34 |   |   | 17 |   |
| Tax effect                                                                           |       |                            | —     |   |   |   | — | ** ** |   | — |   |   | (33 | ) |   |   | — |   |   | (33 | ) |
| In translation differences (Note 13)                                                 |       |                            | (20        | ) |   |   | 148 | ** ** |   | 128 |   |   | 749 |   |   |   | 659 |   |   | 1,408 |   |
| Gross translation differences                                                        |       |                            | 10         |   |   |   | 148 | ** ** |   | 158 |   |   | 807 |   |   |   | 659 |   |   | 1,466 |   |
| Tax effect                                                                           |       |                            | (30        | ) |   |   | — | ** ** |   | (30 | ) |   | (58 | ) |   |   | — |   |   | (58 | ) |
| **PROFIT FOR THE YEAR**                                                              | ** ** |                            | **1,253**  | ** ** |   |   | **408** | ** ** |   | **1,661** | ** ** |   | **3,182** | ** ** |   |   | **575** | ** ** |   | **3,757** | ** ** |
| **TOTAL INCOME AND EXPENSES RECOGNISED IN THE YEAR**                                 | ** ** | ** **                      | **1,290**  | ** ** | ** ** | ** ** | **594** | ** ** | ** ** | **1,884** | ** ** | ** ** | **3,909** | ** ** | ** ** | ** ** | **1,268** | ** ** | ** ** | **5,177** | ** ** |
| Gross effect of changes in accounting policies (application  of IASs 32 and 39) |       |                            | —     |   |   |   | — | ** ** |   | — |   |   | (283 | ) |   |   | (1,574 | ) |   | (1,857 | ) |
| Tax effect                                                                           |       |                            | —     |   |   |   | — | ** ** |   | — |   |   | 91 |   |   |   | — |   |   | 91 |   |
| Net effect of changes in  accounting policies (application of IASs 32 and 39)        |       |                            | —     |   |   |   | — | ** ** |   | — |   |   | (192 | ) |   |   | (1,574 | ) |   | (1,766 | ) |

 

The accompanying Notes 1 to 29 are an integral part of the consolidated statement of recognised income and expense for 2004 and 2005.

F-15

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**ENDESA, S.A. AND SUBSIDIARIESCONSOLIDATED CASH FLOW STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2004 AND 2005**

| ** **                                                                   | ** ** | **Millions of Euros** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| Gross profit before tax and minority interests                               |       | 2,013                           |       | 4,547 |   |
| Depreciation and amortisation charge                                         |       | 1,675                           |       | 1,776 |   |
| Income from sale of assets                                                   |       | (195                            | )          | (1,486 | ) |
| Income tax                                                                   |       | (200                            | )          | (650 | ) |
| Provisions paid                                                              |       | (454                            | )          | (443 | ) |
| Other results not giving rise to cash flows                                  |       | 579                             |       | 465 |   |
| Change in income tax payable                                                 |       | (16                             | )          | 341 |   |
| Change in operating current assets / liabilities                             |       | 246                             |       | (1,188 | ) |
| **NET CASH FLOWS FROM OPERATING ACTIVITIES**                                 | ** ** | **3,648**                       | ** ** | **3,362** | ** ** |
| Investments in property, plant and equipment and  intangible assets          |       | (2,262                          | )          | (3,247 | ) |
| Other investments                                                            |       | (425                            | )          | (1,485 | ) |
| Proceeds from disposal of investments                                        |       | 692                             |       | 3,702 |   |
| Grants and other deferred income                                             |       | 159                             |       | 312 |   |
| **NET CASH FLOWS USED IN INVESTING ACTIVITIES**                              | ** ** | **(1,836**                      | **)**      | **(718** | **)** |
| Non-current bank borrowing drawdowns                                         |       | 1,363                           |       | 3,030 |   |
| Non-current bank borrowings and other financial  liabilities repaid          |       | (455                            | )          | (1,737 | ) |
| Net cash flows from current bank borrowings and  other financial liabilities |       | (1,720                          | )          | (2,366 | ) |
| Treasury share collections / payments                                        |       | 44                              |       | — |   |
| Dividends of the Parent paid                                                 |       | (739                            | )          | (796 | ) |
| Payments to minority interests                                               |       | (196                            | )          | (457 | ) |
| **NET CASH FLOWS FROM FINANCING ACTIVITIES**                                 | ** ** | **(1,703**                      | **)**      | **(2,326** | **)** |
| **TOTAL NET CASH FLOWS**                                                     | ** ** | **109**                         | ** ** | **318** | ** ** |
| Effect of foreign exchange rate changes on cash and  cash equivalents        |       | (22                             | )          | 118 |   |
| **NET INCREASE IN CASH AND CASH EQUIVALENTS**                                | ** ** | **87**                          | ** ** | **436** | ** ** |
| **CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR**                           | ** ** | **2,091**                       | ** ** | **2,178** | ** ** |
| **CASH  AND CASH EQUIVALENTS AT END OF YEAR**                                | ** ** | **2,178**                       | ** ** | **2,614** | ** ** |

 

The accompanying Notes 1 to 29 are an integral part of the consolidated cash flow statement for 2004 and 2005.

F-16

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**ENDESA, S.A. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR 2005**

***1.****                 Groupactivities and financial statements*

Endesa, S.A. (“the Parent” or “the Company”) and itssubsidiaries compose the Endesa Group (“Endesa” or “the Group”). Endesa, S.A.’sregistered office and headquarters are in Madrid, at calle Ribera delLoira, 60.

The Company was incorporated as a Spanish “SociedadAnónima” in 1944 under the name of Empresa Nacional de Electricidad, S.A. andit changed its corporate name to Endesa, S.A. pursuant to a resolution of theshareholders adopted at the Annual General Meeting on 25 June 1997.

Endesa’s corporate purpose is to carry on activitiesin the electricity business in all its various industrial and commercial areas;the exploitation of primary energy resources of all types; the provision ofindustrial services, particularly in the areas of telecommunications, water andgas and those preliminary or complementary to the business activities composingthe Group’s corporate purpose, and the management of the corporate Groupcomprising investments in other companies. The Group may carry on the businessactivities composing its corporate purpose in Spain and abroad directly orthrough its investments in other companies. In 2005 the Endesa Group disposedof its investments in the telecommunications business.

Endesa’s consolidated financial statements for 2004were approved by the shareholders at the Annual General Meeting on 27 May 2005.The 2004 consolidated financial statements were prepared in accordance withSpanish GAAP and, therefore, they do not coincide with the amounts for 2004included in these consolidated financial statements, which were prepared inaccordance with International Financial Reporting Standards (see Note 28 forthe reconciliation of the equity and profit for the year, together with adescription of the principal adjustments).

The Group’s 2005 consolidated financial statements andthe 2005 financial statements of each of the Group companies, which were usedas the basis for the preparation of these consolidated financial statements,have not yet been approved by the shareholders at the respective Annual GeneralMeetings. However, the directors consider that these financial statements willbe approved without any changes.

These consolidatedfinancial statements are presented in millions of euros (unless expresslystated otherwise) because the euro is the functional currency of the principaleconomic area in which the Endesa Group operates. Foreign operations arerecorded in accordance with the policies established in Note 3.1.

***2.****                 Basisof presentation of the consolidated financial statements*

**2.1. Basis ofpresentation**

The consolidated financial statements for 2005 of theEndesa Group were prepared by the directors, at the Board of Directors’ Meetingheld on 16 January 2006, in accordance with the International FinancialReporting Standards (“IFRSs”) adopted by the European Union, in conformity withRegulation (EC) no. 1606/2002 of the European Parliament and of theCouncil.

These financial statements present fairly the Group’sconsolidated equity and financial position at 31 December 2005, andthe results of its operations, the changes in the statement of recognisedincome and expense and the cash flows at the Group in the year then ended.

The consolidated financialstatements for 2005 of the Endesa Group were prepared on the basis of theaccounting records kept by the Company and by the other Group companies. Eachcompany prepares its financial statements in accordance with the accountingprinciples and standards in force in the country in 

F-17

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which itoperates and, therefore, the required adjustments and reclassifications weremade on consolidation to unify the policies and methods used and to make themcompliant with IFRSs.

The consolidated financialstatements for 2004 included for comparative purposes were also prepared inaccordance with the IFRSs adopted by the European Union on a basis consistentwith that applied in 2005, except for the fact that the Group opted to apply theexception contained in IFRS 1, adopted by the European Union, which permits theapplication of IASs 32 and 39 on financial instruments from 1 January 2005,without having to adapt the comparative figures for the prior year. Therefore,any comparison of the two years should be made taking this circumstance intoaccount.

**2.2. Responsibility for the information and for theestimates made**

The information in thesefinancial statements is the responsibility of the Group’s directors.

Inpreparing the accompanying consolidated financial statements estimates wereoccasionally made by the senior executives of the Group in order to quantifycertain of the assets, liabilities, income, expenses and commitments reportedherein. These estimates relate basically to the following:

·       Themeasurement of assets and goodwill to ascertain whether there are anyimpairment losses thereon (see Note 3-e).

·       Theassumptions used in the actuarial calculation of the pension liabilities andcommitments and collective redundancy procedures (see Note 15).

·       Theuseful life of the property, plant and equipment and intangible assets (seeNotes 3-a and 3-d).

·       Theassumptions used in measuring the fair value of the financial instruments (seeNote 3-f).

·       Thepower supplied to customers not read by meters and other electricity systemvariables.

·       Theprobability of the occurrence and the amount of liabilities which are uncertainas to their amount or contingent liabilities.

·       Thefuture facility closure and land restoration costs.

Althoughthese estimates were made on the basis of the best information available at thedate of preparation of these financial statements on the events analysed,events that take place in the future might make it necessary to change theseestimates (upwards or downwards) in coming years. Changes in accountingestimates would be applied prospectively, recognising the effects of the changein estimates in the related future consolidated financial statements.

**2.3. Basis of consolidation**

The subsidiaries are fullyconsolidated and all their assets, liabilities, income, expenses and cash flowsare included in the consolidated financial statements after making theadjustments and eliminations relating to intra-Group transactions. Subsidiariesare defined as companies over which the Parent controls half or more of thevoting power of the investee or, even if this percentage is lower, when it hasthe power to govern the financial and operating policies thereof.

The results ofsubsidiaries acquired or disposed of during the year are included in theconsolidated income statement from the effective date of acquisition or untilthe effective date of disposal, as appropriate.

The operations of the Parent and of the consolidatedsubsidiaries are consolidated in accordance with the following basicprinciples:

1.                On acquisition,the assets, liabilities and contingent liabilities of a subsidiary are measuredat their market value. Any excess of the cost of acquisition of the subsidiaryover the market value of 

F-18

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its assets andliabilities, in proportion to the Parent’s ownership interest, is recognised asgoodwill. Any deficiency of the cost of acquisition below the market value ofthe assets and liabilities is credited to the consolidated income statement.

2.                The interest ofminority shareholders in the equity and results of the fully consolidatedsubsidiaries is presented under Equity—Of Minority Interests in theconsolidated balance sheet and under Profit for the Year—Minority Interests inthe consolidated income statement, respectively.

3.                The financialstatements of foreign companies with a functional currency other than the euroare translated to euros as follows:

a.                  Assets andliabilities are translated to euros at the exchange rates prevailing on thedate of the consolidated financial statements.

b.                 Income andexpense items are translated at the average exchange rates for the year.

c.                  Equity istranslated at the historical exchange rates prevailing at the date ofacquisition (or at the average exchange rates in the year it was generated, inthe case of both accumulated earnings and the contributions made), asappropriate.

Exchangedifferences arising on translation of the financial statements are recognised,net of the related tax effect, under the heading Equity—Translation Differences(see Note 13).

4.                Allthe balances and transactions between the consolidated companies wereeliminated on consolidation.

**2.4. Subsidiaries**

The section entitled “MainEndesa Group Companies”, included as an Appendix to these financial statements,lists the main companies composing the Endesa Group.

**Changes in thescope of consolidation**

In June 2004 Endesa Participadas, S.A. sold its50.55% investment in Netco Redes, S.A., as a result of which this companyceased to be fully consolidated.

In September 2004 ENDESA completed itsacquisition of a controlling interest in the French producer Societé Nationaled ́Electricité et de Thermique, S.A. (“Snet”) when Endesa Europa, S.L. acquiredan additional 35% holding in this company, giving it an ownership interest of 65%.As a result of this acquisition Snet was fully consolidated from 1 September 2004.In 2004 this inclusion increased the Group’s assets, excluding cash, by EUR1,341 million and increased its liabilities by EUR 851 million.

In May 2005 Endesa Participadas, S.A. sold allthe shares of Nueva Nuinsa, S.L., as a result of which this company ceased tobe fully consolidated.

In August 2005 EndesaCogeneración y Renovables, S.A. (“ECyR”) acquired all the shares of thePortuguese renewable energy company Finerge-Gestao de Projectos Energéticos,S.A. (“Finerge”), as a result of which this company was fully consolidated from1 September 2005.

**Companies fullyconsolidated although the percentage of ownership is below 50%**

Although in 2005 theEndesa Group has an ownership interest of less than 50% in CompañíaDistribuidora y Comercializadora de Energía, S.A. (“Codensa”), EmpresaGeneradora de Energía Eléctrica, S.A. (“Emgesa”) and Parque Eólico Serra deCapucha, S.A., they are deemed to be subsidiaries, since the Group directly orindirectly, by virtue of shareholders’ agreements, or as a result of the 

F-19

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shareholderstructure and composition and classes of the shares, exercises control overthese companies. In August 2005 the Endesa Group acquired 50% of the shares of thePortuguese company Parque Eólico Serra de Capucha, S.A. as a consequence of theacquisition of Finerge.

***3.****                 Accountingpolicies*

The principal accountingpolicies used in preparing the accompanying consolidated financial statementswere as follows:

**a) Property, plantand equipment**

Property, plant andequipment are stated at cost less accumulated depreciation and any recognisedimpairment loss. Cost includes, as appropriate, the following:

1.                Borrowing costsincurred during the construction period. The interest rate used is that whichrelates to specific-purpose financing or, if no such rate exists, the averagefinancing rate of the company making the investment.

2.                Staff costsrelating directly to construction in progress. The amounts capitalised in thisconnection are recorded in the consolidated income statement as an expenseunder Staff Costs and as a revenue under Work on Non-Current Assets. EUR 170million were capitalised in this connection in 2005 and EUR 161 million in2004.

3.                The future coststhat the Group will have to incur in respect of the closure of its facilitiesare capitalised to the cost of the asset, at present value, and the relatedprovision is recognised. The Group reviews each year its estimate of thesefuture costs, increasing or decreasing the value of the asset in question basedon the results of this estimate. In the case of nuclear plants, this provisionincludes the amount that the Group estimates that it will have to incur until,pursuant to Royal Decree 1349/2003, of 31 October, and Law 24/2005, of 18November, the public radioactive waste management entity Enresa (“Enresa”)assumes responsibility for the decommissioning of these plants.

The acquisition cost of assets acquired before 31 December 2003,includes, where appropriate, the asset revaluations permitted in the variouscountries to correct the value of the property, plant and equipment for theeffect of inflation.

Property, plant and equipment in the course ofconstruction is transferred to operating property, plant and equipment once thetrial period has ended, from which time it starts to be depreciated.

The costs of expansion, modernisation or improvementsleading to increased productivity, capacity or efficiency or to a lengtheningof the useful lives of the assets are capitalised.

Replacements or renewals of complete items that leadto a lengthening of the useful life of the assets or to an increase in theireconomic capacity are recorded as additions to property, plant and equipment,and the items replaced or renewed are derecognised.

Periodic maintenance, upkeep and repair expenses arerecognised in the income statement on an accrual basis as incurred.

The joint property entities whose ownership is sharedby the Company and other owners of indivisible assets are recorded on the basisof the percentage of ownership of the assets.

Based on the results of the impairment test describedin Note 3-e, the Company’s directors consider that the carrying amount ofthe assets does not exceed their recoverable amount.

F-20

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Theproperty, plant and equipment, less, where appropriate, their residual value,are depreciated on a straight-line basis over the years of estimated usefullife of the assets, which constitute the period over which the companies expectto use them:

| ** **                                 | ** ** | **Years of Estimated Useful Life** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------|------------|
| Generating facilities:                     |       |                                                   |       |   |   |
| Hydroelectric power plants                 |       |                                                   | 35-65      |   |   |
| Coal-fired / fuel-oil power plants         |       |                                                   | 25-40      |   |   |
| Nuclear power plants                       |       |                                                   | 40         |   |   |
| Combined cycle plants                      |       |                                                   | 10-25      |   |   |
| Renewable energy plants                    |       |                                                   | 25-55      |   |   |
| Transmission and distribution  facilities: |       |                                                   |       |   |   |
| High-voltage network                       |       |                                                   | 20-40      |   |   |
| Low- and medium-voltage network            |       |                                                   | 20-40      |   |   |
| Measuring and remote control equipment     |       |                                                   | 10-35      |   |   |
| Other facilities                           |       |                                                   | 4-25       |   |   |

 

**b) Investmentproperty**

The companies measure investment property at acquisitioncost less any accumulated depreciation and any accumulated impairment losses.

The market value of the Group’s investment property isdisclosed in Note 6 to the accompanying consolidated financial statements. Thismarket value is calculated on the basis of appraisals undertaken byprofessional valuers.

Investment property isdepreciated on a straight-line basis over the years of useful life of therelated assets.

**c) Goodwill**

Goodwill arising on consolidation represents theexcess of the cost of acquisition over the Group’s interest in the fair valueof the identifiable assets and liabilities of a subsidiary at the date ofacquisition.

The assets and liabilities acquired are measuredprovisionally at the date on which control acquired, and the resulting value isreviewed in a maximum period of one year from the date of acquisition. Untilthe fair value of the assets and liabilities has been definitively determined,the difference between the cost of acquisition and the carrying amount of thecompany acquired is recognised provisionally as goodwill.

Goodwill is treated as an asset of the acquiredcompany and, therefore, in the case of a subsidiary with a functional currencyother than the euro, it is measured in the functional currency of thatsubsidiary and is translated to euros at the exchange rate prevailing at thedate of the balance sheet.

Goodwill acquired on orafter 1 January 2004, is measured at acquisition cost and that acquiredearlier is recognised at the carrying amount at 31 December 2003, inaccordance with Spanish GAAP. In both cases, since 1 January 2004,goodwill has not been amortised, and at the end of each reporting periodgoodwill is reviewed for impairment (i.e. a reduction in its recoverable amountto below its carrying amount) and any impairment is written down (see Note 3-e).

**d) Intangibleassets**

Intangible assets are measured initially atacquisition or production cost and are subsequently measured at cost less anyaccumulated amortisation and any accumulated impairment losses. Intangibleassets are generally amortised over five years.

F-21

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The criteria used to recognise the impairment losseson these assets and, where applicable, the recovery of impairment lossesrecognised in prior years are described in Note 3-e.

The Group recognises CO2 emission allowances as non-amortisableintangible assets. The allowances received for no consideration under therelated national assignment plans are measured at the market price prevailingwhen they are received, and an item of deferred income is recognised for thesame amount.

In 2005 Endesa received for no consideration emissionallowances equal to 46.1 million tonnes of CO2 under the national assignment plans approvedin Spain, France and Poland. These plans also provide for the assignment freeof charge of emission allowances in 2006 and 2007 for an amount equal to 42.8million tonnes and 41.3 million tonnes, respectively. Emission allowances werenot assigned to Endesa Italia S.p.A. because the Italian national emissionallowance assignment plan has not yet been approved. In 2005 the Endesa Groupconsumed 66.8 million tonnes of emission allowances, which include 12.6 milliontonnes relating to Endesa Italia S.p.A.. The accounting treatment applied isdisclosed in Notes 3-j and 3-k.

The hydroelectric power plants and mines are operatedunder the temporary administrative concession system. However, the valuerecognised for these concessions is not material since, in most cases, it wasnot necessary to make significant disbursements to obtain them.

The Group recognisesexpenditure on research activities as an expense in the consolidated incomestatement. The research expenditure charged to the consolidated incomestatement in 2005 and 2004 amounted to EUR 42 million and EUR 24 million,respectively.

**e) Asset impairment**

At each balance sheet date, or whenever it isconsidered necessary, the Group reviews the carrying amounts of its assets todetermine whether there is any indication that those assets have suffered animpairment loss. If any such indication exists, the recoverable amount of theasset is estimated in order to determine the extent of the impairment loss (ifany). Where the identifiable asset itself does not generate cash flows that areindependent from other assets, the Group estimates the recoverable amount ofthe cash-generating unit to which the asset belongs.

In the case of cash-generating units to which goodwillor intangible assets with indefinite useful lives have been allocated, therecoverability analysis is performed systematically at the end of each year orwhenever it is considered necessary to perform such an analysis.

Recoverable amount is the higher of fair value lesscosts to sell and value in use. Value in use is taken to be the present valueof the estimated future cash flows. In calculating the recoverable amount ofproperty, plant and equipment and goodwill, the Group used the value in useapproach in practically all cases.

In assessing value in use, the Group prepares theprojections of future pre-tax cash flows on the basis of the budgets mostrecently approved by the Company’s directors. These budgets include the bestavailable estimates of the income and costs of the cash-generating units usingindustry projections, past experience and future expectations.

These projections cover the coming five years and theflows for future years are estimated by applying reasonable growth rates thatin no case are increasing or exceed the growth rates of prior years.

These flows are discounted at a given pre-tax rate inorder to calculate their present value. This rate reflects the cost of capitalof the business and the geographical area in which it is carried on. In orderto calculate it, the current time value of money and the risk premiumsgenerally used by analysts for the business and the geographical area are takeninto account.

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If the recoverable amount of an asset is less than itscarrying amount, an impairment loss is recognised for the difference with acharge to the heading “Depreciation and Amortisation Charge” in the consolidatedincome statement.

Impairment lossesrecognised for an asset in prior years are reversed when there is a change inthe estimates concerning the recoverable amount of the asset, increasing thecarrying amount of the asset with a credit to income, but so that the increasedcarrying amount does not exceed the carrying amount that would have beendetermined had no impairment loss been recognised. Impairment losses ongoodwill are not reversible.

**f) Financialinstruments**

**Financial assets**

The Groupclassifies its non-current and current financial assets, excluding investmentsaccounted for using the equity method (see Note 9) and assets classified asheld for sale, in four categories:

·       Loansand receivables:   these items are measured at amortised cost, which isbasically the amount of cash delivered, minus principal repayments, plus theaccrued interest receivable, in the case of loans, and at the present value ofthe consideration paid, in the case of receivables.

·       Held-to-maturityinvestments:   investments that the Endesa Group has the intention andability to hold to the date of maturity, which are also measured at amortisedcost.

·       Financialassets at fair value through profit or loss:   these include theheld-for-trading financial assets and financial assets that are managed andassessed at fair value. They are recognised in the consolidated balance sheetat fair value and the changes in fair value are recognised in the consolidatedincome statement. At 31 December 2005, there were no assets of thisnature.

·       Available-for-salefinancial assets:   these are the other financial assets that do not fallinto any of the aforementioned three categories, which relate substantially infull to equity investments (see Note 10). These assets are recognised inthe consolidated balance sheet at fair value when fair value can be determinedreliably. Since it is usually not possible to determine reliably the fair valueof investments in companies that are not publicly listed, when this is thecase, such investments are measured at acquisition cost or at a lower amount ifthere is evidence of impairment. Changes in fair value, net of the related taxeffect, are recognised with a charge or credit, as appropriate, to Equity—UnrealisedAsset and Liability Revaluation Reserve (see Note 13), until these assets aredisposed of, at which time the cumulative balance of this account relating tothose assets is recognised in full in the consolidated income statement. Iffair value is lower than acquisition cost, the difference is recogniseddirectly in the consolidated income statement.

Purchases and sales offinancial assets instrumented in conventional contracts are recognised usingthe trade date method.

In 2004 the Group did notadopt IAS 32/39 for the financial instruments and hedge accounting, and insteadapplied Endesa’s Previous GAAP, the Spanish GAAP. According to such GAAP, theseinvestments were recorded at lower of cost or market value.

*Financialliabilities*

Financial liabilities are generally recognised at theamount received, net of the transaction costs incurred. In subsequent periods,these obligations are measured at amortised cost using the effective interestmethod.

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When the liabilities are the underlying of a fairvalue hedge, as an exception, they are measured at fair value for the hedgedrisk.

In 2004 the Group did notadopt IAS 32/39 for the financial instruments and hedge accounting, insteadapplied Endesa’s Previous GAAP, the Spanish GAAP. According to such GAAP, thefinancial liabilities are recorded at reimbursement value. The differencebetween this value and the received amount is recorded under the caption “OtherAssets” on the attached Balance Sheet and are attributed to the consolidatedincome statement following a financial criteria.

*Derivativefinancial instruments and hedge accounting*

The derivatives held by the Group relate mainly tointerest rate, foreign exchange or electricity or fuel price or supply hedges,the purpose of which is to eliminate or significantly reduce these risks in theunderlying hedged transactions.

Derivatives areinitially recognised at acquisition cost in the consolidated balance sheet andthe required value adjustments are subsequently made to reflect their fairvalue at all times. They are recorded under the heading “Non-Current FinancialAssets” in the consolidated balance sheet if they are positive and under theheading “Bank Borrowings and Other Financial Liabilities” in the consolidatedbalance sheet if they are negative. Gains and losses from these changes arerecognised in the consolidated income statement, unless the derivative has beendesignated as a hedge which is highly effective, in which case it is recognisedas follows:

·       Fairvalue hedges:   the hedged item and the hedge are both measured at fairvalue, and changes in these fair values are recognised in the consolidatedincome statement, netting off the effects under the same heading in theconsolidated income statement.

·       Cashflow hedges:   changes in the fair value of the derivatives, in respect ofthe effective portion of the hedges, under Equity—Unrealised Asset andLiability Revaluation Reserve (see Note 13). The cumulative gain or lossrecognised in this account is transferred to the consolidated income statementto the extent that the underlying has an impact on the consolidated incomestatement in relation to the hedged risk, netting off the effects under thesame heading in the consolidated income statement.

·       Hedgesof a net investment in a foreign operation:   changes in fair value arerecognised, in respect of the effective portion of these hedges, net of therelated tax effect, as Translation Differences in equity (see Note 13), and aretransferred to the consolidated income statement when the hedged investment isdisposed of.

Derivatives embedded in other financial instrumentsare treated as separate derivatives when their risks and characteristics arenot closely related to those of the host contracts and the host contracts arenot carried at fair value with unrealised gains or losses reported in theconsolidated income statement.

The fair value ofthe derivative financial instruments is calculated as follows:

·       Derivativesquoted on an organised market, at market price at year-end.

·       TheGroup measures derivatives not traded on an organised market by discounting theexpected cash flows based on conditions at the end of each year.

In 2004 the Group did notadopt IAS 32/39 for the financial instruments and hedge accounting, and insteadapplied Endesa’s Previous GAAP, the Spanish GAAP. Following this GAAP, thederivates are recorded at acquisition cost and are attributed to theconsolidated income statement following a financial criteria. If the derivativehas not been designated as a hedge, the acquisition costs are compared to themarket value and in case of a loss, such amount is recognized in the incomestatement.

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**g) Investmentsaccounted for using the equity method**

Investments in companies over which the Group hasjoint control with another company or over which it has a significant influenceare accounted for using the equity method. In general, significant influence ispresumed to exist when the Group has an ownership interest of over 20%.

The equity method consists of recognising theinvestment in the consolidated balance sheet at the Group’s share of net assetsof the investee, adjusted, if appropriate, by the effect of transactions withthe Group, plus the unrealised gains relating to the goodwill paid onacquisition of the company.

If the resulting amount were negative, the investmentshould be presented in the Group’s consolidated balance sheet with a zerovalue, unless the Group is obliged to restore the company’s equity position, inwhich case the related provision for contingencies and expenses is recognised.

Dividends received fromthese companies are deducted from the value of the investment, and the resultsof these companies that correspond to Endesa on the basis of its percentage ofownership are recognised, net of the related tax effect, under the heading “Resultof Companies Accounted for Using the Equity Method” in the consolidated incomestatement.

**h) Inventories**

Inventories are stated at the lower of weightedaverage acquisition cost and net realisable value. The Group capitalisesfinance costs to inventories with a turnover of over one year, which relatemainly to nuclear fuel.

The cost of nuclear fuelconsumed is recognised in the consolidated income statement on the basis of theamount burned during the year.

**i) Non-currentassets classified as held for sale**

The Group classifies as non-current assets held forsale, property, plant and equipment, intangible assets or investments under theheading “Investments Accounted for Using the Equity Method” for which at thedate of the consolidated balance sheet active measures had been initiated tosell them and the sale is expected to have been completed within 12 months fromthat date.

These assets are measured at the lower of carryingamount and fair value less costs to sell.

At 31 December 2005,the only asset in this category was the investment in NQF Gas SGPS, S.A. (“NQFGas”) (see Note 9). At 31 December 2004, there were no assets in this category.

**j) Deferred income**

The Group receives legally established compensationfor the amounts paid for the construction or acquisition of certain facilitiesor, in some cases, is assigned the facilities directly in accordance withcurrent legislation.

These amounts are recorded as deferred income on theliability side of the consolidated balance sheet and are recognised in theconsolidated income statement under the heading “Other Operating Income” overthe years of useful life of the asset, thereby offsetting the relateddepreciation charge.

In the case of the assignment of facilities, both theasset and the deferred income are recognised at the fair value of the asset onthe date of the assignment.

The same treatment is given to the CO2 emission allowances receivedfor no consideration under the framework of the national emission allowanceassignment plan approved by each country.

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These allowances areinitially recognised as an intangible asset and an item of deferred income attheir market value when the allowances are received, and are allocated to theheading “Other Operating Income” in the consolidated income statement to the extentthat the CO2 emissionscovered by them are made.

**k) Provisions**

The present obligations at the balance sheet datearising from past events which could give rise to a loss for the Group which isuncertain as to its amount and timing are recognised as provisions in theconsolidated balance sheet at the present value of the most probable amountthat it is considered the Group will have to disburse to settle the obligation.

Provisions are quantified on the basis of the bestinformation available at the date of preparation of the consolidated financialstatements on the consequences of the event giving rise to them and arereviewed and adjusted at the end of each year.

The obligations reflectedin the consolidated balance sheet in respect of provisions for pensions andsimilar obligations and for labour force restructuring plans arise as a resultof collective or individual agreements with the Group’s employees which providefor the Company’s obligation to supplement the public social security systembenefits in the event of retirement, permanent disability, death or terminationof the employment relationship as a result of an agreement between the parties(see Note 15).

*Provisions forpensions and similar obligations*

Most of the Group companies have pension obligationsto their employees, on the basis of the Group company at which they arose.These obligations, which combine defined benefits and defined contributions,are basically formalised in pension plans or insurance policies.

The companies recognise the expenditure relating tothese obligations on an accrual basis over the working life of the employees byperforming the appropriate actuarial studies.

The actuarial losses and gains arising in themeasurement of these liabilities and those arising from changes in the fairvalue of the plan assets are recognised directly under the heading “Equity—RetainedEarnings” (see Note 13). This accounting policy was made possible by theamendment of IAS 19 published in the Official Journal of the EuropeanCommunities on 24 November 2005, and Endesa decided to use this method inthese consolidated financial statements.

The amount of the netactuarial liabilities accrued at year-end is recorded under Long-TermProvisions on the liability side of the accompanying consolidated balancesheet.

*Provisions forlabour force restructuring plans*

The Group recognises termination benefits when thereis an individual or collective agreement with the employees or a genuineexpectation that such an agreement will be reached that will enable theemployees, unilaterally or by mutual agreement with the company, to ceaseworking for the Group in exchange for a termination benefit. If a mutualagreement is required, a provision is only recorded in situations in which theGroup considers that it will give its consent to the termination of theemployees. In all cases in which these provisions are recognised the employeeshave an expectation that these early retirements will take place.

The Group has labour force reduction plans inprogress, mainly in Spain, under the related collective redundancy proceduresapproved by the government, which guarantee that benefits will be receivedthroughout the pre-retirement period.

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The Endesa Grouprecognises the full amount of the expenditure relating to these plans when theobligation arises by performing the appropriate actuarial studies to calculatethe present actuarial obligation at year-end. The actuarial gains and lossesdisclosed each year are recognised in the consolidated income statement forthat year.

*Provision for CO*2 emission allowance costs

From 2005 onwards the European Group companies thatmake CO2 emissionsin their electricity generation activity must deliver in the first few monthsof the subsequent year CO2 emission allowances equal to the volume ofemissions made during the year.

The obligation to deliver emission allowances for theCO2 emissions made during the year is recognisedas a short-term provision under the heading “Current Trade and Other Payables”in the consolidated balance sheet, and the related cost was recorded as OtherVariable Procurements and Services in the consolidated income statement. Thisobligation is measured at the same amount as that at which the CO2 emission allowances to be delivered to coverthis obligation are recognised under Intangible Assets in the consolidatedbalance sheet (see Notes 3-d and 3-j).

If at the consolidated balance sheet date the Groupdoes not hold all the CO2 emission allowances required to cover theemissions made, the cost and the provision for this portion is recognised onthe basis of the best estimate of the price that the Group will have to pay toacquire them. When a more appropriate estimate does not exist, the estimatedacquisition price for the allowances not held by the Group is the market priceat the date of the consolidated balance sheet.

At 31 December 2005,the provision included in the consolidated balance sheet in respect of theemissions made by the Group in 2005 amounted to EUR 579 million. Of thisamount, EUR 370 million will be covered by the emission allowances received inthe related national assignment plans and EUR 157 million will becovered by the allowances acquired during the year. The remainingEUR 52 million relate to allowances not yet acquired at 31 December 2005.

**l) Translation offoreign currency balances**

Transactions in currencies other than the functionalcurrency of each company are recorded in the functional currency of the Group(euros) by applying the exchange rates prevailing at the date of the transaction.During the year, the differences that arise between the balances translated atthe exchange rate prevailing at the date of the transaction and the balancestranslated at the exchange rate prevailing at the date of collection or paymentare recorded as finance costs or finance income in the consolidated incomestatement.

Also, balances receivable or payable at 31 December eachyear, denominated in currencies other than the functional currencies in whichthe financial statements of the consolidated companies are denominated, aretranslated to euros at the year-end exchange rates. The resulting translationdifferences are recognised as finance costs or finance income in theconsolidated income statement.

Since 1 January 2004,the Group’s policy has been to hedge a portion of the income of the LatinAmerican companies that are directly linked to the performance of the US dollarthrough the obtainment of financing in US dollars. Since these transactionsconstitute cash flow hedges, the exchange differences arising on the debt in USdollars are recorded, net of the related tax effect, to the heading “Equity—UnrealisedAsset and Liability Revaluation Reserve” (see Note 13) and are allocated to theconsolidated income statement over the period in which the hedged cash flowswill arise, which has been estimated to be ten years.

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**m) Classificationof balances as current and non-current**

In the accompanying consolidated balance sheet,balances maturing within 12 months are classified as current and those maturingwithin more than 12 months as non-current.

Loans maturing at shortterm but whose long-term refinancing is assured at the Company’s discretionthrough long-term credit facilities are classified as non-current liabilities.At 31 December 2004 and 2005, these balances amounted to EUR 2,069 millionand EUR 2,740 million, respectively.

**n) Income tax**

Income tax is recognised in the consolidated income orin equity accounts in the consolidated balance sheet depending on where theprofits or losses giving rise to it have been recognised. Differences betweenthe carrying amount of the assets and liabilities and their tax bases give riseto deferred tax assets and liabilities, which are measured at the tax ratesthat are expected to apply in the period when the asset is realised or theliability is settled.

Changes in the year in the deferred tax assets andliabilities that do not arise from business combinations are recognised in theconsolidated income statement or directly in equity accounts in theconsolidated balance sheet, as appropriate.

Deferred tax assets and liabilities arising frombusiness combinations which are not recognised on the acquisition of thecontrolling interest because their recovery is not assured are recognised byreducing, where appropriate, the carrying amount of goodwill recognised whenthe business combination was accounted for or, if no such goodwill exists,using the general method.

Deferred tax assets are only recognised to the extentthat it is expected that there will be sufficient taxable profits against whichthe tax assets for temporary differences can be utilised.

Tax credits arising fromeconomic events occurring in the year are deducted from the income tax expense,unless there are doubts as to whether they can be realised, in which case theyare not recognised until they have effectively been realised, or unless theyrelate to specific tax incentives, in which case they are recognised as grants.

**o) Recognition ofincome and expenses**

Revenues and expenses are recognised on an accrual basis.

Revenue is recognised when the gross inflow ofeconomic benefits arising in the course of the Group’s ordinary activities inthe year, provided that this inflow of economic benefits results in increasesin equity other than those relating to contributions from equity participantsand that these benefits can be measured reliably. Revenue is valued at the fairvalue of the consideration received or receivable arising therefrom.

Revenue associated with the rendering of services isonly recognised if it can be estimated reliably, by reference to the stage ofcompletion of the transaction at the balance sheet date.

The Group excludes from the revenue figure grossinflows of economic benefits received by it when it acts as an agent orcommission agent on behalf of third parties, and only recognises as revenueeconomic benefits received and receivable by it on its own account.

When goods or services are exchanged or swapped forgoods or services which are of a similar nature, the exchange is not regardedas a transaction which generates revenue.

The Group records for the net amount non-financialassets purchase or sale contracts settled for the net amount of cash or throughsome other financial instrument. Contracts entered into and maintained for 

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the purpose of receivingor delivering these non-financial assets are recognised on the basis of thecontractual terms of the purchase sale or usage requirements expected by theentity.

Interest income is accruedon a time proportion basis, by reference to the principal outstanding and theeffective interest rate applicable.

**p) Earnings pershare**

Basic earnings per share are calculated by dividingnet profit for the year attributable to the Parent by the weighted averagenumber of ordinary shares outstanding during the year, excluding the averagenumber of shares of the Parent held by the Group companies.

The Group did not performany transactions of any kind leading to diluted earnings per share other thanthe basic earnings per share.

**q) Dividends**

The interim dividend out of the 2004 profit ofEndesa S.A. approved by the Board of Directors on 28 October 2004,amounting to EUR 288 million, is presented as a deduction from theParent’s equity. The final dividend approved by the Annual General Meeting on27 May 2005 is deducted from the Parent’s equity.

The interim dividend outof the 2005 profit of Endesa S.A. approved by the Board of Directors on15 November 2005, amounting to EUR 323 million, is presented as adeduction from the Parent’s equity. However, the final dividend proposed by theBoard of Directors of Endesa, S.A. to the shareholders at the Annual GeneralMeeting is not deducted from equity until is has been approved by the latter.

**r) Consolidatedcash flow statements**

The following termsare used in the consolidated cash flow statements with the meanings specified:

·       Cashflows:   inflows and outflows of cash and cash equivalents, which areinvestments with a term of less than three months, which are highly liquid andsubject to an insignificant risk of changes in value.

·       Operatingactivities:   the principal revenue-producing activities of the Group andother activities that are not investing or financing activities.

·       Investingactivities:   the acquisition and disposal of long-term assets and otherinvestments not included in cash and cash equivalents.

·       Financing activities:   activitiesthat result in changes in the size and composition of equity and borrowings.

***4.****                 Industryregulation and functioning of the electricity system*

**a) Spain:**

*General issues*

The electricityindustry in Spain is basically regulated in Electricity Industry Law 54/1997,of 27 November. The main features of this Law and subsequent implementingregulations are as follows:

·       Electricityis generated on a free-market basis, based on a system of offers tendered bythe producers and a system of bids submitted by consumers eligible to choosetheir power supply source (“eligible consumers”) and by the distributors andretailers.

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·       Thesystem’s economic and technical management, transmission and distributioncontinue to be regulated activities, and their remuneration is established bylaw in an official list of tariffs applicable throughout Spain.

·       Since1 January 2003, all consumers of electricity have been eligible customersand, therefore, they can freely choose whether to acquire their power under theregulated tariff or to buy it in the liberalised market, either directly orthrough a retailer.

·       TheElectricity Industry Law recognises the existence of certain costs relating tothe transition to a competitive market for the utilities owning the electricityproduction facilities that at 31 December 1997, were included in thescope of application of Royal Decree 1538/1987, of 11 December, on thedetermination of the electricity tariff for the electricity service managementcompanies (see Note 25).

Article 12 of the Electricity Industry Lawestablishes that the activities involved in the supply of electricity carriedon in the Balearic and Canary Islands and Ceuta and Melilla will be subject tospecific regulations which will address the special nature of theirgeographical location. In this regard, on 19 December 2003, RoyalDecree 1747/2003 was passed. This Royal Decree, which came into force on1 January 2004, regulates the island and nonmainland electricitysystems.

This Royal Decreeestablished compensation payments to cover the costs incurred and the return onthe capital invested in order to be able to operate in these areas. Theregulations to implement this Royal Decree and establish the methodology forcalculating these compensation payments have not yet been passed.

*Nonmainlandcompensation payments*

In 2002 the government recognised an account payableto Endesa for the excess costs relating to the nonmainland systems for 2001 and2002 amounting to EUR 133 million. This amount will be recovered through thetotal electricity system income until 2010, and the collection right can besecuritised. The balances receivable in this connection recorded on the assetside of the consolidated balance sheets at 31 December 2005 and 2004,amount to EUR 86 million and EUR 103 million, respectively (see Note 10).

Also, in 2005 and 2004 the Group’s directors made aestimate of the additional income that could arise from applying Royal Decree1747/2003, and recorded additional income of EUR 389 million and EUR 122million in this connection in 2005 and 2004, respectively, which is recorded onthe asset side of the accompanying consolidated balance sheet (see Note 10).The estimate at 31 December 2005, was made on the basis of thequantification by the Spanish National Energy Commission (“CNE”) in its reporton Royal Decree 1556/2005 approving the electricity tariff for 2006. In itsreport, CNE makes reference to the report previously sent by it to the Ministryof Industry, Tourism and Trade in relation to the draft Ministerial Orders thathad previously been sent to it for its mandatory report. The criteria adoptedin the CNE report are more restrictive than those used in the draft MinisterialOrders and, therefore, the figure recorded is lower than that that would bederived from the Orders. Of the total amount recorded, in 2005 EUR 203 millionrelated to the estimate of the income revision for 2001-2004 and EUR 9million relate to interest.

The Group’s directors considerthat the definitive amounts for 2005 and 2004 will under no circumstances belower than the amounts recorded.

*Electricity tariff*

The electricity tariffs are set on the basis of themethodology established for the period from 1 January 2003 to 31 December 2010,by Royal Decree 1432/2002, of 31 December.

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The aforementioned Royal Decree initially limited theannual change in the average tariff to a maximum of 1.40%. An increase or areduction of up to 0.60% was provided for as a result of the revision of theforecasts made in calculating the tariff for the two previous years in relationto certain variables, provided that they exceed certain limits, namely endconsumer demand (1%), the legal interest rate for money (50 basis points), thesurplus costs of the special regime premiums (5%) and the price of gas (5%).

The tariff setting methodology contained in RoyalDecree 1432/2002 establishes, among the costs that must be taken into accountin calculating the average or reference tariff, the amount required toguarantee the full recovery of the balance of the costs of transition tocompetition (“CTCs”) before 31 December 2010. However, it wasestablished that, if by applying a straight-line CTC recovery assumption itwere observed that the balance of CTCs receivable at 31 December 2010, wasnot zero, when calculating the average or reference tariff the government wouldapply an increase equal to 1.40%.

Also, in calculating theaverage or reference electricity tariff, the government can take into accountthe costs derived from changes in the legislation regulating the remunerationof the electricity activities. As a result, Royal Decree 1556/2005 approvingthe electricity tariff for 2006 established an average increase in theelectricity tariff of 4.48%.

*Financing of theshortfall in income from regulated activities*

Under Royal Decree-Law 5/2005, of 11 March, if theregulated income of the electricity system is not sufficient to cover the costsof the regulated activities, this shortfall must be financed by the utilitiesindicated in the Royal Decree-Law on the basis of the percentages establishedtherein. The Group’s Parent, Endesa, must finance 44.16% of the shortfall inincome from regulated activities.

In 2005 the estimated shortfall in income fromregulated activities amounted to EUR 3,580 million, of which Endesa mustfinance EUR 1,581 million.

Under Article 1 of Royal Decree 1556/2005, of 23December, establishing the electricity tariff for 2006, on 1 July 2006,after the necessary measures have been taken and the appropriate reports havebeen prepared, the government, by Royal Decree, will approve or modify theaverage or reference tariff, and will review the costs derived from theactivities required to supply electricity, the ongoing system costs and the diversificationand security of supply costs, including the reimbursement, out of the proceedsfrom sales under the tariff system in subsequent years, of the negativebalances resulting from the settlements made, based on the methodology inforce, by the Spanish National Energy Commission, relating to the tariff for2005, to each of the electric utilities included in section l.9 of Schedule lof Royal Decree 2017/1997, of 26 December, in respect of the amounts actuallycontributed by each utility, including the related accrued interest.

The heading “Non-Current Financial Assets” on theasset side of the accompanying consolidated balance sheet includes thefinancial assets derived from this financing provided by the Company amountingto EUR 1,581 million (see Note 10).

The recovery of thefinancing of the shortfall in income from regulated activities and thenonmainland compensation payments considered as a right to cash that has beenrecognized by the Spanish Government and in no case depends on the future salesof the Group.

*CO*2 emission allowances

Also, Royal Decree1866/2004 regulating Spanish National CO2 Emission Allowances Plan for 2005-2007was approved in 2004. In accordance with this legislation, ENDESA must haveallowances for CO2 emissions made on or after 1 January 2005.Royal Decree 60/2005 approved the assignment for no consideration of individualemission allowances for each facility for 2005-2007. ENDESA was assigned 

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emissionallowances for the emission of 120.1 million tonnes of CO2 in that period. If the emissions made exceedthe volume of allowances assigned, it will be necessary to acquire emissionrights in the market.

*Radioactive wastemanagement*

Royal Decree-Law 5/2005 and Law 24/2005 on reforms toincrease productivity amended the Electricity Industry Law, among other things,to establish the obligation for the owners of the nuclear facilities to make afinancial contribution to Enresa for the costs relating to the management ofradioactive waste and fuel consumed at the nuclear power plants from 31 March 2005,and for their decommissioning and shut-down.Until 1 April 2005, the financing of these costs continued to be adiversification and security of supply cost covered by the electricity tariff.The financial contribution takes the form of a payment by the owners of thenuclear plants of a variable amount obtained by multiplying a unit value ineuro cents assigned to each facility by the kWh of power produced by thefacility.

Should production ceaseearly for reasons not attributable to the owner, any shortfall in the fundsreceived by Enresa will be treated as a diversification and security of supplycost. Otherwise, the owner must make good the shortfall within the three yearsfollowing the date on which production ceases.

**b) Europe:**

**Italy:**

**Marketliberalisation and tariffs**

Work is continuing on the liberalisation of theItalian energy market. Since 1 January 2005, the energy authorities,through “Delibera 253/04” and successive amendments, have authorised the activeparticipation of the demand side of the market, allowing wholesalers and largecustomers to purchase their power on the power exchange with hourly bids. UnderLaw 239, since 2004 all customers, except residential consumers, have beeneligible customers. The full liberalisation of the market has been set for 1 July 2007.

The power exchangeis articulated through the following markets:

·       Powermarket:   day-ahead market and balancing market with valuation of the bidsat the marginal system price.

·       Supplementaryservices market with valuation of pay-as-bid offers.

·       Capacitymarket, governed by remuneration criteria established by the authority.

In 2005 the System Managerconfirmed the remuneration mechanism for operators offering plant availabilityon days of critical consumption for the coverage of national demand (CapacityPayment), which comprises a fixed component and a variable component, based onthe remuneration envisaged for the operators if they had still operated in theregulated market.

Decree-Law 6/8/2004 established the amounts of costsof transition to competition to be received by the producers. This Decree-Lawrecognised the entitlement of the producers to receive a total ofEUR 850 million for that period, of which EUR 169 millioncorresponded to Endesa Italia, S.p.A. In December 2004 this mechanism wasapproved by the European Commission and on 23 June 2005, a Decree-Law waspublished that recognised Endesa Italia, S.p.A.’s entitlement to receive thatamount of costs of transition to competition of the generating facilities andestablished the schedule for collecting the recognised amounts, which will spanthe period from 2005 to 2009. The income received in this connection is beingrecognised in the income statement on the basis of the useful lives of theassets and, therefore, this remuneration was recognised. The consolidatedincome statement for 2005 includes income of EUR 33 million in thisrespect, and the accompanying consolidated balance sheet at 31 December 2005,includes EUR 120 million under the asset heading “Non-Current Financial Assets”in relation to the 

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outstanding balancereceivable (see Note 10) and EUR 136 million under the liability heading “DeferredIncome” in relation to the income not yet recognised in the consolidated incomestatement.

The Emission Trading System provided for in CommunityDirective 2003/87/EC has been operating in Italy since 1 January 2005. In December 2005the government approved the national emission allowance assignment plan. At 31 December 2005,this plan had not yet been approved by the European Union.

On 1 November 2005,the integration of the title to and the management of the Italian transmissionsystem (“GRTN”) was completed with the acquisition by Terna S.p.A. of thesystem programming, development and services activities of GRTN S.p.A. Since November GRTNhas been responsible for developing and providing incentives for renewableenergy and other activities of a public service nature.

**France:**

On 13 June 2005 the Energy Orientation Law wasapproved. This Law defines the energy objectives and policies in France androunds off the current legislation on demand management, renewable energies and electricitytransmission and distribution system quality. The Law establishes measures thatensure a sufficient level of investment in generating facilities and networksto guarantee the quality and security of supply of electricity.

The national CO2 allowance assignment plan was established for2005-2007 through Decree no. 2005-190, of 25 February 2005.The overall assignment for the emissions of Snet in this period is 6.8 milliontonnes of CO2.

**c) Latin America:**

The legislation of theLatin American countries in which the Group operates differs from one countryto another; however the main features are as follows:

**Generation:**

In general, they are liberalised markets in whichprivate-sector players take investment decisions freely based on theauthorities’ guidelines. The exception is Brazil, where the new generatingcapacity needs are identified by the Ministry, and the related investments aremade through a system of energy bids made by the players.

In all the countries thereis a centralised dispatching system based on variable production costs whichseek to optimise the available production resources. These variable costsdetermine the marginal generation price, except in Colombia, where dispatchingis based on bids tendered by the players.

**Distribution:**

In the five countries in which the Group operates, theselling price to customers is based on the price at which electricity ispurchased from producers plus a component associated with the aggregatedistribution price. Periodically, the regulator sets this price throughdistribution tariff revision processes. Accordingly, distribution is anessentially regulated activity.

In Argentina, Chile and Peru the purchase price forthe distributors is tied to a producer purchase price calculated by theregulator, which is revised periodically. In Brazil the purchase price is basedon the average prices in the bids for existing power and new power. However,the prices in the private contracts between companies that are still in forcewill remain unchanged during the term of the contracts. In Colombia thepurchase price is negotiated directly with the producers, but the price chargedto the end customer carries an efficiency surcharge for the distributors as awhole. In 2005 the Corta II Law was approved in Chile, which will permit apower purchase mechanism in power bidding arrangements.

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Eligiblecustomers:   the minimum supply thresholds at which electricity can befreely contracted in each country are as follows:

| **Country** | ** ** | ** ** | ** ** | **Minimum MW** | ** ** |
|-------------|------------|------------|------------|---------------------|------------|
| Argentina   |       |       | 0.03       |                |
| Brazil      |       |       | 3.0        |                |       |
| Chile       |       |       | 2.0        | (*)                 |       |
| Colombia    |       |       | 0.1        |                |       |
| Peru        |       |       | 1.0        |                |       |

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(*)          TheCorta Law envisages the reduction of the threshold for eligibility from 2 MW to0.5 MW from March 2006.

**Integration andconcentration limits:**

In general, the legislation in force defends freecompetition and defines criteria for preventing certain levels of economicconcentration and/or market practices from damaging this competition.

In principle, companies can engage in differentactivities (generation, distribution, retailing) provided that there is anappropriate degree of unbundling for both accounting and corporate purposes. Ifthis is permitted, it is in the transmission business in which the greatestrestrictions are generally imposed, due mainly to its nature and to the need toguarantee adequate access to all players. In Argentina and Colombia there arespecific restrictions on producers or distributors being majority stockholdersof transmission companies.

Additionally, in Colombia companies formed after 1994may not be vertically integrated. Producers may not have ownership interestsexceeding 25% in distributors, and vice versa. In Peru companies with a shareof over 5% in a given business require authorisation from the regulator toacquire a holding in a company operating in a different business. In Brazil theintegration of generation and distribution is limited to 30%.

As regards concentration in a specific business, inArgentina, Chile and Peru there are no specific restrictions on ownershippercentages. The law only safeguards competition, and prohibits acts involvingunfair trading or abuse of dominant position in the market. The legislation inforce establishes that the regulator must authorise consolidations or mergersbetween players in the same business segment.

In Brazil there are limits on concentration for bothgeneration and distribution, and at both national and electricity subsystemlevel. At national level concentration is confined to 20% for both generation anddistribution; at electricity subsystem level the limits are 35% in the Northand North East subsystems, and 25% in the South-South East and Central-Westsubsystems. The legislation currently in force requires the legal unbundling ofthe various electricity activities, making deverticalisation of the electricitydistribution companies compulsory and, accordingly, these companies cannotcarry on other electricity activities (generation, transmission and retailingto eligible customers), or own direct or indirect investments in the sharecapital of other electricity business companies. Also, producers cannot ownequity interests in distribution companies.

In Colombia the maximumlimit for horizontal concentration in the generation, distribution and retailingactivities is 25%.

**System access:**

In all countries, access rights and the related fee oraccess price are regulated by the relevant authority.

F-34

----

***5.****                 Property,plant and equipment*

Thedetail of the balance of Property, Plant and Equipment at 31 December 2005and 2004, and of the changes therein in 2005 and 2004 is as follows:

| ** **                                   | ** ** | **31/12/05**          | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **Millions of Euros** | ** ** |
| **Operating  property, plant and equipment** | ** ** | ** **            | ** ** | **Cost** | ** ** | **Accumulated  Depreciation** | ** ** | **Carrying  Amount** | ** ** | **Property,  plant and  equipment in  the course of  construction** | ** ** | **Total  Property,  Plant and  Equipment** | ** ** |
| Land and  structures                         |       | 2,447                 |       |   | (1,075 | ) |   |   | 1,372 |   |   |   | 17 |   |   |   | 1,389 |   |   |
| Electricity  generating facilities:          |       | 35,576                |       |   | (19,238 | ) |   |   | 16,338 |   |   |   | 1,735 |   |   |   | 18,073 |   |   |
| Hydroelectric power plants                   |       | 11,841                |       |   | (5,232 | ) |   |   | 6,609 |   |   |   | 148 |   |   |   | 6,757 |   |   |
| Coal-fired/fuel-oil power plants             |       | 12,146                |       |   | (8,452 | ) |   |   | 3,694 |   |   |   | 564 |   |   |   | 4,258 |   |   |
| Nuclear power plants                         |       | 8,213                 |       |   | (5,031 | ) |   |   | 3,182 |   |   |   | 60 |   |   |   | 3,242 |   |   |
| Combined cycle plants                        |       | 2,629                 |       |   | (296 | ) |   |   | 2,333 |   |   |   | 609 |   |   |   | 2,942 |   |   |
| Renewable energy plants                      |       | 747                   |       |   | (227 | ) |   |   | 520 |   |   |   | 354 |   |   |   | 874 |   |   |
| Transmission and  distribution facilities:   |       | 18,855                |       |   | (8,056 | ) |   |   | 10,799 |   |   |   | 1,459 |   |   |   | 12,258 |   |   |
| High-voltage                                 |       | 2,302                 |       |   | (858 | ) |   |   | 1,444 |   |   |   | 205 |   |   |   | 1,649 |   |   |
| Low- and medium-voltage                      |       | 14,568                |       |   | (6,103 | ) |   |   | 8,465 |   |   |   | 1,144 |   |   |   | 9,609 |   |   |
| Measuring and remote control equipment       |       | 1,626                 |       |   | (912 | ) |   |   | 714 |   |   |   | 54 |   |   |   | 768 |   |   |
| Other facilities                             |       | 359                   |       |   | (183 | ) |   |   | 176 |   |   |   | 56 |   |   |   | 232 |   |   |
| Other property,  plant and equipment         |       | 1,687                 |       |   | (1,186 | ) |   |   | 501 |   |   |   | 92 |   |   |   | 593 |   |   |
| **TOTAL**                                    | ** ** | **58,565**            | ** ** | ** ** | **(29,555** | **)** | ** ** | ** ** | **29,010** |   | ** ** | ** ** | **3,303** |   | ** ** | ** ** | **32,313** |   |   |
|                                              |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                   | ** ** | **31/12/04**          | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **Millions of Euros** | ** ** |
| **Operating  property, plant and equipment** | ** ** | ** **            | ** ** | **Cost** | ** ** | **Accumulated  Depreciation** | ** ** | **Carrying  Amount** | ** ** | **Property,  plant and  equipment in  the course of  construction** | ** ** | **Total  Property,  Plant and  Equipment** | ** ** |
| Land and  structures                         |       | 2,349                 |       |   | (1,017 | ) |   |   | 1,332 |   |   |   | 7 |   |   |   | 1,339 |   |   |
| Electricity  generating facilities:          |       | 33,191                |       |   | (17,879 | ) |   |   | 15,312 |   |   |   | 1,311 |   |   |   | 16,623 |   |   |
| Hydroelectric power plants                   |       | 10,628                |       |   | (4,523 | ) |   |   | 6,105 |   |   |   | 134 |   |   |   | 6,239 |   |   |
| Coal-fired/fuel-oil power plants             |       | 11,829                |       |   | (8,127 | ) |   |   | 3,702 |   |   |   | 238 |   |   |   | 3,940 |   |   |
| Nuclear power plants                         |       | 8,130                 |       |   | (4,890 | ) |   |   | 3,240 |   |   |   | 58 |   |   |   | 3,298 |   |   |
| Combined cycle plants                        |       | 2,011                 |       |   | (180 | ) |   |   | 1,831 |   |   |   | 669 |   |   |   | 2,500 |   |   |
| Renewable energy plants                      |       | 593                   |       |   | (159 | ) |   |   | 434 |   |   |   | 212 |   |   |   | 646 |   |   |
| Transmission and  distribution facilities:   |       | 16,648                |       |   | (7,128 | ) |   |   | 9,520 |   |   |   | 882 |   |   |   | 10,402 |   |   |
| High-voltage                                 |       | 1,631                 |       |   | (586 | ) |   |   | 1,045 |   |   |   | 162 |   |   |   | 1,207 |   |   |
| Low- and medium-voltage                      |       | 13,328                |       |   | (5,374 | ) |   |   | 7,954 |   |   |   | 627 |   |   |   | 8,581 |   |   |
| Measuring and remote control equipment       |       | 1,358                 |       |   | (803 | ) |   |   | 555 |   |   |   | 43 |   |   |   | 598 |   |   |
| Other facilities                             |       | 331                   |       |   | (365 | ) |   |   | (34 | ) |   |   | 50 |   |   |   | 16 |   |   |
| Other property,  plant and equipment         |       | 1,614                 |       |   | (1,205 | ) |   |   | 409 |   |   |   | 137 |   |   |   | 546 |   |   |
| **TOTAL**                                    | ** ** | **53,802**            | ** ** | ** ** | **(27,229** | **)** | ** ** | ** ** | **26,573** |   | ** ** | ** ** | **2,337** |   | ** ** | ** ** | **28,910** |   |   |
|                                              |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-35

----

 

| ** **                                    | ** ** | **Millions of Euros** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| **Operating  property, plant  and equipment** | ** ** | ** **            | ** ** | **Balance  at  31/12/04** | ** ** | **Inclusion/  Exclusion of  Companies** | ** ** | **Additions** | ** ** | **Disposals** | ** ** | **Transfers  and Other** | ** ** | **Translation  Differences** | ** ** | **Balance  at  31/12/05** | ** ** |
| Land and structures                           |       |                  | 2,349      |   |   |   | — |   |   |   | 70 |   |   |   | (16 | ) |   |   | 3 |   |   |   | 41 |   |   |   | 2,447 |   |   |
| Electricity  generating facilities:           |       |                  | 33,191     |   |   |   | 98 |   |   |   | 233 |   |   |   | (190 | ) |   |   | 696 |   |   |   | 1,548 |   |   |   | 35,576 |   |   |
| Hydroelectric power plants                    |       |                  | 10,628     |   |   |   | — |   |   |   | 25 |   |   |   | (2 | ) |   |   | (97 | ) |   |   | 1,287 |   |   |   | 11,841 |   |   |
| Coal-fired/fuel-oil power  plants             |       |                  | 11,829     |   |   |   | (3 | ) |   |   | 95 |   |   |   | (166 | ) |   |   | 260 |   |   |   | 131 |   |   |   | 12,146 |   |   |
| Nuclear power plants                          |       |                  | 8,130      |   |   |   | — |   |   |   | 11 |   |   |   | (22 | ) |   |   | 94 |   |   |   | — |   |   |   | 8,213 |   |   |
| Combined cycle plants                         |       |                  | 2,011      |   |   |   | — |   |   |   | 63 |   |   |   | — |   |   |   | 425 |   |   |   | 130 |   |   |   | 2,629 |   |   |
| Renewable energy plants                       |       |                  | 593        |   |   |   | 101 |   |   |   | 39 |   |   |   | — |   |   |   | 14 |   |   |   | — |   |   |   | 747 |   |   |
| Transmission and  distribution facilities:    |       |                  | 16,648     |   |   |   | — |   |   |   | 10 |   |   |   | (53 | ) |   |   | 1,309 |   |   |   | 941 |   |   |   | 18,855 |   |   |
| High-voltage                                  |       |                  | 1,631      |   |   |   | — |   |   |   | 2 |   |   |   | (8 | ) |   |   | 358 |   |   |   | 319 |   |   |   | 2,302 |   |   |
| Low- and medium-voltage                       |       |                  | 13,328     |   |   |   | — |   |   |   | 5 |   |   |   | (28 | ) |   |   | 718 |   |   |   | 545 |   |   |   | 14,568 |   |   |
| Measuring and remote control equipment   |       |                  | 1,358      |   |   |   | — |   |   |   | 3 |   |   |   | (17 | ) |   |   | 222 |   |   |   | 60 |   |   |   | 1,626 |   |   |
| Other facilities                              |       |                  | 331        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 11 |   |   |   | 17 |   |   |   | 359 |   |   |
| Other property,  plant and equipment          |       |                  | 1,614      |   |   |   | (2 | ) |   |   | 29 |   |   |   | (46 | ) |   |   | 7 |   |   |   | 85 |   |   |   | 1,687 |   |   |
| **TOTAL**                                     | ** ** | ** **            | **53,802** |   | ** ** | ** ** | **96** |   | ** ** | ** ** | **342** |   | ** ** | ** ** | **(305** | **)** | ** ** | ** ** | **2,015** |   | ** ** | ** ** | **2,615** |   | ** ** | ** ** | **58,565** |   |   |
|                                               |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                                        | ** ** | **Millions of Euros** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|
| **Property,  plant and equipment  in the course of construction** | ** ** | ** **            | ** ** | **Balance  at  31/12/04** | ** ** | **Inclusion/  Exclusion of  Companies** | ** ** | **Additions** | ** ** | **Disposals** | ** ** | **Transfers  and Other** | ** ** | **Translation  Differences** | ** ** | **Balance  at  31/12/05** | ** ** |
| Land and  structures                                              |       |                  | 7          |   |   |   | — |   |   |   | 37 |   |   |   | — |   |   |   | (27 | ) |   |   | — |   |   |   | 17 |   |   |
| Electricity  generating facilities:                               |       |                  | 1,311      |   |   |   | 10 |   |   |   | 1,061 |   |   |   | (6 | ) |   |   | (652 | ) |   |   | 11 |   |   |   | 1,735 |   |   |
| Hydroelectric power plants                                        |       |                  | 134        |   |   |   | — |   |   |   | 65 |   |   |   | (4 | ) |   |   | (57 | ) |   |   | 10 |   |   |   | 148 |   |   |
| Coal-fired/fuel-oil power plants                                  |       |                  | 238        |   |   |   | (4 | ) |   |   | 413 |   |   |   | — |   |   |   | (84 | ) |   |   | 1 |   |   |   | 564 |   |   |
| Nuclear power plants                                              |       |                  | 58         |   |   |   | — |   |   |   | 72 |   |   |   | — |   |   |   | (70 | ) |   |   | — |   |   |   | 60 |   |   |
| Combined cycle plants                                             |       |                  | 669        |   |   |   | — |   |   |   | 375 |   |   |   | — |   |   |   | (435 | ) |   |   | — |   |   |   | 609 |   |   |
| Renewable energy plants                                           |       |                  | 212        |   |   |   | 14 |   |   |   | 136 |   |   |   | (2 | ) |   |   | (6 | ) |   |   | — |   |   |   | 354 |   |   |
| Transmission and  distribution facilities:                        |       |                  | 882        |   |   |   | — |   |   |   | 1,769 |   |   |   | — |   |   |   | (1,253 | ) |   |   | 61 |   |   |   | 1,459 |   |   |
| High-voltage                                                      |       |                  | 162        |   |   |   | — |   |   |   | 152 |   |   |   | — |   |   |   | (125 | ) |   |   | 16 |   |   |   | 205 |   |   |
| Low- and medium-voltage                                           |       |                  | 627        |   |   |   | — |   |   |   | 1,383 |   |   |   | — |   |   |   | (901 | ) |   |   | 35 |   |   |   | 1,144 |   |   |
| Measuring and remote control equipment                            |       |                  | 43         |   |   |   | — |   |   |   | 112 |   |   |   | — |   |   |   | (106 | ) |   |   | 5 |   |   |   | 54 |   |   |
| Other facilities                                                  |       |                  | 50         |   |   |   | — |   |   |   | 122 |   |   |   | — |   |   |   | (121 | ) |   |   | 5 |   |   |   | 56 |   |   |
| Other property,  plant and equipment                              |       |                  | 137        |   |   |   | — |   |   |   | 49 |   |   |   | — |   |   |   | (101 | ) |   |   | 7 |   |   |   | 92 |   |   |
| **TOTAL**                                                         | ** ** | ** **            | **2,337**  |   | ** ** | ** ** | **10** |   | ** ** | ** ** | **2,916** |   | ** ** | ** ** | **(6** | **)** | ** ** | ** ** | **(2,033** | **)** | ** ** | ** ** | **79** |   | ** ** | ** ** | **3,303** |   |   |
|                                                                   |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

F-36

----

| ** **                                 | ** ** | **Millions of Euros** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|
| **Accumulated depreciation**          | ** ** | ** **                      | ** ** | **Balance  at  31/12/04** | ** ** | **Inclusion/  Exclusion of  Companies** | ** ** | **Charge for  The Year(*)** | ** ** | **Disposals** | ** ** | **Transfers  and Other** | ** ** | **Translation  Differences** | ** ** | **Balance  at  31/12/05** | ** ** |
| Land and  structures                       |       | (1,017                          | )          |   | — |   |   |   | (58 | ) |   |   | 4 |   |   |   | — |   |   |   | (4 | ) |   | (1,075 | ) |
| Electricity  generating facilities:        |       | (17,879                         | )          |   | (6 | ) |   |   | (974 | ) |   |   | 167 |   |   |   | (3 | ) |   |   | (542 | ) |   | (19,238 | ) |
| Hydroelectric power plants                 |       | (4,523                          | )          |   | — |   |   |   | (273 | ) |   |   | 1 |   |   |   | 26 |   |   |   | (463 | ) |   | (5,232 | ) |
| Coal-fired/fuel-oil power plants           |       | (8,127                          | )          |   | 6 |   |   |   | (401 | ) |   |   | 155 |   |   |   | (26 | ) |   |   | (58 | ) |   | (8,452 | ) |
| Nuclear power plants                       |       | (4,890                          | )          |   | — |   |   |   | (152 | ) |   |   | 11 |   |   |   | — |   |   |   | — |   |   | (5,031 | ) |
| Combined cycle plants                      |       | (180                            | )          |   | — |   |   |   | (102 | ) |   |   | — |   |   |   | 7 |   |   |   | (21 | ) |   | (296 | ) |
| Renewable energy plants                    |       | (159                            | )          |   | (12 | ) |   |   | (46 | ) |   |   | — |   |   |   | (10 | ) |   |   | — |   |   | (227 | ) |
| Transmission and  distribution facilities: |       | (7,128                          | )          |   | — |   |   |   | (583 | ) |   |   | 37 |   |   |   | (33 | ) |   |   | (349 | ) |   | (8,056 | ) |
| High-voltage                               |       | (586                            | )          |   | — |   |   |   | (81 | ) |   |   | 5 |   |   |   | (85 | ) |   |   | (111 | ) |   | (858 | ) |
| Low- and medium-voltage                    |       | (5,374                          | )          |   | — |   |   |   | (404 | ) |   |   | 18 |   |   |   | (133 | ) |   |   | (210 | ) |   | (6,103 | ) |
| Measuring and remote control equipment     |       | (803                            | )          |   | — |   |   |   | (84 | ) |   |   | 14 |   |   |   | (22 | ) |   |   | (17 | ) |   | (912 | ) |
| Other facilities                           |       | (365                            | )          |   | — |   |   |   | (14 | ) |   |   | — |   |   |   | 207 |   |   |   | (11 | ) |   | (183 | ) |
| Other property,  plant and equipment       |       | (1,205                          | )          |   | 2 |   |   |   | (51 | ) |   |   | 39 |   |   |   | 56 |   |   |   | (28 | ) |   | (1,186 | ) |
| **TOTAL**                                  | ** ** | **(27,229**                     | **)**      | ** ** | **(4** | **)** | ** ** | ** ** | **(1,666** | **)** | ** ** | ** ** | **247** |   | ** ** | ** ** | **20** |   | ** ** | ** ** | **(923** | **)** | ** ** | **(29,555** | **)** |
|                                            |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(*)          Also,in 2005 impairment losses amounting to EUR 26 million were recognised.

| ** **                                         | ** ** | **Millions of Euros** | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|
| **Operating property,  plant  and equipment** | ** ** | ** **                      | ** ** | **Balance  at  01/01/04** | ** ** | **Inclusion/  Exclusion of  Companies** | ** ** | **Additions** | ** ** | **Disposals** | ** ** | **Transfers  and Other** | ** ** | **Translation  Differences** | ** ** | **Balance  at  31/12/04** | ** ** |
| Land and  structures                               |       |                            | 1,947      |   |   |   | 289 |   |   |   | 59 |   |   |   | (25 | ) |   |   | 66 |   |   |   | 13 |   |   |   | 2,349 |   |   |
| Electricity  generating facilities:                |       |                            | 30,538     |   |   |   | 1,557 |   |   |   | 302 |   |   |   | (311 | ) |   |   | 1,049 |   |   |   | 56 |   |   |   | 33,191 |   |   |
| Hydroelectric power plants                         |       |                            | 9,937      |   |   |   | — |   |   |   | 70 |   |   |   | (3 | ) |   |   | 547 |   |   |   | 77 |   |   |   | 10,628 |   |   |
| Coal-fired/fuel-oil power plants              |       |                            | 10,310     |   |   |   | 1,512 |   |   |   | 90 |   |   |   | (288 | ) |   |   | 212 |   |   |   | (7 | ) |   |   | 11,829 |   |   |
| Nuclear power plants                               |       |                            | 8,098      |   |   |   | — |   |   |   | 10 |   |   |   | (7 | ) |   |   | 29 |   |   |   | — |   |   |   | 8,130 |   |   |
| Combined cycle  plants                             |       |                            | 1,561      |   |   |   | — |   |   |   | 125 |   |   |   | (12 | ) |   |   | 352 |   |   |   | (15 | ) |   |   | 2,011 |   |   |
| Renewable energy plants                            |       |                            | 632        |   |   |   | 45 |   |   |   | 7 |   |   |   | (1 | ) |   |   | (91 | ) |   |   | 1 |   |   |   | 593 |   |   |
| Transmission and  distribution facilities:         |       |                            | 15,640     |   |   |   | — |   |   |   | 107 |   |   |   | (97 | ) |   |   | 973 |   |   |   | 25 |   |   |   | 16,648 |   |   |
| High-voltage                                       |       |                            | 1,503      |   |   |   | — |   |   |   | 72 |   |   |   | (11 | ) |   |   | 79 |   |   |   | (12 | ) |   |   | 1,631 |   |   |
| Low- and medium-voltage                            |       |                            | 12,562     |   |   |   | — |   |   |   | 32 |   |   |   | (81 | ) |   |   | 775 |   |   |   | 40 |   |   |   | 13,328 |   |   |
| Measuring and remote control equipment             |       |                            | 1,246      |   |   |   | — |   |   |   | 3 |   |   |   | (3 | ) |   |   | 115 |   |   |   | (3 | ) |   |   | 1,358 |   |   |
| Other facilities                                   |       |                            | 329        |   |   |   | — |   |   |   | — |   |   |   | (2 | ) |   |   | 4 |   |   |   | — |   |   |   | 331 |   |   |
| Other property,  plant and equipment               |       |                            | 1,507      |   |   |   | 11 |   |   |   | 29 |   |   |   | (21 | ) |   |   | 102 |   |   |   | (14 | ) |   |   | 1,614 |   |   |
| **TOTAL**                                          | ** ** | ** **                      | **49,632** |   | ** ** | ** ** | **1,857** |   | ** ** | ** ** | **497** |   | ** ** | ** ** | **(454** | **)** | ** ** | ** ** | **2,190** |   | ** ** | ** ** | **80** |   | ** ** | ** ** | **53,802** |   |   |
|                                                    |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-37

----

 

| ** **                                                                                 | ** ** | **Millions of Euros** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| **Property, plant and  equipment in the course  of construction** | ** ** | ** **                      | ** ** | **Balance  at  01/01/04** | ** ** | **Inclusion/  Exclusion of  Companies** | ** ** | **Additions** | ** ** | **Disposals** | ** ** | **Transfers  and Other** | ** ** | **Translation  Differences** | ** ** | **Balance  at  31/12/04** | ** ** |
| Land and structures                                                                        |       |                            | 15         |   |   |   | — |   |   |   | 24 |   |   |   | — |   |   |   | (32 | ) |   |   | — |   |   |   | 7 |   |   |
| Electricity generating  facilities:                                                        |       |                            | 1,689      |   |   |   | 30 |   |   |   | 761 |   |   |   | (5 | ) |   |   | (1,164 | ) |   |   | — |   |   |   | 1,311 |   |   |
| Hydroelectric power  plants                                                                |       |                            | 689        |   |   |   | — |   |   |   | 50 |   |   |   | (2 | ) |   |   | (604 | ) |   |   | 1 |   |   |   | 134 |   |   |
| Coal-fired/fuel-oil  power plants                                                     |       |                            | 131        |   |   |   | 26 |   |   |   | 204 |   |   |   | — |   |   |   | (121 | ) |   |   | (2 | ) |   |   | 238 |   |   |
| Nuclear power plants                                                                       |       |                            | 60         |   |   |   | — |   |   |   | 47 |   |   |   | — |   |   |   | (49 | ) |   |   | — |   |   |   | 58 |   |   |
| Combined cycle plants                                                                      |       |                            | 762        |   |   |   | — |   |   |   | 297 |   |   |   | (3 | ) |   |   | (388 | ) |   |   | 1 |   |   |   | 669 |   |   |
| Renewable energy plants                                                                    |       |                            | 47         |   |   |   | 4 |   |   |   | 163 |   |   |   | — |   |   |   | (2 | ) |   |   | — |   |   |   | 212 |   |   |
| Transmission and  distribution facilities:                                                 |       |                            | 679        |   |   |   | — |   |   |   | 1,211 |   |   |   | (1 | ) |   |   | (1,001 | ) |   |   | (6 | ) |   |   | 882 |   |   |
| High-voltage                                                                               |       |                            | 163        |   |   |   | — |   |   |   | 90 |   |   |   | — |   |   |   | (89 | ) |   |   | (2 | ) |   |   | 162 |   |   |
| Low- and medium-voltage                                                                    |       |                            | 431        |   |   |   | — |   |   |   | 957 |   |   |   | (1 | ) |   |   | (762 | ) |   |   | 2 |   |   |   | 627 |   |   |
| Measuring and remote  control equipment                                                    |       |                            | 35         |   |   |   | — |   |   |   | 107 |   |   |   | — |   |   |   | (99 | ) |   |   | — |   |   |   | 43 |   |   |
| Other facilities                                                                           |       |                            | 50         |   |   |   | — |   |   |   | 57 |   |   |   | — |   |   |   | (51 | ) |   |   | (6 | ) |   |   | 50 |   |   |
| Other property, plant  and equipment                                                       |       |                            | 78         |   |   |   | 3 |   |   |   | 80 |   |   |   | (2 | ) |   |   | (24 | ) |   |   | 2 |   |   |   | 137 |   |   |
| **TOTAL**                                                                                  | ** ** | ** **                      | **2,461**  |   | ** ** | ** ** | **33** |   | ** ** | ** ** | **2,076** |   | ** ** | ** ** | **(8** | **)** | ** ** | ** ** | **(2,221** | **)** | ** ** | ** ** | **(4** | **)** | ** ** | ** ** | **2,337** |   |   |
|                                                                                            |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                 | ** ** | **Millions of Euros** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|
| **Accumulated Depreciation**          | ** ** | ** **                      | ** ** | **Balance  at  01/01/04** | ** ** | **Inclusion/  Exclusion of  Companies** | ** ** | **Charge for  The Year** | ** ** | **Disposals** | ** ** | **Transfers  and Other** | ** ** | **Translation  Differences** | ** ** | **Balance  at  31/12/04** | ** ** |
| Land and  structures                       |       | (841                            | )          |   | (150 | ) |   |   | (47 | ) |   |   | 13 |   |   |   | (1 | ) |   |   | 9 |   |   | (1,017 | ) |
| Electricity  generating facilities:        |       | (16,431                         | )          |   | (866 | ) |   |   | (873 | ) |   |   | 264 |   |   |   | 25 |   |   |   | 2 |   |   | (17,879 | ) |
| Hydroelectric power plants                 |       | (4,310                          | )          |   | 3 |   |   |   | (215 | ) |   |   | 2 |   |   |   | 2 |   |   |   | (5 | ) |   | (4,523 | ) |
| Coal-fired/fuel-oil power plants           |       | (7,045                          | )          |   | (860 | ) |   |   | (400 | ) |   |   | 257 |   |   |   | (81 | ) |   |   | 2 |   |   | (8,127 | ) |
| Nuclear power plants                       |       | (4,743                          | )          |   | — |   |   |   | (151 | ) |   |   | 4 |   |   |   | — |   |   |   | — |   |   | (4,890 | ) |
| Combined cycle plants                      |       | (110                            | )          |   | 3 |   |   |   | (78 | ) |   |   | — |   |   |   | — |   |   |   | 5 |   |   | (180 | ) |
| Renewable energy plants                    |       | (223                            | )          |   | (12 | ) |   |   | (29 | ) |   |   | 1 |   |   |   | 104 |   |   |   | — |   |   | (159 | ) |
| Transmission and  distribution facilities: |       | (6,654                          | )          |   | — |   |   |   | (571 | ) |   |   | 78 |   |   |   | 29 |   |   |   | (10 | ) |   | (7,128 | ) |
| High-voltage                               |       | (530                            | )          |   | — |   |   |   | (67 | ) |   |   | 10 |   |   |   | — |   |   |   | 1 |   |   | (586 | ) |
| Low- and medium-voltage                    |       | (5,077                          | )          |   | — |   |   |   | (356 | ) |   |   | 41 |   |   |   | 21 |   |   |   | (3 | ) |   | (5,374 | ) |
| Measuring and remote control equipment     |       | (755                            | )          |   | — |   |   |   | (74 | ) |   |   | 23 |   |   |   | 1 |   |   |   | 2 |   |   | (803 | ) |
| Other facilities                           |       | (292                            | )          |   | — |   |   |   | (74 | ) |   |   | 4 |   |   |   | 7 |   |   |   | (10 | ) |   | (365 | ) |
| Other property,  plant and equipment       |       | (1,156                          | )          |   | (5 | ) |   |   | (45 | ) |   |   | 18 |   |   |   | (19 | ) |   |   | 2 |   |   | (1,205 | ) |
| **TOTAL**                                  | ** ** | **(25,082**                     | **)**      | ** ** | **(1,021** | **)** | ** ** | ** ** | **(1,536** | **)** | ** ** | ** ** | **373** |   | ** ** | ** ** | **34** |   | ** ** | ** ** | **3** |   | ** ** | **(27,229** | **)** |
|                                            |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(*)   Also, in2004 impairment losses amounting to EUR 57 million were recognised.

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Thedetail of the investments in property, plant and equipment made in 2005 and2004 in the various geographical areas and businesses in which the Groupoperates is as follows:

| ** **          | ** ** | **Millions of Euros** | ** ** |
|---------------------|------------|---------------------------------|------------|
| ** **          | ** ** | **2005**                        | ** ** |
| ** **          | ** ** | **Generation**                  | ** ** | **Distribution and  Transmission** | ** ** | **Other** | ** ** | **Total** | ** ** |
| Spain and  Portugal |       |                            | 943        |   |   |   | 1,389 |   |   |   | 50 |   |   | 2,382 |   |
| Rest of Europe      |       |                            | 185        |   |   |   | — |   |   |   | 91 |   |   | 276 |   |
| Latin America       |       |                            | 166        |   |   |   | 390 |   |   |   | 44 |   |   | 600 |   |
| **TOTAL**           | ** ** | ** **                      | **1,294**  |   | ** ** | ** ** | **1,779** |   | ** ** | ** ** | **185** |   | ** ** | **3,258** | ** ** |

 

| ** **          | ** ** | **Millions of Euros** | ** ** |
|---------------------|------------|---------------------------------|------------|
| ** **          | ** ** | **2004**                        | ** ** |
| ** **          | ** ** | **Generation**                  | ** ** | **Distribution and  Transmission** | ** ** | **Other** | ** ** | **Total** | ** ** |
| Spain and  Portugal |       |                            | 646        |   |   |   | 1,082 |   |   |   | 92 |   |   | 1,820 |   |
| Rest of Europe      |       |                            | 242        |   |   |   | — |   |   |   | 17 |   |   | 259 |   |
| Latin America       |       |                            | 175        |   |   |   | 235 |   |   |   | 84 |   |   | 494 |   |
| **TOTAL**           | ** ** | ** **                      | **1,063**  |   | ** ** | ** ** | **1,317** |   | ** ** | ** ** | **193** |   | ** ** | **2,573** | ** ** |

 

The investments in property, plant and equipment inthe electricity generation business in Spain and Portugal include the advancesmade in the new capacity programme and, among other projects, the constructionof the Cristóbal Colón (Huelva) 400 MW combined cycle plant and thecommencement of construction work on the As Pontes (A Coruña) 800 MW combinedcycle plant, conversion to the use of imported coal by units 3 and 4 of the AsPontes (A Coruña) fossil-fuel plant, and the construction of thedesulphurisation plants of fossil-fuel units 4 and 5 of the Compostilla II(León) plant, together with the measures required to reduce NOx emissions by the fossil-fuel units of thecoal-fired facilities.

The investments in property, plant and equipment inthe electricity generation business in the rest of Europe relate mainly to theperformance of repowering projects in Italy and, specifically, in 2004, theconversion of unit 5 of the Tavazzano power plant. In 2005 these investmentsincluded the conversion to combined cycle technology of unit 3 of the Ostigliapower plant and of unit 6 of the Tavazzano power plant, which came into servicein 2005, together with the entry into service of two turbogas units at theFiume Santo plant.

In Latin America, investments in property, plant andequipment in the electricity generation business in 2004 included, among otherprojects, the start-up of the Ralco 690 MW hydroelectric plant in Chile. In2005 these investments in the generation business included, among otherprojects, the construction in Chile of the San Isidro II 377 MW combined cycleplant and of the Palmucho 32 MW hydroelectric plant; the construction in Peruof Etevensa’s second combined cycle plant, to be called Etevensa II, and otherwork to convert Etevensa I to combined cycle technology.

The investments in distribution relate to networkextensions and expenditure aimed at optimising the functioning thereof in orderto improve the efficiency and quality of the service provided.

At 31 December 2005 and 2004, the Group hadproperty, plant and equipment purchase commitments amounting to EUR 720 millionand EUR 1,364 million, respectively.

Endesa and itssubsidiaries have taken out insurance policies to cover the possible risks towhich their property, plant and equipment are subject and the claims that mightbe filed against them for carrying on their business activities. These policiesare considered to adequately cover the related risks. The loss of profit thatmight arise as a result of outages is also covered.

F-39

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**Environmentalinformation**

One of the main pillars on which Endesa’s businesscommitment to sustainable development is based is environmental protection.This attitude is a hallmark of the Company’s track record and constitutes afundamental trait of its behaviour that is expressly stated in its businessvalues.

Endesa’s environmental management is integrated andfully in tune with its corporate strategy and this commitment has a directeffect on the Company management’s decision-making process.

The purpose of this commitment is to minimise theimpact of the Company’s activities on the environment in which it operates,focusing principally on issues relating to climate change, the implementationof environmental management systems, the appropriate management of spills,waste, emissions, polluted soil and other effects on the environment.

The Strategic Environmental and SustainableDevelopment Plan for 2003-2007 includes the plans and programmes thatEndesa is carrying out in the sustainable development field in this period, andis fully in tune with the Company’s values and its business mission and vision.

Endesa’senvironmental activities are aimed at preserving natural resources, evaluatingthe environmental risks associated with its business activities and ensuringexcellence in management through the third-party certification of itsfacilities.

1.                Spainand Portugal

2005 was the first year in which Law 1/2005 regulatinggreenhouse gas emission trading applied. This Law, which is the result of thetransposition of Directive 2003/87/EC into Spanish law, regulates the participationof the Spanish companies affected in European emission trading.

Endesa, which operates in one of the industries towhich the Directive applies, has put into practice the necessary strategy andtools developed over the years leading up to that in which the Law came intoforce.

Also, Endesa continued with its investment plan aimedat reducing greenhouse gas emissions by improving the efficiency of itsfacilities and investing in new renewable energy and combined cycle capacity.

Noteworthy in connection with the application ofin-house designed efficiency and performance improvement technologies was theintroduction of ABACO technology, designed jointly with the engineering firmInerco, at some of Endesa’s facilities.

In the area of emission trading, Endesa carried outemission allowance purchases from the European Union, participating actively inthe European market.

A key part of Endesa’s climate change strategy is itsparticipation in the project-based emission reduction mechanisms. In 2005Endesa confirmed its position as an internationally renowned actor in the CDM(Clean Development Mechanism) field.

Noteworthy in this regard was the launch of the EndesaClimate Initiative, with which Endesa aims to purchase 15 million tonnes of CO2, five million in 2005-2007and the remaining ten million in 2008-2012.

Also worthy of mention was the signing of theagreement with the Chinese company Huaneng for the purchase of 2.6 milliontonnes of CO2 through 2012 from a 195 MW wind-poweredfacility.

Also, based on the targets established in theStrategic Environmental and Sustainable Development Plan for 2003-2007,Endesa continued its work to implement and subsequently certify EnvironmentalManagement Systems pursuant to the international ISO 14001 standard and the EuropeanEMAS 

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regulations at thefacilities in the key areas of the Company (Generation, Distribution, RenewableEnergies, Corporate Headquarters, etc.).

The followingfacilities of Endesa have achieved certification of their EnvironmentalManagement System (EMAS):

·       TheJinámar (Las Palmas de Gran Canaria) fossil-fuel plant, under the UNE EN-ISO14001 standard.

·       Thecoal port terminal in El Ferrol, under the UNE EN-ISO 14001 standard and theEMAS Regulation.

·       TheGarraf joint venture, a degasification and biogas energy recovery plant at theVall d ́En Joan Controlled Landfill in Barcelona, under the UNE EN-ISO 14001standard and the EMAS Regulation.

It is also expected to obtain EMAS certification,under the UNE EN-ISO 14001 standard, for the Andorra (Teruel) mine, whichunderwent the initial certification audit at the end of 2005.

In the distribution business, in line with theenvironmental management system implementation programme in the StrategicEnvironmental and Sustainable Development Plan for 2003-2007, in 2005 thedocumentation for the environmental management system for the Balearic Islandswas prepared and the related environmental training was given, therebyinitiating the implementation of the system in November 2005. In Aragónthe preliminary phase of the Facility Diagnosis was performed, and in Cataluñathe first annual review of the ISO 14001 EMAS certified in 2004 was conducted.

Also, the implementation of the EMAS at the Company’scorporate headquarters was completed and certification is expected to beachieved for the other corporate buildings in the next few years.

Work continued on the ongoing improvement andadaptation of the waste management systems of the facilities, where theprojects carried out included most notably the re-use of used oils, theminimisation of the production of container waste, the programmed retirement ofcomponents containing asbestos from the facilities, the use of batteries with alonger useful life or rechargeable batteries, the treatment and re-use of usedcleaning solvents, as well as other measures aimed at reducing and minimisingwaste.

Work continued on the plan to eliminate and withdrawequipment with PCBs and on the campaign to analyse PCBs in equipment thatdespite not having been manufactured with PCBs, had become contaminated.

Also, in 2005 around four million tonnes of waste wererecovered at Endesa’s facilities, mostly ash produced by the coal-firedfacilities.

In accordance with the programme established in theCooperation Agreement between Gesa-Endesa and the Balearic Islands Departmentof the Environment, the activities included measures to protect the fishingeagle and the black kite which are in serious danger of extinction in theIslands. Also, under this Agreement, the Company asked to participate, with theDepartment of the Environment, in Project Life for the protection of theEgyptian vulture in Fuerteventura and the measures to be taken in 2006 wereestablished.

Also, a BiodiversityConservation Plan for 2006-2010 was drawn up in order to raise awarenessof Endesa’s natural heritage and to implement new projects in line with thesustainability policy that the Company includes within its main operatingprinciples. Therefore, an analysis of the value and state of conservation ofEndesa’s natural heritage will be carried out to identify the biodiversitymeasures currently being taken at the Company and to plan new actions with thesupport of emblematic projects.

F-41

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2.                Europe

All the facilities of Endesa Italia have beencertified under the ISO 14001 standard, thereby strengthening Endesa’senvironmental commitment at its facilities. This certification is complementedwith the certification under the EMAS Regulation of all its fossil-fuel plants.

Themost notable event in 2005 in relation to the subsidiary Snet was the approvalof its Strategic Environmental and Sustainable Development Plan for 2005-2007,which contains the measures that will be taken in this connection during theperiod. Also noteworthy in relation to its environmental management was the implementationby Snet of the EMAS at all its generating facilities in 2005.

3.                LatinAmerica

In Latin America, Endesa, through its subsidiaryEndesa Chile, continued to consolidate the implementation of EnvironmentalManagement Systems at its facilities, achieving in 2005 certification under theISO 14001 standard for 47 generating facilities in Argentina, Brazil, ChileColombia and Peru, meaning that 93% of the installed capacity in Latin Americahas now been certified.

Also, Chilectra, a Chilean distributor, has joined theranks of the Latin American distributors that have achieved environmentalcertification (Edesur in Argentina, Codensa in Colombia and Edelnor in Peru),signifying that 76% of the power distributed by Endesa in Latin America has nowbeen certified under the ISO 14001 standard. Also, both Ampla and Coelce(Brazilian distributors) started to implement their systems in 2005.

As evidence of itscommitment to the development of renewable energies, Endesa formed Endesa Eco,a subsidiary of Endesa Chile, whose mission is to contribute to the developmentand promotion of renewable energies (mini-hydroelectric plants, wind farms,geothermal, solar, biomass and other plants) with clean and environmentallyfriendly technologies to satisfy the growing demand for energy and, in thisway, guarantee sustainable development.

***6.****                 Investmentproperty*

At 31 December 2005, the Group had properties notused in its business held to be eventually sold and, therefore, they areclassified in the consolidated balance sheet as investment property with acarrying amount of EUR 71 million. At 31 December 2004, theseproperties amounted to EUR 58 million.

The total market value at31 December 2005, of the investment property, calculated on the basis ofvaluations undertaken by independent valuers, ranges from approximately EUR 462million to approximately EUR 635 million. The total market value at31 December 2004 is similar to the book value.

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***7.****                 Intangibleassets*

Thedetail of the balance of Intangible Assets and of the changes therein in 2005and 2004 is as follows:           

| ** **              | ** ** | **Millions of Euros** | ** ** |
|-------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **Balance  at  31/12/04**       | ** ** | **Inclusion/  Exclusion  of  Companies** | ** ** | **Additions** | ** ** | **Amortisation** | ** ** | **Disposals** | ** ** | **Transfers  and  Other** | ** ** | **Translation  Differences** | ** ** | **Balance  at  31/12/05** | ** ** |
| CO2 emission allowances |       |                            | —     |   |   |   | — |   |   |   | 531 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 531 |   |   |
| Computer software       |       |                            | 212        |   |   |   | — |   |   |   | 71 |   |   |   | (77 | ) |   |   | — |   |   |   | (2 | ) |   |   | 8 |   |   |   | 212 |   |   |
| Other                   |       |                            | 111        |   |   |   | (3 | ) |   |   | 10 |   |   |   | (7 | ) |   |   | (3 | ) |   |   | 11 |   |   |   | 1 |   |   |   | 120 |   |   |
| **TOTAL**               | ** ** | ** **                      | **323**    |   | ** ** | ** ** | **(3** | **)** | ** ** | ** ** | **612** |   | ** ** | ** ** | **(84** | **)** | ** ** | ** ** | **(3** | **)** | ** ** | ** ** | **9** |   | ** ** | ** ** | **9** |   | ** ** | ** ** | **863** |   |   |

 

| ** **        | ** ** | **Millions of Euros** | ** ** |
|-------------------|------------|---------------------------------|------------|
| ** **        | ** ** | **Balance  at  01/01/04**       | ** ** | **Inclusion/  Exclusion of  Companies** | ** ** | **Additions** | ** ** | **Amortisation** | ** ** | **Disposals** | ** ** | **Transfers  and Other** | ** ** | **Translation  Differences** | ** ** | **Balance  at  31/12/04** | ** ** |
| Computer software |       |                            | 208        |   |   |   | — |   |   |   | 65 |   |   |   | (60 | ) |   |   | (4 | ) |   |   | 3 |   |   |   | — |   |   |   | 212 |   |   |   |
| Other             |       |                            | 103        |   |   |   | 3 |   |   |   | 33 |   |   |   | (22 | ) |   |   | (4 | ) |   |   | (6 | ) |   |   | 4 |   |   |   | 111 |   |   |   |
| **TOTAL**         | ** ** | ** **                      | **311**    |   | ** ** | ** ** | **3** |   | ** ** | ** ** | **98** |   | ** ** | ** ** | **(82** | **)** | ** ** | ** ** | **(8** | **)** | ** ** | ** ** | **(3** | **)** | ** ** | ** ** | **4** |   | ** ** | ** ** | **323** |   |   |   |
|                   |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amount recognised for CO2 emission allowances includes EUR 374 millionrelating to allowances assigned for no consideration under the national emissionallowance assignment plans of each of the European countries in which the Groupoperates.

The emission allowancesrecognised at 31 December 2005, will be delivered substantially in full inApril 2006 to cover the CO2 emissions made in 2005.

F-43

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***8.****                 Goodwill*

Thedetail, by cash-generating unit (or group of units) to which it is allocated,of goodwill and of the changes therein in 2005 and 2004 is as follows:

| ** **             | ** ** | **Millions of Euros**         | ** ** |
|------------------------|------------|-------------------------------|------------|
| ** **             | ** ** | **Balance at  31/12/04** | ** ** | **Additions** | ** ** | **Disposals** | ** ** | **Translation  Differences** | ** ** | **Other** | ** ** | **Balance at  31/12/05** | ** ** |
| Endesa Italia          |       |                          | 1,324      |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (31 | ) |   |   | 1,293 |   |   |
| Snet                   |       |                          | 183        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (5 | ) |   |   | 178 |   |   |
| Finerge                |       |                          | —     |   |   |   | 145 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 145 |   |   |
| Subsidiaries in  Chile |       |                          | 1,808      |   |   |   | 3 |   |   |   | — |   |   |   | 557 |   |   |   | — |   |   |   | 2,368 |   |   |
| Coelce                 |       |                          | 121        |   |   |   | — |   |   |   | — |   |   |   | 35 |   |   |   | — |   |   |   | 156 |   |   |
| Ampla                  |       |                          | 99         |   |   |   | — |   |   |   | — |   |   |   | 12 |   |   |   | — |   |   |   | 111 |   |   |
| Other                  |       |                          | 21         |   |   |   | — |   |   |   | — |   |   |   | 6 |   |   |   | — |   |   |   | 27 |   |   |
| **TOTAL**              | ** ** | ** **                    | **3,556**  |   | ** ** | ** ** | **148** |   | ** ** | ** ** | **—** |   | ** ** | ** ** | **610** |   | ** ** | ** ** | **(36** | **)** | ** ** | ** ** | **4,278** |   |   |

 

| ** **             | ** ** | **Millions of Euros**         | ** ** |
|------------------------|------------|-------------------------------|------------|
| ** **             | ** ** | **Balance at  01/01/04** | ** ** | **Additions** | ** ** | **Disposals** | ** ** | **Translation  Differences** | ** ** | **Other** | ** ** | **Balance at  31/12/04** | ** ** |
| Endesa Italia          |       |                          | 1,373      |   |   |   | 15 |   |   |   | — |   |   |   | — |   |   |   | (64 | ) |   |   | 1,324 |   |   |
| Snet                   |       |                          | —     |   |   |   | 226 |   |   |   | (24 | ) |   |   | — |   |   |   | (19 | ) |   |   | 183 |   |   |
| Subsidiaries in  Chile |       |                          | 1,837      |   |   |   | — |   |   |   | — |   |   |   | (29 | ) |   |   | — |   |   |   | 1,808 |   |   |
| Coelce                 |       |                          | 174        |   |   |   | — |   |   |   | (57 | ) |   |   | 4 |   |   |   | — |   |   |   | 121 |   |   |
| Ampla                  |       |                          | 114        |   |   |   | — |   |   |   | — |   |   |   | (15 | ) |   |   | — |   |   |   | 99 |   |   |
| Other                  |       |                          | 21         |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 21 |   |   |
| **TOTAL**              | ** ** | ** **                    | **3,519**  |   | ** ** | ** ** | **241** |   | ** ** | ** ** | **(81** | **)** | ** ** | ** ** | **(40** | **)** | ** ** | ** ** | **(83** | **)** | ** ** | ** ** | **3,556** |   |   |

 

The valuation of the assets and liabilities of Snetrequired to calculate the related goodwill was completed in 2005. After thisdefinitive allocation, the goodwill relating to Snet amounted to EUR 178 million.

Theretirement in 2004 relating to SNET corresponds to the offset of the negativeconsolidation goodwill that arose on the acquisition of the additional 35%holding in 2004. The price paid in this second acquisition includes the effectof the price adjustment clause envisaged in the initial acquisition. Followingconcerns information at 31 December 2004, from the financial statements ofthe SNET over which the Group held a 65% stake:

| ** **  | ** ** | **31/12/05**                    | ** ** |
|-------------|------------|---------------------------------|------------|
| ** **  | ** ** | **Millions of Euros** | ** ** |
| ** **  | ** ** | **Non-**                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **  | ** ** | **Current**                     | ** ** | **Current** | ** ** | ** ** | ** ** | ** ** | ** ** | **Minority** | ** ** | **Current** | ** ** | **Current** | ** ** | ** ** | ** ** | **Ordinary** | ** ** |
| **Company** | ** ** | ** **                      | ** ** | **Assets** | ** ** | **Assets** | ** ** | **Goodwill** | ** ** | **Treasury** | ** ** | **interest** | ** ** | **Liabilities** | ** ** | **Liabilities** | ** ** | **Revenue** | ** ** | **Expenses** | ** ** |
| SNET        |       |                            | 911        |   |   |   | 579 |   |   |   | 183 |   |   |   | 332 |   |   |   | 44 |   |   |   | 633 |   |   |   | 174 |   |   |   | 268 |   |   |   | 262 |   |   |
|             |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The goodwill relating to Finerge is provisional sincethe valuation of assets and liabilities required to definitively calculate thegoodwill on the acquisition of this company had not yet been completed at thedate of preparation of these consolidated financial statements.

According to the estimates and projections availableto the Group’s directors, the projected cash flows attributable to these cash-generatingunits (or groups of units) to which the goodwill is allocated will make itpossible to recover the carrying amount of each item of goodwill recognised at31 December 2005.

F-44

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***9.****                 Investmentsaccounted for using the equity method*

Thedetail of the main Group investees accounted for using the equity method and ofthe changes therein in 2005 and 2004 is as follows:

| ** **        | ** ** | **Millions of Euros** | ** ** |
|-------------------|------------|---------------------------------|------------|
| ** **        | ** ** | **Balance at  31/12/04**   | ** ** | **Inclusion/  Exclusion of  Companies** | ** ** | **Additions** | ** ** | **Disposals** | ** ** | **Result of  Companies  Accounted  for Using  the Equity  Method** | ** ** | **Dividends** | ** ** | **Translation  Differences** | ** ** | **Transfers  and Other** | ** ** | **Balance at  31/12/05** | ** ** |
| Gas Atacama       |       |                            | 111        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 9 |   |   |   | — |   |   |   | 13 |   |   |   | (3 | ) |   |   | 130 |   |   |
| Tejo Energía |       |                            | 83         |   |   |   | — |   |   |   | 5 |   |   |   | — |   |   |   | 6 |   |   |   | (11 | ) |   |   | — |   |   |   | 4 |   |   |   | 87 |   |   |
| Nuclenor          |       |                            | 80         |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 19 |   |   |   | (33 | ) |   |   | — |   |   |   | (3 | ) |   |   | 63 |   |   |
| Altek             |       |                            | 45         |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (1 | ) |   |   | — |   |   |   | 4 |   |   |   | (18 | ) |   |   | 30 |   |   |
| Tahaddart         |       |                            | 11         |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 2 |   |   |   | — |   |   |   | — |   |   |   | 9 |   |   |   | 22 |   |   |
| Eurosviluppo      |       |                            | 19         |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 19 |   |   |
| Elcogas           |       |                            | 22         |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (4 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 18 |   |   |
| Auna              |       |                            | 1,083      |   |   |   | — |   |   |   | — |   |   |   | (904 | ) |   |   | 10 |   |   |   | — |   |   |   | — |   |   |   | (189 | ) |   |   | — |   |   |
| Smartcom          |       |                            | 402        |   |   |   | — |   |   |   | — |   |   |   | (411 | ) |   |   | (2 | ) |   |   | — |   |   |   | 11 |   |   |   | — |   |   |   | — |   |   |
| Sidec             |       |                            | 30         |   |   |   | — |   |   |   | — |   |   |   | (56 | ) |   |   | 8 |   |   |   | (2 | ) |   |   | — |   |   |   | 20 |   |   |   | — |   |   |
| NQF Gas           |       |                            | 21         |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1 |   |   |   | — |   |   |   | — |   |   |   | (22 | ) |   |   | — |   |   |
| Other             |       |                            | 284        |   |   |   | (22 | ) |   |   | 1 |   |   |   | (1 | ) |   |   | 19 |   |   |   | (12 | ) |   |   | 6 |   |   |   | (21 | ) |   |   | 254 |   |   |
| **TOTAL**         | ** ** | ** **                      | **2,191**  |   | ** ** | ** ** | **(22** | **)** | ** ** | ** ** | **6** |   | ** ** | ** ** | **(1,372** | **)** | ** ** | ** ** | **67** |   | ** ** | ** ** | **(58** | **)** | ** ** | ** ** | **34** |   | ** ** | ** ** | **(223** | **)** | ** ** | ** ** | **623** |   |   |

 

| ** **        | ** ** | **Millions of Euros** | ** ** |
|-------------------|------------|---------------------------------|------------|
| ** **        | ** ** | **Balance at  01/01/04**   | ** ** | **Inclusion/  Exclusion of  Companies** | ** ** | **Additions** | ** ** | **Disposals** | ** ** | **Result of  Companies  Accounted  for Using  the Equity  Method** | ** ** | **Dividends** | ** ** | **Translation  Differences** | ** ** | **Transfers  and Other** | ** ** | **Balance at  31/12/04** | ** ** |
| Gas Atacama       |       |                            | 110        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 8 |   |   |   | — |   |   |   | (10 | ) |   |   | 3 |   |   |   | 111 |   |   |
| Tejo Energía |       |                            | 76         |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 17 |   |   |   | (10 | ) |   |   | — |   |   |   | — |   |   |   | 83 |   |   |
| Nuclenor          |       |                            | 78         |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 14 |   |   |   | (12 | ) |   |   | — |   |   |   | — |   |   |   | 80 |   |   |
| Altek             |       |                            | —     |   |   |   | 43 |   |   |   | — |   |   |   | — |   |   |   | 1 |   |   |   | — |   |   |   | 1 |   |   |   | — |   |   |   | 45 |   |   |
| Tahaddart         |       |                            | —     |   |   |   | — |   |   |   | 11 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 11 |   |   |
| Eurosviluppo      |       |                            | —     |   |   |   | — |   |   |   | 19 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 19 |   |   |
| Elcogas           |       |                            | —     |   |   |   | — |   |   |   | 24 |   |   |   | — |   |   |   | (2 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 22 |   |   |
| Auna              |       |                            | 819        |   |   |   | — |   |   |   | 261 |   |   |   | — |   |   |   | 10 |   |   |   | — |   |   |   | — |   |   |   | (7 | ) |   |   | 1,083 |   |   |
| Smartcom          |       |                            | 229        |   |   |   | — |   |   |   | 187 |   |   |   | — |   |   |   | (4 | ) |   |   | — |   |   |   | (6 | ) |   |   | (4 | ) |   |   | 402 |   |   |
| Sidec             |       |                            | —     |   |   |   | 28 |   |   |   | — |   |   |   | — |   |   |   | 2 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 30 |   |   |
| NQF Gas           |       |                            | 21         |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 21 |   |   |
| Snet              |       |                            | 435        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 6 |   |   |   | — |   |   |   | — |   |   |   | (441 | ) |   |   | — |   |   |
| Agbar             |       |                            | 134        |   |   |   | — |   |   |   | — |   |   |   | (135 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1 |   |   |   | — |   |   |
| Other             |       |                            | 245        |   |   |   | (18 | ) |   |   | 3 |   |   |   | (12 | ) |   |   | 27 |   |   |   | (17 | ) |   |   | (6 | ) |   |   | 62 |   |   |   | 284 |   |   |
| **TOTAL**         | ** ** | ** **                      | **2,147**  |   | ** ** | ** ** | **53** |   | ** ** | ** ** | **505** |   | ** ** | ** ** | **(147** | **)** | ** ** | ** ** | **79** |   | ** ** | ** ** | **(39** | **)** | ** ** | ** ** | **(21** | **)** | ** ** | ** ** | **(386** | **)** | ** ** | ** ** | **2,191** |   |   |

 

F-45

----

The maintransactions carried out by the Group in 2005 in respect of companies accountedfor using the equity method were as follows (see Note 22):

·       Thesale of the 27.7% investment in the share capital of the telecommunicationsoperator Auna to France Telecom España, S.A. for EUR 2,221 million under anagreement entered into on 29 July 2005, which was formally executed,once it had been approved by the European authorities, on 8 November 2005.

The remaining 5.01% wassold to Deutsche Bank on 30 December 2005, for EUR 378 million. Endesa isentitled to receive 90% of the portion of the selling price in the firsttransaction made with these shares on or after 8 November 2008, thatexceeds the amount of EUR 361 million capitalised at an annual rate of 4.5%.

Thegain on this sale will not be recognised until the first quarter of 2006, sinceat 31 December 2005, the period in which Auna’s other shareholderscould exercise their pre-emption rights had not yet ended. The amount collectedin this transaction guarantees the delivery of these shares to Deutsche Bank,which will take place in the first quarter of 2006.

·       Thesale of the Group’s investment in Smartcom Pcs for EUR 408 million.

·       Thesale of Snet’s investment in the producer Séchilienne-Sidec (“Sidec”) for EUR104 million.

·       TheGroup entered into an agreement with EDP for the sale to the latter of the 49%interest held by Endesa Gas in the Portuguese company NQF Gas SGPS, S.A. (“NQFGas”) for EUR 57 million. The transaction will be completed once certainrequirements in the agreement have been met and, therefore, Endesa classifiedits investment in NQF Gas as Non-Current Assets Classified as Held for Sale.The carrying amount of this investment at 31 December 2005, was EUR 22million.

The main transactions carried out by the Endesa Groupin 2004 in respect of companies accounted for using the equity method were asfollows:

·       Theinvestment of EUR 261 million in Auna relating to the acquisition of anadditional 3% interest in this company.

·       Theinvestment of EUR 187 million in Smartcom Pcs through the conversion into sharecapital of non-current loans existing at the beginning of the year.

·       Theacquisition of an additional investment of 35% in Snet for EUR 121 million.This amount included the effect of the price adjustment envisaged in the firstacquisition made in 2001. As a result of this acquisition, Snet was fullyconsolidated and, therefore, the investment existing at the beginning of 2004was derecognised from the balance of Investments Accounted for Using the EquityMethod.

·       InMay 2004, the holding in Aguas de Barcelona, S.A. (AGBAR) was sold for €238million giving rise to a gain of €102 million.

F-46

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The following concernsinformation at 31 December 2005 and 31 December 2004, from thefinancial statements of the main companies over which the Group holds jointcontrol:

| ** **         | ** ** | **31/12/05**          | ** ** |
|--------------------|------------|-----------------------|------------|
| ** **         | ** ** | **Millions of Euros** | ** ** |
| **Company**        | ** ** | ** **            | ** ** | **Non-  Current  Assets** | ** ** | **Current  Assets** | ** ** | **Non-  Current  Liabilities** | ** ** | **Current  Liabilities** | ** ** | **Revenue** | ** ** | **Ordinary  Expenses** | ** ** |
| Nuclenor           |       |                  | 150        |   |   |   | 121 |   |   |   | 55 |   |   |   | 62 |   |   |   | 210 |   |   |   | 101 |   |   |
| Ergon Energía |       |                  | —     |   |   |   | 75 |   |   |   | — |   |   |   | 73 |   |   |   | 383 |   |   |   | 381 |   |   |
| Tejo Energía  |       |                  | 510        |   |   |   | 106 |   |   |   | 360 |   |   |   | 71 |   |   |   | 228 |   |   |   | 194 |   |   |
| Pegop              |       |                  | 8          |   |   |   | — |   |   |   | — |   |   |   | 3 |   |   |   | 19 |   |   |   | 3 |   |   |
| Carbopego          |       |                  | 21         |   |   |   | — |   |   |   | 11 |   |   |   | — |   |   |   | 98 |   |   |   | 94 |   |   |
| Gas Atacama        |       |                  | 1,114      |   |   |   | 221 |   |   |   | 615 |   |   |   | 170 |   |   |   | 206 |   |   |   | 172 |   |   |
|                    |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **         | ** ** | **31/12/04**                    | ** ** |
|--------------------|------------|---------------------------------|------------|
| ** **         | ** ** | **Millions of Euros** | ** ** |
| **Company**        | ** ** | ** **                      | ** ** | **Non-  Current  Assets** | ** ** | **Current  Assets** | ** ** | **Non-  Current  Liabilities** | ** ** | **Current  Liabilities** | ** ** | **Revenue** | ** ** | **Ordinary  Expenses** | ** ** |
| Nuclenor           |       |                            | 168        |   |   |   | 84 |   |   |   | 64 |   |   |   | 28 |   |   |   | 128 |   |   |   | 88 |   |   |
| Ergon Energía |       |                            | —     |   |   |   | 41 |   |   |   | — |   |   |   | 39 |   |   |   | 244 |   |   |   | 242 |   |   |
| Tejo Energía  |       |                            | 550        |   |   |   | 149 |   |   |   | 410 |   |   |   | 90 |   |   |   | 250 |   |   |   | 166 |   |   |
| Pegop              |       |                            | —     |   |   |   | 12 |   |   |   | — |   |   |   | 6 |   |   |   | 19 |   |   |   | 11 |   |   |
| Carbopego          |       |                            | —     |   |   |   | 8 |   |   |   | — |   |   |   | 1 |   |   |   | 73 |   |   |   | 74 |   |   |
| Gas Atacama        |       |                            | 744        |   |   |   | 163 |   |   |   | 560 |   |   |   | 128 |   |   |   | 190 |   |   |   | 152 |   |   |
|                    |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The main economic andfinancial aggregates of the other companies over which the Endesa Groupexercises joint control and those of the companies over which it exercises significantinfluence are not material.

***10.****          Non-currentfinancial assets*

Thedetail of Non-Current Financial Assets in the accompanying consolidated balancesheet and of the changes therein in 2005 and 2004 is as follows:

| ** **                      | ** ** | **Millions of Euros**     | ** ** |
|---------------------------------|------------|---------------------------|------------|
| ** **                      | ** ** | **Balance  at  31/12/04** | ** ** | **First-Time  Application  of IASs 32  and 39** | ** ** | **Additions  or Charge  for The  Year** | ** ** | **Disposals  or  Reductions** | ** ** | **Value  Adjustment  against  Reserves(*)** | ** ** | **Translation  Differences** | ** ** | **Transfers  and Other** | ** ** | **Balance  at  31/12/05** | ** ** |
| Loans and  receivables          |       |                      | 1,100      |   |   |   | (109 | ) |   |   | 2,397 |   |   |   | (152 | ) |   |   | — |   |   |   | 98 |   |   |   | 40 |   |   |   | 3,374 |   |   |
| Available-for-sale  investments |       |                      | 241        |   |   |   | 41 |   |   |   | 5 |   |   |   | (37 | ) |   |   | 237 |   |   |   | 1 |   |   |   | 176 |   |   |   | 664 |   |   |
| Financial derivatives (Note 18) |       |                      | —     |   |   |   | 154 |   |   |   | 16 |   |   |   | — |   |   |   | (28 | ) |   |   | — |   |   |   | — |   |   |   | 142 |   |   |
| Impairment loss                 |       |                      | (45        | ) |   |   | — |   |   |   | (12 | ) |   |   | 13 |   |   |   | — |   |   |   | (1 | ) |   |   | (1 | ) |   |   | (46 | ) |   |
| **TOTAL**                       | ** ** | ** **                | **1,296**  |   | ** ** | ** ** | **86** |   | ** ** | ** ** | **2,406** |   | ** ** | ** ** | **(176** | **)** | ** ** | ** ** | **209** |   | ** ** | ** ** | **98** |   | ** ** | ** ** | **215** |   | ** ** | ** ** | **4,134** |   |   |

----

(*)          Recognisedunder the heading “Equity—Unrealised Asset and Liability Revaluation Reserve”(see Note 13).

F-47

----

 

| ** **                      | ** ** | **Millions of Euros**     | ** ** |
|---------------------------------|------------|---------------------------|------------|
| ** **                      | ** ** | **Balance  at  01/01/04** | ** ** | **Additions  or Charge  for The  Year** | ** ** | **Disposals or  Reductions** | ** ** | **Value  Adjustment  against  Reserves** | ** ** | **Translation  Differences** | ** ** | **Transfers  and Other** | ** ** | **Balance at  31/12/04** | ** ** |
| Loans and  receivables          |       |                      | 1,337      |   |   |   | 148 |   |   |   | (185 | ) |   |   | — |   |   |   | (2 | ) |   |   | (198 | ) |   |   | 1,100 |   |   |
| Available-for-sale  investments |       |                      | 441        |   |   |   | 26 |   |   |   | (54 | ) |   |   | — |   |   |   | (5 | ) |   |   | (167 | ) |   |   | 241 |   |   |
| Impairment loss                 |       |                      | (90        | ) |   |   | (8 | ) |   |   | 33 |   |   |   | — |   |   |   | — |   |   |   | 20 |   |   |   | (45 | ) |   |
| **TOTAL**                       | ** ** | ** **                | **1,688**  |   | ** ** | ** ** | **166** |   | ** ** | ** ** | **(206** | **)** | ** ** | ** ** | **—** |   | ** ** | ** ** | **(7** | **)** | ** ** | ** ** | **(345** | **)** | ** ** | ** ** | **1,296** |   |   |

 

**Loans andreceivables**

The detail of Loansand Receivables at 31 December 2005 and 2004, is as follows:

| ** **                                                                          | ** ** | **Millions of Euros** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                          | ** ** | **Balance at  31/12/05**   | ** ** | **Balance at  31/12/04** | ** ** |
| Financing of the  shortfall in income from regulated activities in Spain (Note 4-a) |       |                            | 1,581      |   |   |   | — |   |   |
| Additional  non-mainland system compensation (Note 4-a)                             |       |                            | 579        |   |   |   | 225 |   |   |
| Costs of  transition to competition of Endesa Italia (Note 4-b)                     |       |                            | 120        |   |   |   | — |   |   |
| Guarantees and  deposits                                                            |       |                            | 365        |   |   |   | 320 |   |   |
| Loans to  associates                                                                |       |                            | 269        |   |   |   | 122 |   |   |
| Loans to  employees                                                                 |       |                            | 156        |   |   |   | 110 |   |   |
| Other loans                                                                         |       |                            | 304        |   |   |   | 323 |   |   |
| **TOTAL**                                                                           | ** ** | ** **                      | **3,374**  |   | ** ** | ** ** | **1,100** |   |   |

 

The detail, bymaturity, at 31 December 2005, of the non-current and current loans toassociates is as follows:

| ** **              | ** ** | **Millions of Euros** | ** ** |
|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **Balance**           | ** ** | **Current** | ** ** | **Non-Current Maturities** | ** ** |
| ** **              | ** ** | **at**                | ** ** | **Maturity** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Subsequent** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **31/12/05**          | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Years** | ** ** | **Total** | ** ** |
| Euro loans              |       |                  | 123        |   |   |   | 1 |   |   |   | 2 |   |   |   | 1 |   |   |   | 2 |   |   |   | — |   |   |   | 117 |   |   |   | 122 |   |   |
| Foreign currency  loans |       |                  | 147        |   |   |   | — |   |   |   | 147 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 147 |   |   |
| **TOTAL**               | ** ** | ** **            | **270**    |   | ** ** | ** ** | **1** |   | ** ** | ** ** | **149** |   | ** ** | ** ** | **1** |   | ** ** | ** ** | **2** |   | ** ** | ** ** | **—** |   | ** ** | ** ** | **117** |   | ** ** | ** ** | **269** |   |   |

 

These loans earned an average interest of 4.33% in2005.

Thedetail, by maturity, at 31 December 2004, of the non-current and currentloans to associates is as follows:

| ** **              | ** ** | **Millions of Euros** | ** ** |
|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **Balance **     | ** ** | **Current** | ** ** | **Non-Current Maturities** | ** ** |
| ** **              | ** ** | **at**                | ** ** | **Maturity** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Subsequent** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **31/12/04**          | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Years** | ** ** | **Total** | ** ** |
| Euro loans              |       |                  | 124        |   |   |   | 2 |   |   |   | — |   |   |   | 1 |   |   |   | 1 |   |   |   | 2 |   |   |   | 118 |   |   |   | 122 |   |   |
| Foreign currency  loans |       |                  | 140        |   |   |   | 140 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| **TOTAL**               | ** ** | ** **            | **264**    |   | ** ** | ** ** | **142** |   | ** ** | ** ** | **—** |   | ** ** | ** ** | **1** |   | ** ** | ** ** | **1** |   | ** ** | ** ** | **2** |   | ** ** | ** ** | **118** |   | ** ** | ** ** | **122** |   |   |

 

**These loans earned an averageinterest of 4.88% in 2004.**

**Available-for-saleinvestments**

In 2005 the 5.01% interestin Auna amounting to EUR 359 million was included under this heading. Of thisamount, which relates to the fair value of the investment at year-end, EUR 196million were recognised under the heading “Equity—Asset and LiabilityRevaluation Reserve” (see Note 13).

F-48

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This heading also includesthe Group’s investment of 3% in Red Eléctrica de España, S.A. (“Red Eléctrica”)recognised for EUR 106 million, of which EUR 80 million are recorded under theheading “Equity—Asset and Liability Revaluation Reserve” (see Note 13). UnderRoyal Decree-Law 5/2005, of 11 March, the Group must reduce its investmentin Red Eléctrica to 1% before 1 January 2008.

***11.****         **Inventories*

The detail of this heading at 31 December 2005and 2004, is as follows:

| ** **        | ** ** | **Millions of Euros** | ** ** |
|-------------------|------------|---------------------------------|------------|
| ** **        | ** ** | **31/12/05**                    | ** ** | **31/12/04** | ** ** |
| Fuel stocks:      |       |                            | 623        |   |   |   | 634 |   |   |
| Nuclear fuel      |       |                            | 253        |   |   |   | 216 |   |   |
| Other             |       |                            | 370        |   |   |   | 418 |   |   |
| Other inventories |       |                            | 205        |   |   |   | 153 |   |   |
| Value adjustment  |       |                            | (16        | ) |   |   | (31 | ) |   |
| **TOTAL**         | ** ** | ** **                      | **812**    |   | ** ** | ** ** | **756** |   |   |

 

The fuel stock purchase commitments at 31 December 2005, amounted to EUR2,318 million, assuming the market price at 31 December 2005, in the cases inwhich prices are tied to market prices. A portion of these commitments relatesto natural gas purchase agreements with “take or pay” clauses. The Company’sdirectors consider that the Group will be able to fulfil these commitments and,therefore, they do not expect any contingency to arise in this connection.

The fuel stock purchase commitments at 31 December 2004 amounted toEUR 2,074 million.

***12.****         **Trade and other receivables*

The detail of this heading at 31 December 2005and 2004, is as follows:

| ** **                                     | ** ** | **Millions of Euros** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|
| **Trade and Other Receivables** | ** ** | ** **                      | ** ** | **31/12/05** | ** ** | **31/12/05** | ** ** |
| Trade receivables for sales                    |       |                            | 4,397      |   |   |   | 3,421 |   |   |
| Tax assets:                                    |       |                            | 864        |   |   |   | 466 |   |   |
| Spanish corporation tax                        |       |                            | 456        |   |   |   | 217 |   |   |
| Other taxes                                    |       |                            | 408        |   |   |   | 249 |   |   |
| Other receivables                              |       |                            | 1,186      |   |   |   | 745 |   |   |
| Value adjustment                               |       |                            | (349       | ) |   |   | (250 | ) |   |
| **TOTAL**                                      | ** ** | ** **                      | **6,098**  |   | ** ** | ** ** | **4,382** |   |   |
|                                                |            |                                 |            |  |  |  |  |  |  |  |  |

 

The average trade receivable collection period was 27 days in 2005 and26 days in 2004.

F-49

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***13.****         **Equity*

The detail of the Group’s Equity at 31 December2005 and 2004, and of the changes therein is as follows:
|  | ** ** | **Share  Capital** | ** ** | **Share  Premium** | ** ** | **Legal  Reserve** | ** ** | **Revaluation  Reserve** | ** ** | **Restricted  Reserves** | ** ** | **Translation  Differences** | ** ** | **Unrealised  Asset and  Liability  Revaluation  Reserve** | ** ** | **Retained  Earnings** | ** ** | **Interim  Dividend** | ** ** | **Total  Equity of  the Parent** | ** ** | **Equity of  Minority  Interests** | ** ** | **Total  Equity** | ** ** |
|--|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------------|------------|--------------------------|------------|------------------------------|------------|-----------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|--------------------------------------------|------------|-----------------------------------------|------------|-------------------|------------|
| **Balance  at 01/01/04**                            | ** ** |   | **1,271** | ** ** |   |   | **1,376** | ** ** |   |   | **285** | ** ** |   |   | **1,714** | ** ** |   |   | **178** | ** ** |   |   | **—** | ** ** |   |   | **—** | ** ** |   |   | **3,635** | ** ** |   |   | **(280** | **)**  |   |   | **8,179**  | ** ** |   |   | **4,751** | ** ** |   |   | **12,930** | ** ** |   |
|-----------------------------------------------------|------------|--------|-----------|------------|--------|--------|-----------|------------|--------|--------|---------|------------|--------|--------|-----------|------------|--------|--------|---------|------------|--------|--------|------------|------------|--------|--------|------------|------------|--------|--------|-----------|------------|--------|--------|----------|--------|--------|--------|------------|------------|--------|--------|-----------|------------|--------|--------|------------|------------|--------|
| Distribution of  profit                             |       |   | —    | ** ** |   |   | —    | ** ** |   |   | —  | ** ** |   |   | —    | ** ** |   |   | —  |       |   |   | —     |       |   |   | —     |       |   |   | (733      | )          |   |   | 280      |   |   |   | (453       | )          |   |   | (196      | )          |   |   | (649       | )          |   |
| Income and expenses recognised in equity       |       |   | —    | ** ** |   |   | —    | ** ** |   |   | —  | ** ** |   |   | —    | ** ** |   |   | —  |       |   |   | (20        | )          |   |   | 57         |       |   |   | —    |       |   |   | —   |   |   |   | 37         |       |   |   | 186       |       |   |   | 223        |       |   |
| Profit for the  year                                |       |   | —    | ** ** |   |   | —    | ** ** |   |   | —  | ** ** |   |   | —    | ** ** |   |   | —  |       |   |   | —     |       |   |   | —     |       |   |   | 1,253     |       |   |   | —   |   |   |   | 1,253      |       |   |   | 408       |       |   |   | 1,661      |       |   |
| Interim dividend                                    |       |   | —    | ** ** |   |   | —    | ** ** |   |   | —  | ** ** |   |   | —    | ** ** |   |   | —  |       |   |   | —     |       |   |   | —     |       |   |   | —    |       |   |   | (288     | )      |   |   | (288       | )          |   |   | —    |       |   |   | (288       | )          |   |
| Inclusion/Exclusion of  companies                   |       |   | —    | ** ** |   |   | —    | ** ** |   |   | —  | ** ** |   |   | —    | ** ** |   |   | —  |       |   |   | —     |       |   |   | —     |       |   |   | —    |       |   |   | —   |   |   |   | —     |       |   |   | 265       |       |   |   | 265        |       |   |
| Other payments to  shareholders                     |       |   | —    | ** ** |   |   | —    | ** ** |   |   | —  | ** ** |   |   | —    | ** ** |   |   | —  |       |   |   | —     |       |   |   | —     |       |   |   | —    |       |   |   | —   |   |   |   | —     |       |   |   | (9        | )          |   |   | (9         | )          |   |
| Transfers between  reserves                         |       |   | —    | ** ** |   |   | —    | ** ** |   |   | —  | ** ** |   |   | —    | ** ** |   |   | (8      | )          |   |   | —     |       |   |   | —     |       |   |   | 8         |       |   |   | —   |   |   |   | —     |       |   |   | —    |       |   |   | —     |       |   |
| **Balance  at 31/12/04**                            | ** ** |   | **1,271** | ** ** |   |   | **1,376** | ** ** |   |   | **285** | ** ** |   |   | **1,714** | ** ** |   |   | **170** | ** ** |   |   | **(20**    | **)**      |   |   | **57**     | ** ** |   |   | **4,163** | ** ** |   |   | **(288** | **)**  |   |   | **8,728**  | ** ** |   |   | **5,405** | ** ** |   |   | **14,133** | ** ** |   |
| First-time  application of IASs 32 and 39 |       |   | —    | ** ** |   |   | —    | ** ** |   |   | —  | ** ** |   |   | —    | ** ** |   |   | —  |       |   |   | —     |       |   |   | (49        | )          |   |   | (143      | )          |   |   | —   |   |   |   | (192       | )          |   |   | (1,574    | )          |   |   | (1,766     | )          |   |
| Distribution of  profit                             |       |   | —    | ** ** |   |   | —    | ** ** |   |   | —  | ** ** |   |   | —    | ** ** |   |   | —  |       |   |   | —     |       |   |   | —     |       |   |   | (782      | )          |   |   | 288      |   |   |   | (494       | )          |   |   | (216      | )          |   |   | (710       | )          |   |
| Income and expenses recognised in equity       |       |   | —    | ** ** |   |   | —    | ** ** |   |   | —  | ** ** |   |   | —    | ** ** |   |   | —  |       |   |   | 749        |       |   |   | 187        |       |   |   | (209      | )          |   |   | —   |   |   |   | 727        |       |   |   | 693       |       |   |   | 1,420      |       |   |
| Profit for the  year                                |       |   | —    | ** ** |   |   | —    | ** ** |   |   | —  | ** ** |   |   | —    | ** ** |   |   | —  |       |   |   | —     |       |   |   | —     |       |   |   | 3,182     |       |   |   | —   |   |   |   | 3,182      |       |   |   | 575       |       |   |   | 3,757      |       |   |
| Interim dividend                                    |       |   | —    | ** ** |   |   | —    | ** ** |   |   | —  | ** ** |   |   | —    | ** ** |   |   | —  |       |   |   | —     |       |   |   | —     |       |   |   | —    |       |   |   | (323     | )      |   |   | (323       | )          |   |   | —    |       |   |   | (323       | )          |   |
| Inclusion/Exclusion of  companies                   |       |   | —    | ** ** |   |   | —    | ** ** |   |   | —  | ** ** |   |   | —    | ** ** |   |   | —  |       |   |   | —     |       |   |   | —     |       |   |   | —    |       |   |   | —   |   |   |   | —     |       |   |   | 113       |       |   |   | 113        |       |   |
| Other payments to  shareholders                     |       |   | —    | ** ** |   |   | —    | ** ** |   |   | —  | ** ** |   |   | —    | ** ** |   |   | —  |       |   |   | —     |       |   |   | —     |       |   |   | (14       | )          |   |   | —   |   |   |   | (14        | )          |   |   | (283      | )          |   |   | (297       | )          |   |
| Corporate  restructuring                            |       |   | —    | ** ** |   |   | —    | ** ** |   |   | —  | ** ** |   |   | —    | ** ** |   |   | —  |       |   |   | —     |       |   |   | —     |       |   |   | (24       | )          |   |   | —   |   |   |   | (24        | )          |   |   | 24        |       |   |   | —     |       |   |
| **Balance at 31/12/05**                             | ** ** |   | **1,271** | ** ** |   |   | **1,376** | ** ** |   |   | **285** | ** ** |   |   | **1,714** | ** ** |   |   | **170** | ** ** |   |   | **729**    | ** ** |   |   | **195**    | ** ** |   |   | **6,173** | ** ** |   |   | **(323** | **)**  |   |   | **11,590** | ** ** |   |   | **4,737** | ** ** |   |   | **16,327** | ** ** |   |

 

F-50

 

----

**13.1. Equity: Ofthe Parent**

***Share capital***

At 31 December 2005, the share capital of Endesa,S.A. amounted to EUR 1,270,502,540.40 and was represented by 1,058,752,117fully subscribed and paid shares of EUR 1.2 par value each, all of which arelisted on the Spanish Stock Exchanges. There were no changes in 2004 or 2005.

At 31 December 2005, 22,676,060 of these shareswere listed on the New York Stock Exchange in the form of ADRs (27,609,284 at31 December 2004). Endesa, S.A.’s shares are also traded on the Santiagode Chile Offshore Stock Exchange.

On 5 September 2005,Gas Natural SDG, S.A. requested from the Spanish National Securities MarketCommission (“the CNMV”) authorisation to launch a takeover bid for all theshares of Endesa, S.A. At the date of preparation of these consolidatedfinancial statements, this takeover bid was subject to the authorisation of therelated authorities.

***Share premium***

The consolidatedCorporations Law expressly permits the use of the share premium account balanceto increase capital and does not establish any specific restrictions as to itsuse.

***Legal reserve***

Under the consolidated Corporations Law, 10% of netprofit for each year must be transferred to the legal reserve until the balanceof this reserve reaches at least 20% of the share capital.

The legal reserve can be used to increase capitalprovided that the remaining reserve balance does not fall below 10% of theincreased share capital amount. Otherwise, until the legal reserve exceeds 20%of share capital, it can only be used to offset losses, provided thatsufficient other reserves are not available for this purpose.

The Group’s Parent hasrecorded the legal reserve in full.

***Revaluation reserve***

The balance of Revaluation Reserve arose as a resultof the revaluation made pursuant to Royal Decree-Law 7/1996, of 7 June.

This balance can be used, free of tax, to offset booklosses that might arise in the future and to increase share capital.

From 1 January 2007,the balance of this account can be taken to unrestricted reserves, providedthat the monetary surplus has been realised. The surplus will be deemed to havebeen realised in respect of the portion on which depreciation has been takenfor accounting purposes or when the revalued assets have been transferred orderecognised.

F-51

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***Translation differences***

Thedetail, by company, of translation differences net of taxes in the consolidatedbalance sheets at 31 December 2005 and 2004, is as follows:

| ** **             | ** ** | **Millions of Euros** | ** ** |
|------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **31/12/05**                    | ** ** | **31/12/04** | ** ** |
| Ampla                  |       |                            | 39         |   |   |   | 2 |   |   |
| Betania                |       |                            | 33         |   |   |   | 7 |   |   |
| Cachoeira Dourada      |       |                            | 39         |   |   |   | 2 |   |   |
| Fortaleza              |       |                            | 20         |   |   |   | (1 | ) |   |
| Chilectra              |       |                            | (7         | ) |   |   | (3 | ) |   |
| Cien                   |       |                            | 24         |   |   |   | 1 |   |   |
| Edesur                 |       |                            | 3          |   |   |   | (11 | ) |   |
| Emgesa                 |       |                            | 85         |   |   |   | 26 |   |   |
| Endesa Chile           |       |                            | (35        | ) |   |   | (4 | ) |   |
| Enersis                |       |                            | (114       | ) |   |   | (39 | ) |   |
| Investluz/Coelce       |       |                            | 27         |   |   |   | 1 |   |   |
| Codensa                |       |                            | 116        |   |   |   | 31 |   |   |
| Pehuenche              |       |                            | 19         |   |   |   | — |   |   |
| Bialystok              |       |                            | 8          |   |   |   | 4 |   |   |
| Smartcom               |       |                            | —     |   |   |   | (6 | ) |   |
| Subsidiaries in  Chile |       |                            | 438        |   |   |   | (27 | ) |   |
| Other                  |       |                            | 34         |   |   |   | (3 | ) |   |
| **TOTAL**              | ** ** | ** **                      | **729**    |   | ** ** | ** ** | **(20** | **)** | ** ** |

 

***Interim dividend***

The interim dividend in2005 approved by the Board of Directors of Endesa, S.A. on 15 November 2005,amounts to EUR 0.305 gross per share, giving a total of EUR 323 million, whichwas deducted from the Parent’s equity at 31 December 2005.

The interim dividend in2004 approved by the Board of Directors of Endesa, S.A. on 26 October2004, amounted to EUR 0.272 gross per share, giving a total ofEUR 288 million, which was deducted from the Parent’s equity at31 December 2004.

***Treasury shares***

As authorised by the shareholders at the GeneralMeetings on 19 June 2003 and 2 April 2004, and to facilitate tradingliquidity at specific times, in 2004 ENDESA acquired 10,491,164 treasury sharesfor EUR 154 million for an average price of EUR 14.65 per share, and sold12,580,825 shares for EUR 198 million for an average price of EUR 15.73 pershare, giving rise to a gain of EUR 16 million with respect to the acquisitionprice. At 31 December 2004, Endesa did not hold any treasury shares.

As authorised by the shareholders at the GeneralMeetings on 2 April 2004 and 27 May 2005, and to facilitate tradingliquidity at specific times. In 2005 ENDESA, S.A. acquired 250,613 treasuryshares for EUR 4 million for an average price of EUR 17.91 per share, and sold250,613 shares for EUR 4 million for an average price of EUR 18.51 per share.

At 31 December 2005,Endesa did not hold any treasury shares.

F-52

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***Restrictions on the distribution of funds bysubsidiaries***

Certain Group companies have clauses in theirfinancing contracts that have to be met in order to be able to distributeprofits to shareholders. Also, certain companies have assets that are securingpayables to creditors. The assets of the companies subject to theserestrictions amount to EUR 971 million at 31 December 2005 andEUR 797 million at 31 December 2004.

Endesa is subject to the system of notices pursuant toRoyal Decree 929/1998 and Law 5/1995 on the legal regime governing the disposalof public shareholdings in certain companies whereby it is necessary to informthe authorities, under certain circumstances, of acts and resolutions involvingthe acquisition of shares, or other similar equity interests, representing atleast 10% of the share capital of Endesa, S.A., Endesa Generación, S.A. andEndesa Distribución Eléctrica, S.L. However, in the case of Endesa, S.A.,purely financial acquisitions not aimed at participating in its control and/ormanagement are excepted from this system of notices.

Also subject to this regime are corporate acts andresolutions involving the sale or charging of the shares or other equityinterests of Endesa Generación, S.A. and Endesa Distribución Eléctrica, S.L.owned by Endesa, S.A.

The authorities may only oppose the act or resolutionreported if they justifiably appreciate the existence of significant risks ornegative effects, be they direct or indirect, on the business activitiescarried on by the companies, in order to guarantee the appropriate managementof the companies and of the provision of services by them, in conformity withcertain objective criteria contained in the related legislation.

Lastly, it should be notedthat in December 2005 the Spanish government presented in Parliament adraft law that, if it were passed without any amendment, would repeal RoyalDecree 929/1998 and Law 5/1995, thereby eliminating the Spanish legal regimegoverning the disposal of public shareholdings in certain companies.

**13.2. Equity: Ofminority interests**

The main changes in this heading as a result oftransactions carried out in 2005 and 2004 are described below.

In 2004 Snet started to be fully consolidated and, asa result, EUR 41 million were included under Equity—Of Minority Interests.

In 2005 EUR 137 million were included as a result ofthe sale of 5.33% of the investment in Endesa Italia, S.p.A. This salegave rise to a gain of EUR 24 million, and this amount was recorded under theheading “Income from Sale of Assets” in the accompanying consolidated incomestatement (see Note 22).

In 2004, since IASs 32 and39 were not applied, the preference shares amounting to EUR 1,500 millionissued by the Group were recorded under this heading in the consolidatedbalance sheet. In 2005 they were classified as a liability under Non-CurrentLiabilities—Bank Borrowings and Other Financial Liabilities (see Note 16).

F-53

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***14.****          Deferredincome*

Thechanges in the balance of this heading in the accompanying consolidated balancesheet in 2005 and 2004 were as follows:

| ** **                       | ** ** | **Millions of Euros**                              | ** ** |
|----------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                       | ** ** | **Grants and Fixed  Charges for  Connection** | ** ** | **Emission  Allowances  (See Notes 7 and 20)** | ** ** | **Total** | ** ** |
| **Balance at 01/01/04:**         | ** ** |                                                         | **1,347**  | ** ** |   |   | — | ** ** |   | **1,347** | ** ** |
| Inclusion/Exclusion of companies |       |                                                         | 8          |   |   |   | — |   |   | 8 |   |
| Additions                        |       |                                                         | 248        |   |   |   | — |   |   | 248 |   |
| Translation differences          |       |                                                         | (4         | ) |   |   | — |   |   | (4 | ) |
| Amount taken to income           |       |                                                         | (52        | ) |   |   | — |   |   | (52 | ) |
| Other                            |       |                                                         | (12        | ) |   |   | — |   |   | (12 | ) |
| **Balance at 31/12/04:**         | ** ** |                                                         | **1,535**  | ** ** |   |   | — | ** ** |   | **1,535** | ** ** |
| Inclusion/Exclusion of companies |       |                                                         | 4          |   |   |   | — |   |   | 4 |   |
| Additions                        |       |                                                         | 601        |   |   |   | 374 |   |   | 975 |   |
| Amount taken to income           |       |                                                         | (106       | ) |   |   | (370 | ) |   | (476 | ) |
| Translation differences          |       |                                                         | 25         |   |   |   | — |   |   | 25 |   |
| Other                            |       |                                                         | (1         | ) |   |   | — |   |   | (1 | ) |
| **Balance at 31/12/05**          | ** ** |                                                         | **2,058**  | ** ** |   |   | **4** | ** ** |   | **2,062** | ** ** |

 

***15.****          Long-termprovisions*

Thedetail of this heading in the consolidated balance sheet at 31 December 2005and 2004, is as follows:

| ** **                                       | ** ** | **Millions of Euros** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **31/12/05**                    | ** ** | **31/12/04** | ** ** |
| Provisions for  pensions and similar obligations |       |                            | 826        |   |   |   | 471 |   |   |
| Provisions for  labour force restructuring costs |       |                            | 2,209      |   |   |   | 2,233 |   |   |
| Other provisions                                 |       |                            | 2,062      |   |   |   | 1,690 |   |   |
| **TOTAL**                                        | ** ** | ** **                      | **5,097**  |   | ** ** | ** ** | **4,394** |   |   |

 

**a)**               Provisions forpensions and similar obligations

Most of the Groupcompanies have pension payment obligations to their employees, which vary onthe basis of the Group company involved. These obligations, which combinedefined benefits and defined contributions, are basically formalised in pensionplans or insurance policies. The changes in 2005 and 2004 in the heading “Provisionsfor Pensions and Similar Obligations” on the liability side of the consolidatedbalance sheet were as follows:

| ** **                                               | ** ** | **Millions of Euros** | ** ** |
|----------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                               | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| **Beginning balance**                                    | ** ** |                            | **471**    | ** ** |   |   | **483** | ** ** |   |
| Period provisions with a charge to income for the  year: |       |                            |       |   |   |   |   |   |   |
| Staff costs                                              |       |                            | 42         |   |   |   | 42 |   |   |
| Finance expenses                                         |       |                            | 15         |   |   |   | 5 |   |   |
| Period provisions against equity: retained earnings      |       |                            | 323        |   |   |   | — |   |   |
| Amounts used:                                            |       |                            |       |   |   |   |   |   |   |
| Payments                                                 |       |                            | (45        | ) |   |   | (48 | ) |   |
| Transfers and other                                      |       |                            | 20         |   |   |   | (11 | ) |   |
| **Ending balance**                                       | ** ** |                            | **826**    | ** ** |   |   | **471** | ** ** |   |

 

F-54

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The Group’s employees inSpain included under the Framework Agreement dated 25 October 2000, areparticipants in the Endesa Group Employee Pension Plan. Most of the employeesparticipate in defined contribution plans for retirement and defined benefitplans for disability and death of serving employees, as coverage for which theappropriate insurance policies have been taken out.

However,there are two large groups of employees (of a closed number in that no newemployees can be included) who are not included in the general system describedabove:

1.                Electricityemployees of the former Endesa: defined benefit pensions for retirement, deathand disability. The predetermined nature of the benefits for retirement andtheir full coverage eliminate in full any risk relating thereto. The otherbenefits are also guaranteed through insurance contracts. Therefore, except asregards the death of retired employees, the monitoring required for this systemdoes not differ significantly from that required for the mixed plans describedabove.

2.                Fecsa/Enher/HidroEmpordáemployees: defined-benefit pension plan with expected annual salary increaserate tied to the increase in the CPI. This plan is treated exactly in the sameway as a defined-benefit system.

Outside Spain, the pensionobligations consist substantially in full of defined contribution arrangements,all of which have been externalised except in the countries whose legislationpermits internal allowances in this connection, the amount of which is notmaterial.

Basedon the projected unit credit method, the assumptions used in calculating theactuarial liability in respect of uninsured defined benefit obligations inSpain at 31 December 2004 and 2005, were as follows:

| ** **        | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
| Discount rate     |       | 3.588    | %          | 4        | %          |
| Annual CPI growth |       | 2.30     | %          | 2.30     | %          |
| Mortality tables  |       | GRM/F 95 |       | GRM/F 95 |       |

 

The provisions recognisedunder Staff Costs and Net Finance Costs relate to the provisions accrued in theyear in relation to staff costs relating to current employees and the financecosts relating, in both cases, to unexternalised obligations. The balance ofEquity—Retained Earnings (see Note 13) relates to the actuarial gains andlosses and to the change in the liability derived from the change in the marketvalue of the plan assets.

Under Royal Decree1556/2005 approving the electricity tariff for 2006, from 1 January 2006onwards, electricity supplied to employees of electric utilities will be paidfor applying the general tariffs and access fees or tariffs. This legislativechange represents an increase in the cost of the existing obligation to supplypower to both present and former employees at a reduced price.

The increase in theestimated cost required to cover this obligation has led to an increase of EUR249 million in the actuarial liability, and this amount was recognised underthe heading “Equity—Retained Earnings” (see Note 13).

Setforth below is information on the actuarial liabilities and plan assets for thedefined benefit obligations at 31 December 2005 and 2004:

| ** **                                              | ** ** | **Millions of Euros** | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                              | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| Actuarial  liability                                    |       | 1,465                           |       | 1,239 |   |
| Plan assets                                             |       | 1,187                           |       | 1,055 |   |
| Provision recognised in  the consolidated balance sheet |       | 278                             |       | 184 |   |

 

F-55

----

Themovements in the market value of plan assets in 2005 and 2004 were as follows:

| ** **                           | ** ** | **Millions of Euros** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| **Beginning market value**           | ** ** | **1,055**                       | ** ** | **997** | ** ** |
| Estimated gain                       |       | 72                              |       | 68 |   |
| Contributions made by  the companies |       | 35                              |       | 40 |   |
| Payments                             |       | (30                             | )          | (51 | ) |
| Translation differences              |       | 55                              |       | 1 |   |
| **Ending market value**              | ** ** | **1,187**                       | ** ** | **1,055** | ** ** |

 

The annual contributionsto the pension plans are recorded directly with a charge to Staff Costs in theconsolidated income statement. The contributions made in this connection in2005 amounted to EUR 72 million and in 2004 amounted toEUR 47 million.

**b)**               Provisions forlabour force restructuring costs

The obligations reflectedin the consolidated balance sheet in respect of provisions for labour forcerestructuring costs arise as a result of collective or individual agreementswith the Group’s employees which provide for the Company’s obligation tosupplement the public social security system benefits in the event oftermination of the employment relationship as a result of an agreement betweenthe parties.

Thechanges in the Provisions for Labour Force Restructuring Costs on the liabilityside of the consolidated balance sheet in 2005 and 2004 were as follows:

| ** **                                               | ** ** | **Millions of Euros** | ** ** |
|----------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                               | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| **Beginning balance**                                    | ** ** | **2,233**                       | ** ** | **2,302** | ** ** |
| Period provisions with a charge to income for the  year: |       |                            |       |   |   |
| Staff costs                                              |       | 109                             |       | 118 |   |
| Finance costs                                            |       | 208                             |       | 95 |   |
| Amounts used:                                            |       |                            |       |   |   |
| Payments                                                 |       | (319                            | )          | (280 | ) |
| Transfers and other                                      |       | (22                             | )          | (2 | ) |
| **Ending balance**                                       | ** ** | **2,209**                       | ** ** | **2,233** | ** ** |

 

Theseliabilities relate substantially in full to the collective redundancyprocedures undertaken by the Group companies in Spain. At 31 December 2005,there were two types of procedure in progress:

1)              Collectiveredundancy procedures approved by the former companies before the corporaterestructuring in 1999.

The employees wereentitled, based on the collective redundancy procedure approved at eachcompany, to take early retirement between the ages of 50 and 55, in the periodfrom 1998 to 2005, and an extension to 2007 was approved.

At31 December 2005, the total number of employees considered in thisconnection is 4,908, substantially all of whom are no longer in the employ ofthe Group. At 31 December 2004, the total number of employees consideredin this connection was 5,534, of whom 465 were pending.

2)              Voluntaryredundancy plan approved in 2000.

The employees are entitledto take voluntary redundancy at the age of 60, provided that they have reachedthe age of 50 before 31 December 2005, and that they have at least tenyears of service at that date. Employees aged between 50 and 60 are alsoentitled to take voluntary redundancy, provided that there is an agreementbetween the employee and the company concerned.

F-56

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At 31 December 2005,the total number of employees considered in this connection is 4,659, of whom1,600 are currently in a situation of pre-retirement. At 31 December 2004,the total number of employees is similar.

Theeconomic conditions applicable to the employees who have availed themselves ofthese procedures are basically as follows:

·       Thecompany will pay the employee, from the date of termination of his contract andthrough the first date of retirement that is possible after the unemploymentbenefits have come to an end and, at the very latest, until the ex-employee inquestion, reaching retirement age, vests the right to a termination benefitbased on his last annual salary payment, which is updatable on the basis of theannual increase in the CPI.

·       Theunemployment benefits and subsidies received, as well as any other amounts ofofficial benefits for pre-retirement received prior to the date of definitiveretirement, will be deducted from the resulting amounts.

Theassumptions used for the actuarial calculation of the obligations arising underthese collective redundancy procedures are as follows:

| ** **        | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
| Discount rate     |       | 3.588    | %          | 4        | %          |
| Annual CPI growth |       | 2.30     | %          | 2.30     | %          |
| Mortality tables  |       | GRM/F 95 |       | GRM/F 95 |       |

 

The change in theactuarial assumptions and in the bases used to calculate the benefits and thenew procedures considered gave rise to increases of EUR 220 million and EUR 118million in these provisions in 2005 and 2004, respectively. Of these amounts,EUR 111 million related to the decrease in the discount rate used and wereclassified as Finance Costs in the 2005 consolidated income statement. Theremaining EUR 109 million were classified under the heading “Staff Costs” inthe consolidated income statement. Also, financial accrual relating to theseprovisions in 2005 and 2004 amounted to EUR 97 million and EUR 95 million,respectively, and these amounts are classified as Net Finance Costs in the accompanyingconsolidated income statement.

**c)**                Otherprovisions

The detail of the balanceof Other Provisions on the liability side of the accompanying consolidatedbalance sheet and of the changes therein in 2005 is as follows:

| ** **                                         | ** ** | **Millions of Euros**                                           | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **Provisions for   Litigation,   Termination   Benefits, etc.** | ** ** | **Provisions for   Facility   Closure Costs** | ** ** | **Total** | ** ** |
| **Balance at 31/12/04**                            | ** ** |                                                                      | **1,326**  | ** ** |   |   | **364** | ** ** |   | **1,690** | ** ** |
| Period provisions  charged to income for the year: |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Staff costs                                        |       |                                                                      | 47         |   |   |   | — |   |   | 47 |   |
| Finance costs                                      |       |                                                                      | 40         |   |   |   | 14 |   |   | 54 |   |
| Other expenses                                     |       |                                                                      | 239        |   |   |   | 10 |   |   | 249 |   |
| Period provisions  charged to non-current assets   |       |                                                                      | (2         | ) |   |   | 22 |   |   | 20 |   |
| Amounts used:                                      |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Payments                                           |       |                                                                      | (75        | ) |   |   | (4 | ) |   | (79 | ) |
| Translation differences                            |       |                                                                      | 102        |   |   |   | — |   |   | 102 |   |
| Transfers and other                                |       |                                                                      | (27        | ) |   |   | 6 |   |   | (21 | ) |
| **Balance at 31/12/05**                            | ** ** |                                                                      | **1,650**  | ** ** |   |   | **412** | ** ** |   | **2,062** | ** ** |

 

F-57

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The detail of thebalance of Other Provisions on the liability side of the accompanyingconsolidated balance sheet and of the changes therein in 2004 is as follows:

| ** **                                         | ** ** | **Millions of Euros**                                        | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **Provisions for  Litigation,  Termination  Benefits, etc.** | ** ** | **Provisions for  Facility  Closure Costs** | ** ** | **Total** | ** ** |
| **Balance  at 1/1/04**                             | ** ** |                                                                   | **1,249**  | ** ** |   |   | **322** | ** ** |   | **1,571** | ** ** |
| Period provisions  charged to income for the year: |       |                                                                   |       |   |   |   |   |   |   |   |   |
| Staff costs                                        |       |                                                                   | 30         |   |   |   | — |   |   | 30 |   |
| Finance costs                                      |       |                                                                   | 27         |   |   |   | 13 |   |   | 40 |   |
| Other expenses                                     |       |                                                                   | 97         |   |   |   | 14 |   |   | 111 |   |
| Period provisions  charged to non-current assets   |       |                                                                   | —     |   |   |   | (19 | ) |   | (19 | ) |
| Amounts used:                                      |       |                                                                   |       |   |   |   |   |   |   |   |   |
| Payments                                           |       |                                                                   | (60        | ) |   |   | (5 | ) |   | (65 | ) |
| Translation  differences                           |       |                                                                   | 8          |   |   |   | 1 |   |   | 9 |   |
| Transfers and  other                               |       |                                                                   | (25        | ) |   |   | 38 |   |   | 13 |   |
| **Balance at 31/12/04**                            | ** ** |                                                                   | **1,326**  | ** ** |   |   | **364** | ** ** |   | **1,690** | ** ** |

 

**Litigation andarbitration**

At the date ofpreparation of these consolidated financial statements, the main lawsuits orarbitration proceedings involving the Group companies were as follows:

·       In2002 EDF International (“EdF”) filed a request for arbitration at theInternational Court of Arbitration of the International Chamber of Commerceagainst Endesa Internacional, S.A., Repsol YPF, S.A. and YPF, S.A. seeking anorder against Endesa Internacional, S.A. to pay EdF USD 256 million plusinterest, and against Repsol YPF Group to pay US$ 69 million plus interest.Endesa Internacional, S.A., Repsol YPF, S.A. and YPF, S.A. filed an answer anda counterclaim seeking an order against EdF to pay Endesa Internacional USD 58million and YPF, S.A. USD 14 million. This dispute arose from the sale to theFrench EdF Group of the investments of YPF, S.A. and Endesa Internacional, S.A.in the Argentine companies Easa and Edenor. The arbitration proceedings are stillin progress, and the most recent arbitral actions (evidentiary hearing) weretaken in October 2005.

·       Thereare five court proceedings in progress for an amount of over EUR 2 millionagainst Endesa Distribución Eléctrica which could give rise to the obligationto settle various claims (damages resulting from forest fires in Cataluña;administrative penalty for power cuts in Barcelona; and a claim regarding thefulfilment of an agreement for the construction of electricity facilities inthe Canary Islands), amounting to an aggregate amount of EUR 61 million.

·       TheSpanish State Auditing Agency issued an adverse report on certain grantsreceived by Encasur, which, should it be confirmed by the competent instances,would result in a proceeding being instituted for repayment of the grantsamounting to approximately EUR 37 million.

·       Until31 December 1996, Endesa and its subsidiaries were taxed for corporationtax purposes as part of the consolidated tax group of Sociedad Estatal deParticipaciones Industriales (“SEPI”).

The Corporation Tax Lawprovides that companies leaving the Group are entitled to take tax credits notused by the Group if the companies contributed to the generation of the taxcredits. Accordingly, the financial and tax inspection authorities issuedreports to Endesa, S.A. and Unelco recognising the right of these companies totake the tax credits for investments that they had generated from 1992 to 1996from 1997 onwards.

F-58

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However, subsequently, asa result of the inspection conducted at SEPI, in the assessment issued againstthe SEPI Group relating to 1996, the financial and tax inspection authoritiestook all or some of the tax credits generated from 1992 through 1996 by theEndesa Group companies. On 14 June 2001, the Secretary of State for Financehanded down two separate decisions declaring the reports issued to Endesa andUnelco and recognising their right to take the tax credits generated in theaforementioned years to be injurious.

Proceedings for judicialreview as a result of the aforementioned decisions were instituted at theNational Appellate Court, which dismissed the tax authorities’ case.Accordingly, the tax authorities have appealed to the Supreme Court.

The financial and taxinspection authorities also issued assessments against Endesa disallowing itsright to take the tax credits generated from 1992 through 1996. All theseassessments, except for one on which no decision has yet been taken, have beenadjudged to be null and void by the Central Economic-Administrative Tribunal.

Lastly, the NationalAppellate Court ruled the SEPI assessment of 1996 in which the tax credits weretaken null and void. A cassation appeal can be filed against the NationalAppellate Court’s decision with the Supreme Court.

Thetax credits that could be affected by the outcome of the proceedings describedabove total a maximum amount of EUR 136 million.

·       Theauthorities have challenged the applicability of certain tax incentivescorresponding to the Endesa tax group, the maximum contingency for which amountsto EUR 31 million.

·       Thereform of the Local Finances Law, effective from 1 January 2003, modifiedthe air, surface and subsurface charge for occupying the local public domainand included electricity retailers as parties liable to pay this charge, despitetheir not owning the electricity distribution systems occupying the localpublic domain. However, certain municipal councils are issuing assessmentsagainst Endesa Energía, S.A. for the payment of the charge relating to 2002 andprior years.

Certaincontradictory decisions have been handed down by the various High Courtsregarding the applicability of the aforementioned assessments and, therefore,the ultimate decision will be handed down by the Supreme Court. The lawsuitstotal EUR 9 million, although the maximum contingency in this respect amountsto EUR 42 million.

·       ThePeruvian tax authorities (“Sunat”) have been questioning the tax effects of therevaluation by Edegel when the spin-off took place in 1996. With respect to thematters in dispute, Edegel has obtained decisions upholding its case at twoinstances (Arbitral Tribunal and Tax Tribunal), and the Sunat are currentlyreviewing the correctness of the values then ascribed in the course of therevaluation. At the date of preparation of these consolidated financialstatements, Sunat had issued assessments for the period from 1996 to 2001totalling PEN 205 million. Endesa has an investment of 13.78% in Edegel.

·       TheBrazilian customs authorities (“Decex”) have challenged the applicability of aspecial customs arrangement for imported products, granted previously in 1998to the Brazilian subsidiary Cien. On 15 December 2004, the Brazilian taxauthorities ruled that Cien had to pay BRL 187 million in respect of taxes,interest and a penalty on products imported through the State of Río deJaneiro. This ruling has been appealed to the Administrative Tribunal.

·       ENDESA’sBrazilian subsidiary Ampla Energía e Servicios, S.A. (“Ampla”) won a claimfiled against the Brazilian government arguing that Ampla did not have to paycontributions for the financing of the social security system (“Cofins”). Thistax is levied on revenue from sales of electricity. The Court upheld theprevious judgment and declared it final. In 1997 the Brazilian 

F-59

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government filed an ““AçãoRescisória,” a special proceeding for reviewing final judgments. The disputedamount is approximately USD 100 million.

·       Also,in 2005 the Brazilian tax authorities notified Ampla of a tax assessment forUSD 206 million that has been appealed against. The authorities consider thatthe special tax regime, under which interest received by subscribers of a FixedRate Notes issue made by Ampla in 1998 is exempt from tax in Brazil, is notapplicable.

·       PublicEmergency and Regime Reform Law 25561, enacted by the Argentine authorities on6 January 2002, rendered void certain conditions of the concessionagreement of the Group subsidiary Edesur. Law 25561 also required publicservice concession agreements to be renegotiated within a reasonable period oftime in order to adapt them to the new situation.

The failure to renegotiatethe agreement prompted the Chilean corporate stockholders of Edesur,subsidiaries of Endesa, to file a request for arbitration in 2004 pursuant tothe Treaty on the Promotion and Protection of Chilean and ArgentineanInvestments with the International Center for the Settlement of InvestmentDisputes (“ICSID”). The arbitration to defend the lawful rights of thestockholders of Edesur was in progress at the date of preparation of these consolidatedfinancial statements. However, it should be noted that in 2005 the partiesinvolved in this arbitration negotiated an agreement which, if ultimatelyapproved by the Argentine parliament and the Argentine government, could, ifcertain conditions are met, lead to the suspension of these arbitrationproceedings.

·       GasNatural SDG, S.A. has filed with the Barcelona Commercial Courts a statement ofclaim against Endesa and the members of its Board of Directors in which, amongother matters, it requests that interim measures be taken to prohibit thedistribution of dividends tied to the gain obtained on the sale of Auna.Although the legal advisers of Endesa consider this request to be absolutelyunfounded, in view of the limitations inherent to any injunctive reliefproceedings, the possibility of a court judgment being handed down suspendingor limiting the distribution of dividends by the shareholders at the AnnualGeneral Meeting of Endesa cannot be ruled out.

The directors of Endesaconsider that the provisions recorded in the accompanying consolidated balancesheet cover adequately the risks relating to litigation, arbitrationproceedings and other transactions described in this Note and, accordingly,they do not expect any liabilities additional to those disclosed to arise.

In view of the nature ofthe risks covered by these provisions, it is not possible to determine areasonable schedule for the related payments, if any.

***16.****          Bankborrowings and other financial liabilities*

Thedetail of the non-current and current Bank Borrowings and Other FinancialLiabilities at 31 December 2005 and 2004, is as follows:

| ** **                                                 | ** ** | **Millions of Euros** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **31/12/05**          | ** ** | **31/12/04** | ** ** |
| ** **                                                 | ** ** | **Current**           | ** ** | **Non-Current** | ** ** | **Current** | ** ** | **Non-Current** | ** ** |
| Preference shares(1)                                       |       |                  | —     |   |   |   | 1,419 |   |   |   | — |   |   |   | — |   |   |
| Debt instruments and  other held-for-trading liabilities   |       |                  | 1,304      |   |   |   | 10,735 |   |   |   | 453 |   |   |   | 11,574 |   |   |
| Bank borrowings                                            |       |                  | 961        |   |   |   | 5,592 |   |   |   | 915 |   |   |   | 5,128 |   |   |
| Other financial  liabilities                               |       |                  | 185        |   |   |   | 841 |   |   |   | 173 |   |   |   | 1,013 |   |   |
| **Total bank borrowings and other financial  liabilities** | ** ** | ** **            | **2,450**  |   | ** ** | ** ** | **18,587** |   | ** ** | ** ** | **1,541** |   | ** ** | ** ** | **17,715** |   |   |

----

(1)          Since IASs 32 and 39were not applied, at 31 December 2004, the preference shares wereclassified under Equity—Of Minority Interests.

F-60

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Thedetail, by currency and maturity, of the Group’s financial liabilities is asfollows:

| ** **       | ** ** | **Millions of Euros** | ** ** |
|------------------|------------|-----------------------|------------|
| ** **       | ** ** | **Balance**           | ** ** | **Current** | ** ** | **Non-Current Maturity** | ** ** | **Total** | ** ** |
| ** **       | ** ** | **at**                | ** ** | **Maturity** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Subsequent** | ** ** | **Non-** | ** ** |
| ** **       | ** ** | **31/12/05**          | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Years** | ** ** | **Current** | ** ** |
| Euro             |       |                  | 13,484     |   |   |   | 1,192 |   |   | 716 |   | 320 |   | 1,947 |   | 5,227 |   |   | 4,082 |   |   |   | 12,292 |   |   |
| US dollar        |       |                  | 4,458      |   |   |   | 549 |   |   | 208 |   | 582 |   | 970 |   | 256 |   |   | 1,893 |   |   |   | 3,909 |   |   |
| Chilean peso/ UF |       |                  | 715        |   |   |   | 209 |   |   | 3 |   | 3 |   | 5 |   | 131 |   |   | 364 |   |   |   | 506 |   |   |
| Brazilian real   |       |                  | 687        |   |   |   | 200 |   |   | 72 |   | 158 |   | 61 |   | 94 |   |   | 102 |   |   |   | 487 |   |   |
| Other            |       |                  | 1,693      |   |   |   | 300 |   |   | 83 |   | 124 |   | 165 |   | 64 |   |   | 957 |   |   |   | 1,393 |   |   |
| **TOTAL**        | ** ** | ** **            | **21,037** |   | ** ** | ** ** | **2,450** |   | ** ** | **1,082** | ** ** | **1,187** | ** ** | **3,148** | ** ** | **5,772** | ** ** | ** ** | **7,398** |   | ** ** | ** ** | **18,587** |   |   |

 

Thedetail, by currency and maturity, of the Group’s financial liabilities is asfollows:

| ** **       | ** ** | **Millions of Euros** | ** ** |
|------------------|------------|-----------------------|------------|
| ** **       | ** ** | **Balance **     | ** ** | **Current** | ** ** | **Non-Current Maturity** | ** ** | **Total** | ** ** |
| ** **       | ** ** | **at**                | ** ** | **Maturity** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Subsequent** | ** ** | **Non-** | ** ** |
| ** **       | ** ** | **31/12/04**          | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Years** | ** ** | **Current** | ** ** |
| Euro             |       |                  | 13,915     |   |   |   | 894 |   |   | 3,199 |   | 798 |   | 2,871 |   | 2,860 |   |   | 3,293 |   |   |   | 13,021 |   |   |
| US dollar        |       |                  | 3.809      |   |   |   | 366 |   |   | 576 |   | 189 |   | 626 |   | 380 |   |   | 1,672 |   |   |   | 3,443 |   |   |
| Chilean peso/ UF |       |                  | 422        |   |   |   | 3 |   |   | 141 |   | 12 |   | 6 |   | 9 |   |   | 251 |   |   |   | 419 |   |   |
| Brazilian real   |       |                  | 380        |   |   |   | 115 |   |   | 113 |   | 55 |   | 39 |   | 15 |   |   | 43 |   |   |   | 265 |   |   |
| Other            |       |                  | 730        |   |   |   | 163 |   |   | 167 |   | 48 |   | 66 |   | 123 |   |   | 163 |   |   |   | 567 |   |   |
| **TOTAL**        | ** ** | ** **            | **19,256** |   | ** ** | ** ** | **1,541** |   | ** ** | **4,196** | ** ** | **1,102** | ** ** | **3,608** | ** ** | **3,387** | ** ** | ** ** | **5,422** |   | ** ** | ** ** | **17,715** |   |   |

 

Thedetail, by currency, of these liabilities, taking into account the effect ofderivatives on this classification, is as follows:

| ** **     | ** ** | **Millions of Euros** | ** ** |
|----------------|------------|---------------------------------|------------|
| ** **     | ** ** | **31/12/05**                    | ** ** | **31/12/04** | ** ** |
| Euro           |       |                            | 15,033     |   |   |   | 13,922 |   |   |
| US dollar      |       |                            | 3,044      |   |   |   | 2,993 |   |   |
| Chilean peso   |       |                            | 1,399      |   |   |   | 1,108 |   |   |
| Brazilian real |       |                            | 640        |   |   |   | 445 |   |   |
| Other          |       |                            | 921        |   |   |   | 788 |   |   |
| **TOTAL**      | ** ** | ** **                      | **21,037** |   | ** ** | ** ** | **19,256** |   |   |

 

In 2005 the financialliabilities bore average interest at 5.46%.

***Preference shares:***

In March 2003Endesa Capital Finance carried out an issue of preference shares totalling EUR 1,500 millionwith the following features:

·       Dividend:   variabletied to three-month Euribor with a minimum APR of 4% and a maximum APR of 7% inthe first ten years, and tied to Euribor plus an APR of 3.75% from the eleventhyear onwards. The dividend will be payable quarterly.

·       Term:   perpetual,although the issuer may retire the shares early from the tenth year onwards fortheir par value.

·       Guarantee:   subordinatedguarantee from Endesa, S.A.

F-61

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·       Return:   thepayment of dividends will be preferred and non-cumulative and conditional onthe obtainment of a consolidated profit or on the payment of dividends on thecommon shares of Endesa, S.A.

In 2004 these shares wereclassified under Equity—Of Minority Interests because IASs 32 and 39 were notapplied.

***Hedging debt***

Of the Group’s debt in USdollars, EUR 2,187 million relate to future cash flow hedges on the Group’sincome from operations in Latin America tied to the US dollar.

Thechanges in 2005 and 2004 in the heading Equity—Asset and Liability RevaluationReserves as a result of exchange differences on this debt were as follows:

| ** **                                                                    | ** ** | **Millions of Euros**              | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                    | ** ** | **   2005   ** | ** ** | **   2004    ** | ** ** |
| **Balance  of asset and liability revaluation reserves at beginning of year** | ** ** |                                         | **57**     | ** ** |   |   | **—** | ** ** |   |
| Exchange  differences recognised in equity                                    |       |                                         | 57         |   |   |   | 59 |   |   |
| Allocation of  exchange differences to income                                 |       |                                         | (5         | ) |   |   | (2 | ) |   |
| Other                                                                         |       |                                         | 1          |   |   |   | — |   |   |
| **Balance of asset and liability  revaluation reserves at end of year**       | ** ** |                                         | **110**    | ** ** |   |   | **57** | ** ** |   |

 

***Other matters***

At 31 December 2005,the Group companies had undrawn credit facilities totallingEUR 4,587 million. This amount, together with the current assets,sufficiently covers the Group’s short-term payment obligations. At 31 December2004, the Group companies had undrawn credit facilities totalingEUR 2,733 million.

The Group’s financialliabilities contain the covenants that are habitual in contracts of thisnature.

At 31 December 2005 and2004 Endesa, S.A. does not have in its financing contracts any stipulationsinvolving financial ratios that could lead to breach of contract and give riseto the early termination of the contracts.

As regards clausesrelating to credit rating, Endesa S.A. has arranged financial transactionsamounting to EUR 899 million at 31 December 2005 andEUR 805 million at 31 December 2004 that might requireadditional guarantees or renegotiation in the event of a drop in the creditrating.

Most of the contractsgoverning indebtedness to third parties of the companies consolidated withEndesa’s renewable energies subsidiary, ECyR, and of certain Latin Americansubsidiaries include standard project finance clauses relating to thefulfilment of certain financial ratios. Also, they require that all the assetsassigned to the projects be pledged to the creditors. The outstanding balanceof the debt to third parties that includes clauses of this nature amounted to EUR405 million at 31 December 2005 and EUR 230 million at31 December 2004.

As is customary, thecontracts governing a large portion of the financial liabilities of Enersis andEndesa Chile contain cross default clauses in relation to some of their subsidiarieswhereby if one of the subsidiaries were to default on its payment obligationsor other commitments, under certain circumstances, for amounts thatindividually amount to USD 30 million, this situation could lead to the earlymaturity of a significant part of the debt of Enersis and Endesa Chile. Thecontracts governing the debt of Endesa, S.A. do not include any cross defaultclauses in relation to the debt of Enersis and Endesa Italia.

At 31 December 2005and 2004, neither Endesa, S.A. nor any of its major subsidiaries were in asituation of non-compliance with their financial or other obligations thatmight give rise to the early maturity of their financial liabilities.

F-62

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The Group’s directorsconsider that the existence of these clauses will not change thecurrent/non-current classification in the accompanying consolidated balancesheet.

The fair value of theGroup’s gross financial liabilities, including the value of the hedgingderivatives, at 31 December 2005 and 2004, was EUR 21,859 million and EUR 20,279 million,respectively.

***17.****          Riskmanagement policy*

The Endesa Group isexposed to certain risks which it manages by applying risk identification,measurement, concentration limitation and oversight systems.

Themain principles defined by the Endesa Group when establishing its policy forthe management of the principal risks are as follows:

·       Complywith the principles of good corporate governance.

·       Complystrictly with all Endesa’s rules.

·       Eachbusiness and corporate area defines:

i.                    Themarkets and product lines in which it can operate on the basis of havingsufficient know-how and capabilities to ensure effective risk management.

ii.                Criteriaconcerning counterparties.

iii.            Theauthorised operators.

·       Thebusinesses and corporate areas establish for each market in which they operatethe level of risk that they are prepared to assume on a basis that isconsistent with the strategy defined.

·       Thelimits of the businesses and corporate areas are approved by their respectiveRisk Committees or, should they not have one, by the Endesa Risk Committee.

·       Allthe businesses and corporate areas must conduct their business within thelimits approved in each case.

·       Thebusinesses, corporate areas, lines of business and companies establish the riskmanagement controls required to ensure that the transactions are performed inthe markets in accordance with the policies, principles and procedures ofEndesa.

***Interest rate risk***

Interest rate fluctuationschange the fair value of assets and liabilities that bear a fixed interest rateand the future flows from assets and liabilities bearing interest at a floatingrate.

The objective of interestrate risk management is to achieve a balanced debt structure that makes itpossible to minimise the cost of the debt over several years with reducedincome statement volatility.

Based on the Endesa Group’sestimates and debt structure targets, hedging transactions are carried out byarranging derivatives that mitigate these risks.

Thedetail of the interest rate risk structure at 31 December 2005,distinguishing between risk tied to fixed and protected interest rates and risktied to floating interest rates and taking into account the derivativesarranged, is as follows:

| ** **                       | ** ** | **Net Position**             | ** ** |
|----------------------------------|------------|-----------------------------------|------------|
| ** **                       | ** ** | **(Millions of Euros)** | ** ** |
| Fixed or protected interest rate |       |                              | 16,251     |   |   |
| Floating interest rate           |       |                              | 2,030      |   |   |
| **TOTAL**                        | ** ** | ** **                        | **18,281** |   |   |

 

F-63

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Thedetail of the interest rate risk structure at 1 January 2005,distinguishing between risk tied to fixed and protected interest rates and risktied to floating interest rates and taking into account the derivativesarranged, is as follows:

| ** **                        | ** ** | **Net Position**             | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|
| ** **                        | ** ** | **(Millions of Euros)** | ** ** |
| Fixed or protected  interest rate |       |                              | 16,036     |   |   |
| Floating interest rate            |       |                              | 2,662      |   |   |
| **TOTAL**                         | ** ** | ** **                        | **18,698** |   |   |

 

The reference interestrates for the borrowings arranged by the Endesa Group companies are mainlyEuribor and US dollar Libor. In the case of the Latin American currencies, theborrowings are generally tied to the local indexes customarily used in thebanking industry.

***Foreign currency risk***

Theforeign currency risk relates mainly to the following transactions:

·       Debtdenominated in foreign currencies arranged by the Group companies andassociates.

·       Paymentsto be made in international markets in order to purchase fuel stocks.

·       Incomein Latin America tied to the performance of the US dollar.

In addition, the newassets relating to net investments in foreign operations whose functionalcurrency is not the euro are exposed to foreign exchange risk in thetranslation of the financial statements of these foreign operations onconsolidation.

In order to mitigate theforeign exchange risk, the Endesa Group arranged currency swaps and interestrate hedges. The Group also attempts to achieve a balance between the cashcollections and payments relating to its assets and liabilities denominated inforeign currencies.

***Commodity price risk***

TheEndesa Group is exposed to the risk of fluctuations in commodity prices,largely through:

·       Purchasesof fuel stocks in the electricity generation process.

·       Powerpurchase and sale transactions made in domestic and international markets.

Exposure to this risk ismanaged at long term through the diversification of contracts, management ofthe procurements portfolio by tying it to indexes that perform in a similar orcomparable way to end electricity prices (generation) or selling prices(retailing), and through contractual periodic renegotiation clauses, the aim ofwhich is to maintain the economic equilibrium of procurements.

At short and medium termfluctuations in the prices of procurements are managed through specific hedgingtransactions, generally using derivatives.

***Liquidity risk***

The Group’s liquiditypolicy consists of the arrangement of committed credit facilities and currentfinancial assets for an amount sufficient to cater for the projected needs fora given period based on the status and expectations of the debt and capitalmarkets.

***Credit risk***

The Group is not exposedto significant credit risk, since the average period for making collectionsfrom customers is very short and cash placements and made and derivatives arearranged with highly solvent entities.

F-64

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***18.****          Derivativefinancial instruments*

Endesa, applying the risk management policy describedabove, uses mainly interest rate and foreign exchange hedging derivatives.

The most commonly used interest rate derivatives areinterest rate swaps, forward rate agreements and interest rate options. Themost frequently used foreign exchange derivatives are cross currency swaps andforeign exchange hedges.

The Companyclassifies its hedges into three categories:

·       Cashflow hedges:   which hedge the cash flows on debt.

·       Fairvalue hedges:   which hedge the fair value of the debt.

·       Otherhedges:   hedges which, because they do not meet the requirementsestablished by IFRSs, cannot be designated as cash flow or fair value hedges.

Thedetail, by maturity, of the notional and/or contractual amounts of thederivatives outstanding at the Group and of their fair value at 31 December 2005,is as follows:

| ** **                                             | ** ** | **Millions of Euros** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | ** **            | ** ** | **Notional Amount** | ** ** |
| **Derivatives**                                        | ** ** | ** **            | ** ** | **Fair Value** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **Subsequent  Years** | ** ** | **Total** | ** ** |
| **Interest rate hedges**                               | ** ** |                  | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Cash flow hedges                                       |       |                  | (172       | ) |   | 728 |   |   | 383 | ** ** |   |   | 315 | ** ** |   |   | 5,762 | ** ** |   | 7,188 |   |
| Fair value hedges                                      |       |                  | 243        |   |   | 958 |   |   | 67 | ** ** |   |   | 174 | ** ** |   |   | 767 | ** ** |   | 1,966 |   |
| **Foreign exchange hedges**                            | ** ** |                  | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Cash flow hedges                                       |       |                  | (269       | ) |   | 200 |   |   | 41 | ** ** |   |   | 131 | ** ** |   |   | 1,913 | ** ** |   | 2,285 |   |
| Fair value hedges                                      |       |                  | (15        | ) |   | 49 |   |   | — | ** ** |   |   | — | ** ** |   |   | 22 | ** ** |   | 71 |   |
| **Commodity price hedges**                             | ** ** |                  | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Cash flow hedges                                       |       |                  | (17        | ) |   | 1,511 |   |   | 22 | ** ** |   |   | — | ** ** |   |   | — | ** ** |   | 1,533 |   |
| **Derivatives not designated as  hedging instruments** | ** ** |                  | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Interest rate                                          |       |                  | 28         |   |   | 311 |   |   | 235 | ** ** |   |   | 30 | ** ** |   |   | 1,855 | ** ** |   | 2,431 |   |
| Foreign exchange                                       |       |                  | (40        | ) |   | 85 |   |   | 9 | ** ** |   |   | 1 | ** ** |   |   | — | ** ** |   | 95 |   |
| Fuel                                                   |       |                  | —     |   |   | — |   |   | 3 | ** ** |   |   | — | ** ** |   |   | — | ** ** |   | 3 |   |
| Electricity                                            |       |                  | 1          |   |   | 222 |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   | 222 |   |
|                                                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The notional and/or contractual amounts of the contractsentered into do not reflect the actual risk assumed by the Group, since theseamounts only constitute the basis on which the derivative settlementcalculations were made.

The balance of Equity—Asset and Liability RevaluationReserve at 31 December 2005, relating to cash flow hedges was a negativeamount of EUR 191 million before tax, with a negative change of EUR 70 million with respect to the related balance at the beginning of theyear.

This change includes a negative amount of EUR 49million included under the heading Financial Loss in the accompanyingconsolidated income statement to offset the effect on the consolidated incomestatement of the underlying being hedged.

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Theamount of the cash flow hedges recognised in equity at 31 December 2005,will foreseeably be transferred to the consolidated income statement asfollows:

| ** **       | ** ** | **Millions of Euros** | ** ** |
|------------------|------------|---------------------------------|------------|
| 2006             |       |                            | 25         |   |   |
| 2007             |       |                            | 24         |   |   |
| 2008             |       |                            | 24         |   |   |
| Subsequent years |       |                            | 118        |   |   |
| **TOTAL**        | ** ** | ** **                      | **191**    |   |   |

 

***19.****          Taxmatters*

ENDESA, S.A. heads a Group that files consolidatedcorporation tax returns in Spain. The Consolidated Tax Group includes Endesa,S.A., as the Parent, and as subsidiaries, the Spanish companies that meet therequirements provided for in Spanish legislation regulating the taxation of theconsolidated profits of corporate groups. At 31 December 2005, theConsolidated Tax Group comprised 58 companies (67 companies at31 December 2004), of which the most significant were Endesa, S.A., EndesaGeneración, S.A., Gas y Electricidad Generación, S.A.U. (“Gesa Generación”),Unión Eléctrica de Canarias Generación (“Unelco Generación”), Endesa Red, S.A.,Endesa Distribución Eléctrica, S.L., Endesa Operaciones y ServiciosComerciales, S.L., Endesa Energía, S.A., Endesa Europa, S.A., EndesaInternacional S.A., Endesa Participadas, S.A. and Endesa Financiación Filiales,S.A.

The Group’s other subsidiaries file individual taxreturns in accordance with the tax legislation in force in each country.

Setforth below are the reconciliation of the income tax resulting from theapplication of the standard tax rate in force in Spain to the Profit beforeTax, the income tax expense recognised in the consolidated income statement andthe reconciliation of this expense to the net income tax payable for 2005 and2004:

| ** **                                               | ** ** | **Millions of Euros**              | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                               | ** ** | **   2005   ** | ** ** | **    2004    ** | ** ** |
| Consolidated  profit before tax                          |       |                                         | 4,547      |   |   |   | 2,013 |   |   |
| Permanent  differences                                   |       |                                         | (713       | ) |   |   | (338 | ) |   |
| Adjusted profit                                          |       |                                         | 3,834      |   |   |   | 1,675 |   |   |
| Tax rate                                                 |       |                                         | 35         | % |   |   | 35 | % |   |
| Profit adjusted by tax rate                              |       |                                         | 1,342      |   |   |   | 586 |   |   |
| Effect of applying different tax rates                   |       |                                         | (101       | ) |   |   | (61 | ) |   |
| Tax credits                                              |       |                                         | (451       | ) |   |   | (173 | ) |   |
| Income tax expense in the consolidated income  statement |       |                                         | 790        |   |   |   | 352 |   |   |
| Tax recognised directly in equity                        |       |                                         | (114       | ) |   |   | 30 |   |   |
| Total income tax expense                                 |       |                                         | 676        |   |   |   | 382 |   |   |
| Temporary differences                                    |       |                                         | (158       | ) |   |   | (237 | ) |   |
| Net income tax  payable                                  |       |                                         | 518        |   |   |   | 145 |   |   |

 

F-66

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Thedeferred taxes arose in 2005 and 2004 as a result of the following:

| ** **                                                    | ** ** | **Millions of Euros** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------|------------|
| **Deferred Tax Assets**                             | ** ** | ** **                      | ** ** | **   2005   ** | ** ** | **   2004   ** | ** ** |
| Depreciation and  amortisation charge                         |       |                            | 250        |   |   |   | 88 |   |   |
| Provisions for  pensions and collective redundancy procedures |       |                            | 1,486      |   |   |   | 1,379 |   |   |
| Other provisions                                              |       |                            | 491        |   |   |   | 644 |   |   |
| Tax loss and tax  credit carryforwards                        |       |                            | 407        |   |   |   | 392 |   |   |
| Asset revaluation  in Italy                                   |       |                            | 197        |   |   |   | — |   |   |
| Other                                                         |       |                            | 629        |   |   |   | 856 |   |   |
| **TOTAL**                                                     | ** ** | ** **                      | **3,460**  |   | ** ** | ** ** | **3,359** |   |   |
|                                                               |            |                                 |            |  |  |  |  |  |  |  |  |

 

| ** **                                           | ** ** | **Millions of Euros** | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|
| **Deferred Tax Liabilities**               | ** ** | ** **                      | ** ** | **   2005   ** | ** ** | **   2004   ** | ** ** |
| Accelerated  depreciation of assets for tax purposes |       |                            | 1,313      |   |   |   | 1,116 |   |   |
| Other                                                |       |                            | 539        |   |   |   | 608 |   |   |
| **TOTAL**                                            | ** ** | ** **                      | **1,852**  |   | ** ** | ** ** | **1,724** |   |   |
|                                                      |            |                                 |            |  |  |  |  |  |  |  |  |

 

Thedetail at 31 December 2005, of the prior years’ tax losses available foroffset against future profits and the last years for offset are as follows:

| **Year**         | ** ** | ** ** | ** ** | **Millions of Euros** | ** ** |
|------------------|------------|------------|------------|---------------------------------|------------|
| 2006             |       |       | 1          |                            |       |
| 2007             |       |       | 334        |                            |       |
| 2008             |       |       | 6          |                            |       |
| Subsequent years |       |       | 1,817      |                            |       |

 

Of these tax losses, which relate mainly to Latin America,EUR 160 million are recognised under Deferred Tax Assets on the asset side ofthe consolidated balance sheet at 31 December 2005(EUR 152 million at 31 December 2004). No tax asset wasrecognised in respect of the remaining EUR 1,998 million since there is nocertainty as to their recoverability.

The aggregate amount of temporary differencesassociated with retained earnings of subsidiaries for which deferred taxliabilities have not been recognised at 31 December 2005, was notmaterial.

At 31 December 2005, tax assessments totallingapproximately EUR 284 million had been issued against the Group.

In view of the varyinginterpretations that can be made of the applicable tax legislation, the outcomeof the tax audits of the open years that could be conducted by the taxauthorities in the future could give rise to tax liabilities which cannot beobjectively quantified at the present time. However, the Group’s directorsconsider that the liabilities that could arise in this connection would nothave a material effect on the Group’s future earnings.

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***20.****          Revenue*

**a)****               Sales**

Thedetail of this heading in the consolidated income statements for 2005 and 2004is as follows:

| ** **  | ** ** | **Millions of Euros** | ** ** |
|-------------|------------|---------------------------------|------------|
| ** **  | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| Power sales |       | 15,846                          |       | 12,001 |   |
| Services    |       | 1,662                           |       | 1,508 |   |
| **TOTAL**   | ** ** | **17,508**                      | ** ** | **13,509** | ** ** |

 

**b)****               Otheroperating income**

Thedetail of the other operating income in 2005 and 2004 is as follows:

| ** **                                                   | ** ** | **Millions of Euros**              | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                   | ** ** | **   2005   ** | ** ** | **   2004   ** | ** ** |
| CO2 emission allowances (Note  14)                           |       |                                         | 370        |   |   |   | — |   |   |
| Grants related to  income                                    |       |                                         | 23         |   |   |   | 24 |   |   |
| Grants related to  assets transferred to income for the year |       |                                         | 106        |   |   |   | 46 |   |   |
| Other current  operating income                              |       |                                         | 222        |   |   |   | 86 |   |   |
| **TOTAL**                                                    | ** ** | ** **                                   | **721**    |   | ** ** | ** ** | **156** |   |   |

 

***21.****          Financialloss*

Thedetail of the heading “Financial Loss” in the accompanying consolidated incomestatement is as follows:

| ** **             | ** ** | **Millions of Euros** | ** ** |
|------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| Finance income         |       | 224                             |       | 213 |   |
| Finance costs:         |       | (1,481                          | )          | (1,300 | ) |
| Debt                   |       | (1,204                          | )          | (1,147 | ) |
| Provisions             |       | (277                            | )          | (153 | ) |
| Exchange  differences: |       | 5                               |       | (60 | ) |
| Gains                  |       | 243                             |       | 127 |   |
| Losses                 |       | (238                            | )          | (187 | ) |
| **Financial loss**     | ** ** | **(1,252**                      | **)**      | **(1,147** | **)** |

 

The financial loss for2004 does not include a cost of EUR 60 million relating to the preferenceshares because they were recognised in 2004 under Equity—Of Minority Interestsin the consolidated balance sheet since IASs 32 and 39 were not applied in thatyear (see Notes 13.2 and 16).

F-68

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***22.****          Incomefrom sale of assets*

Thedetail of the heading “Income from Sale of Assets” in the accompanyingconsolidated income statements is as follows:

| ** **                          | ** ** | **Millions of Euros**              | ** ** |
|-------------------------------------|------------|----------------------------------------------|------------|
| ** **                          | ** ** | **   2005   ** | ** ** | **   2004   ** | ** ** |
| Equity  investments:                |       |                                         |       |   |   |   |   |   |   |
| Auna                                |       |                                         | 1,273      |   |   |   | — |   |   |
| Sechilienne-Sidec                   |       |                                         | 48         |   |   |   | — |   |   |
| Endesa Italia S.p.A                 |       |                                         | 24         |   |   |   | — |   |   |
| Nueva Nuinsa S.L                    |       |                                         | 16         |   |   |   | — |   |   |
| Lydec Lyonnaise Des Eaux Casablanca |       |                                         | 12         |   |   |   | — |   |   |
| Cepm                                |       |                                         | 7          |   |   |   | — |   |   |
| Smartcom Pcs                        |       |                                         | (3         | ) |   |   | — |   |   |
| Agbar                               |       |                                         | —     |   |   |   | 102 |   |   |
| Senda Ambiental, S.A.               |       |                                         | —     |   |   |   | 14 |   |   |
| Netco Redes, S.A.                   |       |                                         | —     |   |   |   | 8 |   |   |
| Enditel                             |       |                                         | —     |   |   |   | (4 | ) |   |
| Real estate and  other assets       |       |                                         | 109        |   |   |   | 75 |   |   |
| **TOTAL**                           | ** ** | ** **                                   | **1,486**  |   | ** ** | ** ** | **195** |   |   |

 

***23.****          Segmentreporting*

**Basis ofsegmentation**

In carrying on itsbusiness activities, the Group’s organisation is articulated on the basis ofgiving priority to its core business, consisting of the generation,transmission, distribution and retailing of electricity, gas and the provisionof related services, and establishes three major lines of business, each basedon a geographical area:

·       Spainand Portugal, which are managed as an integrated market.

·       Restof Europe.

·       LatinAmerica.

Although within each geographical segment the Groupconsiders there to be a single vertically integrated activity, for the purposeof endowing the segments in Spain and Portugal and Latin America with greatertransparency, Generation and Distribution are treated as secondary segments,and the retailing activity associated therewith are included in each of them.In the case of the Rest of Europe, the Group only has a presence in theGeneration activity.

Since the corporate organisation of the Groupbasically coincides with that of the businesses and, therefore, of thesegments, the basis of allocation established in the segment reportingpresented below is based on the financial information of the companies makingup each segment.

Also, in 2005 the Group had a fourth line of businesscalled “Other Businesses” which included almost exclusively the equityinvestments in companies in the telecommunications industry, which were sold in 2005.

In the segment information presented below, thebalances relating to “Other Businesses” were allocated among the threegeographical segments, as appropriate. When the geographical segments werebroken down into the secondary segments they were included in “Adjustments andOther”.

F-69

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| ** **                                              | ** ** | **Millions of Euros** | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                              | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | **Spain and  Portugal**    | ** ** | **Rest of  Europe** | ** ** | **Latin  America** | ** ** | **Total** | ** ** | **Spain and  Portugal** | ** ** | **Rest of  Europe** | ** ** | **Latin  America** | ** ** | **Total** | ** ** |
| **REVENUE**                                             | ** ** |                            | **9,277**  | ** ** |   |   | **3,720** | ** ** |   |   | **5,232** | ** ** |   | **18,229** | ** ** |   | **6,732** | ** ** |   |   | **2,576** | ** ** |   |   | **4,357** | ** ** |   | **13,665** | ** ** |
| Sales                                                   |       |                            | 8,761      |   |   |   | 3,598 |   |   |   | 5,149 |   |   | 17,508 |   |   | 6,655 |   |   |   | 2,557 |   |   |   | 4,297 |   |   | 13,509 |   |
| Other operating income                                  |       |                            | 516        |   |   |   | 122 |   |   |   | 83 |   |   | 721 |   |   | 77 |   |   |   | 19 |   |   |   | 60 |   |   | 156 |   |
| **PROCUREMENTS AND SERVICES**                           | ** ** |                            | **(4,072** | **)** |   |   | **(2,497** | **)** |   |   | **(2,534** | **)** |   | **(9,103** | **)** |   | **(2,369** | **)** |   |   | **(1,746** | **)** |   |   | **(2,177** | **)** |   | **(6,292** | **)** |
| Power purchased                                         |       |                            | (875       | ) |   |   | (1,087 | ) |   |   | (1,405 | ) |   | (3,367 | ) |   | (434 | ) |   |   | (862 | ) |   |   | (1,060 | ) |   | (2,356 | ) |
| Cost of fuel consumed                                   |       |                            | (2,057     | ) |   |   | (1,189 | ) |   |   | (332 | ) |   | (3,578 | ) |   | (1,547 | ) |   |   | (817 | ) |   |   | (360 | ) |   | (2,724 | ) |
| Transmission expenses                                   |       |                            | (273       | ) |   |   | (10 | ) |   |   | (368 | ) |   | (651 | ) |   | (189 | ) |   |   | (31 | ) |   |   | (300 | ) |   | (520 | ) |
| Other variable  procurements and services               |       |                            | (867       | ) |   |   | (211 | ) |   |   | (429 | ) |   | (1,507 | ) |   | (199 | ) |   |   | (36 | ) |   |   | (457 | ) |   | (692 | ) |
| **CONTRIBUTION MARGIN**                                 | ** ** |                            | **5,205**  | ** ** |   |   | **1,223** | ** ** |   |   | **2,698** | ** ** |   | **9,126** | ** ** |   | **4,363** | ** ** |   |   | **830** | ** ** |   |   | **2,180** | ** ** |   | **7,373** | ** ** |
| Work on non-current  assets                             |       |                            | 139        |   |   |   | 9 |   |   |   | 22 |   |   | 170 |   |   | 133 |   |   |   | 10 |   |   |   | 18 |   |   | 161 |   |
| Staff costs                                             |       |                            | (1,049     | ) |   |   | (161 | ) |   |   | (337 | ) |   | (1,547 | ) |   | (993 | ) |   |   | (115 | ) |   |   | (285 | ) |   | (1,393 | ) |
| Other fixed operating  expenses                         |       |                            | (1,040     | ) |   |   | (184 | ) |   |   | (505 | ) |   | (1,729 | ) |   | (1,039 | ) |   |   | (190 | ) |   |   | (391 | ) |   | (1,620 | ) |
| **GROSS PROFIT/LOSS FROM  OPERATIONS**                  | ** ** |                            | **3,255**  | ** ** |   |   | **887** | ** ** |   |   | **1,878** | ** ** |   | **6,020** | ** ** |   | **2,464** | ** ** |   |   | **535** | ** ** |   |   | **1,522** | ** ** |   | **4,521** | ** ** |
| Depreciation and  amortisation charge                   |       |                            | (1,005     | ) |   |   | (269 | ) |   |   | (502 | ) |   | (1,776 | ) |   | (1,042 | ) |   |   | (165 | ) |   |   | (468 | ) |   | (1,675 | ) |
| **PROFIT/LOSS FROM OPERATIONS**                         | ** ** |                            | **2,250**  | ** ** |   |   | **618** | ** ** |   |   | **1,376** | ** ** |   | **4,244** | ** ** |   | **1,422** | ** ** |   |   | **370** | ** ** |   |   | **1,054** | ** ** |   | **2,846** | ** ** |
| **FINANCIAL PROFIT/LOSS**                               | ** ** |                            | **(664**   | **)** |   |   | **(64** | **)** |   |   | **(524** | **)** |   | **(1,252** | **)** |   | **(545** | **)** |   |   | **(62** | **)** |   |   | **(540** | **)** |   | **(1,147** | **)** |
| Net finance costs                                       |       |                            | (654       | ) |   |   | (63 | ) |   |   | (540 | ) |   | (1,257 | ) |   | (571 | ) |   |   | (63 | ) |   |   | (453 | ) |   | (1,087 | ) |
| Exchange differences                                    |       |                            | (10        | ) |   |   | (1 | ) |   |   | 16 |   |   | 5 |   |   | 26 |   |   |   | 1 |   |   |   | (87 | ) |   | (60 | ) |
| Result of companies  accounted for by the equity method |       |                            | 54         |   |   |   | 9 |   |   |   | 4 |   |   | 67 |   |   | 57 |   |   |   | 10 |   |   |   | 12 |   |   | 79 |   |
| Income from other  investments                          |       |                            | (4         | ) |   |   | — |   |   |   | 6 |   |   | 2 |   |   | 40 |   |   |   | — |   |   |   | — |   |   | 40 |   |
| Income from sale of  assets                             |       |                            | 1,391      |   |   |   | 84 |   |   |   | 11 |   |   | 1,486 |   |   | 193 |   |   |   | — |   |   |   | 2 |   |   | 195 |   |
| **PROFIT/LOSS BEFORE TAX**                              | ** ** |                            | **3,027**  | ** ** |   |   | **647** | ** ** |   |   | **873** | ** ** |   | **4,547** | ** ** |   | **1,167** | ** ** |   |   | **318** | ** ** |   |   | **528** | ** ** |   | **2,013** | ** ** |
| Income tax                                              |       |                            | (572       | ) |   |   | (104 | ) |   |   | (114 | ) |   | (790 | ) |   | (137 | ) |   |   | (114 | ) |   |   | (101 | ) |   | (352 | ) |
| **PROFIT/LOSS FOR THE YEAR**                            | ** ** |                            | **2,455**  | ** ** |   |   | **543** | ** ** |   |   | **759** | ** ** |   | **3,757** | ** ** |   | **1,030** | ** ** |   |   | **204** | ** ** |   |   | **427** | ** ** |   | **1,661** | ** ** |
| **PARENT**                                              | ** ** |                            | **2,446**  | ** ** |   |   | **425** | ** ** |   |   | **311** | ** ** |   | **3,182** | ** ** |   | **961** | ** ** |   |   | **169** | ** ** |   |   | **123** | ** ** |   | **1,253** | ** ** |
| Minority interests                                      |       |                            | 9          |   |   |   | 118 |   |   |   | 448 |   |   | 575 |   |   | 69 |   |   |   | 35 |   |   |   | 304 |   |   | 408 |   |

 

F-70

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| ** **                                         | ** ** | **Millions of Euros** | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | **Spain and  Portugal**    | ** ** | **Rest of  Europe** | ** ** | **Latin  America** | ** ** | **Total** | ** ** | **Spain and  Portugal** | ** ** | **Rest of  Europe** | ** ** | **Latin  America** | ** ** | **Total** | ** ** |
| **ASSETS**                                         | ** ** |                            | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| **Non-current assets**                             | ** ** |                            | **25,295** | ** ** |   |   | **5,692** | ** ** |   |   | **14,755** | ** ** |   | **45,742** | ** ** |   | **21,942** | ** ** |   |   | **5,365** | ** ** |   |   | **12,386** | ** ** |   | **39,693** | ** ** |
| Property, plant and  equipment                     |       |                            | 18,176     | ** ** |   |   | 3,572 | ** ** |   |   | 10,565 | ** ** |   | 32,313 |   |   | 16,663 |   |   |   | 3,532 | ** ** |   |   | 8,715 | ** ** |   | 28,910 |   |
| Investment property                                |       |                            | 4          | ** ** |   |   | — | ** ** |   |   | 67 | ** ** |   | 71 |   |   | — |   |   |   | — | ** ** |   |   | 58 | ** ** |   | 58 |   |
| Intangible assets                                  |       |                            | 720        | ** ** |   |   | 74 | ** ** |   |   | 69 | ** ** |   | 863 |   |   | 251 |   |   |   | 14 | ** ** |   |   | 58 | ** ** |   | 323 |   |
| Goodwill                                           |       |                            | 148        | ** ** |   |   | 1,471 | ** ** |   |   | 2,659 | ** ** |   | 4,278 |   |   | — |   |   |   | 1,507 | ** ** |   |   | 2,049 | ** ** |   | 3,556 |   |
| Non-current financial  assets                      |       |                            | 3,409      | ** ** |   |   | 151 | ** ** |   |   | 574 | ** ** |   | 4,134 |   |   | 756 |   |   |   | 41 | ** ** |   |   | 499 | ** ** |   | 1,296 |   |
| Investments accounted for  using the equity method |       |                            | 378        | ** ** |   |   | 78 | ** ** |   |   | 167 | ** ** |   | 623 |   |   | 1,494 |   |   |   | 112 | ** ** |   |   | 585 | ** ** |   | 2,191 |   |
| Deferred tax assets                                |       |                            | 2,460      | ** ** |   |   | 346 | ** ** |   |   | 654 | ** ** |   | 3,460 |   |   | 2,778 |   |   |   | 159 | ** ** |   |   | 422 | ** ** |   | 3,359 |   |
| **Current assets**                                 | ** ** |                            | **6,075**  | ** ** |   |   | **1,145** | ** ** |   |   | **2,381** | ** ** |   | **9,601** | ** ** |   | **4,356** | ** ** |   |   | **833** | ** ** |   |   | **2,300** | ** ** |   | **7,489** | ** ** |
| Inventories                                        |       |                            | 548        | ** ** |   |   | 150 | ** ** |   |   | 114 | ** ** |   | 812 |   |   | 502 |   |   |   | 189 | ** ** |   |   | 65 | ** ** |   | 756 |   |
| Trade and other  receivables                       |       |                            | 3,124      | ** ** |   |   | 805 | ** ** |   |   | 1,305 | ** ** |   | 5,234 |   |   | 2,403 |   |   |   | 487 | ** ** |   |   | 1,026 | ** ** |   | 3,916 |   |
| Current financial assets                           |       |                            | 22         | ** ** |   |   | — | ** ** |   |   | 55 | ** ** |   | 77 |   |   | (78 | ) |   |   | 13 | ** ** |   |   | 129 | ** ** |   | 64 |   |
| Current tax assets                                 |       |                            | 471        | ** ** |   |   | 63 | ** ** |   |   | 330 | ** ** |   | 864 |   |   | 114 |   |   |   | 83 | ** ** |   |   | 269 | ** ** |   | 466 |   |
| Cash and cash equivalents                          |       |                            | 1,910      | ** ** |   |   | 127 | ** ** |   |   | 577 | ** ** |   | 2,614 |   |   | 1,306 |   |   |   | 61 | ** ** |   |   | 811 | ** ** |   | 2,178 |   |
| Other assets                                       |       |                            | —     | ** ** |   |   | — | ** ** |   |   | — | ** ** |   | — |   |   | 109 |   |   |   | — | ** ** |   |   | — | ** ** |   | 109 |   |
| **Non-current assets cl. as held  for sale**       | ** ** |                            | **22**     | ** ** |   |   | — | ** ** |   |   | — | ** ** |   | **22** |   |   | — |   |   |   | — | ** ** |   |   | — | ** ** |   | — |   |
| **TOTAL ASSETS**                                   | ** ** |                            | **31,392** | ** ** |   |   | **6,837** | ** ** |   |   | **17,136** | ** ** |   | **55,365** | ** ** |   | **26,298** | ** ** |   |   | **6,198** | ** ** |   |   | **14,686** | ** ** |   | **47,182** | ** ** |
| **EQUITY AND LIABILITIES**                         | ** ** |                            | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| **Equity**                                         | ** ** |                            | **6,566**  | ** ** |   |   | **2,834** | ** ** |   |   | **6,927** | ** ** |   | **16,327** | ** ** |   | **7,022** | ** ** |   |   | **2,306** | ** ** |   |   | **4,805** | ** ** |   | **14,133** | ** ** |
| Of the Parent                                      |       |                            | 6,447      | ** ** |   |   | 1,979 | ** ** |   |   | 3,164 | ** ** |   | 11,590 |   |   | 5,406 |   |   |   | 1,667 | ** ** |   |   | 1,655 | ** ** |   | 8,728 |   |
| Of minority interests                              |       |                            | 119        | ** ** |   |   | 855 | ** ** |   |   | 3,763 | ** ** |   | 4,737 |   |   | 1,616 |   |   |   | 639 | ** ** |   |   | 3,150 | ** ** |   | 5,405 |   |
| **Non-current liabilities**                        | ** ** |                            | **18,337** | ** ** |   |   | **2,704** | ** ** |   |   | **7,589** | ** ** |   | **28,630** | ** ** |   | **15,201** | ** ** |   |   | **2,947** | ** ** |   |   | **8,252** | ** ** |   | **26,400** | ** ** |
| Deferred income                                    |       |                            | 1,799      | ** ** |   |   | 148 | ** ** |   |   | 115 | ** ** |   | 2,062 |   |   | 1,446 |   |   |   | 9 | ** ** |   |   | 80 | ** ** |   | 1,535 |   |
| Long-term provisions                               |       |                            | 3,865      | ** ** |   |   | 342 | ** ** |   |   | 890 | ** ** |   | 5,097 |   |   | 3,469 |   |   |   | 254 | ** ** |   |   | 671 | ** ** |   | 4,394 |   |
| Bank borrowings and other  financial liabilities   |       |                            | 11,719     | ** ** |   |   | 1,390 | ** ** |   |   | 5,478 | ** ** |   | 18,587 |   |   | 9,256 |   |   |   | 1,881 | ** ** |   |   | 6,578 | ** ** |   | 17,715 |   |
| Other non-current  payables                        |       |                            | 407        | ** ** |   |   | 503 | ** ** |   |   | 122 | ** ** |   | 1,032 |   |   | 397 |   |   |   | 535 | ** ** |   |   | 100 | ** ** |   | 1,032 |   |
| Deferred tax liabilities                           |       |                            | 547        | ** ** |   |   | 321 | ** ** |   |   | 984 | ** ** |   | 1,852 |   |   | 633 |   |   |   | 268 | ** ** |   |   | 823 | ** ** |   | 1,724 |   |
| **Current liabilities**                            | ** ** |                            | **6,489**  | ** ** |   |   | **1,299** | ** ** |   |   | **2,620** | ** ** |   | **10,408** | ** ** |   | **4,075** | ** ** |   |   | **945** | ** ** |   |   | **1,629** | ** ** |   | **6,649** | ** ** |
| Bank borrowings and other  financial liabilities   |       |                            | 1,219      | ** ** |   |   | 23 | ** ** |   |   | 1,208 | ** ** |   | 2,450 |   |   | 592 |   |   |   | 297 | ** ** |   |   | 652 | ** ** |   | 1,541 |   |
| Non-current trade and  other payables              |       |                            | 5,024      | ** ** |   |   | 1,002 | ** ** |   |   | 948 | ** ** |   | 6,974 |   |   | 3,248 |   |   |   | 576 | ** ** |   |   | 756 | ** ** |   | 4,580 |   |
| Current tax liabilities                            |       |                            | 246        | ** ** |   |   | 274 | ** ** |   |   | 464 | ** ** |   | 984 |   |   | 235 |   |   |   | 72 | ** ** |   |   | 221 | ** ** |   | 528 |   |
| **TOTAL EQUITY AND LIABILITIES**                   | ** ** |                            | **31,392** | ** ** |   |   | **6,837** | ** ** |   |   | **17,136** | ** ** |   | **55,365** | ** ** |   | **26,298** | ** ** |   |   | **6,198** | ** ** |   |   | **14,686** | ** ** |   | **47,182** | ** ** |

 

F-71

----

| ** **                                                   | ** ** | **Electricity Business in Spain and Portugal** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                                                                | ** ** | **2004** | ** ** |
| ** **                                                   | ** ** | **Generation**                                                          | ** ** | **Distribution** | ** ** | **Corporate  Activities** | ** ** | **Adjustments  and Other** | ** ** | **Total** | ** ** | **Generation** | ** ** | **Distribution** | ** ** | **Corporate  Activities** | ** ** | **Adjustments  and Other** | ** ** | **Total** | ** ** |
| **REVENUE**                                                  | ** ** |                                                                    | **8,140**  | ** ** |   |   | **1,944** | ** ** |   |   | **8** | ** ** |   |   | **(815** | **)** |   | **9,277** | ** ** |   | **5,506** | ** ** |   |   | **1,862** | ** ** |   |   | **84** | ** ** |   |   | **(720** | **)** |   | **6,732** | ** ** |
| Sales                                                        |       |                                                                    | 7,740      |   |   |   | 1,824 |   |   |   | 8 |   |   |   | (811 | ) |   | 8,761 |   |   | 5,461 |   |   |   | 1,762 |   |   |   | 75 |   |   |   | (643 | ) |   | 6,655 |   |
| Other operating income                                       |       |                                                                    | 400        |   |   |   | 120 |   |   |   | — |   |   |   | (4 | ) |   | 516 |   |   | 45 |   |   |   | 100 |   |   |   | 9 |   |   |   | (77 | ) |   | 77 |   |
| **PROCUREMENTS AND SERVICES**                                | ** ** |                                                                    | **(4,761** | **)** |   |   | **(138** | **)** |   |   | **—** | ** ** |   |   | **827** | ** ** |   | **(4,072** | **)** |   | **(2,937** | **)** |   |   | **(88** | **)** |   |   | **(9** | **)** |   |   | **665** | ** ** |   | **(2,369** | **)** |
| Power purchased                                              |       |                                                                    | (1,017     | ) |   |   | (2 | ) |   |   | — |   |   |   | 144 |   |   | (875 | ) |   | (495 | ) |   |   | — |   |   |   | (9 | ) |   |   | 70 |   |   | (434 | ) |
| Cost of fuel consumed                                        |       |                                                                    | (2,057     | ) |   |   | — |   |   |   | — |   |   |   | — |   |   | (2,057 | ) |   | (1,554 | ) |   |   | (1 | ) |   |   | — |   |   |   | 8 |   |   | (1,547 | ) |
| Transmission expenses                                        |       |                                                                    | (828       | ) |   |   | (1 | ) |   |   | — |   |   |   | 556 |   |   | (273 | ) |   | (608 | ) |   |   | (1 | ) |   |   | — |   |   |   | 420 |   |   | (189 | ) |
| Other variable  procurements and services               |       |                                                                    | (859       | ) |   |   | (135 | ) |   |   | — |   |   |   | 127 |   |   | (867 | ) |   | (280 | ) |   |   | (86 | ) |   |   | — |   |   |   | 167 |   |   | (199 | ) |
| **CONTRIBUTION MARGIN**                                      | ** ** |                                                                    | **3,379**  | ** ** |   |   | **1,806** | ** ** |   |   | **8** | ** ** |   |   | **12** | ** ** |   | **5,205** | ** ** |   | **2,569** | ** ** |   |   | **1,774** | ** ** |   |   | **75** | ** ** |   |   | **(55** | **)** |   | **4,363** | ** ** |
| Work on non-current  assets                                  |       |                                                                    | 7          |   |   |   | 116 |   |   |   | — |   |   |   | 16 |   |   | 139 |   |   | 13 |   |   |   | 108 |   |   |   | 1 |   |   |   | 11 |   |   | 133 |   |
| Staff costs                                                  |       |                                                                    | (391       | ) |   |   | (518 | ) |   |   | (132 | ) |   |   | (8 | ) |   | (1,049 | ) |   | (393 | ) |   |   | (441 | ) |   |   | (134 | ) |   |   | (25 | ) |   | (993 | ) |
| Other fixed operating  expenses                              |       |                                                                    | (678       | ) |   |   | (515 | ) |   |   | 173 |   |   |   | (20 | ) |   | (1,040 | ) |   | (664 | ) |   |   | (540 | ) |   |   | 128 |   |   |   | 37 |   |   | (1,039 | ) |
| **GROSS PROFIT/LOSS FROM  OPERATIONS**                       | ** ** |                                                                    | **2,317**  | ** ** |   |   | **889** | ** ** |   |   | **49** | ** ** |   |   | **—** | ** ** |   | **3,255** | ** ** |   | **1,525** | ** ** |   |   | **901** | ** ** |   |   | **70** | ** ** |   |   | **(32** | **)** |   | **2,464** | ** ** |
| Depreciation and  amortisation charge                        |       |                                                                    | (571       | ) |   |   | (410 | ) |   |   | (23 | ) |   |   | (1 | ) |   | (1,005 | ) |   | (628 | ) |   |   | (390 | ) |   |   | (24 | ) |   |   | — |   |   | (1,042 | ) |
| **PROFIT/LOSS FROM OPERATIONS**                              | ** ** |                                                                    | **1,746**  | ** ** |   |   | **479** | ** ** |   |   | **26** | ** ** |   |   | **(1** | **)** |   | **2,250** | ** ** |   | **897** | ** ** |   |   | **511** | ** ** |   |   | **46** | ** ** |   |   | **(32** | **)** |   | **1,422** | ** ** |
| **FINANCIAL PROFIT/LOSS**                                    | ** ** |                                                                    | **(241**   | **)** |   |   | **(250** | **)** |   |   | **(196** | **)** |   |   | **23** | ** ** |   | **(664** | **)** |   | **(186** | **)** |   |   | **(181** | **)** |   |   | **743** | ** ** |   |   | **(921** | **)** |   | **(545** | **)** |
| Net finance costs                                            |       |                                                                    | (241       | ) |   |   | (250 | ) |   |   | (189 | ) |   |   | 26 |   |   | (654 | ) |   | (186 | ) |   |   | (182 | ) |   |   | 734 |   |   |   | (937 | ) |   | (571 | ) |
| Exchange differences                                         |       |                                                                    | —     |   |   |   | — |   |   |   | (7 | ) |   |   | (3 | ) |   | (10 | ) |   | — |   |   |   | 1 |   |   |   | 9 |   |   |   | 16 |   |   | 26 |   |
| Result of companies  accounted for by the equity method |       |                                                                    | 41         |   |   |   | 3 |   |   |   | — |   |   |   | 10 |   |   | 54 |   |   | 45 |   |   |   | 1 |   |   |   | — |   |   |   | 11 |   |   | 57 |   |
| Income from other  investments                               |       |                                                                    | 1          |   |   |   | 2 |   |   |   | 4,075 |   |   |   | (4,082 | ) |   | (4 | ) |   | 23 |   |   |   | — |   |   |   | 407 |   |   |   | (390 | ) |   | 40 |   |
| Income from sale of  assets                                  |       |                                                                    | —     |   |   |   | 106 |   |   |   | 9 |   |   |   | 1,276 |   |   | 1,391 |   |   | — |   |   |   | 48 |   |   |   | 23 |   |   |   | 122 |   |   | 193 |   |
| **PROFIT/LOSS BEFORE TAX**                                   | ** ** |                                                                    | **1,547**  | ** ** |   |   | **340** | ** ** |   |   | **3,914** | ** ** |   |   | **(2,774** | **)** |   | **3,027** | ** ** |   | **779** | ** ** |   |   | **379** | ** ** |   |   | **1,219** | ** ** |   |   | **(1,210** | **)** |   | **1,167** | ** ** |
| Income tax                                                   |       |                                                                    | (401       | ) |   |   | (138 | ) |   |   | (250 | ) |   |   | 217 |   |   | (572 | ) |   | (166 | ) |   |   | (85 | ) |   |   | (103 | ) |   |   | 217 |   |   | (137 | ) |
| **PROFIT/LOSS FOR THE YEAR**                                 | ** ** |                                                                    | **1,146**  | ** ** |   |   | **202** | ** ** |   |   | **3,664** | ** ** |   |   | **(2,557** | **)** |   | **2,455** | ** ** |   | **613** | ** ** |   |   | **294** | ** ** |   |   | **1,116** | ** ** |   |   | **(993** | **)** |   | **1,030** | ** ** |
| **PARENT**                                                   | ** ** |                                                                    | **1,144**  | ** ** |   |   | **199** | ** ** |   |   | **3,664** | ** ** |   |   | **(2,561** | **)** |   | **2,446** | ** ** |   | **612** | ** ** |   |   | **291** | ** ** |   |   | **1,116** | ** ** |   |   | **(1,058** | **)** |   | **961** | ** ** |
| Minority interests                                           |       |                                                                    | 2          |   |   |   | 3 |   |   |   | — |   |   |   | 4 |   |   | 9 |   |   | 1 |   |   |   | 3 |   |   |   | — |   |   |   | 65 |   |   | 69 |   |

 

F-72

 

----

 

| ** **                                             | ** ** | **Electricity Business in Spain and Portugal** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2005**                                                                | ** ** | **2004** | ** ** |
| ** **                                             | ** ** | **Generation**                                                          | ** ** | **Distribution** | ** ** | **Corporate  Activities** | ** ** | **Adjustments  and Other** | ** ** | **Total** | ** ** | **Generation** | ** ** | **Distribution** | ** ** | **Corporate  Activities** | ** ** | **Adjustments  and Other** | ** ** | **Total** | ** ** |
| **ASSETS**                                             | ** ** |                                                                    | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| **Non-current  assets**                                | ** ** |                                                                    | **11,858** | ** ** |   |   | **10,220** | ** ** |   |   | **48,305** | ** ** |   |   | **(45,088** | **)** |   | **25,295** | ** ** |   | **10,320** | ** ** |   |   | **9,282** | ** ** |   |   | **40,605** | ** ** |   |   | **(38,265** | **)** |   | **21,942** | ** ** |
| Property, plant  and equipment                         |       |                                                                    | 9,153      | ** ** |   |   | 8,592 | ** ** |   |   | 77 | ** ** |   |   | 354 |   |   | 18,176 |   |   | 8,650 | ** ** |   |   | 7,558 | ** ** |   |   | 78 | ** ** |   |   | 377 |   |   | 16,663 |   |
| Investment  property                                   |       |                                                                    | —     | ** ** |   |   | 4 | ** ** |   |   | — | ** ** |   |   | — |   |   | 4 |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — |   |   | — |   |
| Intangible assets                                      |       |                                                                    | 539        | ** ** |   |   | 142 | ** ** |   |   | 38 | ** ** |   |   | 1 |   |   | 720 |   |   | 65 | ** ** |   |   | 150 | ** ** |   |   | 35 | ** ** |   |   | 1 |   |   | 251 |   |
| Goodwill                                               |       |                                                                    | 148        | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — |   |   | 148 |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — |   |   | — |   |
| Non-current  financial assets                          |       |                                                                    | 841        | ** ** |   |   | 379 | ** ** |   |   | 47,696 | ** ** |   |   | (45,507 | ) |   | 3,409 |   |   | 358 | ** ** |   |   | 368 | ** ** |   |   | 39,430 | ** ** |   |   | (39,400 | ) |   | 756 |   |
| Investments  accounted for using the equity method     |       |                                                                    | 273        | ** ** |   |   | 11 | ** ** |   |   | — | ** ** |   |   | 94 |   |   | 378 |   |   | 258 | ** ** |   |   | 32 | ** ** |   |   | 9 | ** ** |   |   | 1,195 |   |   | 1,494 |   |
| Deferred tax  assets                                   |       |                                                                    | 904        | ** ** |   |   | 1,092 | ** ** |   |   | 494 | ** ** |   |   | (30 | ) |   | 2,460 |   |   | 989 | ** ** |   |   | 1,174 | ** ** |   |   | 1,053 | ** ** |   |   | (438 | ) |   | 2,778 |   |
| **Current  assets**                                    | ** ** |                                                                    | **4,237**  | ** ** |   |   | **1,981** | ** ** |   |   | **6,848** | ** ** |   |   | **(6,991** | **)** |   | **6,075** | ** ** |   | **2,016** | ** ** |   |   | **1,247** | ** ** |   |   | **2,494** | ** ** |   |   | **(1,401** | **)** |   | **4,356** | ** ** |
| Inventories                                            |       |                                                                    | 534        | ** ** |   |   | 19 | ** ** |   |   | — | ** ** |   |   | (5 | ) |   | 548 |   |   | 482 | ** ** |   |   | 16 | ** ** |   |   | — | ** ** |   |   | 4 |   |   | 502 |   |
| Trade and other  receivables                           |       |                                                                    | 2,978      | ** ** |   |   | 1,692 | ** ** |   |   | 142 | ** ** |   |   | (1,688 | ) |   | 3,124 |   |   | 1,371 | ** ** |   |   | 1,175 | ** ** |   |   | 165 | ** ** |   |   | (308 | ) |   | 2,403 |   |
| Current financial  assets                              | ** ** |                                                                    | **8**      | ** ** |   |   | **2** | ** ** |   |   | **4,215** | ** ** |   |   | **(4,203** | **)** |   | **22** | ** ** |   | **15** | ** ** |   |   | **4** | ** ** |   |   | **614** | ** ** |   |   | **(711** | **)** |   | **(78** | **)** |
| Current tax assets                                     |       |                                                                    | 596        | ** ** |   |   | 243 | ** ** |   |   | 1,014 | ** ** |   |   | (1,382 | ) |   | 471 |   |   | 113 | ** ** |   |   | 47 | ** ** |   |   | 432 | ** ** |   |   | (478 | ) |   | 114 |   |
| Cash and cash  equivalents                             |       |                                                                    | 121        | ** ** |   |   | 25 | ** ** |   |   | 1,462 | ** ** |   |   | 302 |   |   | 1,910 |   |   | 35 | ** ** |   |   | 5 | ** ** |   |   | 1,266 | ** ** |   |   | — |   |   | 1,306 |   |
| Other assets                                           |       |                                                                    | —     | ** ** |   |   | — | ** ** |   |   | 15 | ** ** |   |   | (15 | ) |   | — |   |   | — | ** ** |   |   | — | ** ** |   |   | 17 | ** ** |   |   | 92 |   |   | 109 |   |
| **Non-current  assets cl. held f.sale**                | ** ** |                                                                    | **—** | ** ** |   |   | **22** | ** ** |   |   | **—** | ** ** |   |   | **—** | ** ** |   | **22** | ** ** |   | **—** | ** ** |   |   | **—** | ** ** |   |   | **—** | ** ** |   |   | **—** | ** ** |   | **—** | ** ** |
| **TOTAL  ASSETS**                                      | ** ** |                                                                    | **16,095** | ** ** |   |   | **12,223** | ** ** |   |   | **55,153** | ** ** |   |   | **(52,079** | **)** |   | **31,392** | ** ** |   | **12,336** | ** ** |   |   | **10,529** | ** ** |   |   | **43,099** | ** ** |   |   | **(39,666** | **)** |   | **26,298** | ** ** |
| **EQUITY AND LIABILITIES**                             | ** ** |                                                                    | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| **Equity**                                             | ** ** |                                                                    | **4,448**  | ** ** |   |   | **1,733** | ** ** |   |   | **21,432** | ** ** |   |   | **(21,047** | **)** |   | **6,566** | ** ** |   | **4,749** | ** ** |   |   | **2,035** | ** ** |   |   | **18,944** | ** ** |   |   | **(18,706** | **)** |   | **7,022** | ** ** |
| Of the Parent                                          |       |                                                                    | 4,430      | ** ** |   |   | 1,723 | ** ** |   |   | 21,432 | ** ** |   |   | (21,138 | ) |   | 6,447 |   |   | 4,733 | ** ** |   |   | 2,025 | ** ** |   |   | 18,944 | ** ** |   |   | (20,296 | ) |   | 5,406 |   |
| Of minority  interests                                 |       |                                                                    | 18         | ** ** |   |   | 10 | ** ** |   |   | — | ** ** |   |   | 91 |   |   | 119 |   |   | 16 | ** ** |   |   | 10 | ** ** |   |   | — | ** ** |   |   | 1,590 |   |   | 1,616 |   |
| **Non-current  liabilities**                           | ** ** |                                                                    | **6,051**  | ** ** |   |   | **8,359** | ** ** |   |   | **24,355** | ** ** |   |   | **(20,428** | **)** |   | **18,337** | ** ** |   | **5,668** | ** ** |   |   | **6,600** | ** ** |   |   | **20,959** | ** ** |   |   | **(18,026** | **)** |   | **15,201** | ** ** |
| Deferred income                                        |       |                                                                    | 86         | ** ** |   |   | 1,720 | ** ** |   |   | — | ** ** |   |   | (7 | ) |   | 1,799 |   |   | 88 | ** ** |   |   | 1,358 | ** ** |   |   | — | ** ** |   |   | — |   |   | 1,446 |   |
| Long-term  provisions                                  |       |                                                                    | 1,608      | ** ** |   |   | 1,874 | ** ** |   |   | 377 | ** ** |   |   | 6 |   |   | 3,865 |   |   | 1,395 | ** ** |   |   | 1,583 | ** ** |   |   | 513 | ** ** |   |   | (22 | ) |   | 3,469 |   |
| Bank borrowings  and other financial liabilities  |       |                                                                    | 4,008      | ** ** |   |   | 4,374 | ** ** |   |   | 23,853 | ** ** |   |   | (20,516 | ) |   | 11,719 |   |   | 3,863 | ** ** |   |   | 3,279 | ** ** |   |   | 20,317 | ** ** |   |   | (18,203 | ) |   | 9,256 |   |
| Other non-current  payables                            |       |                                                                    | 108        | ** ** |   |   | 293 | ** ** |   |   | — | ** ** |   |   | 6 |   |   | 407 |   |   | 115 | ** ** |   |   | 277 | ** ** |   |   | — | ** ** |   |   | 5 |   |   | 397 |   |
| Deferred tax  liabilities                              |       |                                                                    | 241        | ** ** |   |   | 98 | ** ** |   |   | 125 | ** ** |   |   | 83 |   |   | 547 |   |   | 207 | ** ** |   |   | 103 | ** ** |   |   | 129 | ** ** |   |   | 194 |   |   | 633 |   |
| **Current  liabilities**                               | ** ** |                                                                    | **5,596**  | ** ** |   |   | **2,131** | ** ** |   |   | **9,366** | ** ** |   |   | **(10,604** | **)** |   | **6,489** | ** ** |   | **1,919** | ** ** |   |   | **1,894** | ** ** |   |   | **3,196** | ** ** |   |   | **(2,934** | **)** |   | **4,075** | ** ** |
| Bank borrowings  and other financial liabilities  |       |                                                                    | 554        | ** ** |   |   | 205 | ** ** |   |   | 6,832 | ** ** |   |   | (6,372 | ) |   | 1,219 |   |   | 37 | ** ** |   |   | 183 | ** ** |   |   | 2,390 | ** ** |   |   | (2,018 | ) |   | 592 |   |
| Non-current trade  and other payables                  |       |                                                                    | 4,424      | ** ** |   |   | 1,838 | ** ** |   |   | 1,736 | ** ** |   |   | (2,974 | ) |   | 5,024 |   |   | 1,628 | ** ** |   |   | 1,595 | ** ** |   |   | 520 | ** ** |   |   | (495 | ) |   | 3,248 |   |
| Current tax  liabilities                               |       |                                                                    | 618        | ** ** |   |   | 88 | ** ** |   |   | 798 | ** ** |   |   | (1,258 | ) |   | 246 |   |   | 254 | ** ** |   |   | 116 | ** ** |   |   | 286 | ** ** |   |   | (421 | ) |   | 235 |   |
| **TOTAL  EQUITY AND LIABILITIES**                      | ** ** |                                                                    | **16,095** | ** ** |   |   | **12,223** | ** ** |   |   | **55,153** | ** ** |   |   | **(52,079** | **)** |   | **31,392** | ** ** |   | **12,336** | ** ** |   |   | **10,529** | ** ** |   |   | **43,099** | ** ** |   |   | **(39,666** | **)** |   | **26,298** | ** ** |

 

F-73

 

----

| ** **                                              | ** ** | **Electricity Business in Latin America** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                                      | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | **Generation**                                                | ** ** | **Distribution** | ** ** | **Corporate  Activities** | ** ** | **Adjustments  and Other** | ** ** | **Total** | ** ** | **Generation** | ** ** | **Distribution** | ** ** | **Corporate  Activities** | ** ** | **Adjustments  and Other** | ** ** | **Total** | ** ** |
| **REVENUE**                                             | ** ** |                                                          | **2,297**  | ** ** |   |   | **3,476** | ** ** |   |   | **17** | ** ** |   |   | **(558** | **)** |   | **5,232** | ** ** |   | **1,936** | ** ** |   |   | **2,912** | ** ** |   |   | **6** | ** ** |   |   | **(497** | **)** |   | **4,357** | ** ** |
| Sales                                                   |       |                                                          | 2,284      |   |   |   | 3,419 |   |   |   | 10 |   |   |   | (564 | ) |   | 5,149 |   |   | 1,947 |   |   |   | 2,862 |   |   |   | 5 |   |   |   | (517 | ) |   | 4,297 |   |
| Other operating income                                  |       |                                                          | 13         |   |   |   | 57 |   |   |   | 7 |   |   |   | 6 |   |   | 83 |   |   | (11 | ) |   |   | 50 |   |   |   | 1 |   |   |   | 20 |   |   | 60 |   |
| **PROCUREMENTS AND SERVICES**                           | ** ** |                                                          | **(1,063** | **)** |   |   | **(2,048** | **)** |   |   | **—** | ** ** |   |   | **577** | ** ** |   | **(2,534** | **)** |   | **(816** | **)** |   |   | **(1,839** | **)** |   |   | **—** | ** ** |   |   | **478** | ** ** |   | **(2,177** | **)** |
| Power purchased                                         |       |                                                          | (328       | ) |   |   | (1,684 | ) |   |   | — |   |   |   | 607 |   |   | (1,405 | ) |   | (231 | ) |   |   | (1,381 | ) |   |   | — |   |   |   | 552 |   |   | (1,060 | ) |
| Cost of fuel consumed                                   |       |                                                          | (332       | ) |   |   | — |   |   |   | — |   |   |   | — |   |   | (332 | ) |   | (308 | ) |   |   | (18 | ) |   |   | — |   |   |   | (34 | ) |   | (360 | ) |
| Transmission expenses                                   |       |                                                          | (281       | ) |   |   | (115 | ) |   |   | — |   |   |   | 28 |   |   | (368 | ) |   | (226 | ) |   |   | (71 | ) |   |   | — |   |   |   | (3 | ) |   | (300 | ) |
| Other variable  procurements and  services              |       |                                                          | (122       | ) |   |   | (249 | ) |   |   | — |   |   |   | (58 | ) |   | (429 | ) |   | (51 | ) |   |   | (369 | ) |   |   | — |   |   |   | (37 | ) |   | (457 | ) |
| **CONTRIBUTION MARGIN**                                 | ** ** |                                                          | **1,234**  | ** ** |   |   | **1,428** | ** ** |   |   | **17** | ** ** |   |   | **19** | ** ** |   | **2,698** | ** ** |   | **1,120** | ** ** |   |   | **1,073** | ** ** |   |   | **6** | ** ** |   |   | **(19** | **)** |   | **2,180** | ** ** |
| Work on non-current  assets                             |       |                                                          | —     |   |   |   | 22 |   |   |   | — |   |   |   | — |   |   | 22 |   |   | — |   |   |   | 18 |   |   |   | — |   |   |   | — |   |   | 18 |   |
| Staff costs                                             |       |                                                          | (75        | ) |   |   | (187 | ) |   |   | (24 | ) |   |   | (51 | ) |   | (337 | ) |   | (57 | ) |   |   | (164 | ) |   |   | (20 | ) |   |   | (44 | ) |   | (285 | ) |
| Other fixed operating  expenses                         |       |                                                          | (107       | ) |   |   | (365 | ) |   |   | (78 | ) |   |   | 45 |   |   | (505 | ) |   | (125 | ) |   |   | (279 | ) |   |   | (64 | ) |   |   | 77 |   |   | (391 | ) |
| **GROSS PROFIT/LOSS FROM  OPERATIONS**                  | ** ** |                                                          | **1,052**  | ** ** |   |   | **898** | ** ** |   |   | **(85** | **)** |   |   | **13** | ** ** |   | **1,878** | ** ** |   | **938** | ** ** |   |   | **648** | ** ** |   |   | **(78** | **)** |   |   | **14** | ** ** |   | **1,522** | ** ** |
| Depreciation and  amortisation charge                   |       |                                                          | (270       | ) |   |   | (221 | ) |   |   | (2 | ) |   |   | (9 | ) |   | (502 | ) |   | (216 | ) |   |   | (248 | ) |   |   | (1 | ) |   |   | (3 | ) |   | (468 | ) |
| **PROFIT/LOSS FROM OPERATIONS**                         | ** ** |                                                          | **782**    | ** ** |   |   | **677** | ** ** |   |   | **(87** | **)** |   |   | **4** | ** ** |   | **1,376** | ** ** |   | **722** | ** ** |   |   | **400** | ** ** |   |   | **(79** | **)** |   |   | **11** | ** ** |   | **1,054** | ** ** |
| **FINANCIAL PROFIT/LOSS**                               | ** ** |                                                          | **(300**   | **)** |   |   | **(153** | **)** |   |   | **(70** | **)** |   |   | **(1** | **)** |   | **(524** | **)** |   | **(270** | **)** |   |   | **(148** | **)** |   |   | **(150** | **)** |   |   | **28** | ** ** |   | **(540** | **)** |
| Net finance costs                                       |       |                                                          | (305       | ) |   |   | (146 | ) |   |   | (82 | ) |   |   | (7 | ) |   | (540 | ) |   | (258 | ) |   |   | (106 | ) |   |   | (80 | ) |   |   | (9 | ) |   | (453 | ) |
| Exchange differences                                    |       |                                                          | 5          |   |   |   | (7 | ) |   |   | 12 |   |   |   | 6 |   |   | 16 |   |   | (12 | ) |   |   | (42 | ) |   |   | (70 | ) |   |   | 37 |   |   | (87 | ) |
| Result of companies  accounted for by the equity method |       |                                                          | 26         |   |   |   | — |   |   |   | (6 | ) |   |   | (16 | ) |   | 4 |   |   | 14 |   |   |   | — |   |   |   | 3 |   |   |   | (5 | ) |   | 12 |   |
| Income from other  investments                          |       |                                                          | (7         | ) |   |   | — |   |   |   | 58 |   |   |   | (45 | ) |   | 6 |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Income from disposal of  assets                         |       |                                                          | 5          |   |   |   | (1 | ) |   |   | 17 |   |   |   | (10 | ) |   | 11 |   |   | 8 |   |   |   | — |   |   |   | — |   |   |   | (6 | ) |   | 2 |   |
| **PROFIT/LOSS BEFORE TAX**                              | ** ** |                                                          | **506**    | ** ** |   |   | **523** | ** ** |   |   | **(88** | **)** |   |   | **(68** | **)** |   | **873** | ** ** |   | **474** | ** ** |   |   | **252** | ** ** |   |   | **(226** | **)** |   |   | **28** | ** ** |   | **528** | ** ** |
| Income tax                                              |       |                                                          | (52        | ) |   |   | (140 | ) |   |   | (42 | ) |   |   | 120 |   |   | (114 | ) |   | (89 | ) |   |   | (69 | ) |   |   | 61 |   |   |   | (4 | ) |   | (101 | ) |
| **PROFIT/LOSS FOR THE YEAR**                            | ** ** |                                                          | **454**    | ** ** |   |   | **383** | ** ** |   |   | **(130** | **)** |   |   | **52** | ** ** |   | **759** | ** ** |   | **385** | ** ** |   |   | **183** | ** ** |   |   | **(165** | **)** |   |   | **24** | ** ** |   | **427** | ** ** |
| **PARENT**                                              | ** ** |                                                          | **297**    | ** ** |   |   | **306** | ** ** |   |   | **(130** | **)** |   |   | **(162** | **)** |   | **311** | ** ** |   | **226** | ** ** |   |   | **167** | ** ** |   |   | **(165** | **)** |   |   | **(105** | **)** |   | **123** | ** ** |
| Minority interests                                      |       |                                                          | 157        |   |   |   | 77 |   |   |   | — |   |   |   | 214 |   |   | 448 |   |   | 159 |   |   |   | 16 |   |   |   | — |   |   |   | 129 |   |   | 304 |   |

 

F-74

 

----

 

| ** **                                         | ** ** | **Electricity Business in Latin America** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                         | ** ** | **2005**                                                      | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | **Generation**                                                | ** ** | **Distribution** | ** ** | **Corporate  Activities** | ** ** | **Adjustments  and Other** | ** ** | **Total** | ** ** | **Generation** | ** ** | **Distribution** | ** ** | **Corporate  Activities** | ** ** | **Adjustments  and Other** | ** ** | **Total** | ** ** |
| **ASSETS**                                         | ** ** |                                                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| **Non-current assets**                             | ** ** |                                                          | **5,199**  | ** ** |   |   | **5,189** | ** ** |   |   | **8,739** | ** ** |   |   | **(4,372** | **)** |   | **14,755** | ** ** |   | **6,405** | ** ** |   |   | **4,055** | ** ** |   |   | **5,980** | ** ** |   |   | **(4,054** | **)** |   | **12,386** | ** ** |
| Property, plant and  equipment                     |       |                                                          | 6,800      |   |   |   | 3,720 | ** ** |   |   | 22 | ** ** |   |   | 23 |   |   | 10,565 |   |   | 5,744 | ** ** |   |   | 2,926 | ** ** |   |   | 18 | ** ** |   |   | 27 |   |   | 8,715 |   |
| Investment property                                |       |                                                          | —     |   |   |   | — | ** ** |   |   | — | ** ** |   |   | 67 |   |   | 67 |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | 58 |   |   | 58 |   |
| Intangible assets                                  |       |                                                          | 26         |   |   |   | 42 | ** ** |   |   | 1 | ** ** |   |   | — |   |   | 69 |   |   | 22 | ** ** |   |   | 35 | ** ** |   |   | 1 | ** ** |   |   | — |   |   | 58 |   |
| Goodwill                                           |       |                                                          | 140        |   |   |   | 382 | ** ** |   |   | 1,476 | ** ** |   |   | 661 |   |   | 2,659 |   |   | 113 | ** ** |   |   | 305 | ** ** |   |   | 1,211 | ** ** |   |   | 420 |   |   | 2,049 |   |
| Non-current financial  assets                      |       |                                                          | 388        |   |   |   | 724 | ** ** |   |   | 3,426 | ** ** |   |   | (3,964 | ) |   | 574 |   |   | 210 | ** ** |   |   | 623 | ** ** |   |   | 1,174 | ** ** |   |   | (1,508 | ) |   | 499 |   |
| Investments accounted for  using the equity method |       |                                                          | (2,434     | ) |   |   | — | ** ** |   |   | 3,720 | ** ** |   |   | (1,119 | ) |   | 167 |   |   | 140 | ** ** |   |   | — | ** ** |   |   | 3,447 | ** ** |   |   | (3,002 | ) |   | 585 |   |
| Deferred tax assets                                |       |                                                          | 279        |   |   |   | 321 | ** ** |   |   | 94 | ** ** |   |   | (40 | ) |   | 654 |   |   | 176 | ** ** |   |   | 166 | ** ** |   |   | 129 | ** ** |   |   | (49 | ) |   | 422 |   |
| **Current assets**                                 | ** ** |                                                          | **1,163**  | ** ** |   |   | **1,237** | ** ** |   |   | **259** | ** ** |   |   | **(278** | **)** |   | **2,381** | ** ** |   | **1,031** | ** ** |   |   | **1,283** | ** ** |   |   | **362** | ** ** |   |   | **(376** | **)** |   | **2,300** | ** ** |
| Inventories                                        |       |                                                          | 47         |   |   |   | 28 | ** ** |   |   | — | ** ** |   |   | 39 |   |   | 114 |   |   | 30 | ** ** |   |   | 19 | ** ** |   |   | — | ** ** |   |   | 16 |   |   | 65 |   |
| Trade and other  receivables                       |       |                                                          | 534        |   |   |   | 838 | ** ** |   |   | 123 | ** ** |   |   | (190 | ) |   | 1,305 |   |   | 402 | ** ** |   |   | 664 | ** ** |   |   | 18 | ** ** |   |   | (58 | ) |   | 1,026 |   |
| Current financial assets                           |       |                                                          | 67         |   |   |   | 68 | ** ** |   |   | 42 | ** ** |   |   | (122 | ) |   | 55 |   |   | 161 | ** ** |   |   | 93 | ** ** |   |   | 219 | ** ** |   |   | (344 | ) |   | 129 |   |
| Current tax assets                                 |       |                                                          | 177        |   |   |   | 96 | ** ** |   |   | 57 | ** ** |   |   | — |   |   | 330 |   |   | 29 | ** ** |   |   | 135 | ** ** |   |   | 113 | ** ** |   |   | (8 | ) |   | 269 |   |
| Cash and cash equivalents                          |       |                                                          | 338        |   |   |   | 207 | ** ** |   |   | 37 | ** ** |   |   | (5 | ) |   | 577 |   |   | 409 | ** ** |   |   | 372 | ** ** |   |   | 12 | ** ** |   |   | 18 |   |   | 811 |   |
| Other assets                                       |       |                                                          | —     |   |   |   | — | ** ** |   |   | — | ** ** |   |   | — |   |   | — |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — |   |   | — |   |
| **Non-current assets held for  sale**              |       |                                                          | —     |   |   |   | — | ** ** |   |   | — | ** ** |   |   | — |   |   | — |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — |   |   | — |   |
| **TOTAL ASSETS**                                   | ** ** |                                                          | **6,362**  | ** ** |   |   | **6,426** | ** ** |   |   | **8,998** | ** ** |   |   | **(4,650** | **)** |   | **17,136** | ** ** |   | **7,436** | ** ** |   |   | **5,338** | ** ** |   |   | **6,342** | ** ** |   |   | **(4,430** | **)** |   | **14,686** | ** ** |
| **EQUITY AND LIABILITIES**                         | ** ** |                                                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| **Equity**                                         | ** ** |                                                          | **883**    | ** ** |   |   | **2,448** | ** ** |   |   | **6,768** | ** ** |   |   | **(3,172** | **)** |   | **6,927** | ** ** |   | **2,735** | ** ** |   |   | **2,190** | ** ** |   |   | **2,951** | ** ** |   |   | **(3,071** | **)** |   | **4,805** | ** ** |
| Of the Parent                                      |       |                                                          | (434       | ) |   |   | 2,316 | ** ** |   |   | 6,768 | ** ** |   |   | (5,486 | ) |   | 3,164 |   |   | 1,467 | ** ** |   |   | 2,051 | ** ** |   |   | 2,951 | ** ** |   |   | (4,814 | ) |   | 1,655 |   |
| Of minority interests                              |       |                                                          | 1,317      |   |   |   | 132 | ** ** |   |   | — | ** ** |   |   | 2,314 |   |   | 3,763 |   |   | 1,268 | ** ** |   |   | 139 | ** ** |   |   | — | ** ** |   |   | 1,743 |   |   | 3,150 |   |
| **Non-current liabilities**                        | ** ** |                                                          | **4,066**  | ** ** |   |   | **2,757** | ** ** |   |   | **1,795** | ** ** |   |   | **(1,029** | **)** |   | **7,589** | ** ** |   | **3,805** | ** ** |   |   | **2,317** | ** ** |   |   | **3,169** | ** ** |   |   | **(1,039** | **)** |   | **8,252** | ** ** |
| Deferred income                                    |       |                                                          | 4          |   |   |   | 116 | ** ** |   |   | 5 | ** ** |   |   | (10 | ) |   | 115 |   |   | 3 | ** ** |   |   | 79 | ** ** |   |   | 7 | ** ** |   |   | (9 | ) |   | 80 |   |
| Long-term provisions                               |       |                                                          | 220        |   |   |   | 493 | ** ** |   |   | 148 | ** ** |   |   | 29 |   |   | 890 |   |   | 172 | ** ** |   |   | 361 | ** ** |   |   | 153 | ** ** |   |   | (15 | ) |   | 671 |   |
| Bank borr. and other  financial liab.              |       |                                                          | 3,172      |   |   |   | 1,816 | ** ** |   |   | 1,620 | ** ** |   |   | (1,130 | ) |   | 5,478 |   |   | 3,084 | ** ** |   |   | 1,617 | ** ** |   |   | 2,992 | ** ** |   |   | (1,115 | ) |   | 6,578 |   |
| Other non-current payables                         |       |                                                          | 44         |   |   |   | 104 | ** ** |   |   | — | ** ** |   |   | (26 | ) |   | 122 |   |   | 34 | ** ** |   |   | 71 | ** ** |   |   | — | ** ** |   |   | (5 | ) |   | 100 |   |
| Deferred tax liabilities                           |       |                                                          | 626        |   |   |   | 228 | ** ** |   |   | 22 | ** ** |   |   | 108 |   |   | 984 |   |   | 512 | ** ** |   |   | 189 | ** ** |   |   | 17 | ** ** |   |   | 105 |   |   | 823 |   |
| **Current liabilities**                            | ** ** |                                                          | **1,413**  | ** ** |   |   | **1,221** | ** ** |   |   | **435** | ** ** |   |   | **(449** | **)** |   | **2,620** | ** ** |   | **896** | ** ** |   |   | **831** | ** ** |   |   | **222** | ** ** |   |   | **(320** | **)** |   | **1,629** | ** ** |
| Bank borrowings and other  financial  liabilities  |       |                                                          | 725        |   |   |   | 340 | ** ** |   |   | 320 | ** ** |   |   | (177 | ) |   | 1,208 |   |   | 569 | ** ** |   |   | 397 | ** ** |   |   | 136 | ** ** |   |   | (450 | ) |   | 652 |   |
| Non-current trade and  other  payables             |       |                                                          | 441        |   |   |   | 674 | ** ** |   |   | 114 | ** ** |   |   | (281 | ) |   | 948 |   |   | 213 | ** ** |   |   | 332 | ** ** |   |   | 82 | ** ** |   |   | 129 |   |   | 756 |   |
| Current tax liabilities                            |       |                                                          | 247        |   |   |   | 207 | ** ** |   |   | 1 | ** ** |   |   | 9 |   |   | 464 |   |   | 114 | ** ** |   |   | 102 | ** ** |   |   | 4 | ** ** |   |   | 1 |   |   | 221 |   |
| **TOTAL EQUITY AND  LIABILITIES**                  | ** ** |                                                          | **6,362**  | ** ** |   |   | **6,426** | ** ** |   |   | **8,998** | ** ** |   |   | **(4,650** | **)** |   | **17,136** | ** ** |   | **7,436** | ** ** |   |   | **5,338** | ** ** |   |   | **6,342** | ** ** |   |   | **(4,430** | **)** |   | **14,686** | ** ** |

 

F-75

 

----

***24.****          Balancesand transactions with related parties*

Transactions between theCompany and its subsidiaries, which are related parties, form part of theCompany’s normal business activities and have been eliminated on consolidation.Therefore, they are not disclosed in this Note.

*Significantshareholders*

Thenoteworthy transactions carried out in 2005 with significant shareholders, allof which were performed on an arm’s length basis, were as follows:

| **Significant  Shareholder** | ** ** | ** **                               | ** ** | **Group Company** | ** **  | **Nature of the  Relationship** | ** ** | **Type of Transaction**                            | ** ** | **Amount  (Millions  of Euros)** | ** ** |
|------------------------------|------------|------------------------------------------|------------|------------------------|-------------|-------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------|------------|
| Caja Madrid                  |       | Endesa,  S.A.                            |       |                   | Contractual |                                      |       | Long-term  credit line                                       |       |                                  | 10.0       |   |   |
| Caja Madrid                  |       | Endesa,  S.A.                            |       |                   | Contractual |                                      |       | Multicompany  guarantee line                                 |       |                                  | 53.2       |   |   |
| Caja Madrid                  |       | Endesa,  S.A.                            |       |                   | Contractual |                                      |       | Collective  redundancy procedure multicompany guarantee line |       |                                  | 64.3       |   |   |
| Caja Madrid                  |       | Endesa,  S.A.                            |       |                   | Contractual |                                      |       | Pension  plan custodian                                      |       |                                  | 978.1      |   |   |
| Caja Madrid                  |       | Endesa,  S.A.                            |       |                   | Contractual |                                      |       | Interest  rate derivatives                                   |       |                                  | 1,663.9    |   |   |
| Caja Madrid                  |       | Endesa,  S.A.                            |       |                   | Contractual |                                      |       | Forward  US dollar purchase                                  |       |                                  | 4.3        |   |   |
| Caja Madrid                  |       | Endesa,  S.A.                            |       |                   | Contractual |                                      |       | Forward  US dollar sale                                      |       |                                  | 2.1        |   |   |
| Caja Madrid                  |       | Energías  de la Mancha, S.A.        |       |                   | Contractual |                                      |       | Project  financing                                           |       |                                  | 12.5       |   |   |
| Caja Madrid                  |       | Energías  de la Mancha, S.A.        |       |                   | Contractual |                                      |       | Interest  rate derivative                                    |       |                                  | 9.6        |   |   |
| Caja Madrid                  |       | Gas  Aragón                         |       |                   | Contractual |                                      |       | Credit  account                                              |       |                                  | 7.5        |   |   |
| Caja Madrid                  |       | Gesa  Gas                                |       |                   | Contractual |                                      |       | Credit  account                                              |       |                                  | 0.2        |   |   |
| Caja Madrid                  |       | Planta  Regasificadora Sagunto           |       |                   | Contractual |                                      |       | Project  financing                                           |       |                                  | 23.0       |   |   |
| Caja Madrid                  |       | Planta  Regasificadora Noroeste          |       |                   | Contractual |                                      |       | Project  financing                                           |       |                                  | 40.0       |   |   |
| Caja Madrid                  |       | Endesa  Italia                           |       |                   | Contractual |                                      |       | Interest  rate derivative                                    |       |                                  | 100.0      |   |   |
| Caja Madrid                  |       | Endesa  Italia                           |       |                   | Contractual |                                      |       | Bank  debt guarantee                                         |       |                                  | 17.2       |   |   |
| Caja Madrid                  |       | Internacional  Endesa B.V.               |       |                   | Contractual |                                      |       | Foreign  currency derivative                                 |       |                                  | 93.0       |   |   |
| Caja Madrid                  |       | Internacional  Endesa B.V.               |       |                   | Contractual |                                      |       | Interest  rate derivative                                    |       |                                  | 340.0      |   |   |
| Caja Madrid                  |       | Internacional  Endesa B.V.(3)            |       |                   | Contractual |                                      |       | EMTN  Programme placing agent                                |       |                                  | 340.0      |   |   |
| Caja Madrid                  |       | Internacional  Endesa B.V.               |       |                   | Contractual |                                      |       | Preference  share placing agent                              |       |                                  | 1,043.0    |   |   |
| Caja Madrid                  |       | Enersis                                  |       |                   | Contractual |                                      |       | Syndicated  loan                                             |       |                                  | 9.5        |   |   |
| Caja Madrid                  |       | Endesa  Chile                            |       |                   | Contractual |                                      |       | Syndicated  loan                                             |       |                                  | 7.2        |   |   |
| Mapfre(1)(2)                 |       | Endesa,  S.A.                            |       |                   | Contractual |                                      |       | 60%  share in insurance policy for damage                    |       |                                  | N/A        |   |   |
| Mapfre(1)(2)                 |       | Endesa,  S.A.                            |       |                   | Contractual |                                      |       | 53%  share in third-part liability insurance policy          |       |                                  | N/A        |   |   |
| Mapfre(1)(2)                 |       | Endesa,  S.A.                            |       |                   | Contractual |                                      |       | Primary  insurance policy for damage                         |       |                                  | N/A        |   |   |
| Mapfre(1)(2)                 |       | Endesa  Distribución Eléctrica |       |                   | Contractual |                                      |       | Insurer  financing                                           |       |                                  | 84.5       |   |   |
| Mapfre(1)(2)                 |       | Endesa  Generación                  |       |                   | Contractual |                                      |       | Insurer  financing                                           |       |                                  | 1.2        |   |   |
| Mapfre(1)(2)                 |       | Endesa  Group                            |       |                   | Contractual |                                      |       | Life  insurance                                              |       |                                  | N/A        |   |   |
| Mapfre(1)(2)                 |       | Endesa  Distribución Eléctrica |       |                   | Contractual |                                      |       | Life  insurance                                              |       |                                  | N/A        |   |   |
| Axa(2)                       |       | Endesa,  S.A.                            |       |                   | Contractual |                                      |       | 22%  share in third-part liability insurance policy          |       |                                  | N/A        |   |   |
| Axa(2)                       |       | Endesa, S.A.                             |       |                   | Contractual |                                      |       | Life insurance                                               |       |                                  | N/A        |   |   |

----

(1)    Mapfre’slife insurance activities form part of Mapfre-Caja Madrid Holding de EntidadesAseguradoras, S.A., in which Caja Madrid has an ownership interest of 49%.

(2)    Theinclusion of the transactions with this company does not imply, under any circumstances,that it may be considered to be a related party for the purposes of Ministry ofEconomy and Finance Order EHA/3050/2004, of 15 September.

(3)    Caja Madrid acts as the placing bank.

F-76

----

Thenoteworthy transactions carried out in 2004 with significant shareholders, allof which were performed on an arm’s length basis, were as follows:

| **Significant  Shareholder** | ** ** | **Group Company**              | ** ** | **Nature of the  Relationship** | ** **  | **Type of Transaction** | ** ** | **Amount  (Millions of   Euros)** | ** ** |
|------------------------------|------------|-------------------------------------|------------|-------------------------------------------|-------------|-----------------------------------|------------|---------------------------------------------|------------|
| Caja Madrid                  |       | Endesa,  S.A.                       |       |                                      | Contractual |                              |       | Domestic  paper programme                   |       |   | 36 |   |   |
| Caja Madrid                  |       | Endesa,  S.A.                       |       |                                      | Contractual |                              |       | Guarantee  line                             |       |   | 150 |   |   |
| Caja Madrid                  |       | Endesa,  S.A.                       |       |                                      | Contractual |                              |       | Pension  plan custodian                     |       |   | 1.536 |   |   |
| La Caixa                     |       | International  ENDESA, B.V.         |       |                                      | Contractual |                              |       | Derivative                                  |       |   | 115 |   |   |
| La Caixa                     |       | Gas  Aragón, S.A.              |       |                                      | Contractual |                              |       | Credit  Account                             |       |   | 6 |   |   |
| La Caixa                     |       | Planta  de Regasificación de   |       |                                      | Contractual |                              |       | Loan                                        |       |   | 23 |   |   |
|                         |       | Sagunto, S.A.                       |       |                                      |        |                              |       |                                        |       |   |   |   |   |
| La Caixa                     |       | Endesa  Italia, SRL                 |       |                                      | Contractual |                              |       | Loan                                        |       |   | 100 |   |   |
| La Caixa                     |       | Endesa  Italia, SRL                 |       |                                      | Contractual |                              |       | Derivative                                  |       |   | 100 |   |   |
| La Caixa                     |       | Enersis,  S.A.                      |       |                                      | Contractual |                              |       | Syndicated  loan                            |       |   | 100 |   |   |
| La Caixa                     |       | Endesa  Chile, S.A.                 |       |                                      | Contractual |                              |       | Syndicated  loan                            |       |   | 62 |   |   |
| La Caixa                     |       | Endesa,  S.A.                       |       |                                      | Contractual |                              |       | Domestic  paper programme                   |       |   | 169 |   |   |
| La Caixa                     |       | Endesa,  S.A.                       |       |                                      | Contractual |                              |       | Guarantee  line                             |       |   | 300 |   |   |
| La Caixa                     |       | Endesa  Diversificación, S.A.  |       |                                      | Contractual |                              |       | Asesoría  en venta                     |       |   | 2.4 |   |   |
| Mapfre (1)(2)                |       | Endesa  Distribucion Eléctrica |       |                                      | Contractual |                              |       | Insurer  Financer                           |       |   | 108.1 |   |   |
| Mapfre (1)(2)                |       | Endesa  Generación             |       |                                      | Contractual |                              |       | Insurer  financing                          |       |   | 1.5 |   |   |
| Mapfre (1)(2)                |       | Endesa,  S.A.                       |       |                                      | Contractual |                              |       | Life  insurance                             |       |   | n.a. |   |   |
| Musini (2)(3)                |       | Endesa,  S.A.                       |       |                                      | Contractual |                              |       | 60%  share in insurance policy for damage   |       |   | n.a. |   |   |
| Musini (2)(3)                |       | Endesa,  S.A.                       |       |                                      | Contractual |                              |       | 50%  share in third-party liability         |       |   |   |   |   |
|                         |       |                                |       |                                      |        |                              |       | insurance policy                            |       |   | n.a. |   |   |
| Musini (2)(3)                |       | Endesa, S.A.                        |       |                                      | Contractual |                              |       | Insurance policy for  damage                |       |   | n.a. |   |   |

----

(1)   Mapfre’slife insurance activities form part of Mapfre-Caja Madrid Holding de EntidadesAseguradoras, S.A., in which Caja Madrid has an ownership interest of 49%.

(2)   Theinclusion of the transactions with this company does not imply, under anycircumstances, that it may be considered to be a related party for the purposesof Ministry of Economy and Finance Order EHA/3050/2004, of 15 September.

(3)   Mapfre acquired Musini in 2004.

*Associates andjoint ventures*

The transactions with associates and joint venturesrelate mainly to loans granted, the balance of which at 31 December 2005,amounted to EUR 269 million (see Note 10), and to guarantees provided amountingto EUR 187 million at the same date.

The main loan transactions relate to Atacama Finance(EUR 147 million), Megasa (EUR 25 million), Emesa (EUR 24 million), GasAlicante (EUR 10 million) and NQF Gas (EUR 8 million).

The guarantees provided relate to Elcogas (EUR 114million), Planta Regasificadora de Sagunto (EUR 38 million) and Tirme (EUR 35million).

The transactions with associates and joint venturesrelate mainly to loans granted, the balance of which at 31 December 2004,amounted to EUR 122 million, and to guarantees provided amounting to EUR182 million at the same date.

F-77

----

*Directors andsenior executives*

In 2005 the members of theBoard of Directors and senior executives of Endesa, S.A., and the shareholdersrepresented on the Board of Directors or individuals or companies who theyrepresent, did not participate in unusual and/or significant transactions ofthe Company.

**A)**              Remunerationand other benefits

The Company has adoptedthe reporting model in Appendix I of the Corporate Governance Annual Report forpublicly listed companies implemented by the Spanish National Securities MarketCommission (CNMV), approved in CNMV Circular 1/2004, of 17 March.

**1. Remuneration ofdirectors in 2005 and 2004**

**a)**              Remuneration andother benefits at the Company:

| ** **                                     | ** ** | **Thousands  of Euros** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|
| **Type of Remuneration**             | ** ** | ** **                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Fixed  remuneration(1)                         |       | 2,937                        |       | 2,170 |   |
| Variable  remuneration                         |       | 1,733                        |       | 1,349 |   |
| Attendance fees                                |       | 1,112                        |       | 930 |   |
| Bylaw-stipulated  directors’ emoluments   |       | —                       |       | — |   |
| Share options and  other financial instruments |       | —                       |       | — |   |
| Other                                          |       | 32                           |       | 47 |   |
| **TOTAL**                                      | ** ** | **5,814**                    |       | **4,496** |   |
|                                                |            |                              |            |  |  |  |  |

 

| ** **                                          | ** ** | **Thousands  of Euros** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|
| **Other Benefits**                             | ** ** | ** **                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Advances                                            |       | 343                          |       | 343 |   |
| Loans                                               |       | 93                           |       | 153 |   |
| Pension funds and  plans: contributions(2)          |       | 2,359                        |       | 4,555 |   |
| Pension funds and  plans: obligations assumed       |       | —                       |       | — |   |
| Life insurance  premiums                            |       | 326                          |       | 225 |   |
| Guarantees provided by  the Company to directors(2) |       | 10,369                       |       | 5,865 |   |
|                                                     |            |                              |            |  |  |  |  |

----

(1)          At all the Endesa Groupcompanies, the fixed remuneration of the Chairman is 10% higher than that ofthe chief executive.

(2)          As a general rule, theCompany has established a guarantee of future rights in respect of pensions andremuneration for employees reaching certain ages and years of service.

For the employeesreferred to in the preceding paragraph, the contributions in 2005, with respectto this section, for future services to pension funds and plans amount to EUR1,389 thousand; the guarantee of future rights in respect of the item ofremuneration Guarantees Provided by the Company to Directors amounts to EUR10,369 thousand. The latter figure will decrease each year the director staysat the Company in question.

F-78

----

**b)**              Remuneration andother benefits for membership of the Board of Directors of the Company or ofGroup companies and/or for being senior executives of Group companies:

| ** **                                     | ** ** | **Thousands  of Euros** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|
| **Type of Remuneration**             | ** ** | ** **                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Fixed  remuneration                            |       |                         | —     |   |   |   | — |   |   |
| Variable  remuneration                         |       |                         | —     |   |   |   | — |   |   |
| Attendance fees                                |       |                         | 340        |   |   |   | 311 |   |   |
| Bylaw-stipulated  directors’ emoluments   |       |                         | —     |   |   |   | — |   |   |
| Share options and  other financial instruments |       |                         | —     |   |   |   | — |   |   |
| Other                                          |       |                         | —     |   |   |   | — |   |   |
| **TOTAL**                                      | ** ** | ** **                   | **340**    |   | ** ** | ** ** | **311** |   |   |
|                                                |            |                              |            |  |  |  |  |  |  |  |  |

 

| ** **                                       | ** ** | **Thousands  of Euros** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|
| **Other Benefits**                          | ** ** | ** **                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Advances                                         |       |                         | —     |   |   |   | — |   |   |
| Loans                                            |       |                         | —     |   |   |   | — |   |   |
| Pension funds and  plans: contributions          |       |                         | —     |   |   |   | — |   |   |
| Pension funds and  plans: obligations assumed    |       |                         | —     |   |   |   | — |   |   |
| Life insurance  premiums                         |       |                         | —     |   |   |   | — |   |   |
| Guarantees provided by  the Company to directors |       |                         | —     |   |   |   | — |   |   |
|                                                  |            |                              |            |  |  |  |  |  |  |  |  |

 

**c)**               Total remuneration by type of director:

| ** **                          | ** ** | **Thousands of Euros** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| **Type of Director**      | ** ** | ** **                       | ** ** | **By Company** | ** ** | **By Group** | ** ** | **By Company** | ** ** | **By Group** | ** ** |
| Executive  directors                |       |                             | 4,184      |   |   |   | 90 |   |   |   | 2,984 |   |   |   | 71 |   |   |
| Nonexecutive  nominee directors     |       |                             | 142        |   |   |   | — |   |   |   | 112 |   |   |   | — |   |   |
| Nonexecutive  independent directors |       |                             | 1,388      |   |   |   | 240 |   |   |   | 1,400 |   |   |   | 240 |   |   |
| Other  nonexecutive directors       |       |                             | 100        |   |   |   | 10 |   |   |   | — |   |   |   | — |   |   |
| **TOTAL**                           | ** ** | ** **                       | **5,814**  |   | ** ** | ** ** | **340** |   | ** ** | ** ** | **4,496** |   | ** ** | ** ** | **311** |   |   |
|                                     |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**d)**              Total remunerationand percentage with respect to the profit attributed to the Parent:

| ** **                                                                                     | ** ** | **Thousands  of Euros** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| **Type of Remuneration**                                                             | ** ** | ** **                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Total  remuneration of directors                                                               |       | 6,154                        |       | 4,807 |   |
| Total remuneration of  directors / Profit attributed to the Parent (expressed as a percentage) |       | 0.19                         | (*)        | 0.35 | (**) |
|                                                                                                |            |                              |            |  |  |  |  |

----

(*)          Based on the percentagereferred to in Article 40 of the Corporate Bylaws, i.e., the sum of thefixed remuneration amounts and share in profits with respect to theconsolidated Group’s profit approved by the shareholders and the Annual GeneralMeeting, this percentage would be 0.02%.

(**)   Calculated on the basis of theconsolidated Group’s profit for 2004 in accordance with Spanish GAAP.

F-79

----

**2.****                 Identificationof the senior executives who are not executive directors, and totalremuneration earned bythem in the year:**

**2005**Senior Executives

| **Name**                                        | ** ** | ** **                                                                    | ** ** | **Position** |
|-------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|--------------|
| Francisco Borja Acha Besga                      |       | Corporate Legal Counselling Manager                                           |
| José Damián Bogas Gálvez(1)      |       | General Manager for Spain and Portugal                                        |
| Gabriel Castro Villalba                         |       | Corporate Communications Manager                                              |
| Ma Isabel Fernández Lozano            |       | Corporate Manager Assistant to the Corporate  Services Manager                |
| Ángel Ferrera Martínez                |       | Chairman of the Advisory Board of Unelco-Endesa  Canary Islands               |
| Amado Franco Lahoz                              |       | Chairman of the Advisory Board of Erz-Endesa Aragón                      |
| José Antonio Gutiérrez Pérez(1)  |       | General Manager of Erz-Endesa Aragón                                     |
| José Félix Ibáñez Guerra(1) |       | General Manager—Mining                                                   |
| Pedro Larrea Paguaga                            |       | General Manager—Energy Management                                        |
| Héctor López Vilaseco                 |       | General Manager—Energy Management in Latin America                       |
| José Luis Marín López Otero(1)   |       | General Manager—Distribution                                             |
| Alberto Martín Rivals                      |       | General Manager—Business in Latin America                                |
| José A. Martínez Fernández(1)    |       | General Manager of Sevillana-Endesa Andalucia and  Extremadura                |
| Germán Medina Carrillo(1)                  |       | Corporate Human Resources Manager                                             |
| Salvador Montejo Velilla                        |       | General Secretary and Secretary of the Board of  Directors                    |
| Manuel Morán Casero                        |       | General Manager—Generation                                               |
| Jesús Olmos Clavijo                        |       | General Manager for Europe                                                    |
| José Luis Palomo Álvarez(1)           |       | Corporate Financial and Control Manager                                       |
| Antonio Pareja Molina(1)                        |       | Corporate Services Manager                                                    |
| José María Plans Gómez(1)        |       | General Manager of Unelco-Endesa Canary Islands                               |
| José Luis Puche Castillejo                 |       | Corporate Audit Manager                                                       |
| Álvaro Quiralte Abelló                |       | General Manager of Endesa Italia                                              |
| Jaime Reguart Pelegrí(1)                   |       | General Manager of Gesa-Endesa Balearic Islands                               |
| Bartolomé Reus Beltrán                |       | Chairman of the Advisory Board of Gesa- Endesa  Balearic Islands              |
| Luis Rivera Novo(1)                             |       | General Manager for Latin America                                             |
| Jorge Rosemblut Ratinoff                        |       | Chairman of Chilectra                                                         |
| José María Rovira Vilanova(1)         |       | General Manager of Fecsa- Endesa Cataluña                                |
| Carlos Torres Vila                              |       | Corporate Strategy Manager                                                    |
| Javier Uriarte Monereo                          |       | General Manager—Retailing                                                |
| Mario Valcarce Durán                       |       | General Manager of Enersis                                                    |
| Jaime Ybarra Llosent                            |       | Chairman of the Advisory Board of Sevillana Endesa  Andalucia and Extremadura |
| Pablo Yrarrazabal Valdés                   |       | Chairman of Enersis                                                           |
| Rafael López Rueda                         |       | General Manager of Chilectra                                                  |
| Rafael Mateo Alcalá                        |       | General Manager of Endesa Chile                                               |
| Antón Costas Comesaña(2)              |       | Chairman of the Advisory Board of Fecsa-Endesa  Cataluña                 |
| Juan Rosell  Lastortras(2)                      |       | Chairman  of the Advisory Board of Fecsa-Endesa Cataluña                 |

----

(1)          Subject to the systemdescribed in point 1 a) (2) (Other Benefits), with the terms andconditions specific to them.

(2)          Juan Rosell Lastortrasceased to be a senior executive of the Company on 27 May 2005, and wasreplaced by Antón Costas Comesaña.

| ** **                               | ** ** | **Thousands of Euros** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| **Type of Remuneration**       | ** ** | ** **                       | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** |
| Total remuneration of  senior executives |       |                             | 16,793     |   |   |   | 17,271 |   |   |
|                                          |            |                                  |            |  |  |  |  |  |  |  |  |

 

F-80

----

**3.**                 Guaranteeclauses for cases of termination or changes of control for the seniorexecutives, including the executive directors of the Company or of its Group

Number of beneficiaries: 31 at 31 December 2005 and 29at 31 December 2004.

Body authorising the clauses: Board of Directors.

These clauses are the same in all the contracts of theexecutive directors and senior executives of the Company and of its Group and,as can be observed from the reports requested by the Company, they are in linewith standard practice in the market. They were approved by the Board ofDirectors following the report of the Appointments and Remuneration Committeeand provide for termination benefits in the event of termination of theemployment relationship and a post-contractual non-competition clause. Theregime for these clauses is as follows:

Termination of theemployment relationship:

·       Bymutual agreement: termination benefit equal to three times the annualremuneration.

·       Atthe unilateral decision of the executive: no entitlement to terminationbenefit, unless the decision to terminate the employment relationship is basedon the serious and culpable breach by the Company of its obligations, theposition is rendered devoid of content, or in the event of any of the othercases of remunerated termination provided for in Article 10.3 of RoyalDecree 1382/1985.

·       Asa result of termination by the Company: termination benefit equal to thatdescribed in the first point.

·       Atthe decision of the Company based on the serious wilful misconduct ornegligence of the executive in discharging his duties: no entitlement totermination benefit.

These conditions are alternatives to those derivedfrom changes to the pre-existing employment relationship or the terminationthereof due to pre-retirement for the CEO and senior executives.

Post-contractualnon-competition clause:

·       Two years. Asconsideration, the executive is entitled to an amount equal to one annual fixedremuneration payment.

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**B)**             Otherdisclosures concerning the Board of Directors

Pursuantto Article 127 ter. of the Spanish Corporations Law, introduced by Law26/2003, of 17 July, which amends Securities Market Law 24/1988, of 28 July,and the consolidated Spanish Corporations Law, in order to reinforce thetransparency of publicly listed corporations, following is a detail of thecompanies engaging in an activity that is identical, similar or complementaryto the activity that constitutes the corporate purpose of Endesa, S.A. in whichthe members of the Board of Directors own equity interests, and of thefunctions or positions, if any, that they discharge or hold thereat:

| **31/12/05**                        | ** ** |
|-------------------------------------|------------|
| Name of Director          | ** ** | ** ** | ** ** | **Employer  Identification  Number of  the Company  in Question** | ** ** | **Name of the Company in Question** | ** ** | **% of  Ownership** | ** ** | **Position** | ** ** |
| Rafael Miranda Robredo              |       | A 78003662 |   | Enagas,  S.A. |   |   | 0.00079 |   |   |   | None |   |   |
| Francisco Núñez  Boluda   |       | A  48010615 |   | Iberdrola,  S.A. |   |   | 0.00013 |   |   |   | None |   |   |
|                                |       | A  28005239 |   | Unión  Fenosa, S.A. |   |   | 0.00098 |   |   |   | None |   |   |
| Juan Ramón Quintás Seonae |       | A  48010615 |   | Iberdrola,  S.A. |   |   | 0.00018 |   |   |   | None |   |   |
| Francisco Javier  Ramos Gascón |       | A  48010615 |   | Iberdrola,  S.A. |   |   | 0.00104 |   |   |   | None |   |   |
|                                |       | A  28005239 |   | Unión  Fenosa, S.A. |   |   | 0.00277 |   |   |   | None |   |   |
|                                |       | A  78003662 |   | Red  Eléctrica de España, S.A. |   |   | 0.00028 |   |   |   | None |   |   |
|                                |       | 00811720580 |   | Enel,  S.p.A. |   |   | 0.00004 |   |   |   | None |   |   |
| José Serna Masiá          |       | A  48010615 |   | Iberdrola,  S.A. |   |   | 0.00091 |   |   |   | None |   |   |
|                                     |       | A  28005239 |   | Unión  Fenosa, S.A. |   |   | 0.00098 |   |   |   | None |   |   |
| Manuel Ríos Navarro            |       | 00811720580 |   | Enel, S.p.A. |   |   | 0.00008 |   |   |   | None |   |   |

 

| **31/12/04**                         | ** ** |
|--------------------------------------|------------|
| Name of Director           | ** ** | ** ** | ** ** | **Employer  Identification  Number of  the Company  in Question** | ** ** | **Name of the Company in Question** | ** ** | **% of  Ownership** | ** ** | **Position** | ** ** |
| Rafael Miranda Robredo               |       | A  78003662 |   | Red Eléctrica de España, S.A. |   |   | 0.00024 |   |   |   | None |   |   |
|                                 |       | A  62530175 |   | Gas  Natural SDG, S.A |   |   | 0.00017 |   |   |   | None |   |   |
|                                 |       | A  48010615 |   | Iberdrola, S.A. |   |   | 0.00013 |   |   |   | None |   |   |
| Francisco Núñez Boluda     |       | A  48010615 |   | Iberdrola,  S.A. |   |   | 0.00013 |   |   |   | None |   |   |
|                                 |       | A  28005239 |   | Unión Fenosa, S.A. |   |   | 0.00098 |   |   |   | None |   |   |
| Juan Ramón  Quintás Seonae |       | A  48010615 |   | Iberdrola, S.A. |   |   | 0.00018 |   |   |   | None |   |   |
| Francisco Javier Ramos Gascón   |       | A  48010615 |   | Iberdrola, S.A. |   |   | 0.00104 |   |   |   | None |   |   |
|                                 |       | A  28005239 |   | Unión Fenosa, S.A. |   |   | 0.00277 |   |   |   | None |   |   |
|                                      |       | A  78003662 |   | Red Eléctrica de España, S.A. |   |   | 0.00028 |   |   |   | None |   |   |
|                                      |       | 00811720580 |   | Enel,  S.p.A. |   |   | 0.00004 |   |   |   | None |   |   |
| José Serna Masiá           |       | A  48010615 |   | Iberdrola, S.A. |   |   | 0.00091 |   |   |   | None |   |   |
|                                 |       | A 28005239 |   | Unión Fenosa, S.A. |   |   | 0.00098 |   |   |   | None |   |   |

 

Also, pursuant to the aforementioned Law, there is norecord that any members of the Board of Directors carry on, or carried on in 2005and 2004, activities, as independent professionals or as employees, that areidentical, similar or complementary to the activity that constitutes thecorporate purpose of Endesa, S.A.

In 2005 and 2004 therewere no cases of conflict of interest involving the directors, withoutprejudice to the abstentions recorded, even though no conflict existed and witha view to taking the utmost precaution, in the minutes of the meetings of thegoverning bodies of the Company.

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***25.****          Guaranteecommitments to third parties and other contingent assets and liabilities*

Under current legislationin Spain and pursuant to Spanish Electricity System Law 54/1997, the Group isinsured against third-party liability claims for nuclear accidents arising fromthe operation of nuclear plants up to EUR 150 million. Any damages in excess ofthis amount would be governed by the international conventions entered into bythe Spanish State. The nuclear power plants are also insured against damage totheir installations and machinery breakdowns, with maximum coverage ofEUR 700 million for each power plant.

At 31 December 2005,the Endesa Group had provided guarantees to third parties in connection withits business activities totalling EUR 187 million (EUR 182 million at31 December 2004).

At 31 December 2005,the Group was entitled to receive until 2010 remuneration for the transition tocompetition for a maximum amount of EUR 828 million. This amount is reduced bythe income received by the Group from electricity sales made in the wholesaleproduction market with an average price that exceeds EUR 36.06 per MWh. In viewof the current price situation in the wholesale production market, the Group’sdirectors consider that no additional amounts of remuneration for thetransition to competition will be received directly. The accompanyingconsolidated balance sheet does not include any asset in this connection.

***26.****          Otherdisclosures*

**Fees paid to auditors**

Thedetail of the fees for the services provided in 2005 and 2004 by the auditorsof the financial statements of the various Group companies is as follows:

| ** **                                                                      | ** ** | **Euros**              | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                      | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                                                      | ** ** | **Principal  Auditor** | ** ** | **Other  Auditors of  Subsidiaries** | ** ** | **Principal  Auditor** | ** ** | **Other  Auditors of  Subsidiaries** | ** ** |
| Audit of  financial statements                                                  |       | 7,049,520              |       |   | 1,596,284 |   |   | 5,385,852 |   |   | 1,478,900 |   |   |
| Audits other than of the financial statements and  other audit-related services |       | 1,189,132              |       |   | 568,674 |   |   | 1,327,432 |   |   | 785,115 |   |   |
| Other non-audit services                                                        |       | 2,032,159              |       |   | 655,770 |   |   | 1,834,426 |   |   | 732,320 |   |   |
| **TOTAL**                                                                       | ** ** | **10,270,811**         | ** ** | ** ** | **2,820,728** |   | ** ** | **8,547,710** | ** ** | ** ** | **2,996,335** |   |   |

 

**Headcount**

At 31 December 2005,Endesa had a total of 27,204 employees, of whom 12,709 work in the electricitybusiness in Spain and Portugal, 2,153 in the electricity business in the restof Europe, 12,317 in the electricity business in Latin America and 25 in otherbusinesses.

At 31 December 2004,Endesa had a total of 27,157 employees, of whom 12,889 work in the electricitybusiness in Spain and Portugal, 2,440 in the electricity business in the restof Europe, 11,735 in the electricity business in Latin America and 93 in otherbusinesses.

***27.****          Eventsafter the balance sheet date*

On 19 August 2005, abinding offer was submitted to the Polish Treasury Ministry to acquire up to85% of the shares of the Polish producer Zespol Elecktrowni Dolna Odra, S.A. (“DolnaOdra”) with an electricity capacity of 1,960 MW. On 7 November 2005,Endesa was selected by the aforementioned Ministry to negotiate the completionof the sale on an exclusive basis for one month, and on 5 December 2005,the exclusivity period ended successfully. On 9 January 2006, the EuropeanCommission 

F-83

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notifiedEndesa Europa of its authorisation to conclude this transaction, which is nowonly pending an agreement with the employees.

The sale of the 5.01%investment in the share capital of the telecommunications operator Auna toDeutsche Bank for EUR 378 million under an agreement entered into on 30December 2005, was formally executed on February 20, 2006 once theperiod in which Auna’s other shareholders could exercise their pre-emptionrights had ended.

Regarding the exchangeoffer for all of the outstanding ordinary shares and American Depositary Shares(“ADSs”) of Endesa announced by Gas Natural SDG, S.A. on 5 September 2005,as explained in Note 13, and after obtaining regulatory approvals from theSpanish Council of Ministers and the Comisión Nacional del Mercado de Valores,the Spanish securities regulator, Gas Natural commenced its offer onMarch 6, 2006.

On February 21, 2006,E.ON AG, a German energy company, announced a tender offer by its wholly-ownedsubsidiary, E.ON Zwölfte Verwaltungs GmbH, for all of the outstanding ordinaryshares and ADSs of Endesa. E.ON’s offer consists of €27.50in cash for each ordinary share and ADS of Endesa. E.ON is currently awaitingSpanish and EC regulatory approvals. E.ON’s offer, if and when commenced, willnot be permitted to expire until the injunction against Gas Natural’s offer isremoved or Gas Natural’s offer is withdrawn or terminated.

RoyalDecree-Law 3/2006 modifies the order matching process in the day-ahead andintra-day markets such that the energy acquired by electricity distributioncompanies is offset by the sales of electricity by electricity generationcompanies in the ordinary regime, when such companies are within the sameindustrial group. The price that will be used to settle these sales andpurchases will eventually be set by the Spanish government as a function ofprevailing market prices, but provisionaly such price has been fixed at Euro42.35/MWh. Effective as of March 2, 2006, for purposes of the tariffdeficit calculation, proceeds from sales of electricity by electricitygeneration companies in the ordinary regime will be reduced in an amount equalto the market value of the CO2 emission allowances that were allocated for freeunder the NAP. For purposes of the tariff deficit calculation betweenJanuary 1, 2006 and March 2, 2006, there will be a reduction, for eachindustrial group, of the tariff deficit to which such group is entitled in anamount equal to the market value of emission allowances granted to suchindustrial group in this period.

On February 28, 2006,Royal Decree-Law 4/2006, ratified on February 24, 2006, was published.This law modifies the duties of the CNE, specifically, its fourteenth dutydelineated in the Law of the Hydrocarbon Sector. This duty grants the CNE thepower to authorize the acquisition of interest in any company or entity by aregulated company (a company that performs regulated activities). This newfourteenth duty will apply to pending takeovers at the day of the publicationof the RD-Law 4/2006, except where they had already obtained authorization inaccordance with the former fourteenth duty of the Law of the Hydrocarbon Sectoras noted above.

***28.****          Transitionfrom Spanish GAAP to International Financial Reporting Standards (IFRSs)*

Until 2004 the Groupprepared its financial statements in accordance with the accounting principlesand standards in force in Spain (“Spanish GAAP”). From 2005 onwards the Groupis preparing its financial statements in accordance with the InternationalFinancial Reporting Standards adopted by the European Union, in conformity withRegulation (EC) no. 1606/2002 of the European Parliament and of the Council.

The figures for 2004 in these financial statementshave been reconciled in order to present them in accordance with the sameprinciples and criteria as those applicable to those for 2005, except for thefact that the Group applied the exception provided for in the IFRSs making itpossible not to apply IAS 32 (Financial Instruments: Disclosure andPresentation) and IAS 39 (Financial Instruments: Recognition and Measurement)for the financial statements for 2004.

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The conversion ofthe Spanish GAAP financial statements to IFRSs involves applying theseprinciples and criteria retrospectively, except in the following cases in whichthe Group decided to apply the exceptions provided for in the IFRSs:

·       Itwas opted not to apply IFRS 3 retrospectively to business combinationsoccurring before 1 January 2004, and to retain the goodwillrecognised in accordance with Spanish GAAP.

·       Thedepreciated cost of the property, plant and equipment at 1 January 2004,was taken to be the depreciated cost of the assets including the assetrevaluations made in accordance with the legislation in force in the countriesin which the Endesa Group companies operate that had been accepted in theSpanish GAAP financial statements.

·       Thetranslation differences arising on or after 1 January 2004, weretransferred to reserves.

Thereconciliation of the equity at 1 January 2004, in accordance with SpanishGAAP and IFRSs is as follows:

| ** **                                    | ** ** | **Millions of Euros**     | ** ** |
|-----------------------------------------------|------------|-------------------------------------|------------|
| ** **                                    | ** ** | **Equity of the  Parent** | ** ** | **Equity of  Minority  Interests** | ** ** | **Total** | ** ** |
| **Balance  at 01/01/04 under Spanish GAAP**   | ** ** |                                | **8,801**  | ** ** |   |   | **—** | ** ** |   | **8,801** | ** ** |
| Inclusion of  minority interests(a)           |       |                                | —     |   |   |   | 4,945 |   |   | 4,945 |   |
| Recognition of  goodwill in local currency(b) |       |                                | (263       | ) |   |   | (51 | ) |   | (314 | ) |
| Derecognition of  deferred charges(c)         |       |                                | (247       | ) |   |   | (9 | ) |   | (256 | ) |
| Equity accounting  adjustments(e)             |       |                                | (189       | ) |   |   | — |   |   | (189 | ) |
| Provision for  dismantling of assets(g)       |       |                                | (134       | ) |   |   | — |   |   | (134 | ) |
| Tax-related  temporary differences(h)         |       |                                | (35        | ) |   |   | (91 | ) |   | (126 | ) |
| Provision for  major repairs(i)               |       |                                | 39         |   |   |   | — |   |   | 39 |   |
| Exchange gains(j)                             |       |                                | 57         |   |   |   | — |   |   | 57 |   |
| Adjustment of  other provisions to IFRSs(k)   |       |                                | 178        |   |   |   | 9 |   |   | 187 |   |
| Other adjustments                             |       |                                | (28        | ) |   |   | (52 | ) |   | (80 | ) |
| **Balance at 01/01/04 under IFRSs**           | ** ** |                                | **8,179**  | ** ** |   |   | **4,751** | ** ** |   | **12,930** | ** ** |

 

F-85

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Thereconciliation of the profit for 2004 and the equity at 1 January 2004,the date of transition to IFRSs, and at 31 December 2004, between SpanishGAAP and IFRSs is as follows:

| ** **                                                 | ** ** | **Millions of Euros** | ** ** |
|------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                 | ** ** | **Profit**                      | ** ** | **Share  Capital,  Reserves and  Translation  Differences** | ** ** | **Minority  Interests** | ** ** | **Total  Equity** | ** ** |
| **Balance at 31/12/04 under  Spanish GAAP**                | ** ** | **1,379**                       | ** ** |   | **8,098** | ** ** |   |   | ** ** | **(*)** |   | **9,477** | ** ** |
| Inclusion of minority  interests(a)                        |       | —                          |       |   | — |   |   |   | 5,711 |   |   | 5,711 |   |
| Recognition of goodwill  in local currency(b)              |       | —                          |       |   | (263 | ) |   |   | (51 | ) |   | (314 | ) |
| Derecognition of  deferred charges(c)                      |       | 23                              |       |   | (247 | ) |   |   | (9 | ) |   | (233 | ) |
| Amortisation of  goodwill(d)                               |       | 215                             |       |   | — |   |   |   | 52 |   |   | 267 |   |
| Equity accounting  adjustments(e)                          |       | (26                             | )          |   | (189 | ) |   |   | — |   |   | (215 | ) |
| Adjustments for  inflation(f)                              |       | (138                            | )          |   | — |   |   |   | (191 | ) |   | (329 | ) |
| Provision for  dismantling of assets(g)                    |       | 3                               |       |   | (134 | ) |   |   | — |   |   | (131 | ) |
| Tax-related temporary  differences(h)                      |       | —                          |       |   | (35 | ) |   |   | (93 | ) |   | (128 | ) |
| Provision for major  repairs(i)                            |       | (15                             | )          |   | 39 |   |   |   | — |   |   | 24 |   |
| Exchange gains(j)                                          |       | (35                             | )          |   | 46 |   |   |   | — |   |   | 11 |   |
| Adjustment of other  provisions to IFRSs(k)                |       | (157                            | )          |   | 178 |   |   |   | (10 | ) |   | 11 |   |
| Other adjustments                                          |       | 4                               |       |   | (18 | ) |   |   | (4 | ) |   | (18 | ) |
| **Balance  at 31/12/04 under IFRSs**                       | ** ** | **1,253**                       | ** ** |   | **7,475** | ** ** |   |   | **5,405** | ** ** |   | **14,133** | ** ** |
| Preference shares(l)                                       |       | —                          |       |   | — |   |   |   | (1,500 | ) |   | (1,500 | ) |
| Measurement of  derivatives(m)                             |       | —                          |       |   | (137 | ) |   |   | (7 | ) |   | (144 | ) |
| Effect of companies  accounted for using the equity method |       | —                          |       |   | (18 | ) |   |   | — |   |   | (18 | ) |
| Market value of publicly  listed shares(n)                 |       | —                          |       |   | 27 |   |   |   | — |   |   | 27 |   |
| Derecognition of  regulatory assets(o)                     |       | —                          |       |   | (64 | ) |   |   | (67 | ) |   | (131 | ) |
| **Balance at 01/01/05 under IFRSs**                        | ** ** | **1,253**                       | ** ** |   | **7,283** | ** ** |   |   | **3,831** | ** ** |   | **12,367** | ** ** |

----

(*)          Under Spanish GAAP, thebalance of Minority Interests does not form part of Equity.

The main adjustments madeto the consolidated financial statements for 2004 are as follows:

**a) Inclusion ofminority interests**

Under Spanish GAAP, equityis made up only of equity corresponding to the shareholders of the Parent.However, under IFRSs equity includes the equity corresponding to theshareholders of both the Parent and the minority interests. Therefore, thebalance of Minority Interests in the consolidated balance sheet of Endesaprepared in accordance with Spanish GAAP is included under the heading Equityin the IFRS consolidated balance sheet.

**b) Recognition ofgoodwill in local currency**

Under Spanish GAAP, goodwill is classified as an assetof the acquirer and, therefore, it is recognised in the acquirer’s functionalcurrency. However, under IFRSs, goodwill is deemed to be an asset of thecompany acquired.

Based on the above, Endesahad recorded a portion of the goodwill that arose on the acquisition of LatinAmerican companies in euros; however, in accordance with IFRSs, this goodwillmust be recorded in local currency. Since these companies were acquired, therelated local currencies have depreciated with respect to the euro and,accordingly, the value of the goodwill is lower under IFRSs than under SpanishGAAP.

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**c) Derecognition of deferred charges**

Under Spanish GAAP it ispossible, under certain circumstances, to recognise as assets expenses such asdeferred charges; however, under IFRSs, expenses of this nature may not becapitalised. Therefore, in order to convert the Spanish GAAP consolidatedfinancial statements of Endesa to IFRSs, it was necessary to derecognise thesecapitalised expenses, which relate mainly to labour force restructuring coststo be recovered through costs of transition to competition (“CTCs”). Also, thecapitalised debt arrangement expenses were deducted from the liabilityrecognised in relation to this debt.

**d) Amortisation ofgoodwill**

Under Spanish GAAP, goodwill must be amortisedsystematically over a maximum period of 20 years. Pursuant to Spanish GAAP,Endesa has been amortising goodwill over 20 years, since this is considered theaverage period over which this goodwill will be recovered.

Under IFRSs it is notconsidered that there is a systematic decline in value of goodwill and,therefore, it is not amortised and the only thing necessary is to perform aperiodic analysis of its recoverability. This analysis was also performed underSpanish GAAP. Therefore, the goodwill amortisation charge recognised in 2004 waseliminated when the IFRS consolidated income statement was prepared.

**e) Equityaccounting adjustments**

Under Spanish GAAP, a significant influence isconsidered to exist when 3% or more of a publicly listed company is held.Therefore, such companies could be accounted for using the equity method.However, under IFRSs, in order to account for an investment using the equitymethod it is necessary to demonstrate that significant influence exists, whichis presumed to be the case when an ownership interest of 20% or more is held.

In addition to the changein the companies thus accounted for, the difference in the value of theinvestees accounted for by the equity method arose mainly as a result of theeffect of the adjustments made at these companies in the conversion fromSpanish GAAP to IFRSs.

**f) Adjustments forinflation**

Under Spanish GAAP it was possible to retainadjustments for inflation at consolidated companies operating in countrieswhose accounting legislation permitted such adjustments.

Under IFRSs, in order to make such adjustments forinflation the country in which the company operates must be hyperinflationary,based on the requirements contained in IFRSs for countries to be classified assuch.

The analysis performeddisclosed that none of the countries in relation to which Endesa has beenmaking adjustments for inflation, namely Chile, Colombia and Peru, qualify ashyperinflationary and, therefore, the adjustment for inflation made pursuant toSpanish GAAP in 2004 was reversed when the financial statements were convertedto IFRSs.

**g) Provision fordismantling of assets**

When it is foreseen thatat the end of the useful life of an asset it will be necessary to incur assetdismantling expenses, IFRSs require that these expenses be estimated and thatthe carrying amount of the assets be increased the present value of theseexpenses and that the related provision be recorded. When these estimatedexpenses are included in the carrying amount of non-current assets, they aredepreciated over the useful life of the assets. Endesa made these calculationsto reconstruct the cost and accumulated depreciation of the assets from thedate on which they became operational and made the corresponding adjustmentwhen the Spanish GAAP financial statements were converted to IFRSs.

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**h) Tax-relatedtemporary differences**

Under both Spanish GAAP and IFRSs, deferred tax assetsor liabilities must be recognised for the differences for tax and accountingpurposes in the dates on which liability for the tax arises.

Under Spanish GAAP, inorder to recognise deferred taxes there must have been a timing differencebetween the date of recognition for accounting purposes and the date of therelated tax return. However, IFRSs require the use of the balance sheetliability method, whereby any difference between the carrying amount and thetax base of an asset or liability gives rise to a deferred tax asset orliability that must be recognised. When Endesa’s financial statements wereconverted to IFRSs, the adjustments required to comply with this requirementwere included. In this adjustment it is not included the tax effect of the restof the adjustments included in the reconciliation as they reflect the effectnet of taxes.

**i) Provision formajor repairs**

Under Spanish GAAP,provisions must be recorded for the scheduled periodic maintenance ofgenerating facilities so that when the overhauls are carried out the costthereof has already been recognised in the income statement and provisioned.Under IFRSs such provisions may not be recognised, since it is not permitted torecognise expenses early or to recognise future liabilities and, therefore, therelated costs are charged to income in the period in which they are incurred.Consequently, in the conversion of the consolidated financial statementsprepared in accordance with Spanish GAAP to IFRSs, these provisions werederecognised.

**j) Exchange gains**

Under Spanish GAAP, exchange gains may only berecognised in income when they have been realised, until then they areclassified as deferred income on the liability side of the balance sheet.

Under IFRSs, both foreignexchange losses and exchange gains are recognised in income on an accrualbasis. Therefore, when the Spanish GAAP financial statements were converted toIFRSs, the liability recognised for unrealised exchange gains was eliminated.

**k) Adjustment ofother provisions**

Under Spanish GAAP, the principle of prudence prevailsover all other principles, making it possible to recognise provisions inaccordance with the principle of prudence even if the probability of the riskmaterialising is less than 50% or in order to cover existing uncertainties.

Under IFRSs, in order to be able to recognise aprovision, it must be more likely than not that the risk will materialise andit must be possible to measure the risk with sufficient reliability.

Based on thesedifferences, certain of the provisions recognised by Endesa in the balancesheet at 31 December 2003, under Spanish GAAP were not acceptableunder IFRSs. These include the provision for all the investment risk and directand indirect loans relating to the Argentine companies. Since some of theseprovisions were reversed in 2004, the income recognised in accordance withSpanish GAAP in 2004 as a result of the reversal of the provisions did not constituteincome for IFRS purposes because the provisions did not exist.

**Elimination ofextraordinary items**

There are no extraordinaryitems in the IFRS income statement and, therefore, the extraordinary itemsrecognised in the Spanish GAAP income statement must be reclassified to otherheadings based on their nature, which does not have an impact on the netprofit, although it does affect the various margins in the income statement.

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**Netting off ofpower sales and purchases**

Under IFRSs, the income of the electricitydistribution activity in Spain is recorded only for the regulated marginrecognised for this activity, since the remainder of the income recognisedunder Spanish GAAP relates to the automatic charging of certain costs of thedistributor, chiefly power purchases.

Also, the sales to the wholesale market of the Group’sproducer in Spain that are made in the same time band, and therefore at thesame price, as the purchases made in that same market by the Group’s retailerare eliminated in accordance with IFRSs and, accordingly, neither the incomenor the expense is disclosed.

Under Spanish GAAP, based on the formal transactionsperformed, both the income and the expense are disclosed.

The effect of netting offthese expenses and income disclosed in accordance with Spanish GAAP led to areduction in the income under IFRSs in 2004, although it did not have anyeffect on the net profit or on the various margins in the income statement.

**Application of IASs32 and 39**

The main adjustments madeat the beginning of 2005 on application of IASs 32 and 39 were as follows:

**l) Preferenceshares**

Under Spanish GAAP, sincepreference shares are shares of subsidiaries held by third parties, they areclassified as minority interests. However, under IFRSs, since the holders ofsuch shares are entitled to a dividend when Endesa reports a consolidatedprofit and, therefore, they do not have the capacity to decide whether adividend is paid on these shares, they are classified as a financial liability.

**m) Measurement ofderivatives**

Under Spanish GAAP, ifderivatives are deemed to be hedging instruments they are not measured and theresult they produce is allocated to income on an accrual basis. Derivativesthat are not hedging instruments must be measured and a provision is recordedif the measurement carried out indicates a loss. No accounting entry isrecognised if the measurement discloses a gain. IFRSs define more strictly theconditions that have to be met in order for a derivative to qualify for hedgeaccounting. Also, all derivatives are measured at fair value and are recognisedin equity or in profit or loss, depending on the type of derivative involved.

**n) Market value ofpublicly listed shares**

Under IASs 32 and 39,investments in publicly listed companies over which a significant influence isexercised must be recognised at their market value. Under Spanish GAAP, suchinvestments are recognised at the lower of cost and market if the percentage ofownership is lower than 3%; if it is 3% or higher, the investments are accountedfor using the equity method. Therefore, at the beginning of 2005, when IASs 32and 39 were applied for the first time, Endesa changed the value of theseinvestments to reflect them at their market value.

**o) Derecognition ofregulatory assets**

Under Spanish GAAP, certain Latin American regulatoryassets were recognised as financial assets but did not qualify for recognitionas such under IASs 32 and 39. Therefore, these items were adjusted in thefirst-time application of these IASs.

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**29.**          *Differences Between IFRS and United States Generally Accepted Accounting Principles*

As discussed in Note 2.1, the accompanying financialstatements were prepared in accordance with International Financial ReportingStandards (“IFRS”) as adopted by the European Union as of December 31,2005, in conformity with European Regulation (EC) No. 1606/2002 of theEuropean Parliament and of the Council. For Endesa there are no differences betweenIFRS as adopted by the EU and IFRS published by the International AccountingStandards Board (“IASB”).

Until 2004 Endesa had prepared its financialstatements in accordance with accounting principles generally accepted in Spain(“Spanish GAAP”), Endesa’s Previous GAAP. Spanish GAAP is not comparable toinformation prepared in accordance with IFRS. A reconciliation of openingequity balance and net income for the first financial year beginning onJanuary 1, 2004 from Spanish GAAP to IFRS is included in Note 28—“Transitionfrom Spanish GAAP to IFRS”.

This is the first year that Endesa’s financialstatements have been prepared on an IFRS basis. In relation to this transitionto IFRS, in April 2005 the Securities and Exchange Commission (“SEC”)adopted some amendments to Form 20-F to provide a one timeaccommodation relating to financial statements prepared under IFRS for foreignprivate issuers registered with the SEC, such as Endesa. This accommodationpermitted Endesa for their first year of reporting under IFRS to file two yearsrather than three years of statements of income, changes in shareholders’equity and cash flows prepared in accordance with IFRS, with appropriaterelated disclosure and respective reconciliation of financial statement itemsto generally accepted accounting principles as used in the United States (“U.S.GAAP”).

International FinancialReporting Standards (“IFRS”) differ in certain significant aspects fromaccounting principles generally accepted in the United States of America (“U.S.GAAP”). These differences are discussed in the following paragraphs.

**Reconciliation ofnet income and stockholders’ equity from IFRS to U.S. GAAP**

It is worth noting that under U.S. GAAP, equityconsists only of equity corresponding to the shareholders of the ParentCompany. Under IFRS equity includes the equity corresponding to theshareholders of both the Parent and the minority interests. As explained below,to arrive at equity of the Parent Company under U.S. GAAP from equity underIFRS it is necessary to deduct the amount belonging to minority interest, whichdoes not mean that the equity corresponding to the shareholders of the ParentCompany has been reduced in any case due to this adjustment.

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The following table (“Reconciliation Table”) is asummary of the adjustments to consolidated net income and to  consolidated shareholders’ equity that wouldhave been required if U.S. GAAP had been applied instead of IFRS:

| ** **                                                             | ** ** | ** ** | ** ** | **Net Income**                    | ** ** | **Equity**                             | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                             | ** ** | **Item**   | ** ** | **For the years ended** | ** ** | **For the years ended** | ** ** |
| ** **                                                             | ** ** | **#**      | ** ** | **December 31,**                  | ** ** | **December 31,**                  | ** ** |
| ** **                                                             | ** ** | ** ** | ** ** | **2004(1)**                            | ** ** | **2005**                               | ** ** | **2004(2)** | ** ** | **2005** | ** ** |
| ** **                                                             | ** ** | ** ** | ** ** | **Millions of Euros**        | ** ** |
| **Amounts per accompanying**                                           | ** ** | ** ** |       |                                   |       |                                   |       |   |   |   |   |   |   |
| **Financial statements:**                                              | ** ** | ** ** | ** ** | ** **                             | ** ** |                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Of the  Parent Company**                                             | ** ** | ** ** | ** ** | ** **                             | **1,253**  |                                   | ** ** | **3,182** | ** ** | **8,728** | ** ** | **11,590** | ** ** |
| Of the Minority interest                                               | ** ** | ** ** |       |                                   | 408        |                                   |       | 575 |   | 5,405 |   | 4,737 |   |
| Total                                                                  | ** ** | ** ** |       |                                   | 1,661      |                                   |       | 3,757 |   | 14,133 |   | 16,327 |   |
| **Increases (decreases) due to**                                       |       |       |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Minority interest                                                      | ** ** | **1**      |       |                                   | (408       | )                                      |       | (575 | ) | (5,405 | ) | (4,737 | ) |
| Reconciliation  adjust.for inflation of foreign subsidiaries           | ** ** | **2.1**    |       |                                   | 84         |                                   |       | 93 |   | (1,106 | ) | (1,296 | ) |
| Adjustments to the cost  of property and equipment                     | ** ** | **3**      |       |                                   | 148        |                                   |       | 125 |   | (1,350 | ) | (1,225 | ) |
| Revenue recognition                                                    | ** ** | **4**      |       |                                   | 76         |                                   |       | (17 | ) | (102 | ) | 134 |   |
| Planned major  maintenance activities                                  | ** ** | **5**      |       |                                   | 22         |                                   |       | — |   | (43 | ) | — |   |
| Sale and lease back  involving real estate                             | ** ** | **6**      |       |                                   | 14         |                                   |       | 14 |   | (113 | ) | (99 | ) |
| Accounting for certain  investments in equity securities               | ** ** | **7**      |       |                                   | 42         |                                   |       | (219 | ) | 300 |   | (154 | ) |
| Goodwill arising under U.S.  GAAP - business combinations         | ** ** | **8.1**    |       |                                   | —     |                                   |       | — |   | 642 |   | 642 |   |
| Goodwill amortization                                                  | ** ** | **8.2**    |       |                                   | —     |                                   |       | — |   | 538 |   | 622 |   |
| Reversal of goodwill  impairment                                       | ** ** | **8.3**    |       |                                   | 57         |                                   |       | — |   | 57 |   | 57 |   |
| Negative goodwill                                                      | ** ** | **8.4**    |       |                                   | (1         | )                                      |       | 1 |   | (7 | ) | (3 | ) |
| Termination benefits                                                   | ** ** | **9**      |       |                                   | (131       | )                                      |       | (187 | ) | 777 |   | 590 |   |
| Pension plans - Prior  Service Costs of Plan Amendments                | ** ** | **10.1**   |       |                                   | (19        | )                                      |       | (19 | ) | 143 |   | 124 |   |
| Pension plans - Acturial  gain and losses                              | ** ** | **10.2**   |       |                                   | —     |                                   |       | (323 | ) | — |   | — |   |
| Derivative instruments  and hedging activities                         | ** ** | **11**     |       |                                   | 26         |                                   |       | (2 | ) | (50 | ) | 30 |   |
| Treasury stock                                                         | ** ** | **12**     |       |                                   | (16        | )                                      |       | — |   | — |   | — |   |
| Transation gain or  losses in intercompany’s transactions         | ** ** | **13**     |       |                                   | 1          |                                   |       | 5 |   | 1 |   | — |   |
| Currency translation  adjustment                                       | ** ** | **14**     |       |                                   | —     |                                   |       | (32 | ) | — |   | — |   |
| Tax effect of the above  adjustments                                   | ** ** | **15**     |       |                                   | 33         |                                   |       | 249 |   | 729 |   | 743 |   |
| Effect of minority  interest of the above adjustments                  |       |       |       |                                   | (135       | )                                      |       | (146 | ) | 229 |   | 255 |   |
| **Amounts in accordance with U.S. GAAP before  cumulative**            | ** ** | ** ** |       |                                   |       |                                   |       |   |   |   |   |   |   |
| **effect of a change in  accounting principle**                        | ** ** | ** ** | ** ** | ** **                             | **1,454**  |                                   | ** ** | **2,724** | ** ** | **9,373** | ** ** | **12,010** | ** ** |
| Cumulative effect of a change in accounting  principle:                | ** ** | ** ** |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Planned major  maintenance activities.                                 | ** ** | **5**      |       |                                   | —     |                                   |       | 43 |   | — |   | — |   |
| Tax effect of the above  adjustments                                   |       |       |       |                                   |       |                                   |       | (14 | ) |   |   |   |   |
| Effect of minority  interest of the above adjustments                  |       |       |       |                                   |       |                                   |       |   |   |   |   |   |   |
| **Amounts under U.S. GAAP  corresponding to Parent Company**           | ** ** | ** ** | ** ** | ** **                             | **1,454**  |                                   | ** ** | **2,753** | ** ** | **9,373** | ** ** | **12,010** | ** ** |
| **Basic and Diluted Earnings per share before  cumulative**            | ** ** | ** ** |       |                                   |       |                                   |       |   |   |   |   |   |   |
| **effect of a change in  accounting principle**                        | * *   | * *   | * *   | * *                               | *1.4*      |                                   |       | *2.6* | * * |   |   |   |   |
| **Cumulative effect of a change  in accounting principle per share**   | ** ** | ** ** | * *   | * *                               | *—*   |                                   | * *   | *.0* |   | * * |   |   |   |
| **Basic and Diluted Earnings per share in  accordance with U.S. GAAP** | * *   | * *   | * *   | * *                               | *1.4*      |                                   |       | *2.6* | * * |   |   |   |   |

 

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(1)          Net income under U.S.GAAP as of December 31, 2004 has been restated as a consequence of theelimination of the effect of the inflation (see below for the reconciliation ofnet income under U.S. 

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GAAP as previouslyreported and net income as restated). The restatement made is exclusively dueto the fact that in prior years as allowed pursuant to Item 17(c) (iv) (A) of Form 20-F Endesa’s reconciliationfrom accounting principles generally accepted in Spain to U.S. GAAP excludedany adjustments attributable to the effect of differences resulting from theaccounting for inflation as it was considered to be part of a comprehensivemeasure of accounting for the effect of some Latin American subsidiariesprice-level changes in the local GAAP. Since such price-level adjustment asItem 17 (c) (iv) A for Form 20-F is no longer applicableas a result of the Company’s adoption of EU-IFRS (see Note 28) all inflationadjustments for U.S. GAAP before January 1, 2004 have been removed frompresented U.S. GAAP amounts.

(2)          Shareholders’equity under U.S. GAAP as of December 31, 2004 has been restated as aconsequence of the elimination of the effect of the inflation (see below thereconciliation of shareholders’ equity under U.S. GAAP as previously reportedand shareholders’ equity as restated). The restatement made is exclusively dueto the fact that in prior years, as allowed pursuant to Item 17(c) (iv) (A) of Form 20-F, Endesa’s reconciliationfrom accounting principles generally accepted in Spain to U.S. GAAP excludedany adjustments attributable to the effect of differences resulting from theaccounting for inflation as it was considered to be part of a comprehensivemeasure of accounting for the effect of some Latin American subsidiaries’price-level changes in the local GAAP. Since such price-level adjustment asItem 17 (c) (iv) A for Form 20-F is no longer applicableas a result of the Company’s adoption of EU-IFRS (see Note 28) all inflationadjustments for U.S. GAAP before January 1, 2004 have been removed frompresented U.S. GAAP amounts.

Thelast adjustment in the reconciliation refers to the sum of the minorityinterest effect of each reconciling adjustment. For the first adjustment seeNote 28 b) and 30.1 of the Financial Statements.

| ** **                                                                      | ** ** | **Millions of Euros** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------|------------|
| **Statements of changes in shareholder’s equity** | ** ** | ** **                      | ** ** | **2004 (1)** | ** ** | **2005** | ** ** |
| **U.S.  GAAP shareholders’ equity at the beginning of the year**           | ** ** |                            | **8,736**  | ** ** |   | **9,373** | ** ** |
| **Movements during the year:**                                                  |       |                            |       |   |   |   |   |
| Net income for  the year                                                        |       |                            | 1,454      |   |   | 2,753 |   |
| Interim dividend                                                                |       |                            | (288       | ) |   | (323 | ) |
| Supplementary  dividend                                                         |       |                            | (464       | ) |   | (494 | ) |
| Accumulated other  comprehensive income (loss):                                 |       |                            |       |   |   |   |   |
| Currency Translation Adjustment                                                 |       |                            | 52         |   |   | 873 |   |
| Derivative instruments, net of tax                                              |       |                            | (107       | ) |   | (148 | ) |
| Available-for-sale securities, net of tax effect                                |       |                            | (63        | ) |   | 14 |   |
| Treasury stock                                                                  |       |                            | 44         |   |   | — |   |
| Other                                                                           |       |                            | 9          |   |   | (38 | ) |
| **U.S. GAAP shareholders’ equity  at the end of the year**                 | ** ** |                            | **9,373**  | ** ** |   | **12,010** | ** ** |
|                                                                                 |            |                                 |            |  |  |  |  |  |  |

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(1)          Shareholders’equity under U.S. GAAP as of December 31, 2004 has been restated as aconsequence of the elimination of the effect of the inflation (see below thereconciliation of shareholders’ equity under U.S. GAAP as previously reportedand shareholders’ equity as restated). The restatement made is exclusively dueto fact that in prior years as allowed pursuant to Item 17(c) (iv) (A) of Form 20-F Endesa’s reconciliationfrom accounting principles generally accepted in Spain to U.S. GAAP excludedany adjustments attributable to the effect of differences resulting from theaccounting for inflation as it was considered to be part of a comprehensivemeasure of accounting for the effect of some Latin American subsidiariesprice-level changes in the local GAAP. Since such price-level adjustment asItem 17 (c) (iv) A for Form 20-F is no longer applicableas a result of the Company’s adoption of EU-IFRS (see Note 28) all inflationadjustments for U.S. GAAP before January 1, 2004 have been removed frompresented U.S. GAAP amounts.

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The differences includedin the Reconciliation Table above are explained in the following items:

**1. *Minority interest***

Under U.S. GAAP,shareholder’s equity and net income is made up only of the equity portionattributed to equity holders of the Parent Company. However, under IFRS equityand net income include the equity and net income corresponding to theshareholders of both the controlling shareholder and the minority interests.Therefore, an adjustment to reconcile to U.S. GAAP is recorded in order toexclude the Minority Interests portion of shareholder’s equity and net income.

As explained further on “16. Classificationdifferences between IFRS and U.S. GAAP”, within “16.3 Deconsolidation of EndesaCapital Finance, LLC”, in 2004 €1,500 million ofpreference shares issued by Endesa Capital Finance classified as minorityinterests under IFRS is reclassified to long-term debt in the ConsolidatedBalance Sheet under U.S. GAAP at December 31, 2004. Additionally, €60million that is classified as income (loss) attributed to minority interests inthe Statement of Income for the period ended December 31, 2004 under IFRSis reclassified to financial expenses under U.S. GAAP. This adjustment is notincluded in the Reconciliation Table as it does not affect net income andshareholder’s equity.

**2. *Adjustments for Inflationof Foreign Subsidiaries***

**2.1 - Reconciliation Adjustments for Inflation ofForeign Subsidiaries**

Spanish GAAP, Endesa’sprevious GAAP, did not require the removal of any inflation adjustment forGroup Companies located in countries where local accounting legislationrequired such adjustment to be recorded (Chile, Colombia and Peru), from thedate of their inclusion in the Group through each year-end.

In Endesa’s previousfilings, as allowed pursuant to Item 17 c (iv) (A) of Form 20-Fthe reconciliation from Endesa’s previous GAAP to U.S. GAAP excluded anyadjustments attributable to the effect of differences resulting from theaccounting for inflation, since under Endesa’s previous GAAP the application ofinflation restatement was considered to be part of a comprehensive measure ofaccounting for the effect of some Latin American subsidiaries price-level changes.

Under IFRS, in order torecord an inflation adjustment for a country in which the company operates, theeconomy must be classified as hyperinflationary, based on IFRS criteria.. Theanalysis performed disclosed that none of the countries in relation to whichEndesa has been making inflation adjustments, namely Chile, Colombia and Peru,qualify as hyperinflationary.

However as indicated inNote 28 Endesa has made use of IFRS 1 exceptions and has maintained theinflation adjustment previously recorded under Spanish GAAP as part of thedepreciated cost of the property, plant and equipment at 1 January 2004for each respective subsidiary where such adjustment had been made. Inaccordance with IFRS such exception was not permitted for the goodwill in eachrespective Foreign Subsidiary with inflation adjustment, therefore such effecthas been eliminated in the first time adoption of IFRS.

Such IFRS 1 exception is not allowed under U.S. GAAP;therefore Endesa presents a reconciling item for all inflation effectsmaintained in Endesa’s IFRS balances for the depreciated cost of the property,plant and equipment inflation adjustment until the first application of IFRSand an increase in income of each year that results from the recalculation ofthe depreciation expense on a historical cost basis without inflation effect,which is being amortized as part of the respective cost of such assets overtheir respective remaining useful life.

**2.2 - Restatement of U.S. GAAP Figures for Adjustmentsfor Inflation of Foreign Subsidiaries**

As previously explainedthe inflation adjustment had never been considered as an reconciling item fromSpanish GAAP, Endesa’s previous GAAP, to U.S. GAAP since under Endesa’sprevious GAAP the application of inflation adjustment was considered to be partof a comprehensive measure of accounting for the effect of some Latin Americansubsidiaries price-level changes.

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In addition, the Chilean Association of Accountantsissued in 1998 its Technical Bulletin (“BT”) No. 64 that required theadoption of the U.S. dollar as the “functional currency” as part of acomprehensive basis of adjusting for inflation for those financial statementsof foreign subsidiaries that operated in “unstable countries” (as defined by BT-64),and which are not considered to be an extension of Enersis Group (a Chilean SECregistrant which is a subsidiary of Endesa Group). This accounting policy wasalso followed under U.S. GAAP, since BT-64 was considered to be anintegral part of a comprehensive basis of adjusting for inflation. However inview of the changes in the economic circumstances in the Latin American region,Endesa determined that consideration of the U.S. dollar as the functionalcurrency of such subsidiaries as required by BT-64 was no longerappropriate in 2001. As a result, management decided to discontinue the use ofBT-64 in preparation of the U.S. GAAP accounts and apply the provisionsof SFAS No. 52, “Foreign Currency Translation,” beginning January 1,2001.

Therefore in orderto eliminate all inflation adjustment effects the Group has restated Endesa’spreviously presented U.S. GAAP figures in order to:

·       eliminatein all previous presented periods prior to January 1, 2004 all inflationadjustments recorded as part of the depreciated cost of the property, plant andequipment and goodwill in each respective Foreign Subsidiary

·       eliminateall inflation adjustment effects recorded in the year 2004 as part of thedepreciated cost of the property, plant and equipment and goodwill in each respectiveForeign Subsidiary

·       eliminatein all previous presented periods prior to December 31, 2004 all theinflation adjustments recorded for the effects of applying BT 64.

In prior years as allowed pursuant to Item 17(c) (iv) (A) of Form 20-F Endesa’s reconciliationfrom accounting principles generally accepted in Spain to U.S. GAAP excludedany adjustments attributable to the effect of differences resulting from theaccounting for inflation as it was considered to be part of a comprehensivemeasure of accounting for the effect of some Latin American subsidiariesprice-level changes in the local GAAP. Since such price-level adjustment as Item17 (c) (iv) A for Form 20-F is no longer applicable as aresult of the Company’s adoption of EU-IFRS (see Note 28) all inflationadjustment for U.S. GAAP before January 1, 2004 have been removed.

Setforth below is a reconciling table of Endesa’s previously presented U.S. GAAPshareholders’ equity and net income, which as permitted did not eliminate anyeffects of inflation adjustment, to the U.S. GAAP figures without inflationadjustments as reconciled from the IFRS financial statements.

| ** **                            | ** ** | **YEAR 2004**  | ** ** |
|---------------------------------------|------------|---------------------|------------|
| ** **                            | ** ** | **Net Income** | ** ** | **Equity** | ** ** |
| **U.S.  GAAP as originally reported** | ** ** |                | **1,576**  | ** ** |   | **10,181** | ** ** |
| Effect of change in monetary          |       |                |       |   |   |   |   |
| restatement on U.S. GAAP              |       |                | (126       | ) |   | (2,159 | ) |
| Tax effects                           |       |                | (15        | ) |   | 344 |   |
| Effect of  minority interest          |       |                | 19         |   |   | 1,007 |   |
| **U.S.  GAAP as restated**            | ** ** |                | **1,454**  | ** ** |   | **9,373** | ** ** |

 

***3.Adjustments to the cost of property and equipment***

***3.1. Elimination of legal restatements of Spanish fixedassets***

As described in Note 3-a, the cost andaccumulated depreciation of the utility plants includes the asset revaluationpermitted in the various countries to correct the value of the property, plantand equipment for 

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the effect of inflation.The fixed assets in Spain of Endesa Group were revalued based on a one-timeadjustment in 1996 in accordance with Spanish regulations.

As indicated in Note 28, under IFRS Endesa has madeuse of the exception permitted by applying IFRS 1 and has maintained thedepreciated cost of the property, plant and equipment at 1 January 2004including asset revaluations.

Under U.S. GAAP, such revaluations are not permitted.The adjustments shown in the reconciliation include a reduction inshareholders’ equity to eliminate the revaluations made in Spain and anincrease in income of each year resulting from the recalculation of thedepreciation expense based on historical cost.

The inflation adjustmentfor countries outside Spain has been considered in the Adjustment for Inflationof Foreign Subsidiaries as described above.

***4.Revenue recognition***

***4.1. Up-front Fee***

Under IFRS, in accordance with IAS 18 revenuerecognition regarding entrance fees (certain “up front” fees) depends on thenature of the services provided. If the fee includes only the entrance, and allother services or products are paid for separately, or if there is a separateannual subscription, the fee is recognized as revenue if no significantuncertainty as to its collectability exists.

Under U.S. GAAP Staff Accounting BulletinNo. 101, Revenue Recognition in Financial Statements, (SAB 101 modified bySAB 104, or SEC Staff Accounting Bulletin Topic 13-A.1, RevenueRecognition) guidance is followed.

Under IFRS, such entrance fee collected by ElectricityDistribution Activities from new customers is considered to be a standalonetransaction and all other services are paid for separately, therefore such feeis recognized up-front as revenue when no significant uncertainty as to itscollectability exists.

Under U.S. GAAP, such entrance fee which is consideredto be revenue earned from access and similar charges should be recognized overthe estimated life of the customer relationship.

The effect of the deferredand released revenue from prior periods has been recorded as a reconciliationitem from IFRS to U.S. GAAP.

***4.2. Revenue Recognition in Brazilian Subsidiaries***

Some Brazilian subsidiaries which are considered to beregulated enterprises have recorded the revenues and defer the cost establishedby the Brazilian Government to compensate the effects of the energy shortage in2002 and 2001.

As explained in Note 28, the Group has not adopted IAS32/39 for Endesa’s financial instruments and hedging accounting; rather it hasused for the year 2004 Endesa’s Previous GAAP, Spanish GAAP. During 2004 theserevenues and deferred costs were considered in Endesa’s Previous GAAP asfinancial assets - accounts receivables fully recognized for Spanish GAAPpurposes.

Endesa has applied IAS 32/39 as of January 1,2005. In accordance with the IFRS accounting guidance, those financial assets -accounts receivables recorded under Endesa’s Previous GAAP - did not meet thedefinition of financial assets according to IAS 39 and therefore those assetshave been adjusted in Endesa’s IFRS financial statements in the first-timeapplication of IAS 32/39 as of January 1, 2005.

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Inaccordance with EITF Issue 92-7, “Accounting by rated-regulated utilitiesfor the effects of certain alternative revenue programs”, under U.S. GAAP anasset should be recorded for the part that will be recovered in the next 24months. Therefore, as of December 31, 2004 the Group has reversed the partof the asset (under Endesa’s Previous GAAP considered as financialassets - accounts receivables) that would be recovered in a period longer than24 months. As of December 31, 2005 due to the first-time application ofIAS 32/39 as of January 1, 2005, which has removed all the asset recordedunder Endesa’s Previous GAAP, the Company has recorded under U.S. GAAP thatpart that will be recovered in the next 24 months. Under U.S. GAAP for 2005 and 2004 the recorded assets are not financialassets but are intangible assets. Therefore the effect of thisadjustment in the reconciliation to U.S. GAAP is an increase in net income of €38million and a decrease of €7 million and a decrease in equity of €13  million and an increase of €234million for the years ended December 31, 2004 and 2005, respectively.

***5.  Planned Major Maintenance Activities***

Under IFRS planned majormaintenance activities are expensed as they are incurred.

Prior to January 1, 2005,Endesa used the accrual method to account for such costs in accordance with U.S.GAAP. Under the accrual method, the estimated cost of the initial overhaul isaccrued to the overhaul. At that time, the actual cost of overhaul is chargedto the accrual, with any deficiency or excess charged or credited to expense.The cost of the next overhaul is then estimated and accrued to that overhaul,at which time the process is repeated. From January 1, 2005 these costsare being expensed as they are incurred.

Thecumulative effect of the change in principle under U.S. GAAP (€43) million has been included in the U.S. GAAPnet income for the period ended December 31, 2005, eliminating the relatedreconciling difference between IFRS and U.S. GAAP that existed atDecember 31, 2004.

***6. Sale and leaseback involving real estate***

In 2003 Endesa Group sold and leased back certain realestate assets, including its main office building, to a third party, which isnot a Special Purpose Entity (SPE) as defined in U.S. GAAP.

Under IFRS, if the sale-leaseback transaction resultsin an operating lease, the gain or loss on the sale of the asset should berecognized immediately if the sale is made at fair value. Regardless of thesale price, if at the time of a sale-leaseback transaction the asset’s carryingamount exceeds its fair value, the excess should be recognized immediately as aloss. Sale-leaseback transactions involving real estate should be accounted forin the same manner as other sale-leaseback transactions.

Under U.S. GAAP, only thegain on the sale in excess of the present value of the minimum lease paymentsis recognized at the date of the sale in the case that the seller has leasedback more than a minor portion of the asset. The remaining gain is deferred andamortized in accordance with U.S. GAAP, i.e. amortized in equal monthly amountsover the lease term because the leaseback has been classified as an operatinglease.

***7. Accounting for certain investments in equitysecurities***

**7.1. Accounting forcertain investments in debt and equity securities prior to adoption of IAS32/39**

As explained in Note 28,the Group has not adopted IAS 32/39 for Endesa’s financial instruments andhedging accounting; rather the Group has used for 2004 Endesa’s Previous GAAP,Spanish GAAP. Therefore during the year 2004, prior to the first application ofIAS 32/39, the accounting policies for some equity securities, in accordancewith Spanish GAAP, Endesa’s Previous GAAP, required the equity method ofaccounting for investments in listed equity securities where the investor heldmore than 3% irrespective of whether or not the entity could exercisesignificant influence. However, during 2004 under 

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IFRS theaccounting value of these investments were held at their carrying amounts as ofDecember 31, 2003. Other debt securities were recorded at initial costplus interest.

Asindicated in Note 28 Endesa has applied IAS 32/39 as of January 1, 2005.In accordance with IFRS accounting guidance, financial assets in debt andequity securities should be recorded depending on their initial classification.Endesa’s investments in debt and equity securities basically were considered asavailable for sale at fair value with changes in equity.

U.S. GAAP (SFAS No. 115) requires investmentsin marketable debt and equity securities to be classified based on the purposefor which they were acquired (held-to-maturity securities, trading securitiesand available-for-sale securities). The treatment of the unrealized gains andlosses differs depending on the classification: unrealized gains and losses(except other than temporary impairments) on securities which the companyconsiders held-to-maturity are not recorded; unrealized gains and losses onsecurities considered available-for-sale are not recorded in the incomestatement but as a separate component of the shareholders’ equity,  “Other comprehensive income”; unrealizedgains or losses on trading securities are recorded in the income statement.Market value is determined using the year-end market price.

For U.S. GAAP purposes,unrealized gains/losses of securities considered available-for-sale areincluded in shareholders’ equity until they are realized or recorded intoearnings due to other than temporary decline of value.

Therefore the Group hasincluded a reconciliation item for the period ended December 31, 2004 inorder to adjust all investments in debt and listed equity securities from costand equity method, as required according to Endesa’s Previous GAAP, to fairvalue with changes in equity as required under U.S. GAAP.

Since Endesa has appliedIAS 32/39 which is similar to the principles under U.S. GAAP for these types ofinvestment, no item has been included in the reconciling table.

Thefollowing supplementary information presents for 2005 the aggregate amount ofunrealized gains and losses under U.S. GAAP; the aggregate relate to the fairvalue of Endesa’s investments and the unrealized gains or losses segregated bythose that have been in a continuous unrealized gain or loss position for lessthan 12 months and those that have been in a continuous unrealized gain or lossposition for 12 months or longer.

| **Equity Security**           | ** ** | ** ** | ** ** | **Original  Cost** | ** ** | **Fair Value** | ** ** | **Unrealized  Gains less  than 12 months** | ** ** | **Unrealized  Gains  previous years** | ** ** | **Total Gross  Unrealized  Gains** | ** ** |
|------------------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------|------------|
| Red Eléctrica de  España |       |       | 20         |               |       |                | 106        |                                                      |       |                                       | 39         |                                    |       |   | 47 |   |   |   | 86 |   |   |
|                                    |            |            |            |                    |            |                     |            |                                                           |            |                                            |            |                                         |            |  |  |  |  |  |  |  |  |  |  |

 

Goodwill from equityinvestment was recorded apart from the amounts of each respective investmentunder Endesa’s Previous GAAP. Due to the first application of IFRS the goodwillof equity investment was recorded in equity investment. In addition, the amountof Endesa’s previous proportional equity investment recorded under Endesa’sPrevious GAAP was adjusted for the application of IFRS in such investment. Inorder to recognize the effects of the first application of IFRS to Endesa’sequity investees (mainly in Auna) such effect was recorded against retainedearnings, instead of adjusting the goodwill recognized under Endesa’s PreviousGAAP.

Under U.S. GAAP goodwill of each equity investment wasinitially recorded considering initial allocation of the proportional equityinvestment in accordance with U.S. GAAP, unrecorded intangible assets and theremaining goodwill. In this respect, goodwill of Endesa’s equity investment inAuna under U.S. GAAP was different than as recorded under Spanish GAAP,Endesa’s Previous GAAP, due to different proportional equity under both GAAPs.This effect did not produce any significant reconciliation difference betweenU.S GAAP and Endesa’s Previous GAAP since it related basically to areclassification between goodwill and proportional equity participation bothwithin financial investment in equity investee under U.S. GAAP.

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However, due to the application of IFRS in Endesa’sproportional equity investment in Auna, Endesa has included a reconciling itemin order to reverse the effects of the first application of IFRS for Endesa’sparticipation in Auna, which was recorded as reserve for the first applicationof IFRS and for recording such investment and goodwill in accordance with U.S.GAAP. Such difference relates to the different Goodwill for equity investmentunder U.S. GAAP, IFRS and Spanish GAAP, Endesa’s Previous GAAP.

Since the Company sold asignificant part of its equity investment during 2005 as explained in Note 9 amajor proportional part of the U.S. GAAP goodwill for the respective disposalwas recorded in earnings in Endesa’s reconciliation between IFRS to U.S. GAAP.As the sales of fully consolidated companies and companies accounted for usingthe equity method are considered within Operating Income under U.S. GAAP butnot under IFRS, the income from the sale of this equity investment isconsidered Operating Income under U.S. GAAP.

**7.2. Accounting forcertain investments in equity securities—Unlisted Equity Investments**

During 2005 Endesa has disposed of a significant partof its equity investment in Auna, an unlisted equity investment. The remainingparticipation was classified under IAS 32/39 as available for sale. IFRSrequires investments in unlisted equity investments for which a fair value canbe reasonably estimated to be recorded at fair value with changes in fair valuerecorded in reserves within shareholders’ equity.

U.S. GAAP requires that unlisted equity securities tobe recognized at cost with any impairment loss recognized in earnings.

The Group has includedthis effect in Endesa’s reconciliation in order to adjust from IFRS to U.S.GAAP.

***8. Business Combinations and Goodwill***

**8.1. Goodwillarising under U.S. GAAP—Business Combination**

Under IFRS, goodwill arising on consolidationrepresents the excess of the cost of acquisition over the Group’s interest inthe fair value of the identifiable assets and liabilities of a subsidiary atthe date of acquisition. The assets and liabilities acquired are measuredprovisionally at the date on which control has been acquired, and the resultingvalue is reviewed in a maximum period of one year from the date of acquisition.Until the fair value of the assets and liabilities has been definitivelydetermined, the difference between the cost of acquisition and the carryingamount of the company acquired is recognized provisionally as goodwill.

As permitted by IFRS 1 for the first adoption of IFRSthe Company has applied an exception of not recalculating all the effects ofbusiness combinations prior to January 1, 2004, therefore Goodwill forbusiness combinations prior to January 1, 2004, is measured as recordedunder Spanish GAAP, Endesa’s previous GAAP. Since January 1, 2004 goodwillhas not been amortized, any business combination was recorded in accordancewith IFRS 3, at the end of each reporting period goodwill has been reviewed forimpairment (i.e. a reduction in its recoverable amount to below its carryingamount) and any impairment has been written down, according to IFRS.

Under U.S. GAAP, assets acquired and liabilitiesassumed are recorded at their estimated fair values, and the excess of thepurchase price over the estimated fair value of the net identifiable assets isrecorded as goodwill. Under U.S. GAAP, when equity securities (including anywarrants, rights or options) are issued as consideration in businesscombinations, their fair value should be considered in order to determine thepurchase price. Under U.S. GAAP, acquisitions are recorded in accordance withthe purchase accounting method. By this method, under U.S. GAAP the excess ofthe cost over the fair value of acquired assets and liabilities should berecognized as goodwill.

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On July 16, 1999, Sevillana de Electricidad,S.A., Fuerzas Eléctricas de Cataluña, S.A. (FECSA), Empresa Hidroeléctrica delRibagorzana, S.A. (ENHER), Eléctricas Reunidas de Zaragoza, S.A. (ERZ), Gas yElectricidad, S.A. (GESA), Unión Eléctrica de Canarias, S.A. (UNELCO), Electrade Viesgo, S.A. (VIESGO) and Saltos del Nansa, S.A. (NANSA) were merged intoEndesa, S.A. (absorbing company). Under the merger, which was effective foraccounting purposes from January 1, 1999, the absorbing company acquiredthe absorbed companies’ assets and liabilities net of successive transactionsby universal succession. The merger took place through the exchange of theshares held by the merged companies’ minority stockholders for newly issuedshares of Endesa, S.A. Under U.S. GAAP such acquisition of the shares from theminority stockholders is accounted for under the purchase method. Accordingly,the cost of the acquired company is measured by the fair value of the equitysecurities issued and goodwill is recognized for the difference between thepurchase price and the fair value of the net assets acquired. Under SpanishGAAP, Endesa’s previous GAAP, such acquisition was recorded using the “pooling”method. Furthermore, under U.S. GAAP the purchase of the shares from the minoritystockholders is recorded on the consummation date of the transaction(July 16, 1999) rather than the accounting effective date. Accordingly,minority interest in the results of operations recorded for the period fromJanuary 1, 1999 to July 16, 1999 has been adjusted in U.S. GAAP forthe purposes of the purchase price allocation.

***8.2. Goodwill amortization***

Under IFRS, goodwill hasnot been amortized as from the date of application of IFRS,  January 1, 2004.

Under U.S. GAAP effectiveJanuary 1, 2002, goodwill is no longer being amortized.

***8.3. Reversal of goodwill impairment***

Under IFRS, with respectto cash-generating units to which goodwill has been allocated, therecoverability analysis is performed systematically at the end of each year orwhenever it is considered necessary to perform such an analysis.

The recoverable amount isthe higher of fair value less costs to sell and value in use. Value in use istaken to be the present value of the estimated future cash flows. Incalculating the recoverable amount of goodwill, the Group used the value in useapproach in practically all cases.

In assessing the value inuse, the Group prepares the projections of future pre-tax cash flows based onthe most recent forecasts approved by the Company’s directors. These budgetsinclude the best available estimates of the income and costs of thecash-generating units using industry projections, past experience and futureexpectations.

These cash flows arediscounted at a given pre-tax rate in order to calculate their present value.This rate reflects the cost of capital of the business and the geographicalarea in which it operates. In order to calculate it, the current time value ofmoney and the risk premiums generally used by analysts for the business and thegeographical area are taken into account.

If the recoverable amountof an asset is less than its carrying amount, an impairment loss is recognizedfor the difference with a charge to the heading “Depreciation and AmortizationCharge” in the consolidated income statement. Impairment losses on goodwill arenot reversible.

As indicated in Note 8,during 2004 Endesa recorded an impairment loss under IFRS for itscash-generating unit Coelce for an amount of €57million.

Under U.S. GAAP effectiveJanuary 1, 2002, the Group adopted SFAS No. 142, *Goodwill and Other Intangible Assets*(SFAS142). Under SFAS 142, goodwill related to subsidiaries and equity methodinvestments is no longer amortized over its estimated useful life. Goodwill onreporting units is tested for impairment on an annual basis and wheneverindicators of impairment arise. Under U.S. GAAP, the 

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goodwill impairment test,which is based on fair value, is performed on a reporting unit level. Goodwillon equity method investments continues to be tested for impairment inaccordance with Accounting Principles Board (“APB”) Opinion No. 18, *The Equity Method of Accounting for Investments inCommon Stock* (“APB 18”).

The fair value of thereporting units for which goodwill has been assigned was considered to be thebest reasonably consistent measurement of fair value measurements that includedboth income and market approaches. The income approach, which has been applied,considered the traditional discounted cash flow method. Goodwill is beingtested for impairment as of December 31 of every year.

Since under IFRS goodwillis tested at a lower level of financial information (cash-generating units)than the U.S. GAAP reporting unit, the impairment recorded in 2004 under IFRSwas not considered necessary; therefore it has been reversed in thereconciliation note from IFRS to U.S. GAAP.

On December 31,2005 and 2004, as a result of the test performed, Endesa Group determined thatno impairment under U.S. GAAP was required for the goodwill.

***8.4. Negative Goodwill***

Under IFRS any excess costof the acquisition over the acquirer’s interest in the fair value of the netidentifiable assets acquired represents goodwill and should be recognized as anasset. Negative goodwill is recognized in earnings. When there is apparently anexcess of the acquirer’s interest in the fair value of the net assets acquiredover the cost of the acquisition, the acquirer is required to undertake areassessment of the cost of the combination and fair value of the acquiredassets and assumed liabilities and contingent liabilities. If excess continuesto exist following the reassessment, it is recognized immediately in profit.

Under U.S. GAAP, theexcess of the cost of an acquired entity over the net of the amounts assignedto assets acquired and liabilities assumed is recognized as goodwill. In somecases, the sum of the amounts assigned to assets acquired and liabilitiesassumed will exceed the cost of the acquired entity (so-called “negative”goodwill). That excess should be allocated as a pro rata reduction of theamounts that otherwise would have been assigned to all of the acquirednoncurrent assets except (a) financial assets, other than investmentsaccounted for by the equity method, (b) assets to be disposed of by sale,(c) deferred tax assets, and (d) prepaid assets relating to pensionor other postretirement benefit plans. If any excess remains after reducing tozero the amounts that otherwise would have been assigned to those assets, thatremaining excess is recognized as an extraordinary gain in the period in whichthe business combination is completed, unless the combination involvescontingent consideration that would be recognized as an additional element ofcost of the acquired entity. In this case, a potentially lesser amount isrecognized as the extraordinary gain.

All the negative goodwillrecorded under Spanish GAAP, Endesa’s previous GAAP, has been reversed upon thefirst adoption of IFRS.

Therefore the Group has includeda reconciling item in order to reconcile the effects of the first applicationto IFRS to U.S. GAAP as indicated above.

***8.5. Goodwill Disclosure***

Both U.S. GAAP and IFRSgoodwill related to subsidiaries are disclosed separately as an intangible assetwhile goodwill on equity method investments are included in the carrying amountof the investments.

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OnDecember 31, 2005 and 2004, the carrying amounts of goodwill under U.S.GAAP for each of Endesa’s business segment and reporting units are as follows:

| ** **                                         | ** ** | **Domestic**    | ** ** | **Latin America**             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|-----------------|------------|-------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                         | ** ** | **electricity** | ** ** | **electricity activity** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ***millions of euros***                  | ** ** | ** **      | ** ** | **activity**                  | ** ** | **Chile**  | ** ** | **Brazil** | ** ** | **Others** | ** ** | **Italy**  | ** ** | **France** | ** ** | **Portugal** | ** ** | **Total** | ** ** |
| **Changes in the amounts of Goodwill - U.S. GAAP** | ** ** |            | ** ** | ** **                    |       | ** ** | ** ** |       | ** ** | ** ** |       |       | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Balance as of  January 01, 2004               |       |            | 642        | ** **                    |       | 2,137      |       |       | 343        |       |       |       | 25         | ** ** |   | 1,479 |   |   | — | ** ** |   |   | **—** | ** ** |   | **4,626** | ** ** |
| Additions                                          |       |            | —     | ** **                    |       | 102        |       |       | —     |       |       |       | —     | ** ** |   | 15 |   |   | 276 | ** ** |   |   | **—** | ** ** |   | **393** | ** ** |
| Retirements                                        |       |            | —     | ** **                    |       | —     |       |       | —     |       |       |       | —     | ** ** |   | — | ** ** |   | (46 | ) |   |   | **—** | ** ** |   | **(46** | **)** |
| Translation  differences                           |       |            | —     | ** **                    |       | (33        | )          |       | (10        | )          |       |       | —     | ** ** |   | — | ** ** |   | — | ** ** |   |   | **—** | ** ** |   | **(43** | **)** |
| Others                                             |       |            | —     | ** **                    |       | —     |       |       | —     |       |       |       | —     | ** ** |   | — | ** ** |   | (19 | ) |   |   | **—** | ** ** |   | (19 | **)** |
| **Balance  as of December 31, 2004**          | ** ** |            | **642**    | ** **                    |       | **2,206**  | ** ** |       | **333**    | ** ** |       |       | **25**     | ** ** |   | **1,494** | ** ** |   | **211** | ** ** |   |   | **—** | ** ** |   | **4,911** | ** ** |
|                                                    |            |                 |            |                               |            |            |            |            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                          | ** ** | **Domestic**    | ** ** | **Latin America**        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |       |
|-----------------------------------------------------|------------|-----------------|------------|-------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **electricity** | ** ** | **electricity activity** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |       |
| ***millions of euros***                   | ** ** | ** **      | ** ** | **activity**                  | ** ** | **Chile**  | ** ** | **Brazil** | ** ** | **Others** | ** ** | **Italy**  | ** ** | **France** | ** ** | **Portugal** | ** ** | **Total** | ** ** |
| **Changes  in the amounts of Goodwill - U.S. GAAP** | ** ** |            | ** ** | ** **                    |       |       | ** ** | ** ** |       |       | ** ** | ** ** |       |       | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Balance as of January 01, 2005                 |       |            | 642        | ** **                    |       |       | 2,206      | ** ** |       |       | 333        | ** ** |       |       | 25 | ** ** |   | 1,494 |   |   | 211 | ** ** |   |   | — | ** ** |   |   | **4,911** | ** ** |   |
| Additions                                           |       |            | —     | ** **                    |       |       | 3          | ** ** |       |       | —     | ** ** |       |       | — | ** ** |   | — |   |   | — | ** ** |   |   | 145 | ** ** |   |   | **148** | ** ** |   |
| Retirements                                         |       |            | —     | ** **                    |       |       | —     | ** ** |       |       | —     | ** ** |       |       | — | ** ** |   | — |   |   | — | ** ** |   |   | — | ** ** |   |   | **—** | ** ** |   |
| Translation differences                             |       |            | —     | ** **                    |       |       | 623        | ** ** |       |       | 64         | ** ** |       |       | 7 | ** ** |   | — |   |   | — | ** ** |   |   | — | ** ** |   |   | **694** | ** ** |   |
| Others                                              |       |            | —     | ** **                    |       |       | —     | ** ** |       |       | —     | ** ** |       |       | — | ** ** |   | — | ** ** |   | **(5** | **)** |   |   | — | ** ** |   |   | **(5** | **)** |   |
| **Balance  as of December 31, 2005**           | ** ** |            | **642**    | ** **                    |       |       | **2,832**  | ** ** |       |       | **397**    | ** ** |       |       | **32** | ** ** |   | **1,494** | ** ** |   | **206** | ** ** |   |   | **145** | ** ** |   |   | **5,748** | ** ** |   |
|                                                     |            |                 |            |                               |            |            |            |            |            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

During 2004 the Companyelected to focus on a geographic region for its International ElectricityBusiness Segment. Therefore, management has reorganized the reporting units ofsuch segment based upon countries resulting in the integration of all previousreporting units segregated in services and countries to a single reporting unitthat represents all the Companies’ integrated services in each respectivecountry.

***9.Termination Benefits***

Under IFRS an entity shall recognize terminationbenefits as a liability and an expense when the entity has a detailed formalplan, without realistic possibility of withdrawal, to terminate the employmentof an employee or group of employees before the normal retirement date.

Under U.S. GAAP in accordance with SFAS 88.15, specialtermination benefits are recognized when the employees formally accept theoffer and the amount can be reasonably estimated.

Therefore inEndesa’s reconciliation from IFRS to U.S. GAAP the Group has eliminated part ofEndesa’s provision that did not meet U.S. GAAP criteria.

***10.   Pensionplans***

*Spanish LawEnvironment for Pension Plans*

The EEC 80/987 directive, which deals with protectionof employees’ rights in case of employers’ insolvency, obligates all of itsMember States to adopt the necessary measures to protect current and retiredemployees’ interests. To implement this directive, the Spanish parliamentapproved in 1995, 1997 and 1998 certain laws that deal with protection ofemployees’ pension rights. Following this legislation, all the pension benefitsrelated to employees and other beneficiaries were to be funded through pensionplans or insurance contracts. Except for certain exceptions detailed below,under no circumstances would it be acceptable to fund those benefits througheither internal funds or similar instruments that represent the maintenance ofthe employer’s entitlement over the contributed resources. The transfer shouldnot result in any modification of the employees’ pension rights, unless boththe employer and employees agree to such modifications. The due date forexternalization was November 16, 2002.

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With thislegislation, the Spanish government pursued two objectives:

·       Toprotect the employees’ pension rights in case of the employer’s insolvency.

·       Tofree employers from the need to manage the resources regarding theseobligations and transfer these obligations to financial and insurance entities.

As applied in Spanish GAAP, Endesa’s Previous GAAP,the law established a transition period for certain specific situations. Inthese cases, each company had to set up a plan to balance its obligations that setthe transfer of funds, the past service costs and the pension benefits. Thefunds contributed comprised the balances recorded in the balance sheet unless adifferent amount of funds had been approved. If so, the difference should havebeen accounted for before transfer. When the plan included retired employees orother beneficiaries’ benefits, the funds should not be assigned to the currentemployees before fully covering the accrued benefits obligations for theseindividuals. The maximum period to complete the transfer was 10 years. Themaximum time to cover the deficit obligation should have been 15 years, with aminimum contribution of 5% each year. After half of the estimated period of thetransfer, at least 50% of the deficit should have been contributed.

With reference to insurance contracts, the lawpermitted the premium to be financed over a 10-year period.

After the transitionperiod, no further contributions to the plan or the insurance contractregarding projected benefit obligations would be required.

***10.1 -Prior Service Costs of Plan Amendments***

Some of the costs in relation to past services costshave been recognized in accordance with Spanish GAAP, Endesa’s Previous GAAP,as deferred costs. Upon the transition to IFRS as indicated in Note 28.c andrequired by IFRS 1, these deferred costs have been totally eliminated.

Under U.S. GAAP those planamendments that relate to prior service cost are recognized during the futureservice periods of those active employees at the date of the amendment who areexpected to receive benefits under the plan.

***10.2 -Actuarial gain and losses***

Under IFRS as indicated in Note 3.k - Provisions forpensions and similar obligations, the amount of the net actuarial liabilitiesaccrued at year-end is recorded under Long-Term Provisions on the liabilityside of the accompanying consolidated balance sheet and all actuarial lossesand gains arising in the measurement of these liabilities and those arisingfrom changes in the fair value of the plan assets are recognized directly underthe heading “Equity—Retained Earnings”.

Under U.S. GAAP theactuarial gain or losses must be amortized over the average remaining serviceperiod of active employees expected to receive benefits under the plan or in afaster period. Consistent with Endesa’s previous periods, the accountingtreatment followed by Endesa under U.S. GAAP is to record in earnings alleffects of actuarial gain or losses. Due to this accounting treatment Endesadoes not have a shareholder’s equity difference between IFRS and U.S. GAAP.

***10.3.Pension plans disclosures***

The following data present some supplementaryinformation regarding Endesa’s pension plans in Spain and in Latin America.

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Definedbenefit pension plan assets allocations at December 31, 2005, by assets categoryare as follows:

| **Asset  Category** | ** ** | ** ** | ** ** | **Plan asset** | ** ** |
|---------------------|------------|------------|------------|---------------------|------------|
| Equity securities   |       |       | 27.63      | %                   |       |
| Debt securities     |       |       | 70.83      | %                   |       |
| Real State          |       |       | 1.15       | %                   |       |
| Other               |       |       | 0.39       | %                   |       |

 

As ofDecember 31, 2005, the following benefits payments are expected to be paid(millions of euros):

| **Year**   | ** ** | ** ** | ** ** | **Pension   Benefit** | ** ** |
|------------|------------|------------|------------|----------------------------|------------|
| 2006       |       |       | 67         |                       |       |
| 2007       |       |       | 73         |                       |       |
| 2008       |       |       | 79         |                       |       |
| 2009       |       |       | 82         |                       |       |
| 2010       |       |       | 87         |                       |       |
| Thereafter |       |       | 430        |                       |       |

 

***11.   Derivativeinstruments and hedging activities***

***11.1 Derivatives and Hedging prior to January 1, 2005***

As explained in Note 28, during 2004, the Group hasnot adopted IAS 32/39 for Endesa’s financial instruments and hedgingaccounting; rather it has applied Endesa’s Previous GAAP, the Spanish GAAP.During 2004, in accordance with Spanish GAAP derivatives were recorded at lowerof cost or market value and embedded derivatives were not required to bebifurcated. Under Endesa’s Previous GAAP hedging strategy did not have to meetminimum documentation requirements and those derivatives designated in aeconomic hedging strategy were not recorded at fair value, rather they modifiedthe respective hedged item accrual basis in order to take into considerationthe characteristics of the hedging strategy achieved by the respectivederivative.

SFAS No. 133 establishes accounting and reportingstandards for derivative instruments, including certain derivative instrumentsembedded in other contracts (embedded derivatives) and for hedging activities.SFAS No. 133 requires that all derivatives, whether designated in hedgingrelationships or not, to be recorded on the balance sheet at fair value. Theaccounting for changes in fair value of a derivative instrument depends on itsintended use and the resulting designation.

If the derivative is designated as a fair value hedge,the changes in the fair value of the derivative and of the hedged itemattributable to the hedged risk are recognized in earnings. If the derivativeis designated as a cash flow hedge, the effective portions of changes in thefair value of the derivative are recorded in OCI and are recognized in theincome statement when the hedged item affects earnings. Ineffective portions ofchanges in the fair value of cash flow hedges are recognized in earnings. Thegain or loss on a hedging derivative instrument that is designated as, and iseffective as, an economic hedge of the net investment in a foreign operationshall be reported in the same manner as a translation adjustment to the extentit is effective as a hedge. The ineffective portion of net investment hedgesshall be reported in earnings.

Accordingly, in 2004 theGroup has included a reconciling item in order to account for all differencesbetween Endesa’s Previous GAAP and U.S. GAAP.

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***11.2 Derivatives and Hedging after to January 1, 2005***

As indicated in Note 28 Endesa has applied IAS 32/39as of January 1, 2005. In accordance with the IFRS accounting guidance,all derivatives, including certain derivative instruments embedded in othercontracts (embedded derivatives), and used for hedging activities must berecorded at fair value. According to IFRS hedging activities must be properlydocumented and proved to be efficient.

In addition under IFRS for fair value hedges: thehedged item and the hedge are both measured at fair value, and changes in thesefair values are recognized in the consolidated income statement, netting offthe effects under the same heading in the consolidated income statement.

Under IFRS cash flow hedges must  record changes in the fair value of thederivatives, with respect to the effective portion of the hedges under Equity—UnrealizedAsset and Liability Revaluation Reserve. The cumulative gain or loss recognizedin this account is transferred to the consolidated income statement to theextent that the underlying has an impact on the consolidated income statementin relation to the hedged risk, netting off the effects under the same headingin the consolidated income statement.

Under IFRS hedges of a net investment in a foreignoperation: changes in fair value are recognized, in respect of the effective portionof these hedges, net of the related tax effect, as Translation Differences inequity (see Note 13), and are transferred to the consolidated income statementwhen the hedged investment is disposed of.

As required by IFRS, all hedging documentation had tobe in place prior to the adoption of IAS 32/39.

Under U.S. GAAP, as explained above, SFAS No. 133established similar criteria as IFRS for the accounting recognition of allderivatives, including certain derivative instruments embedded in other contracts(embedded derivatives), and used for hedging activities.

Basically the significantdifferences between IFRS and U.S. GAAP for derivatives and hedging activitiesafter January 1, 2005 include transactions for which: (a) derivativeswere used for hedging under IFRS that have been formally documented prior tothe adoption of IAS 32/39, January 1, 2005, but were not assigned anddocumented as a hedge instrument under U.S. GAAP; (b) non-derivativeinstruments that were used as a hedging instrument of foreign exchange risks ofhighly probable forecast transaction, for which under U.S. GAAP such strategyis only allowed with derivatives instruments; and (c) contracts that wereclassified as own use under IFRS and, therefore, were not treated as a derivative,for which under U.S. GAAP either formal documentation stating that suchinstruments were being used as normal purchases and sales have not beenprepared or they could not be treated as normal purchases and sales due to thecurrencies under which the contracts were made.

***12.****   Treasury Stock*

As explained in Note 28, during 2004, the Group hasnot adopted IAS 32/39 for Endesa’s financial instruments and hedgingaccounting; rather the Company used Endesa’s Previous GAAP, the Spanish GAAP.During 2004, in accordance with Spanish GAAP since there are no plans to retirethe treasury stock of the Controlling Company (Endesa, S.A.), these shares wererecorded during 2004 at the lower of cost or underlying book value in theaccompanying consolidated balance sheet, and a restricted reserve was recordedin this connection. If the cost of the shares of treasury stock is higher thantheir market value, the provision required to cover this difference is chargedto the “Non operating Income” caption in the consolidated statement of income.The remainder of the provisions recorded for the difference between theunderlying book value and the lower of the cost or market value of the sharesis charged to unrestricted reserves. Gains and losses on subsequent sales oftreasury stock were recorded in net income.

Upon the adoption of IAS 32/39, according to IFRS,treasury shares should not be recognized as an asset. The acquisition oftreasury shares, or an obligation to purchase treasury shares for a fixedamount of 

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cash or for anotherfinancial asset, should be recognized as a deduction from equity. Similarly, acontract acquired by an entity that gives it the right to acquire a fixednumber of its own shares for a fixed amount of cash or another financial asset(e.g., a purchased call option) should be recognized as a deduction fromequity. No gain or loss should be recognized in the income statement on theacquisition or cancellation of treasury shares.

Under U.S. GAAP capital stock acquired which is notretired may be treated as if it had been retired or, if not prohibited by law,carried at cost and reflected as a separate deduction from shareholders’equity. Gains and losses on subsequent sales of treasury stock are notrecognized in net income.

Therefore the Group hasincluded a reconciling item for the year ended December 31, 2004 in orderto adjust the accounting treatment followed during such year to U.S. GAAP. In2005, due to the application of IAS 32/39 no difference in treatment betweenboth accounting principles arose as a reconciling item between net income orshareholder’s equity.

***13.****   Transaction gain or losses in intercompanytransactions*

In accordance with IAS 21, until December 31,2005, IFRS as adopted by Endesa considered a different accounting treatmentdepending on the currency in which a monetary item considered as part of anentity investment in a foreign operation was denominated. Accounting policiesfollowed required the exchange differences that arise on translating themonetary item into the functional currencies of the reporting entity to remainrecognized in profit or loss if such item was in a currency other than thefunctional currency of either the reporting entity or the foreign operation.

Under U.S. GAAP, an item regarded as part of anentity’s investment in a foreign operation would have the exchange differencesthat arise on translating the monetary item to be classified as cumulativetranslation adjustment as part of other comprehensive income.

The Group has included a reconciling differencebetween IFRS and U.S. GAAP net income for this effect for both 2004 and 2005for those items in currencies other than of the reporting entity or the foreignoperation. This difference did not produce any impact in the IFRS to U.S. GAAPreconciliation of shareholder’s equity.

Given the fact thatIAS 21 has been amended on December 15, 2005 allowing a similar treatmentas U.S. GAAP, for this difference will cease as from the adoption of suchamendment as from January 1, 2006.

***14.Currency Translation Adjustment***

Both IFRS and U.S. GAAP require that the CurrencyTranslation Adjustment (CTA) arising from the translation of the financialstatements of foreign subsidiaries and associated companies is recorded toShareholders’ Equity. Under both GAAPs when an investment in a foreign companyis sold, the accumulated CTA is credited to the statement of income. Thisadjustment though does not affect Stockholders’ Equity.

However, when converting from Spanish GAAP, Endesa’sPrevious GAAP, to IFRS the group applied the exception provided for in IFRS,and the translation differencesarising on or after January 1, 2004, were transferred to reserves.

In 2005 Smartcom was sold and, accordingly, thereconciliation of IFRS to U.S. GAAP includes an adjustment for accumulated translation adjustment under U.S.GAAP in this regard for €33 million.

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***15.Income Taxes***

Under IFRS a deferred tax asset is recognized for alldeductible temporary differences to the extent that it is probable that taxableprofit will be available against which the deductible temporary difference canbe utilized, unless the deferred tax asset arises from the initial recognitionof an asset or liability in a transaction that: (a) is not a businesscombination; and (b) at the time of the transaction, affects neitheraccounting profit nor taxable profit (tax loss). In addition according to IFRSdeferred tax assets and liabilities are considered to be non-current.

Under U.S. GAAP an enterprise shall recognize alldeferred tax liability or assets for all temporary differences, operating lossand tax credit carryforwards, independently if at the time of the transaction,affects neither accounting profit nor taxable profit (tax loss), except for anytemporary differences that arise from initial recognition of goodwill. Anyrecognized deferred tax assets should be reduced by a valuation allowance if itis more likely than not that some portion or all of the deferred tax assetswill not be realized. In addition, U.S. GAAP requires classification ofdeferred tax liabilities and assets as current or noncurrent based on theclassification for financial reporting of the related non-tax asset orliability.

Except for the income tax effects of U.S. GAAPadjustments recorded in Endesa’s reconciliations to U.S. GAAP, when applicable,and the balance sheet classification difference as disclosed below, the Grouphas not identified any significant difference from the application of IFRS andU.S. GAAP for tax matters.

Deferredtax assets and liabilities as of December 31, 2005 and 2004 under U.S.GAAP are as follows:

| ** **                         | ** ** | **Millions of Euros** | ** ** |
|------------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **Deferred Taxes**         | ** ** |
| ** **                         | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                         | ** ** | **Assets**                      | ** ** | **Liabilities** | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
| Balance under  IFRS (Note 19)      |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Deferred tax                       |       | 3,359                           |       |   | 1,724 |   |   | 3,460 |   |   | 1,852 |   |   |
|                               |       | 3,359                           |       |   | 1,724 |   |   | 3,460 |   |   | 1,852 |   |   |
| Total adjustments  under U.S. GAAP |       | 729                             |       |   | — |   |   | 743 |   |   | — |   |   |
| **Deferred  tax under U.S. GAAP**  | ** ** | **4,088**                       | ** ** | ** ** | **1,724** |   | ** ** | **4,203** | ** ** | ** ** | **1,852** |   |   |

 

***16.  Classification differences between IFRS andU.S. GAAP***

***16.1 CO2emission allowances***

Under IFRS as indicated in Note 3.d the Group isrecording CO2 Emission allowances received as an intangible asset and deferredincome by their fair value at date they are granted by each respectiveGovernment. Such intangible assets are not subsequently revalued and areexcluded when delivered to each respective Government.

As indicated in Note 3.k, under IFRS Endesa records aprovision against earnings considering the same cost of the respectiveintangible asset for those amounts that the Group has been granted. In thisrespect the Company recorded in earnings a part of Endesa’s deferred income forthe same amount of emission rights used.

In addition, any shortfall of emissions allowanceafter consideration of amounts granted is recorded as a provision at fair valueagainst earning for the amount considered necessary to buy such allowances.Such provision is reviewed and recorded in every period at its fair value withany change recorded in earnings.

Under U.S. GAAP the Group has eliminated from Endesa’sbalance sheet all intangible asset, deferred income, provision for emissiongranted and all respective income and expenses from Endesa’s income statementsince the Company is not recording any accounting effect for emissions grantedor used 

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under the granted amount.In addition in U.S. GAAP the Group has maintained the provision at fair valuethrough earnings for those rights that Endesa will need to buy.

Inthis respect the Group has eliminated the following amounts which do not haveany impact in Endesa’s IFRS or U.S. GAAP net income or shareholder’s equity:

| ** **          | ** ** | **2005** | ** ** |
|---------------------|------------|----------|------------|
| Intangible Assets   |       | (374     | )          |
| Provisions          |       | 370      |       |
| Operating Income    |       | 370      |       |
| Operating  Expenses |       | (370     | )          |
| Deferred Income     |       | 4        |       |

 

***16.2Nuclear Fuel***

As disclosed in Note 3.h,under IFRS, the Company has classified Nuclear Fuel in Inventory that underU.S. GAAP constitutes a depreciable asset. Consequently, under U.S. GAAP, €253million and €216million should be reclassified from inventory to long-term asset as ofDecember 31, 2005 and 2004, respectively. The related U.S. GAAPdepreciation expense of €81 million and €88 million for the yearsended December 31, 2005 and 2004, respectively, is reclassified butremains unchanged.

***16.3Deconsolidation of Endesa Capital Finance, LLC***

As explained in Note 28 during 2004, the Group has notadopted IAS 32/39 for Endesa’s financial instruments and hedging accountingrather the Company uses Endesa’s Previous GAAP, Spanish GAAP.

In March 2003, Endesa Group created a variableinterest entity (“VIE”), Endesa Capital Finance, LLC (“Endesa Capital Finance”)to issue €1,500 million of preference shares. TheFinancial Accounting Standards Board (“FASB”) released InterpretationNo. 46, Consolidation of Variable Interest Entities (“FIN 46R”), whichrequires that all primary beneficiaries of variable interest entities consolidatethat entity. FIN 46R is effective immediately for VIEs created afterJanuary 31, 2003 and to VIEs in which an enterprise obtains an interestafter that date. According to this Interpretation, Endesa Capital Finance is aVIE and Endesa Group is not the primary beneficiary. Accordingly, under U.S.GAAP, Endesa Group should not consolidate Endesa Capital Finance. Consequently,the loan payable to Endesa Capital Finance remains outstanding on the U.S. GAAPconsolidated financial statements.

Under Spanish GAAP, since preference shares are sharesof subsidiaries held by third parties, they were classified as minorityinterests.

Therefore, in 2004 the €1,500million of preference shares issued by Endesa Capital Finance that isclassified as minority interests under IFRS should be reclassified to long-termdebt in the Consolidated Balance Sheet under U.S. GAAP at December 31,2004.

Similarly, €60 million that isclassified as income (loss) attributed to minority interests in the Statementof Income for the period ended December 31, 2004 under IFRS should bereclassified to financial expenses under U.S. GAAP.

In 2005 Endesa haveapplied IAS 32/39 as January 1, 2005. As commented in Note 28 uponadoption of IAS 32 the preferred shares issued by Endesa Capital Finance nolonger qualify as equity instruments under IFRS but are presented as afinancial liability. Therefore, in 2005 a reclassification between equity andliability as the one described above is not applicable.

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***17. Additional disclosure required under U.S. GAAP***

***17.1 Disclosures about the fairvalue of financial instruments and about derivative financial instruments***

Statement of FinancialAccounting Standard No. 107 (SFAS No. 107) requires that the Companydisclose the estimated fair values of its financial instruments as ofDecember 31, 2005 and 2004. The following methods and assumptions wereused by the Group to estimate the fair value of each class of financialinstruments for which it is practicable to estimate such value:

1.    Cash, short-term financial investments, accounts receivable andpayable, and other short- term debt and credit—

The carrying valuesreflected in the consolidated financial statements are reasonable estimates offair value because of the relatively short period of time between theorigination of the instruments and their expected realization.

2.    Financial investments in non-consolidated companies—

Thefair value of the long-term investment securities of the companies notconsolidated as of December 31, 2005 and 2004, is as follows:

—        Listedcompanies—

Listedcompanies were valued at their market price on the last trading day in 2005 and2004. As of December 31, 2005 and 2004, the market value ofavailable-for-sale securities, based on the stock market price was as follows:

| ** ** | ** ** | **Millions of euros** | ** ** |
|------------|------------|---------------------------------|------------|
| ** ** | ** ** | ** **                      | ** ** | **Gross Unrealized** | ** ** | ** ** | ** ** |
| ** ** | ** ** | **Cost Basis**             | ** ** | **Gains (Losses)** | ** ** | **Fair Value** | ** ** |
| 2004       |       |                            | 20         |   |   |   | 47 |   |   |   | 67 |   |   |
| 2005       |       |                            | 20         |   |   |   | 86 |   |   |   | 106 |   |   |

 

In 2005 and 2004, none ofthe investments in available-for-sale securities was more than 12 months in acontinuing unrealized loss position.

3.    Loans to companies accounted for by the equity method and otherloans-

The fair value is the bookvalue since they accrue interest cost at market rates.

4.    Debentures and bonds—

Since all the debenturesand bonds are listed, the fair values reflect the market price on the lasttrading day in 2005 and 2004.

5.    Commercial paper—

Commercial paper noteswere discounted to present value on the basis of the market interest ratesborne by these securities as of December 31, 2005 and 2004.

6.    Fixed-interest loans and credits—

The fair value offixed-interest loans and credits was estimated by discounting at the marketinterest rate for similar transactions arranged at 2005 and 2004 year-end.

7.    Variable-interest loans and credits—

Since these debts arevalued at prevailing market interest rates, their fair value as ofDecember 31, 2005 and 2004, is the same as their carrying amounts.

8.    Other long-term debt—

This caption includesvarious long-term debt items, principally guarantees received, which, becauseof their nature, are not transferable and whose fair value is the same as theirbook value.

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Following is a summary ofthe carrying amounts and fair value of the financial instruments as ofDecember 31, 2005 and 2004:

| ** **                                               | ** ** | **2005**              | ** ** | **2004**            | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                               | ** ** | **Carrying  Amounts** | ** ** | **Fair Value** | ** ** | **Carrying  Amounts** | ** ** | **Fair Value** | ** ** |
| Cash and cash  equivalents                               |       |                  | 2,614      |                |       |   | 2,614 |   |   |   | 2,178 |   |   |   | 2,178 |   |   |
| Current financial assets                                 |       |                  | 77         |                |       |   | 77 |   |   |   | 64 |   |   |   | 64 |   |   |
| Trade and other  receivables                             |       |                  | 6,098      |                |       |   | 6,098 |   |   |   | 4,382 |   |   |   | 4,382 |   |   |
| Current trade and other  payables                        |       |                  | 7,958      |                |       |   | 7,958 |   |   |   | 5,108 |   |   |   | 5,108 |   |   |
| Other non-current  payables                              |       |                  | 1,032      |                |       |   | 1,032 |   |   |   | 1,032 |   |   |   | 1,032 |   |   |
| Financial investment (non consolidated)                  |       |                  |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Listed company                                           |       |                  | 20         |                |       |   | 106 |   |   |   | 20 |   |   |   | 67 |   |   |
| Loans to associates                                      |       |                  | 269        |                |       |   | 269 |   |   |   | 122 |   |   |   | 122 |   |   |
| Other loans                                              |       |                  | 304        |                |       |   | 304 |   |   |   | 323 |   |   |   | 323 |   |   |
| Short and long term debt                                 |       |                  |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Preference shares                                        |       |                  | 1,419      |                |       |   | 1,500 |   |   |   | — |   |   |   | — |   |   |
| Debt instruments and  other held-for-trading liabilities |       |                  | 11,546     |                |       |   | 12,524 |   |   |   | 12,027 |   |   |   | 12,784 |   |   |
| Bank borrowings                                          |       |                  | 6,507      |                |       |   | 6,814 |   |   |   | 6,043 |   |   |   | 6,041 |   |   |
| Other financial  liabilities                             |       |                  | 1,024      |                |       |   | 793 |   |   |   | 1,186 |   |   |   | 1,245 |   |   |
| Derivatives                                              |       |                  | 541        |                |       |   | 228 |   |   |   | — |   |   |   | 210 |   |   |

 

***17.2. Comprehensive Income***

TotalComprehensive income under U.S. GAAP for the years ended December 31, 2005and 2004 was €3,492 million and €1,336 million,respectively. The following is a Statement of Comprehensive Income for theyears ended December 31, 2005 and 2004:

| ** **                                               | ** ** | **Millions of euros** | ** ** |
|----------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                               | ** ** | **2004 (***)**             | ** ** | **2005** | ** ** |
| **Net  Income according to U.S. GAAP**                   | ** ** |                            | **1,454**  | ** ** |   | **2,753** | ** ** |
| Currency  Translation Adjustment(*)                      |       |                            | 52         |   |   | 905 |   |
| Translation  differences related to disposals(*)         |       |                            |       |   |   | (32 | ) |
| Available-for-sale  securities, net of tax effect(**)    |       |                            | (63        | ) |   | 14 |   |
| Derivative instruments:                                  |       |                            |       |   |   |   |   |
| Deferred revenues on SFAS No. 133 hedge net of  tax |       |                            | (107       | ) |   | (148 | ) |
| **Comprehensive  (loss)/Income**                         | ** ** |                            | **1,336**  | ** ** |   | **3,492** | ** ** |

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(*)                       Thereis no tax effect on translation adjustments

(**)                Taxeffect of 35%

(***)         Netincome under U.S. GAAP as of December 31, 2004 has been restated as aconsequence of the elimination of the effect of the inflation (see below thereconciliation of net income under U.S. GAAP as previously reported and netincome as restated).

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Thetable below shows changes in Accumulated Other Comprehensive Income:

| ** **                                                                                                      | ** ** | **Accumulated Other Comprehensive Income (Loss) Net of Tax** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| **In millions of Euros**                                                                         | ** ** | **Unrealized Gains  (Losses) on  Securities**                                         | ** ** | **Foreign Currency** | ** ** | **Derivatives** | ** ** | **Total** | ** ** |
| **Balance  at December 31, 2003**                                                                          | ** ** |                                                                                            | **94**     | ** ** |   |   | **(1,723** | **)** |   |   | **6** | ** ** |   | **(1,623** | **)** |
| Unrealized gains  (losses) on securities for the period                                                         |       |                                                                                            | 32         |   |   |   | — |   |   |   | — |   |   | 32 |   |
| Reclassification  to net income for gain (losses) realized from other then temporary  impairments of securities |       |                                                                                            | (95        | ) |   |   | — |   |   |   | — |   |   | (95 | ) |
| Foreign currency  period change, net of disposals                                                               |       |                                                                                            | —     |   |   |   | 52 |   |   |   | — |   |   | 52 |   |
| Derivatives period  change, net of reclassifications to net income                                              |       |                                                                                            | —     |   |   |   | — |   |   |   | (107 | ) |   | (107 | ) |
| **Balance  at December 31, 2004**                                                                          | ** ** |                                                                                            | **31**     | ** ** |   |   | **(1,671** | **)** |   |   | **(101** | **)** |   | **(1,741** | **)** |
| Unrealized gains  (losses) on securities for the period                                                         |       |                                                                                            | 14         |   |   |   | — |   |   |   | — |   |   | 14 |   |
| Reclassification  to net income for gain (losses) realized from other then temporary  impairments of securities |       |                                                                                            | —     |   |   |   | (32 | ) |   |   | — |   |   | (32 | ) |
| Foreign currency  period change, net of disposals                                                               |       |                                                                                            | —     |   |   |   | 905 |   |   |   | — |   |   | 905 |   |
| Derivatives period  change, net of reclassifications to net income                                              |       |                                                                                            | —     |   |   |   | — |   |   |   | (148 | ) |   | (148 | ) |
| **Balance at December 31,  2005**                                                                          | ** ** |                                                                                            | **45**     | ** ** |   |   | **(798** | **)** |   |   | **(249** | **)** |   | **(1,002** | **)** |

 

***17.3. RestrictedNet Assets***

Some of Endesa’ssubsidiaries are subject to debt agreements that limit the cash dividends andloans that may be distributed to us. At December 31, 2005, Endesa’s totalrestricted net assets for Endesa’s consolidated subsidiaries and Endesa’sparticipation in undistributed earnings of Endesa’s equity investees were €1,512 millionand €9.5 million,respectively.

***17.4.Information about Property Associations***

Under IFRS the joint property entities whose ownershipis shared by the Company and other owners of indivisible assets are recorded onthe basis of the percentage of ownership of each respective asset andliability.

Regarding Endesa’s Property Associations, suchassociations represent an undivided interest held in specific assets, owned byvarious partners, the Group is proportionally liable for each liability and theyare not separate legal entities. Endesa considers that the analysis of thejoint control of these assets is not applicable due to the specificcharacteristic of such assets.

Additionally, asrequested by SAB Topic 10-C, the amounts integrated in Endesa’sfinancial statements are disclosed below:

| ** **                       | ** ** | **Amounts integrated in Endesa’s assets** | ** ** | ** **                    | ** ** |
|----------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------|------------|
| ***Million of euros*** | ** ** | **Utility plant  in use**                                | ** ** | **Accumulated  depreciation** | ** ** | **Plant under  construction** | ** ** | **Endesa’s  share** | ** ** |
| CN Asco I                   |       |                                                               | 2,374      |                          |       |   | (1,597 | ) |   |   | 27 |   |   |   | 100 | % |   |
| CN Asco II                  |       |                                                               | 2,134      |                          |       |   | (1,353 | ) |   |   | 16 |   |   |   | 85 | % |   |
| CN Vandellos II             |       |                                                               | 2,423      |                          |       |   | (1,473 | ) |   |   | 17 |   |   |   | 72 | % |   |
| CN Almaraz I                |       |                                                               | 383        |                          |       |   | (259 | ) |   |   | 1 |   |   |   | 36 | % |   |
| CN Almaraz II               |       |                                                               | 377        |                          |       |   | (235 | ) |   |   | 2 |   |   |   | 36 | % |   |
| CC Anllares                      |       |                                                               | 147        |                          |       |   | (129 | ) |   |   | 0 |   |   |   | 33 | % |   |
| **TOTAL**                        | ** ** | ** **                                                         | **7,838**  |                          | ** ** | ** ** | **(5,046** | **)** | ** ** | ** ** | **63** |   |   |   |   |   |   |

 

***17.5.Cash flow statement***

Endesa compiles the cash flow statement in accordancewith International Accounting Standards (IAS 7). The SEC’srules applicable to Annual Reports on Form 20-F permit thecompilation of cash flow statements under IAS 7.

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***17.6.Current trade and other payables***

Thedetail of this heading at December 31, 2005 and 2004, is as follows:

| **Current trade and other payables** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
| Current trade  payables                                  |       | 5,683    |       | 3,303    |       |
| Tax liabilities                                          |       | 984      |       | 528      |       |
| Financial assets  liabilities                            |       | 43       |       | 75       |       |
| Fixed assets  providers                                  |       | 870      |       | 898      |       |
| Dividends payable                                        |       | 378      |       | 304      |       |
| **TOTAL**                                                |       | 7,958    |       | 5,108    |       |

 

***18. Newaccounting standards***

***Accounting for Non-monetaryTransactions***

In December 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement No. 153,“Exchanges of Non-monetary Assets” effectively amending Accounting PrinciplesBoard (“APB”) Opinion No. 29, “Accounting for Non-monetary Transactions,”and eliminates the exception for non-monetary exchanges of similar productiveassets and replaces it with a general exception for exchanges of non-monetaryassets that do not have commercial substance. SFAS No. 153 is effectivefor non-monetary asset exchanges occurring in fiscal periods beginning afterJune 15, 2005. The Company does not anticipate that the adoption of thisStatement will have a material effect on its financial position, results ofoperations or cash flows.

***Accounting Changes and ErrorCorrections***

In May 2005, the FASBissued Statement No. 154, “Accounting Changes and Error Corrections”,replacing APB Opinion No. 20 and FASB Statement No. 3 (“SFASNo. 154”). SFAS No. 154 requires retrospective application to priorperiods’ financial statements of changes in accounting principles, unlessimpracticable. The statement defines retrospective application as theapplication of a different accounting principle to prior accounting periods asif that principle had always been used and redefines restatement as revisingpreviously issued financial statements to reflect the correction of an error. SFASNo. 154 also requires that retrospective application of a change inaccounting principle be limited to the direct effects of the change. Indirecteffects of a change in accounting principle should be recognized in the periodof the accounting change. The new standard is effective for accounting changesmade in fiscal years beginning after December 15, 2005. The Company doesnot anticipate that the adoption of this standard will have a material effecton its financial position, results of operations or cash flows.

***Accounting for Certain Hybrid Financial Instruments anamendment of FASB Statements No. 133 and 140***

On February 2006 the FASB issued Statement ofFinancial Accounting Standards No. 155 Accounting for Certain HybridFinancial Instruments an amendment of FASB Statements No. 133 and 140 thatamends FASB Statements No. 133, Accounting for Derivative Instruments andHedging Activities, and No. 140, Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities. This Statement resolvesissues addressed in Statement 133 Implementation Issue No. D1,“Application of Statement 133 to Beneficial Interests in Securitized FinancialAssets.”

This Statement permitsfair value remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation, clarifies whichinterest-only strips and principal-only strips are not subject to therequirements of Statement 133, establishes a requirement to evaluate interestsin securitized financial assets to identify interests that are freestandingderivatives or that 

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arehybrid financial instruments that contain an embedded derivative requiringbifurcation, clarifies that concentrations of credit risk in the form ofsubordination are not embedded derivatives and amends Statement 140 toeliminate the prohibition on a qualifying special purpose entity from holding aderivative financial instrument that pertains to a beneficial interest otherthan another derivative financial instrument. This Statement is effective forall financial instruments acquired or issued after the beginning of an entity’sfirst fiscal year that begins after September 15, 2006. Earlier adoptionis permitted as of the beginning of an entity’s fiscal year, provided the entityhas not yet issued financial statements, including financial statements for anyinterim period for that fiscal year. The Company does not anticipate that theadoption of this new statement at the required effective date will have asignificant effect in its results of operations, financial position or cashflows.

***The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments***

On November 2, 2005,the FASB issued Financial Staff Position (“FSP”) FAS 115-1 and FAS124-1, “The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments,” which nullifies certain requirements ofEmerging Issues Task Force (“EITF”) Issue No. 03-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments” andsupersedes EITF Abstracts Topic No. D-44, “Recognition ofOther-Than-Temporary Impairment Upon the Planned Sale of a Security whose CostExceeds Fair Value.”  The guidance inthis FSP will be applied to reporting periods beginning after December 15,2005. The Company does not expect that the adoption of this guidance will havea material effect on its financial position, results of operations or cashflows.

***Determining the AmortizationPeriod for Leasehold Improvements Purchased after Lease Inception or Acquiredin a Business Combination***

At the June 15 and 16EITF meeting, and further modified at the September 15, 2005 meeting, theEITF discussed Issue 05-6, “Determining the Amortization Period forLeasehold  Improvements Purchased afterLease Inception or Acquired in a Business Combination,” (“EITF 05-6”),and concluded on the appropriate amortization periods for leaseholdimprovements either acquired in a business combination or which were notpreexisting and were placed in service significantly after, and notcontemplated at, the beginning of the lease term. This Issue is effective forleasehold improvements (that are within the scope of this Issue) that arepurchased or acquired in reporting periods beginning after June 29, 2005.The Company does not anticipate that the adoption of EITF 05-6 willhave a material effect on its financial position, results of operations or cashflows.

***Accounting for Servicing ofFinancial Assets***

Summary of StatementNo. 156 “Accounting for Servicing of Financial Assets—an amendment of FASBStatement No. 140”  This Statementamends FASB Statement No. 140, Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities, with respect to the accountingfor separately recognized servicing assets and servicing liabilities. ThisStatement requires an entity to recognize a servicing asset or servicingliability each time it undertakes an obligation to service a financial asset byentering into a servicing contract in certain situations, requires allseparately recognized servicing assets and servicing liabilities to beinitially measured at fair value, if practicable and permits an entity tochoose either of subsequent measurement methods for each class of separatelyrecognized servicing assets and servicing liabilities. An entity should adoptthis Statement as of the beginning of its first fiscal year that begins afterSeptember 15, 2006. Earlier adoption is permitted as of the beginning ofan entity’s fiscal year, provided the entity has not yet issued financialstatements, including interim financial statements, for any period of thatfiscal year. The Company does not anticipate that the adoption of this newstatement at the required effective date will have a significant effect in itsresults of operations, financial position or cash flows.

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