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As filed with the Securities and Exchange Commission on June 30, 2004 SECURITIES AND EXCHANGE COMMISSION    Form 20-F o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
 OR
 xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended: December 31, 2003
 OR
 o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  Commission file number: 1-14970
 ENEL-Società per Azioni  (Exact name of registrant as specified in its charter)
 ENEL S.p.A.
 (Translation of registrants name into English)
 Italy
 (Jurisdiction of incorporation or organization)
 Viale Regina Margherita 137, Rome, Italy
 (Address of principal executive offices)
  
  Title of each class
    
    Name of each exchange on which registeredAmerican Depositary Shares
    
    New York Stock ExchangeOrdinary shares with a par value of Euro 1 each
    
    New York Stock Exchange (*)
   None
   None
    6,063,075,189 Ordinary Shares Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes       x      No      o Indicate by check mark which financial statement item the registrant has elected to follow. o x
   (*) Not for trading, but only in connection with the registration of the American Depositary Shares.




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TABLE OF CONTENTS PRESENTATION OF FINANCIAL AND OTHER INFORMATION
    
    
    1GLOSSARY OF SELECTED ELECTRICITY TERMS
    
    
    3PART IITEM. 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
    
    
    4ITEM. 2 OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    4ITEM 3. KEY INFORMATION
    
    
    4The Enel Group
    
    
    4Selected Consolidated Financial Data
    
    
    4Exchange Rates
    
    
    7Risk Factors
    
    
    8Forward-Looking Statements
    
    
    17ITEM 4. INFORMATION ON THE COMPANY
    
    
    18History and Development of the Company
    
    
    18Business
    
    
    20Overview
    
    
    20Strategy
    
    
    23The Enel Group
    
    
    26Regulatory Matters
    
    
    60Overview of Regulation in the Energy Sector
    
    
    60Electricity Regulation
    
    
    60Gas Regulation
    
    
    74Telecommunications Regulation
    
    
    76Environmental Matters
    
    
    78Properties, Plants and Equipment
    
    
    85ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    85Summary of Results
    
    
    85The Electricity Market under the New Regulatory Framework
    
    
    85Overview
    
    
    87Outlook
    
    
    92Results of Operations
    
    
    952003 compared with 2002
    
    
    952002 compared with 2001
    
    
    106Inflation
    
    
    116U.S. GAAP Reconciliation
    
    
    117Liquidity and Capital Resources
    
    
    123Off-Balance Sheet Arrangements
    
    
    127
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##### Table of Contents



Contractual Obligations and Commitments
    
    
    128Trend Information
    
    
    131Process of Transition to International Financial Reporting Standards
    
    
    131ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    132Directors
    
    
    132Senior Management
    
    
    135Board of Statutory Auditors
    
    
    137Executive Compensation
    
    
    138Share Ownership
    
    
    139Employees
    
    
    140Employee benefits
    
    
    141ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    142Major Shareholders
    
    
    142Related Party Transactions
    
    
    143ITEM 8. FINANCIAL INFORMATION
    
    
    144Consolidated Financial Statements
    
    
    144Other Financial Information
    
    
    144Legal Proceedings
    
    
    144Dividend Policy
    
    
    146Significant Changes
    
    
    147ITEM 9. THE OFFER AND LISTING
    
    
    148Markets and Price Range of ADSs and Ordinary Shares
    
    
    148ITEM 10. ADDITIONAL INFORMATION
    
    
    149Stock Option Plan
    
    
    149By-Laws
    
    
    153Material Contracts
    
    
    170Exchange Controls
    
    
    170Taxation
    
    
    171Documents On Display
    
    
    175ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
    
    175Price Risk Management and Market Risk Information
    
    
    175ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    179PART IIITEM 13. DEFAULTS, DIVIDENDS AVERAGES AND DELINQUENCIES
    
    
    179ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    180ITEM 15. CONTROLS AND PROCEDURES
    
    
    180
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ITEM 16. [RESERVED]
    
    
    180ITEM
16A. AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    180ITEM 16B. CODE OF ETHICS
    
    
    180ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    180PART III
ITEM 17. FINANCIAL STATEMENTS
    
    
    181ITEM 18. FINANCIAL STATEMENTS
    
    
    181ITEM 19. EXHIBITS
    
    
    182EXHIBIT 1.1EXHIBIT 3.1EXHIBIT 4.1EX-12.1EX-12.2EX-13.1
  iii




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PRESENTATION OF FINANCIAL AND OTHER INFORMATION Unless we indicate otherwise, the financial information contained in this
annual report is prepared in accordance with Italian GAAP, which are the
accounting principles prescribed by Italian law, and supplemented by the
accounting principles issued by the Consiglio Nazionale dei Dottori
Commercialisti e dei Ragioneri (National Board of Chartered Accountants) and,
to the extent such requirements or principles are silent on particular issues
and not at variance, by those standards laid down by the International
Accounting Standards Board (I.A.S.B.). These principles are described in note 2
to our consolidated financial statements included in this annual report. These
principles differ in certain respects from generally accepted accounting
principles in the United States or U.S. GAAP. We describe these differences in
note 23 to our consolidated financial statements. Unless indicated otherwise,
any reference in this annual report to our consolidated financial statements is
to the consolidated financial statements (including the notes to the
consolidated financial statements) included in this annual report. We publish our consolidated financial statements in euro. In this annual
report, unless we specify otherwise or the context otherwise requires:  
    
    References to dollars, $ and U.S. dollars are to United States dollars;  
    
    References to lire, lira or Lit. are to Italian lire; and  
    
    References to
, euro or Euro are to the euro, the
single currency established for participants in the third stage of
the European Economic and Monetary Union, or EMU, commencing January
1, 1999. The Republic of Italy is a participant in EMU. From January
1, 1999 through December 31, 2001, the lira existed solely as a
subdivision of the euro and the euro existed in electronic form
only. During such period, non-cash transactions were conducted in
either euro or lire. Euro notes and coins were circulated for the
first time on January 1, 2002. As of March 1, 2002, only euro notes
and coins are legal tender in Italy and the other participating
member states and the lira has ceased to exist. To facilitate a comparison, all lire-denominated financial data for
periods prior to January 1, 2001 included in this annual report have been
restated from lire to euro at the fixed rate as of December 31, 1998
established by the European Central Bank of Lit. 1,936.27 = Euro 1.00. For convenience only and except where we specify otherwise, we have
translated certain euro figures into dollars at the rate of Euro 1.00 =
$1.2597, the noon buying rate in The City of New York for cable transfers in
foreign currencies as announced by the Federal Reserve Bank of New York for
customs purposes (the noon buying rate) on December 31, 2003, the date of the
most recent balance sheet included in this annual report. By including
convenience currency translations in this annual report, we are not
representing that the euro amounts actually represent the dollar amounts shown
or could be converted into dollars at the rates indicated. On June 15, 2004,
the noon buying rate for euro was $ 1.2139 = Euro 1.00. For information about
the rate of exchange between the dollar and the euro since January 1, 1999, you
should read Item 3. Key InformationExchange Rates. In this annual report, Enel and the Company refer to ENEL S.p.A. and
the terms Enel Group, Group, we, us and our refer to ENEL S.p.A.,
together with its consolidated subsidiaries.
All references to Italy or the State are to the Republic of Italy. All
references to the Treasury Ministry or the Treasury are to the Ministry of
Economy and Finance and its predecessor, the Ministry of the Treasury, Budget
and Economic Planning of the Republic of Italy. All references to the Industry
Ministry are to the Ministry of Productive Activities and its predecessor, the
Ministry of Industry, Commerce and Handcrafts of the Republic of Italy, all
references to the Environment Ministry are to the Ministry of the Environment
of the Republic of Italy, all references to the Energy Authority are to the
Authority for Electric Energy and Gas of the Republic of Italy, all references
to the Communications Authority are to the Authority for the Guarantee of
Communications of the Republic of Italy, and all references to the Antitrust
Authority are to the Antitrust Authority of the Republic of Italy. All
references to the Gestore della Rete are to the Gestore della Rete di
Trasmissione Nazionale S.p.A., a company owned by the Treasury Ministry that
manages Italys national electricity transmission grid. 1




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We use a number of terms related to the electricity industry in this
annual report. We have explained some of these terms in the following Glossary
of Selected Electricity Terms included in this annual report. 2




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GLOSSARY OF SELECTED ELECTRICITY TERMS The following explanations are not technical definitions, but they should
assist you in understanding some of the terms used in this document. Average thermal efficiency
    
    A measure of the efficiency of a thermal generating plant in converting sources
of energy such as fuel oil into electricity. Average thermal efficiency is
expressed as the amount of electricity actually produced in kWh as a percentage
of the kWh equivalent of the energy source consumed.CO2
    
    Carbon Dioxide.Combined Cycle Gas Turbine
    
    A type of generating plant that produces electricity through both gas turbines
and steam turbines. Conventional boilers or other generators recover and use
the heat exiting from gas turbines.Co-generation
    
    The simultaneous generation of steam and electricity, typically where the need
arises for industrial purposes.Generating unit
    
    An electric generator together with the turbine or other device which drives it.Gigawatt (GW)
    
    1,000,000,000 watts (1,000 megawatts).Gigawatt hour (GWh)
    
    One gigawatt of power supplied or demanded for one hour.Installed capacity
    
    The maximum power which could be produced continuously throughout a prolonged
period of operation. All equipment is assumed to be fully operational.Kilovolt (kV)
    
    1,000 volts.Kilovolt ampere (kVA)
    
    1,000 volts ampere.Kilowatt (kW)
    
    1,000 watts.Kilowatt hour (kWh)
    
    One kilowatt of power supplied or demanded for one hour.Megawatt (MW)
    
    1,000,000 watts (1,000 kilowatts).Megawatt hour (MWh)
    
    One megawatt of power supplied or demanded for one hour.Megavolt ampere (MVA)
    
    1,000,000 volts ampere.NOx
    
    Nitrogen oxides.NH3
    
    Ammonia.Orimulsion
    
    Abbreviation of Orinoco emulsion, which is a fossil fuel from the Orinoco
river basin in Venezuela consisting of very fine bitumen dispersed in water.
Orimulsion emits the same amount of CO2 as fuel oil of equivalent energy value.SO2
    
    Sulfur dioxide.Substation
    
    Equipment which switches and/or changes or regulates the voltage of electricity
in a transmission and distribution system.Terawatt (TW)
    
    1,000,000,000,000 watts (1,000 gigawatts).Terawatthour (TWh)
    
    One terawatt of power supplied or demanded for one hour.Thermal unit
    
    A generating unit which uses combustible fuel as the source of energy to drive
an electric generator.Volt
    
    The basic unit of electric force analogous to water pressure in pounds per
square inch.Voltampere
    
    The basic unit of apparent electrical power.Watt
    
    The basic unit of active electrical power.
 3




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PART I 
 Item. 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS Not applicable. 
 Item. 2 OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 
 Item 3. KEY INFORMATION 
 The Enel Group We are the principal electricity company in Italy, with the leading
position in the generation, distribution, sale and transmission of electricity.
Our net electricity production in 2003 was 137.8 TWh. Our net production
increased by 5%, or by 6.4 TWh, in 2003 as compared to 2002. Based on data
provided by the Gestore della Rete, we estimate that our production represented
49.4% of Italian net production during 2003. We believe that, in terms of the
volume of electricity sold in the year 2003, we were one of the largest
electric utilities in Europe. According to Bloomberg, as of March 31, 2004,
based on market capitalization, we were the largest publicly traded electric
utility in Europe. Based on revenues, we were one of the largest industrial
companies in Italy, with operating revenues of Euro 31,317 million, or
approximately $39,450 million, in 2003. We earned net income of Euro 2,509
million, or $3,161 million, in 2003. The Republic of Italy, through the Treasury Ministry, currently owns
approximately 50.35% of Enels shares, having sold approximately 32% of the Companys shares
in our initial public offering in 1999 as part of the privatization and
liberalization of the Italian electricity market, and subsequently selling
stakes of approximately 7% in the context of a private placement transaction in
November 2003 and approximately 10% to Cassa Depositi e Prestiti S.p.A., a
state-controlled company, in December 2003. Our current senior management team
has focused on preparing to face the challenges posed by market deregulation by
capitalizing on our expertise in the electricity and gas sectors and by seeking
new opportunities for growth in Italy and abroad. We intend to focus on our
core energy business, achieve cost leadership in the generation, distribution
and sale of electricity and gas, and make customer care a high priority. In
addition, we will continue to evaluate strategically relevant international
opportunities, both in new markets and in our existing markets, such as Spain
and Bulgaria and, in the area of renewable energy, in North and Central
America. We view our telecommunications activities solely as a financial
investment. 
 Selected Consolidated Financial Data You should read the following selected consolidated financial data
together with Item 5. Operating and Financial Review and Prospects and our
consolidated financial statements and notes thereto included elsewhere in this
annual report. Our consolidated financial statements and the notes thereto included
herein have been prepared in accordance with Italian GAAP, which differs in
certain important respects from U.S. GAAP. For an explanation and
quantification of such differences, see notes 23 and 24 to our consolidated
financial statements included herein. 4




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As of December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(2)(euro in millions, except per share amounts) (1)
    
    (dollars in millions,except
per shareamounts)Consolidated Statement of Income DataAmounts in accordance with Italian GAAP:Operating revenues
    
    
    20,960
    
    
    
    25,109
    
    
    
    28,781
    
    
    
    29,977
    
    
    
    31,317
    
    
    $
    39,450Operating expenses:Depreciation and amortization
    
    
    3,203
    
    
    
    3,459
    
    
    
    4,459
    
    
    
    4,477
    
    
    
    4,516
    
    
    
    5,689Other
    
    
    12,372
    
    
    
    16,897
    
    
    
    20,844
    
    
    
    22,620
    
    
    
    22,069
    
    
    
    27,800Total operating expenses
    
    
    15,575
    
    
    
    20,356
    
    
    
    25,303
    
    
    
    27,097
    
    
    
    26,585
    
    
    
    33,489Operating income
    
    
    5,385
    
    
    
    4,753
    
    
    
    3,478
    
    
    
    2,880
    
    
    
    4,732
    
    
    
    5,961Financial income (expense)
    
    
    (584
    )
    
    
    (648
    )
    
    
    (1,110
    )
    
    
    (1,178
    )
    
    
    (1,130
    )
    
    
    (1,423
    )Equity losses(3)
    
    
    (227
    )
    
    
    (458
    )
    
    
    (85
    )
    
    
    (59
    )
    
    
    (73
    )
    
    
    (92
    )Extraordinary income (expense)(4)
    
    
    (547
    )
    
    
    192
    
    
    
    2,318
    
    
    
    736
    
    
    
    (136
    )
    
    
    (171
    )Income before taxes
    
    
    4,027
    
    
    
    3,839
    
    
    
    4,601
    
    
    
    2,379
    
    
    
    3,393
    
    
    
    4,275Income taxes
    
    
    1,683
    
    
    
    1,649
    
    
    
    649
    
    
    
    608
    
    
    
    966
    
    
    
    1,217Net income (after minority interest)
    

    
    2,345
    
    
    
    2,188
    
    
    
    4,226
    
    
    
    2,008
    
    
    
    2,509
    
    
    $
    3,161Earnings per share(5)
    
    
    0.19
    
    

    
    0.18
    
    
    
    0.70
    
    
    
    0.33
    
    
    
    0.41
    
    
    $
    0.52Number of shares outstanding
(in millions)
    
    
    12.126
    
    
    
    12.126
    
    
    
    6.063
    
    
    
    6.063
    
    
    
    6.063
    
    
    
    Amounts in accordance with U.S. GAAP(6):Operating revenues
    
    
    21,053
    
    
    
    26,432
    
    
    
    28,781
    
    
    
    30,604
    
    
    
    31,237
    
    
    $
    39,349Depreciation and amortization
    
    
    3,064
    
    
    
    3,485
    
    
    
    4,478
    
    
    
    4,069
    
    
    
    4,506
    
    
    
    5,676Operating income (7)
    
    
    5,102
    
    
    
    4,065
    
    
    
    5,337
    (*)
    
    
    2,617
    (**)
    
    
    4,966
    
    
    
    6,255Income before taxes (7)
    
    
    4,228
    
    
    
    3,125
    
    
    
    3,965
    
    
    
    1,373
    
    
    
    3,798
    
    
    
    4,784Net income
    
    
    2,295
    
    
    
    1,841
    
    
    
    3,688
    
    
    
    1,399
    
    
    
    2,376
    
    
    
    2,993Earnings per share(5)
    
    
    0.19
    
    
    
    0.15
    
    
    
    0.61
    
    
    
    0.23
    
    
    
    0.39
    
    
    $
    0.49
      5




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As of December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(2)(euro in millions) (1)
    
    (dollars inmillions)Consolidated Balance Sheet DataAmounts in accordance with
Italian GAAP:Fixed assets, net
    
    
    37,914
    
    
    
    35,744
    
    
    
    35,004
    
    
    
    37,533
    
    
    
    37,155
    
    
    $
    46,804Current assets
    
    
    6,193
    
    
    
    9,456
    
    
    
    11,902
    
    
    
    14,464
    
    
    
    14,520
    
    
    
    18,291Total assets
    
    
    45,017
    
    
    
    49,633
    
    
    
    63,190
    
    
    
    67,019
    
    
    
    68,930
    
    
    
    86,831Current liabilities
    
    
    10,796
    
    
    
    15,621
    
    
    
    19,164
    
    
    
    21,916
    
    
    
    22,908
    
    
    
    28,857Short-term debt(8)
    
    
    3,481
    
    
    
    6,406
    
    
    
    7,107
    
    
    
    8,371
    
    
    
    8,643
    
    
    
    10,888Long-term debt(9)
    
    
    8,760
    
    
    
    7,984
    
    
    
    16,072
    
    
    
    17,172
    
    
    
    18,005
    
    
    
    22,681Shareholders equity
    
    
    17,577
    
    
    
    18,312
    
    
    
    20,966
    
    
    
    20,772
    
    
    
    21,124
    
    
    
    26,610Amounts in accordance with U.S.
GAAP(6):Fixed assets, net
    
    
    37,709
    
    
    
    37,403
    
    
    
    36,035
    
    
    
    38,304
    
    
    
    37,407
    
    
    $
    47,122Total assets
    
    
    45,341
    
    
    
    54,535
    
    
    
    63,799
    
    
    
    66,423
    
    
    
    68,505
    
    
    
    86,296Short-term debt(8)
    
    
    3,481
    
    
    
    6,406
    
    
    
    7,107
    
    
    
    8,371
    
    
    
    8,643
    
    
    
    10,888Long-term debt(9)
    
    
    8,760
    
    
    
    10,301
    
    
    
    16,072
    
    
    
    17,172
    
    
    
    18,005
    
    
    
    22,681Shareholders equity
    
    
    16,989
    
    
    
    17,438
    
    
    
    19,467
    
    
    
    18,526
    
    
    
    18,651
    
    
    
    23,495Consolidated Cash Flow DataAmounts in accordance with Italian
GAAP:Net cash provided by operating
activities
    
    
    6,978
    
    
    
    4,900
    
    
    
    6,164
    
    
    
    4,793
    
    
    
    7,173
    
    
    $
    9,036Net cash used in investing activities
    
    
    (2,351
    )
    
    
    (3,429
    )
    
    
    (8,666
    )
    
    
    (4,206
    )
    
    
    (4,695
    )
    
    
    (5,914
    )Net cash (used in) provided by
financing activities
    
    
    (5,571
    )
    
    
    (1,510
    )
    
    
    2,598
    
    
    
    (774
    )
    
    
    (2,426
    )
    
    
    (3,057
    )Amounts in accordance with U.S.
GAAP(6):Net cash provided by
operating activities
    
    
    7,010
    
    
    
    4,937
    
    
    
    5,554
    
    
    
    3,815
    
    
    
    6,843
    
    
    
    8,620Net cash used in investing activities
    
    
    (2,383
    )
    
    
    (3,468
    )
    
    
    (8,707
    )
    
    
    (4,241
    )
    
    
    (4,730
    )
    
    
    (5,958
    )Net cash (used in) provided by
financing activities
    
    
    (5,571
    )
    
    
    (1,509
    )
    
    
    3,249
    
    
    
    239
    
    
    
    (2,061
    )
    
    
    (2,596
    )
 As of December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003Operating Data (unaudited)Gross installed capacity (GW)
    
    
    59.4
    
    
    
    58.9
    
    
    
    52.0
    (10)
    
    
    45.3
    (14)
    
    
    45.7Domestic generation (TWh)(11)
    
    
    178.8
    
    
    
    182.5
    
    
    
    169.1
    (12)
    
    
    145.1
    (13)
    
    
    137.8Domestic sales to final customers (TWh) (11)
    
    
    230.5
    
    
    
    222.9
    
    
    
    206.0
    
    
    
    194.3
    
    
    
    152.2Customers (millions)
    
    
    29.7
    
    
    
    29.8
    
    
    
    29.8
    
    
    
    28.8
    
    
    
    28.9Employees
    
    
    78,511
    
    
    
    72,647
    
    
    
    72,661
    
    
    
    71,204
    
    
    
    64,770
   (1)
    
    Lira amounts relating to the fiscal years 1999 to 2001 have been translated
into euro amounts at the fixed rate of Lit. 1,936.27 = Euro1.00.(2)
    
    We have translated euro amounts into dollar amounts at the noon buying rate
for euro on December 31, 2003 of Euro 1.00 = $ 1.2597.(3)
    
    Under Italian GAAP, for the year ended December 31, 1999 and 2000, we
accounted for our investment in WIND Telecomunicazioni S.p.A., or WIND,
the lead company of our telecommunications segment, under the equity
method of accounting. We have consolidated WIND on a line-by-line basis
since January 1, 2001. We used the cost method of accounting in previous
periods. You should read note 2 to our consolidated financial statements
for a discussion of our consolidation principles. For purposes of U.S.
GAAP, we have consolidated WIND since January 1, 2000.(4)
    
    You should read note 23 to our consolidated financial statements for a
discussion of the different criteria used under Italian GAAP and U.S. GAAP
for determining what constitutes an extraordinary item.(5)
    
    We calculate earnings per share by dividing our consolidated net income
by the number of ordinary shares outstanding during each period. Prior to
our initial public offering in November 1999, all of our ordinary shares
were owned by the Treasury Ministry. Following the offering, and at
December 31, 2003, the Treasury Ministry owned approximately 51% and its
subsidiary Cassa Depositi e Prestiti S.p.A. owned approximately 10% of our
ordinary shares. You should consider that our share capital was Lit.
12,126,150,379,000 (corresponding to Euro 6,262,634,018) divided into
12,126,150,379 shares with a par value of each share of Lit. 1,000
(corresponding to Euro 0.52) until July 9, 2001, the date on which both
the re-denomination of our share capital in euro and the one-for-two
reverse stock split became effective. As a result of the re-denomination
and the reverse stock split, our share capital amounted to Euro
6,063,075,189, divided into 6,063,075,189 shares, each with a par value of
Euro 1. Currently, our share capital amounts to Euro 6,097,105,820 divided
into 6,097,105,820 shares with a par value of Euro 1. 6




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(6)
    
    For information concerning differences between Italian GAAP and U.S. GAAP
that are relevant to our consolidated financial statements, you should
read notes 23, 24 and 25 to our consolidated financial statements.(7)
    
    Operating income under U.S. GAAP in 2000, 2001 and 2002 is affected by
the different treatment under U.S. GAAP of extraordinary contributions to
the national pension system (Euro 577 million, Euro 523 million and Euro
446 million, respectively). In 2002, it also includes the write-down of
goodwill related to WIND for an amount of Euro 2,336 million. See note 23
to our consolidated financial statements.(8)
    
    Includes current portion of long-term debt.(9)
    
    Excludes current portion of long-term debt.(10)
    
    Including 7,346 MW owned by Eurogen, the generating company that we sold
in May 2002.(11)
    
    For the period beginning on January 1 of each year and ending as of such
date.(12)
    
    Including 12.2 TWh generated by Elettrogen and Valgen before they were
divested during 2001, and 20.9 TWh generated by Eurogen.(13)
    
    Including 8.0 TWh generated by Eurogen before it was divested in May 2002,
and 5.7 TWh generated by Interpower.(14)
    
    Including 3.0 GW of capacity of Interpower. 
 Exchange Rates The following table shows, for the periods indicated, information
concerning the exchange rate between the U.S. dollar and the euro. These rates
are provided solely for your convenience. We do not represent that the euro
could be converted into U.S. dollars at these rates or at any other rate. The column of averages in the table below shows the averages of the
relevant exchange rates on the last business day of each month during the
relevant period. The high and low columns show the highest and lowest exchange
rates on any business day during the relevant period. End of period
    
    Average
    
    High
    
    LowU.S. dollars per euro (1)Year:1999
    
    
    1.0070
    
    
    
    1.05882000
    
    
    0.9388
    
    
    
    0.92072001
    
    
    0.8901
    
    
    
    0.89092002
    
    
    1.0485
    
    
    
    0.94952003
    
    
    1.2597
    
    
    
    1.1411Month ended:December 31, 2003
    
    
    
    
    
    
    
    
    
    
    1.2597
    
    
    
    1.1956January 31, 2004
    
    
    
    
    
    
    
    
    
    
    1.2853
    
    
    
    1.2389February 29, 2004
    
    
    
    
    
    
    
    
    
    
    1.2848
    
    
    
    1.2426March 31, 2004
    
    
    
    
    
    
    
    
    
    
    1.2431
    
    
    
    1.2088April 30, 2004
    
    
    
    
    
    
    
    
    
    
    1.2358
    
    
    
    1.1802May 31, 2004
    
    
    
    
    
    
    
    
    
    
    1.2274
    
    
    
    1.1801
   (1)
    
    Based on the Noon Buying Rate for the euro for the periods indicated. Our ordinary shares are quoted in euro on Telematico, the Italian
automated screen-based trading market managed by Borsa Italiana. Our American
Depositary Shares, or ADSs, are quoted in U.S. dollars and traded on the New
York Stock Exchange. The fixed conversion rate between the euro and the lira established on
December 31, 1998 was Lit. 1,936.27 = Euro 1.00. On June 15, 2004 the noon buying rate for the euro was $1.2139 = Euro
1.00. 
 Risk Factors You should carefully consider the risks described below and all of the
other information in this document. If any of the risks described below
actually occurs, our business, financial condition or results of operations
could be materially adversely affected and the trading price of our ordinary
shares or ADSs could decline. 7




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Risks Relating to Our Energy Business We must overcome regulatory challenges to implement our new strategy Regulatory changes implemented in Italy as part of the general
liberalization of the electricity market in the past few years have led to
increased competition and placed limits on the size of our power generation and
other businesses. Even so, in 2002, our new management team made a strategic
decision to move away from the diversification strategy we had been pursuing in
recent years and to refocus on our core energy business. As regards our electricity business, by law, since January 1, 2003, no
single company or group may generate and/or import more than 50% of the total
of imported and domestically produced electricity in Italy. As a result of this
limit, we were required to sell not less than 15,000 MW of our generating
capacity by January 1, 2003, which we achieved through the sale of Elettrogen
S.p.A., Eurogen S.p.A. and Interpower S.p.A., three generating companies we
call the Gencos (see Item 4. Information on
the CompanyBusinessThe Enel
GroupDisposal of the Gencos). Based on data from the Gestore della Rete, we
estimate that our market share in the sale of electricity in Italy decreased
from 92% in 1999 to 56% in 2003, and we expect our market share to continue to
decline in the coming years as liberalization progresses. As a consequence of
our disposal of the three Gencos, our operating profits have declined, and will
continue to do so as a result of the increased competition and regulatory
constraints on our market share, unless we are able to offset the decrease in
sales volumes of our generation business through improved efficiency, increased
sales in other areas of our business or international expansion. Our entry into the gas sector also exposes us to risks relating to market
regulation. Italian regulations enacted in May 2000 have sought to introduce
competition into the Italian natural gas market through the liberalization of
the import, export, transport, dispatching, distribution and sale of gas.
However, we cannot predict whether or when these regulations will result in a
fully liberalized market, or how the natural gas market will develop under
these conditions. On January 1, 2003, the gas market was supposed to be
completely liberalized, with sellers able to freely determine prices for all
customers. However, the Energy Authority, which retained the right to control
prices for certain, mainly residential, customers after that date, imposed a
price freeze through December 2003 and, then new tariff criteria with respect
to those customers at the levels that were in place on December 31, 2002. The
Energy Authority must decide by July 31, 2005, whether to allow distributors to
freely set the prices charged to these customers. It is also still in the
process of establishing regulations to govern certain activities on the free
market (such as sales regulations, network codes and provider-switching
procedures). In this environment, our strategy is to seek both to be the cost leader in
the generation of electricity and the distribution and sale of electricity and
gas in Italy and to provide high quality customer service. If we are unable to
implement this strategy, or are otherwise unable to adapt our core energy
businesses to meet these regulatory challenges, it may have a material adverse
effect on our business prospects, financial condition and results of
operations. We face increasing competition in the electricity market For many years we had virtually no competition in the markets for the
generation, transmission and distribution of electricity in Italy. The increase
in competition under the electricity market structure called for by the Bersani
Decree, a law enacted in 1999 with the intent of liberalizing the Italian
electricity market, may materially adversely affect our results of operations
and financial condition by further reducing our market share, revenues and/or
profits. Under this structure, the number of customers able to purchase
electricity on the free market will continue to increase each year as
consumption thresholds determining eligibility drop, until all customers become
eligible in 2007. Our competitors in the generation business include independent power
producers and municipal utilities. In addition, our disposal of the Gencos has
exposed us to increasing competition from other operators of electricity
generating capacity, including Italian and international power companies. In
sales of electricity on the free market, we also face competition from
suppliers and wholesalers that are intensive users of electricity and may
resell to other end users the electricity that they purchase. In addition, we
face increased competition following the 8




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introduction, on March 31, 2004, of the Borsa dellEnergia Elettrica, or
pool market for electricity, where prices are determined by competitive
bidding. We expect that competition will increase further due to:  
    
    An increase in bilateral contracts between our competitors
and final customers;
    
    Regulations limiting each operators access to international
electricity sources to a maximum percentage of available
interconnection capacity; and
    
    The construction of new generation facilities by our
competitors and the development of new interconnection lines that
would increase the volume of electricity that might be imported in
Italy. For a more complete description of the regulation of the industry and the
way we expect it to affect the electricity market, you should read Item 4.
Information on the CompanyRegulatory Matters#Electricity Regulation. Future regulation could have a significant adverse effect on our energy businesses and their profitability The laws, regulations and policies of the European Union and the Italian
government significantly affect our revenues and profits and the way we conduct
our business. The regulatory framework for both the Italian electricity and
natural gas markets has changed significantly in recent years as a result of
legislation designed to liberalize these markets and create more competition.
Future regulation by the European Union or the Italian government may require
significant changes in our business or otherwise affect our business in ways
that we cannot predict. Any new regulations that cause us to restructure or
otherwise change our business may have a material adverse effect on our
business prospects, results of operations and financial condition. You should
read Item 4. Information on the CompanyRegulatory Matters for a detailed
discussion of these regulatory changes. In the future we will be unable to control Ternas strategy and our disposal of all or part of our interest in Terna may occur on unfavorable terms While the management and operation of the national electricity
transmission grid are currently entrusted in the Gestore della Rete, which is
wholly owned by our controlling shareholder, the Treasury Ministry, we own
94.136% of this grid through our subsidiary Terna S.p.A., in which we hold only
a 50% interest; the remaining shares are publicly held, as on June 23, 2004, we
 completed an initial public offering in Italy and a private placement with
certain institutional investors ( in accordance with Rule 144A
and Regulation S under the
United States Securities Act of 1933) of the other 50% of
Ternas shares receiving gross proceeds  of Euro 1,700 million. A recently enacted decree provides for
the transfer, by October 31, 2005, of the management and operation of the
national transmission grid from the Gestore della Reteto Terna, which will
retain the ownership of the grid assets. Upon this transfer, no electricity
operator, including us, shall be entitled to voting rights in excess of 5% with
respect to the appointment of Ternas directors. You should read Item 4.
Information on the Company#Regulatory MattersElectricity Regulation for a
detailed discussion of these restrictions. As a result of this transfer and
these restrictions, we will no longer control Terna, even in the event that we
still own 50% of its share capital, and we will therefore have to deconsolidate
its operations. This may have a material adverse effect on our business
prospects, financial condition and results of operations. In addition, the recently enacted decree requires that we reduce our
holding in Terna to no more than 20% by July 1, 2007 and imposes certain
restrictions on how we can effect such reduction. You should read Item 4.
Information on the Company#Regulatory MattersElectricity Regulation for a
discussion of these restrictions. As a result of our obligation to reduce our
holding in Terna and the restrictions on voting rights imposed by the decree,
we may have to dispose of our holding in Terna at prices and terms less
favorable than those we would obtain in the absence of these constraints or
those that we obtained in the initial public offering of Terna shares. 9




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Significant increases in fuel prices or disruptions in our fuel supplies could
have a negative effect on our business Our thermal generating plants use fuel oil, natural gas and coal to
generate electricity. Increases in energy prices, therefore, have a direct
effect on our operating costs. Both the cost and availability of fuel are
subject to many economic and political factors and events occurring throughout
the world that we can neither control nor accurately predict. While the
government-set tariffs we charge on the regulated market include a component
intended to compensate us for changes in the cost of fuel, the introduction of
the pool market and the increase in the number of consumers who qualify to
participate in the free market will increase risks relating to fuel price
fluctuations. In addition, our use of natural gas has increased in recent years, and can
be expected to continue to increase in the near future, particularly as we
continue to convert plants to combined cycle technology. In 2003, approximately
35% of the electricity we produced was generated by plants using natural gas. A
significant portion of the natural gas we currently use depends on direct
supplies from Algeria and Nigeria. Security concerns associated with this
imported supply add an element of uncertainty regarding our continued ability
to procure sufficient quantities of natural gas. If there are substantial increases in the price of the fuels we use to
generate electricity that we are unable to pass on to our customers, or if
adequate supplies of fuel become unavailable in the future, our results of
operations and financial condition may be materially adversely affected. We may not be able to realize the benefits of acquisitions in our gas distribution business A significant part of our strategy going forward is to develop and
increase our natural gas distribution activities. As part of this strategy, we
have acquired a number of natural gas distributors with operations in various
Italian regions during the past three years, including Enel Rete Gas (formerly
Camuzzi Gazometri S.p.A.), one of the largest alternative gas distributors in
Italy. We are in the process of integrating these several entities into one gas
distribution company in order to improve the efficiency of our operations.
There can be no assurance that we will be able to realize potential synergies,
cost savings or other benefits expected from their integration. Our expansion outside of Italy subjects us to risks associated with local market conditions We have in recent years expanded our operations overseas. We have
operations in the electricity generation and distribution market in Spain and
in the renewable energy sector both in Spain and in North and Central America.
In 2003, we entered the Bulgarian market with our acquisition of a controlling
stake in Entergy Power Holding Maritza BV, which owns a power generation plant
in Bulgaria. We will continue to evaluate opportunities abroad and may expand
our investments in these countries or in new markets. Our acquisition of
businesses outside of Italy requires us to become familiar with new markets and
competitors, and exposes us to local economic, regulatory and political risks.
Operating internationally may also subject us to risks related to currency
exchange rate fluctuations, foreign investment restrictions or restrictions on
remittances by local subsidiaries. Depending on the circumstances, unfavorable
developments in one or more of these areas in a foreign country in which we
have operations could adversely affect our business prospects, financial
condition and results of operations. New regulations may limit our ability to recover fully our stranded costs Our stranded costs mainly consist of costs resulting from governmental
requirements imposed in the past on the design and operation of our generation
plants. In particular, because of governmental policies, we built most of our
plants to ensure a high degree of flexibility in the type of fuel that they
could use. The Industry Ministry and the Treasury Ministry determined which
costs were to be considered as recoverable stranded costs and established a
system to recover them. Under that system, we were to be permitted to recover a
significant portion of our stranded costs between 2000 and 2006. However, a law
enacted in April 2003 has narrowed the type of stranded costs that we will be
able to recover after January 1, 2004 to those incurred in connection with our
imports of liquefied natural gas from Nigeria. This law also provides that our
recoverable stranded costs for the 2000-2003 period will be determined under
parameters to be set by the Industry Ministry and the Treasury Ministry, after
consultation with 10




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the Energy Authority. We cannot predict how the Industry Ministry and
Treasury Ministry will calculate these costs, or whether the amounts we will be
permitted to recover, if any, will be sufficient to reimburse us for costs
actually incurred. You should read Item 4. Information on the
CompanyRegulatory MattersElectricity RegulationThe
tariff structureStranded
costs for a more detailed description of the stranded costs recovery plan. Recent acquisitions have resulted in an increase in our level of indebtedness,
and may result in credit rating downgrades or otherwise affect our financial
condition Recent acquisitions have had and will continue to have a significant
effect on our results of operations and financial condition. Our acquisition of
Infostrada, Italys second-largest provider of fixed-line telephone services in
2001, has had a negative impact on our results through the amortization of Euro
7,631 million in goodwill that arose from the transaction, and the indebtedness
incurred to finance the acquisition has negatively affected our financial
condition. In addition, in July 2003, we acquired the 26.6% stake in WIND then
held by Wireless Services Belgium SA, a subsidiary of France Télécom.
We  paid France Télécom a purchase price of Euro 1,330 million
and reimbursed it for a capital contribution of
Euro 59 million it had made to WIND. Thus, we became WINDs sole shareholder.
After the announcement of this transaction, Standard & Poors Rating
Services changed the outlook on our long-term debt from stable to negative, and
Moodys Investors Service changed the outlook for all of its ratings on our
debt from stable to negative, although both agencies confirmed their rating of
A+ and A1, respectively, for our long-term debt. However, on June 17, 2004,
Standard & Poors Rating Services changed the outlook on our long-term debt
from negative to stable. Credit rating downgrades would increase our borrowing
costs. Our long-term financial debt at March 31, 2004, was Euro 22,683 million.
If we incur additional indebtedness to finance future acquisitions, or if such
transactions generate significant amounts of goodwill or result in the
downgrade of our credit ratings, it could have a material adverse effect on our
financial condition and results of operations. See Item 5. Operating and
Financial Review and ProspectsLiquidity and Capital Resources. We have had to increase investments and may incur additional costs to comply
with regulations on the quality of electricity service In Italy, we are subject to regulations on quality-of-service standards
for electricity companies, particularly with regard to service continuity, or
the frequency and duration of interruptions in service. In connection with the
continuity standards, the Energy Authority has put in place a system of bonuses
and penalties, under which entities that exceed the quality standards for
continuity of service earn bonus payments from the Energy Authority, and
entities that do not meet these standards must pay fines. In order to comply with these regulations and provide our electricity
services in accordance with the quality-of-service standards, we invested
approximately Euro 1,740 million from 2001 through 2003, and have in place a
plan requiring expenditures of approximately Euro 2,030 million in the period
2004-2008 to enhance the quality of our service. We cannot be sure that our
planned levels of capital expenditures will be adequate to ensure our
compliance with existing quality-of-service targets, including those with
respect to continuity of service, or whether our results of operations may be
adversely affected by our failure to meet these targets, or by any penalties we
might be required to pay as a result of any such failure. Our core energy businesses and other activities are subject to numerous
environmental regulations that could significantly affect our results of
operations and financial condition Our core electricity and gas businesses and other activities, such as
power-related engineering and construction and telecommunications, are subject
to extensive environmental regulation under Italian law, including laws adopted
to implement European Union regulations and directives and international
agreements on the environment. Environmental regulations affecting our business
primarily relate to air emissions, water pollution, waste disposal and
electromagnetic fields. The principal air emissions deriving from fossil-fueled
electricity generation are sulfur dioxide (SO2), nitrogen oxides (NOx), carbon
dioxide (CO2) and particulate matter such as dust and ash. A primary focus of
environmental regulation applicable to our business is to reduce these
emissions. 11




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
    
    May take such forms as emission limits, taxes or required
remediation measures; and
    
    May influence our policies in ways that affect our business
decisions and strategy, such as by discouraging our use of certain
fuels.  2
      Further power outages involving our electricity operations could adversely
affect our results of operations and financial condition
       12




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a preliminary report that, while not making any definitive finding
regarding responsibility, raised the possibility that the blackout may have
been partially attributable to the conduct of Italian generation and
distribution companies, including us. While we do not believe we were
responsible for the blackout, we cannot exclude the possibility that we will be
held liable for it by the Italian courts and/or by the Energy Authority. Any
finding of liability on our part could result in the imposition of fines and in
additional lawsuits by other parties against us, which could have a material
adverse effect on our financial condition and results of operations. We have been and are subject to investigations concerning certain disruptions
experienced in the Italian electricity supply; adverse findings could have a
material adverse effect on our business, financial condition and results of
operations Certain disruptions in the Italian electricity supply were experienced on
June 26, 2003. These disruptions, which we effected upon request of the
Gestore della Rete,were defense procedures which are carried out when the
electricity available cannot satisfy the demand for it and are intended to
prevent the entire electricity system from collapsing. The disruptions lasted
for approximately 90 minutes each and concerned an aggregate of approximately 7
million customers. The Energy Authoritys initial inquiry into these
disruptions was completed in November 2003. In its December 2003 report, the
Energy Authority primarily attributed the low amount of electricity available,
which resulted in the adoption of these defense procedures, to certain
structural causes including insufficient domestic generation capacity, the
resulting dependence of the Italian electricity system on imported electricity,
and the reduction of the available interconnection capacity
attributable to a heat wave, as well as to certain specific conditions
(including a 800 MW reduction of imports of electricity from France under the
import agreement between Enel and Eléctricité de France). The Energy Authority
censured the Gestore della Reteand generation companies, including us,
arguing that the disruptions were due, among other things, to the
unavailability of certain plants that we were required to maintain in
operations. We have contested the conclusions reached by the Energy Authority.
On April 2, 2004,  the Authority decided to initiate a formal inquiry to
determine the responsibilities of the parties involved in the events of June
26, 2003. Any finding of liability on our part could result in the imposition
of fines and in potential lawsuits against us, which could have a material
adverse effect on our financial condition and results of operations. We have been and are subject to market abuse investigations; adverse findings
could have a material adverse effect on our financial condition and results of
operations We are currently one of a number of companies under investigation by the
Energy Authority for possible abuse of dominant position in the electricity
market in connection with a sharp increase in the price of electricity on the
pool market over a three-day period in June 2004. On June 9, 2004, the Energy
Authority began an investigation to ascertain whether this price increase was
caused by an exercise of market power by the entities with a dominant
position in the business of electricity supply in Italy, including us. This investigation is not the first of its nature to which we have been
subject in recent years. We are currently appealing the imposition of a
2.5 million fine on us in November 2003 as a result of an adverse ruling by
the Italian Antitrust Authority in connection with alleged abuse of dominant
position by us and Enel Energia in 2002 in our sales of electricity to Eligible
Customers. See Item 8. Financial InformationOther Financial
InformationLegal Proceedings. We cannot exclude the possibility that we will be held liable in the
current investigation by the Energy Authority, nor that there will be other
such investigations by the Energy Authority or the Antitrust Authority in the
future. Should we be held liable for market abuse in the current or any such
future investigation, and should such liability result in the imposition of
significant fines or of material restrictions on out activity, there could be a
material adverse affect on our financial condition and results of operations. 13




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Risks Relating to Our Other Businesses We may be unable to divest our telecommunications business on acceptable terms We view our telecommunications activities solely as a financial
investment. We expect to dispose of all or part of our telecommunications
operations at some point in the future. Although this planned divestment
generally fits into our strategy of focusing on our core energy business, there
can be no assurance that we will be able to sell these assets in accordance
with our own timetable, if at all, or that any sales will be made on favorable
terms. Our inability to dispose of this business on acceptable terms could have
a material adverse effect on our business strategy and financial condition. WINDs ability to offer competitive services depends on the use of rapidly
changing technologies, which are unproven and can require significant
expenditures The telecommunications industry is subject to rapid technological change,
which puts pressure on existing participants and new entrants to develop new or
advanced fixed-line, mobile or Internet technologies that are unproven and may
not provide the expected advantages over existing technologies. We cannot
predict the effect of these technological changes on WIND or its ability to
provide competitive services. For example, as of December 31, 2003, WIND made total payments of Euro
2,447 million in order to acquire and operate a UMTS license from the Italian
government for the provision of third generation mobile telephony services.
WIND will be required to make substantial investments during the next several
years in order to build out its UMTS network and develop related services and
products, as well as paying approximately an additional Euro 253 million in
respect of its license over the next eight years. UMTS technology and
UMTS-related services, however, are not yet fully tested. If UMTS technology is
not developed on a timely basis, or if it does not deliver the anticipated
advantages over current services or gain widespread acceptance, WINDs results
of operations could be materially and adversely affected. WIND expects that competition for resources and infrastructure needed to
develop new telecommunications technologies will intensify. As new technologies
develop, WIND may be placed at a competitive disadvantage and competitive
pressures may force it to implement these new technologies at a substantial
cost. Any inability by WIND to implement these new technologies on a timely
basis, penetrate new markets in a timely manner in response to changing market
conditions or customer requirements, or any failure by new or enhanced services
offered by WIND to achieve a significant degree of market acceptance, could
have a material adverse effect on WINDs business prospects, operating results
and financial condition. WIND faces increasing competition The Italian and EU telecommunications sector is highly competitive and we
expect competition to increase. In fixed-line telephony, WIND competes primarily with Telecom Italia, the
incumbent operator that historically held a monopoly for fixed-line services in
Italy and continues to hold a significant majority of the overall market for
fixed-line services. WIND also competes with a number of other fixed-line
operators that, like WIND, seek to offer customers an alternative to Telecom
Italia. In its mobile telephone business, WIND faces strong competition,
particularly from Telecom Italia Mobile and Vodafone Omnitel, the two leading
wireless operators in Italy, and from 3, a mobile operator which launched its
commercial services in 2003 and which, along with Telecom Italia Mobile,
Vodafone Omnitel and WIND, successfully bid for UMTS licenses for
third-generation mobile telephony services in 2000. WIND also faces significant competition from existing operators in the
Internet and data service areas, and we expect that new competitors will emerge
as these markets continue to evolve and grow. Telecom Italia, WINDs principal competitor, has greater financial
resources, more developed infrastructure and a larger market share than WIND.
In order to compete effectively with existing competitors and 14




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any new entrants, WIND may be required to reduce its tariffs further and
make additional capital expenditures to develop its services; subsequent
reductions in revenues or increases in costs could have a material adverse
impact on WINDs operating results and financial condition. WIND relies on agreements with other fixed-line and mobile telephone carriers
to provide telephone services WIND depends on its interconnection agreement with Telecom Italias
network to provide indirect access for its fixed-line telephone services and on
its ability to lease lines from Telecom Italia in order to provide direct
access for certain of WINDs largest corporate clients. WIND also relies on
interconnection and roaming agreements with other telephone operators,
including international carriers, in order to expand the scope and range of its
telephony services. WINDs ability to operate its networks and offer services
to its customers may be adversely affected if the access to the network of
Telecom Italia or any of the other carriers with which WIND has such an
agreement is offered solely on economic terms that do not make it financially
attractive for WIND to offer direct access to their customers. WIND may not be able to expand its fixed-line business as planned if it does
not implement access to the local loop on a timely basis WIND is offering direct access to its network to fixed-line customers as a
result of the unbundling of the local loop, a process whereby Telecom Italia is
required to give alternative carriers such as WIND access to the local loop,
Telecom Italias last-mile connections that include the wires leading to a
customers home or office. Telecom Italia has begun to offer other operators
access to the local loop under conditions established by the Communications
Authority. Any delay in the expansion of WINDs access to Telecom Italias
local loop may adversely affect its operations and results. WIND may also be
adversely affected if the economic terms and conditions at which access to the
local loop is offered do not make it financially attractive for WIND to offer
direct access services to its customers. WINDs ability to build out its network is dependent on its receipt of licenses
and government authorizations WIND requires government licenses and authorizations for rights of way to
build out its networks. We cannot assure you that WIND will be able to obtain
new licenses or authorizations or renew those that expire, in which case WIND
will have to alter its plans for the development of the network. WIND may be
also adversely affected if other telecommunications operators obtain licenses
and authorizations on more favorable terms. We have made significant capital investments in developing WINDs
telecommunications business. We incurred a substantial amount of debt and made
significant expenditures in connection with WINDs purchase of a third
generation UMTS mobile license and our acquisition of Infostrada. Other Risks Relating to Our Businesses We may incur significant capital expenditures to comply with legislation on
electromagnetic fields; we may not be fully reimbursed for these capital
expenditures In 2001, the Italian parliament passed a law intended to protect the
general public and workers against alleged potential long-term health effects
of exposure to electromagnetic fields generated by both low frequency
infrastructure, including electricity transmission and distribution lines and
substations, and high-frequency infrastructure, including the transmission
stations that WIND uses to provide mobile telephone services. The law provides
for the adoption and implementation of programs to bring existing electricity
transmission and distribution lines, substations and high frequency
infrastructure into compliance with electromagnetic exposure requirements to be
set by the Italian government. If the Italian government were to set limits
that are stricter than those currently in effect, we could be required to
upgrade, move or make other changes to some of our mobile telephony
infrastructure or our existing electricity lines and transmission and
distribution facilities. This process would increase our costs. Although with
respect to electricity transmission and distribution lines and substations, the
law requires the Energy Authority to set criteria, terms and conditions for the
recovery of the costs that the owners would bear in implementing any required
restructuring, any actual reimbursements we would receive may be lower than our
actual 15




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##### Table of Contents



costs. Our results and financial condition may be adversely affected as a
consequence. You should read Item 4. Information on the
CompanyRegulatory
MattersEnvironmental Matters for a more detailed description. If the Italian government reduces early retirement pensions, it will be more
expensive for us to continue our plan of voluntary workforce reduction Our ability to improve labor productivity and reduce the aggregate number
of our employees may be affected by changes in government regulation. Beginning
in 1996, we have reduced our headcount substantially, primarily through
voluntary measures such as by providing incentives for early retirement and
through attrition. In recent years, a number of Italian political figures have
proposed plans for significant reform of the national pension system. Any
substantial reform of the current system may reduce the availability of early
retirement pension benefits. If this occurs, it may be more expensive for us to
continue our plan of voluntary headcount reduction. Risks relating to Enels Ordinary Shares and ADSs The Treasury Ministry is Enels majority shareholder and will continue to
control important actions of the Company The Treasury Ministry holds approximately 50.35% of Enels outstanding
share capital and therefore controls the Company. In addition, Cassa Depositi e
Prestiti S.p.A., a company controlled by the Treasury Ministry, holds an
additional 10.29% shareholding. As long as the Treasury Ministry holds a majority of Enels ordinary
shares, it will have the right to:  
    
    Control a number of important actions that the Company takes,
including the power to block capital increases and other amendments
to Enels by-laws;
    
    Elect the chairman of the board of directors and all but
one-fifth of the other directors; and
    
    Appoint two members (one of whom will be appointed chairman)
and an alternate member to Enels board of statutory auditors. The special powers of the Italian government may limit Enels shareholders
ability to benefit from a premium in connection with a change of control
transaction The Italian privatization law and Enels by-laws confer upon the Italian
government, acting through the Treasury Ministry (which will act after
consultations with and in agreement with the Industry Ministry), certain
special powers with respect to the Companys business and actions by its
shareholders. These powers may permit the government to influence the Companys
business regardless of the level of its shareholding. The government may review
the scope and duration of the Treasury Ministrys special powers starting in
September 2004. The Treasury Ministry may directly appoint one non-voting member of Enels
board of directors, in addition to the directors elected by the Treasury
Ministry in its capacity as a shareholder. In addition, the Treasury Ministry,
under certain conditions, has veto power over:  
    
    Whether any investor acquiring 3% or more of Enels share
capital has the right to vote at the Companys shareholders
meetings. Should the Treasury Ministry exercise this veto power,
these investors must sell their shareholding in Enel within one
year;
    
    Whether shares that are subject to shareholders agreements
covering 5% or more of Enels share capital may be voted at the
Companys shareholders meetings; and
    
    Major corporate actions involving the Company, such as a
merger or a demerger. 16




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##### Table of Contents



As a result, Enel may not enter into change of control transactions
without the approval of the Treasury Ministry, in agreement with the Industry
Ministry. This may limit Enels shareholders ability to benefit from a premium
in connection with a change of control transaction. The value of the ordinary shares or ADSs may be adversely affected by sales of
substantial amounts of ordinary shares by the Treasury Ministry or the
perception that such sales could occur The Treasury Ministry may sell additional portions of its shareholding in
Enel at any time. There are no minimum ownership or similar requirements under
Italian law that would limit sales of additional shares by the Treasury
Ministry. Sales of substantial amounts of Enels ordinary shares by the
Treasury Ministry, or the perception that such sales could occur, could
adversely affect the market price of Enels ordinary shares and American
Depositary Shares, or ADSs, and Enels ability to raise capital through equity
offerings. The dollar value of dividends Enel pays in respect of the Companys ordinary
shares and ADSs will be affected by the euro/dollar exchange rate Enel pays cash dividends in euro; as a result, exchange rate movements may
affect the U.S. dollar amounts that investors receive from the depositary if
they hold ADSs. The price of Enels ordinary shares is quoted in euro. Exchange
rate movements may also affect the U.S. dollar price of the ADSs and the U.S.
dollar equivalent of Enels ordinary share price. If you hold ADSs rather than ordinary shares it may be difficult for you to
exercise some of the rights of a shareholder It may be more difficult for you to exercise the rights of a shareholder
if you hold ADSs than it would be if you directly held ordinary shares. For
example, if Enel offers new shares and you have the right to subscribe for a
portion of them, the depositary is allowed, in its own discretion, to sell for
your benefit that right to subscribe for new shares instead of making it
available to you. Also, in some cases you may not be able to vote by giving
instructions to the depositary on how to vote for you. 
 Forward-Looking Statements This annual report includes forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements regard, among other
things:  
    
    Anticipated trends in our businesses, including trends in demand for electricity;
    
    Our ability to implement successfully our cost reduction program;
    
    Our intention to develop our gas business and expand our core businesses;
    
    Changes in our regulatory environment and expectations on how
the new regulations will be implemented;
    
    The impact of changes in electricity tariffs;
    
    The remuneration of our generation activities based on
competitive electricity prices rather than tariffs following the
introduction of the pool market;
    
    The possibility that significant volumes of electricity
generated at generation costs lower than current average generation
costs in Italy will become available as a result of increased imports
and/or the construction of new plants in Italy; 17




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
    
    The development of our telecommunications business, including
the fact that we currently view our interest in WIND as a financial
investment, and changes in the market environment, technology and
regulation that may affect this business;
    
    Our intention to divest certain non-core businesses; and
    
    Future capital expenditures and investments. The forward-looking statements included in this annual report are subject
to risks, uncertainties and assumptions about our company. Our actual results
of operations may differ materially from the forward-looking statements as a
result of, among other things, the risk factors described under Risk Factors.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise
occurring after the date of this annual report. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
annual report might not occur. 
 Item 4. Information on the Company 
 History and Development of the Company We were established in December 1962 as a state-owned entity (Ente
Nazionale per lEnergia Elettrica) through the nationalization of approximately
1,250 private power companies in Italy. Our principal objective following the
nationalization was to provide low cost electricity to support the development
of the country. We believe that we have accomplished the purpose for which we
were established. In 1962, of a total population of 51 million, about 2 million
Italians did not have electricity, and the country had only approximately
300,000 kilometers of high, medium and low tension electricity lines.
Electricity now reaches virtually the entire Italian population, and at
September 2000, the most recent date for which complete data is available, the
country had about 1,095,700 kilometers of transmission and distribution lines. In 1992, we ceased to operate as a public entity and were transformed into
a joint stock company, Enel S.p.A. On April 1, 1999, the Bersani Decree took effect. This decree began the
transformation of the Italian electricity market from a highly regulated market
to a liberalized one, in which energy prices charged by generators will
eventually be fully determined by competitive bidding. Beginning in October
1999, as required by the Bersani Decree, we formed separate subsidiary
companies, to each of which we assigned the responsibility (and related assets,
liabilities and personnel) for each of our significant businesses. In November 1999, Enel completed an initial public offering of
3,848,802,000 shares, representing a sale of 31.74% of the Companys share
capital. The gross proceeds of the initial public offering were Euro 16,550
million. As a result of the initial public offering, Enels ADSs were listed on
the New York Stock Exchange and Enels shares were listed on the Mercato
Telematico Azionario, or Telematico, the Italian screen-based trading market
managed by Borsa Italiana S.p.A. Since 1999, we have expanded our operations in the gas sector through the
acquisition of several independent gas distributors. Since 2000, we have also
expanded our energy operations abroad through the acquisition of three power
producers specializing in renewable resources with operations in North America,
Central and South America and Spain, respectively, as well as through the
purchase, in 2002, of Electra de Viesgo S.L. (Viesgo), a company with
electricity generation and distribution operations in Spain, and, in March
2003, of a controlling interest in Maritza East III Power Company AD, or
Maritza East III, a company with electricity generation operations in Bulgaria.
In addition, in March 2004, we acquired two hydroelectric plants in North
America: Twin Falls, located in the State of Washington, and Lower Saranac,
located in the State of New York. As required by Italian legislation, we have
at the same time disposed of approximately 15,000 MW of our generating capacity
through the sale of Elettrogen S.p.A. in September 2001, Eurogen S.p.A. in May
2002, and Interpower S.p.A. in January 2003; we have also been forced to sell
several municipal distribution networks as part of the 18




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liberalization of the market and we expect that others will be sold in the
future. As explained in more detail below, we have also recently sold a 50%
interest in our transmission division in a public offering in Italy. We have also invested in telecommunications, starting in 1997, when we
along with our initial partners, France Télécom and Deutsche Telekom, formed
our telecommunications subsidiary, WIND. Our initial stake in WIND was 51%,
which increased to 73.4% following Deutsche Telekoms exit from the joint
venture in July 2000 and our purchase and contribution to WIND of Infostrada,
which was merged into WIND as of January 1, 2002. In July 2003, we acquired the
26.6% stake in WIND then held by Wireless Services Belgium SA, a subsidiary of
France Télécom, becoming WINDs sole shareholder. In 2002, we reorganized our operations into six business divisions, and in
2003 we added a seventh, in order to increase the focus of our activities on
the market and to better control costs and enhance synergies among our various
subsidiaries. The divisions are: Generation and Energy Management; Sales,
Infrastructure and Networks; International; Transmission; Telecommunications;
Services and Other Activities; and Corporate. The Generation and Energy Management Division is responsible for our
operations related to the production of electricity and the procurement of fuel
for electricity generated. Our key subsidiaries in this division include Enel
Produzione S.p.A., the divisions lead company, in energy generation; Enel
Green Power S.p.A., for the generation of energy from renewable resources; and
Enel Trade S.p.A., which purchases fuel for all of our generating operations,
sells electricity to resellers and customers with annual consumption higher
than 100 Gwh, sells gas to gas distribution companies and is active in the fuel
trading sector. Before 2003, the division comprised also our power generation
activities outside of Italy, which have been included in our new International
Division since January 1, 2003. Our Sales, Infrastructure and Networks Division comprises two business
units, which operate independently under the umbrella of Enel Distribuzione,
S.p.A., the divisions lead company. The Infrastructure and Networks business
unit operates mainly through Enel Distribuzione, which distributes electricity
in Italy; and three gas distribution companies in Italy, which we plan to
merge, together with Sicilmetano, our newly acquired subsidiary, into a single
entity by the end of 2004. The Sales business unit sells electricity and gas
and provides electricity-related services. Our key subsidiaries in this area
include Enel Distribuzione, which sells electricity on the regulated market in
Italy; Enel Energia S.p.A., which sells electricity on the free market to
customers with annual consumption up to 100 Gwh; Deval S.p.A., which
distributes and sells electricity in the Valle dAosta area in Italy; Enel Gas
S.p.A., which resells natural gas to end users in Italy; Enel Sole S.r.l.,
which offers public lighting services; and Enel.si S.r.l., which offers
electricity systems-related services and beyond the meter products and
services, such as consulting and sales of electricity equipment. Before 2003,
the division also comprised our sales and distribution activities outside of
Italy, which have been included in our new International Division since January
1, 2003. Our International Division was introduced in 2003 and includes our
electricity generation, distribution and sales activities outside of Italy. The
International Division currently includes generating activities, comprising
Viesgo Generaciòn S.L., an electricity company in Spain acquired in January
2002 and our largest operation abroad, with a gross installed capacity of 2,365
MW; Maritza East III, which we acquired in 2003 and is active in Bulgaria, Enel
Uniòn Fenosa Renovables, Enel North America Inc. (formerly CHI Energy) and Enel
Latin America LLC (formerly Energia Global International LLC), all of which
specialize in renewable resources and are active in Spain, North America and
Central and South America, respectively, as well as distribution and sale
activities, comprising Electra de Viesgo Distribuciòn and Viesgo Energia, both
active in Spain. Terna S.p.A., our 50% owned subsidiary, constitutes our Transmission
Division and owns approximately 94% of Italys national electricity grid. In
June 2004, we completed an initial public offering and listing in Italy and a
private placement with certain institutional investors (in accordance with Rule 144A
and Regulation S under the Securities Act) of 1,000,000,000 of Terna shares
representing the other 50% of Ternas issued share capital. The gross proceeds of such
offering were Euro 1,700 million. Our Telecommunications Divisions operations are carried out by WIND, and
the Services and Other Activities Division includes our other non-core business
operations, such as, among others, Enel Facility Management S.p.A. (formerly
Enel Real Estate S.p.A.) and Enelpower S.p.A., which provides power-related 19




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engineering and construction services mainly to Group companies and
Enel.it S.r.l., our group-wide information technology unit. We are in the
process of divesting certain real estate assets through the sale of Newreal
S.p.A. On June 3, 2004, we signed an agreement providing for the transfer of
the entire share capital of Newreal for approximately Euro 1,400 million. We
expect to close this transaction by the first half of July 2004. Enel S.p.A. constitutes our Corporate Division and, as the parent company,
defines the strategic objectives for the Enel Group and coordinates the
activities of all of the divisions. In addition, Enel manages finance
operations and insurance risk coverage for all Group companies and provides
assistance and guidelines on organizational, industrial relations, accounting,
administrative, tax and legal issues. See BusinessOverview for a listing
and description of our principal subsidiaries. For a description of our capital expenditures in each of the last three
fiscal years, please refer to BusinessThe Enel GroupCapital Investment Program. Enel S.p.A. is a società per azioni, or a joint stock company whose
capital is represented by shares, incorporated under the law of Italy. Enels
statuto, or by-laws, provide that the duration of the Company is until December
31, 2100. Enels registered office is at Viale Regina Margherita 137, Rome,
Italy. Enels main telephone number is +39 06 83051. Individual investors may
reach our retail investors team at telephone number +39 06 8305 2081, while
institutional investors may reach our investor relations team at telephone
number +39 06 8305 7008. Enel is represented in the United States by our
subsidiary Enel North America Inc., located at Andover Business Park, 200
Bulfinch Drive, MA 01810. 
 Business 
 Overview We are the principal electricity company in Italy, with the leading
position in the generation, distribution, sale and transmission of electricity.
Our net electricity production in 2003 was 137.8 TWh. Our net production
increased by 5%, or by 6.4 TWh, in 2003 as compared to 2002. Based on data
provided by the Gestore della Rete, we estimate that our production represented
49.4% of Italian net production during 2003. We believe that, in terms of the
volume of electricity sold in the year 2003, we were one of the largest
electric utilities in Europe. According to Bloomberg, as of March 31, 2004, we
were the largest publicly traded electric utility in Europe, based on market
capitalization. Based on revenues, we were one of the largest industrial
companies in Italy, with operating revenues of Euro 31,317 million, or
approximately $39,450 million, in 2003. We earned net income of Euro 2,509
million, or $3,161 million, in 2003. Our Generation and Energy Management Division includes electricity
operations in Italy. We are the largest producer of electricity in Italy
through Enel Produzione S.p.A., our primary generating company, and Enel Green
Power S.p.A., which specializes in producing electricity from renewable
resources. As of December 31, 2003, we had 593 generating plants, consisting of
thermal, hydroelectric, geothermal and other renewable resources facilities,
which, based on data provided by the Gestore della Rete, we estimate
represented approximately 53% of the total gross installed capacity in Italy as
of December 31, 2003. In 2003, 77.4% of our net production was from thermal
plants, 18.9% was from hydroelectric plants and the remaining 3.7% was from
geothermal and other renewable resources plants. We no longer own or operate
any nuclear plants. As explained in more detail below, Italian legislation
designed to liberalize the electricity market required us to dispose of
approximately of 15,000 MW of our generating capacity by the end of 2003. We
met this requirement through the disposal of three companies formed for this
purpose that we called the Gencos, Elettrogen S.p.A., Eurogen S.p.A. and
Interpower S.p.A., which own generating plants having an aggregate net
installed capacity of approximately 15,000 MW. We completed the sales of
Elettrogen, Eurogen, and Interpower in September 2001, May 2002 and January
2003, respectively. In 2003, the Generation and Energy Management Division had revenues of
Euro 12,111 million. This compares to revenues in 2002 of Euro 11,777 million
(including Euro 923 million from international generation operations now part
of our new International Division). 20




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Through Enel Distribuzione S.p.A. and Deval S.p.A. in our Sales,
Infrastructure and Networks business unit, we are the largest electricity
distributor in Italy. At December 31, 2003, our distribution network consisted
of a total of 1,082,369 km of lines, mostly medium and low voltage, and 411,358
primary and secondary transformer substations, with a total transformer
capacity of 153,677 MVA. As described in more detail below, Italian legislation
has required us to dispose of our distribution networks in certain
municipalities. Our Infrastructure and Networks area also includes our gas
distribution operations, which we carry out through Enel Distribuzione Gas
S.p.A., GE.AD S.r.l. and Enel Rete Gas S.p.A. (formerly Camuzzi Gazometri
S.p.A.), which we acquired in May 2002. In 2003, these companies, which we
intend to merge, together with Sicilmetano, our newly acquired subsidiary, into
one unit by the end of 2004, provided us with access to an aggregate of
approximately 1.8 million natural gas customers. We are also the largest supplier of electricity in Italy through Enel
Distribuzione S.p.A. and Enel Energia S.p.A. of our Sales, Infrastructure and
Networks business unit. In 2003, we sold electricity to approximately 23.1
million households, or approximately 90% of all households in Italy. We
distributed and sold approximately 157.1 TWh of electricity on the regulated
market in 2003, of which approximately 20% went to industrial customers, 32%
went to customers in the commercial and other services sector, 35% went to
residential customers, 10% went to other distributors, and 3% went to the
agricultural sector. We also distributed a total of 108 TWh of electricity and
sold approximately 6.1 TWh of electricity to consumers who meet consumption
thresholds that permit them to participate in the free market, or Eligible
Customers. Consumers not meeting these thresholds are called Non-Eligible
Customers. See Regulatory MattersElectricity Regulation for additional
information on the electricity market. Enel Gas S.p.A., also in this area,
resells natural gas to end users. In 2002, the Sales, Infrastructure and Networks Division had revenues of
Euro 20,047 million, compared to Euro 20,586 million in 2002. Our International Division includes our electricity generation,
distribution and sale activities outside of Italy and is also in charge of
seeking business development through partnerships and acquisitions abroad. The
International Division currently includes Viesgo Generaciòn S.L., which is our
largest operation abroad, an electricity generation company in Spain, with a
gross installed capacity of 2,365 MW, Enel Uniòn Fenosa Renovables S.A., a
company active in Spain in the field of renewable energy with 381 MW of
installed capacity currently in operation, 83 MW that we expect to be in
operation by the end of 2004 and other 15 MW that we expect to be in operation
by the end of 2005; Maritza East III Power Company A.D., which we acquired in
2003, a generating company with 732 MW of installed capacity in Bulgaria; Enel
North America Inc., with 325 MW of installed capacity, and Enel Latin
America LLC, with 199 MW of installed capacity which are active in the power
generation from renewable sources in North America and in Central and South
America, respectively; and Electra de Viesgo Distribuciòn S.L. and Viesgo
Energia S.L., companies active in the electricity distribution and sale
business in Spain. In 2003, this division had revenues of Euro 921 million, as
compared to revenues of Euro 923 million that were generated in 2002 from our
international operations. Through our 50% subsidiary Terna S.p.A., our Transmission Division
continues to own approximately 94% of the transmission assets of Italys
national electricity grid, according to the latest evaluation of the Italian
Energy Authority carried out on January 11, 2001, and all the Italian grid of
high voltage 380 kV lines. However, as a part of the liberalization of the
Italian electricity sector, we were required to transfer responsibility for the
management and control of the national transmission grid and responsibility for
electricity dispatching to the Gestore della Rete, a company now wholly owned
by the Treasury Ministry. The transmission grid that Terna owns and that the
Gestore della Reteoperates carries almost all the electricity transmitted to
distribution networks for sale in Italy. A law of October 2003
requires the integration of the ownership and management of the
Italian transmission grid and provides for certain ownership
restrictions on the entity that will own and manage the grid. A governmental decree enacted in May
2004 implemented the October 2003 law and provides for the transfer to Terna of the responsibility to manage the
national transmission grid and the related assets by October 31, 2005. Upon
this transfer, we will no longer control Terna, as no electricity operator,
including us, shall be entitled to control more than 5% of the voting rights
with respect to the appointment of Ternas directors. In any event, we are
required by the decree of May 2004 to reduce our holding in Terna to no more
than 20% by July 1, 2007. In June 2004, we completed an initial public offering
and listing in Italy and a private placement with certain institutional
investors (in accordance with Rule 144A and Regulation S
under the Securities Act) of
1,000,000,000 of Terna shares, representing 50% of Ternas issued share
capital. The gross proceeds of such offering were Euro 1,700 million. As of
December 31, 2003, the transmission grid that Terna owns consisted of a total
of approximately 38,577 km of lines and 295 primary transformer stations. Our
revenues at this division in 2003 were Euro 877 million, compared to Euro 830
million in 2002. 21




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The following table shows selected operating data for our electricity
operations in Italy for each of the past five years. Net production equals
gross production of electricity less consumption by units generating
electricity and mechanical and electrical losses in production. 1999
    
    2000
    
    2001
    
    2002
    
    2003Gross installed capacity at period end (GW)
    
    
    59.4
    
    
    
    58.9
    
    
    
    52.0
    
    
    
    45.3
    (2)
    
    
    43Net production (TWh)
    
    
    178.8
    
    
    
    182.5
    
    
    
    169.1
    (1)
    
    
    145.1
    (3)
    
    
    137.8Electricity sold to final customers and to
municipal distributors (TWh)
    
    
    230.5
    
    
    
    222.9
    
    
    
    206.0
    
    
    
    194.3
    
    
    
    163.2Electricity customers at year end (millions)
    
    
    29.7
    
    
    
    29.8
    
    
    
    29.8
    
    
    
    29.5
    
    
    
    29.6
   (1)
    
    Including 12.2 TWh generated by Elettrogen and Valgen before they were
divested.(2)
    
    Including 3.0 GW of capacity at Interpower.(3)
    
    Including 8.0 TWh generated by Eurogen before it was divested and 5.7
TWh generated by Interpower. The Telecommunications Division comprises WIND. As of March 31, 2004, WIND
provides mobile telephony services to a customer base in Italy comprising
approximately 10.2 million mobile customer lines and had approximately 2.8
million fixed line customers and 15.2 million registered users for its Internet
access services. WINDs revenues in 2003 were Euro 4,383 million, compared to
Euro 3,921 million in 2002. We view our telecommunications activities solely as
a financial investment. Our Services and Other Activities Division includes, among other
businesses, our real estate, engineering and construction and information
technology services, as well as our water activities. In 2003, this division
had revenues of Euro 2,788 million, compared to Euro 2,874 million in 2002. For a detailed discussion of our operations and financial results in the
period 2001-2003, see Item 5. Operating and Financial Review and Prospects. The following chart sets forth our principal business units and the main
companies through which we conduct these businesses. GroupCountry of
    
    PercentageName
    
    Principal Business
    
    Incorporation
    
    OwnershipEnel S.p.A.
    
    Holding company
    
    ItalyGeneration and Energy ManagementEnel Produzione S.p.A.
    
    Power generation
    
    Italy
    
    
    100
    %Enel Trade S.p.A. (formerly ENEL
F.T.L. S.p.A.)
    
    Sales of electricity to Eligible
Customers,
 sales of natural gas, fuel
trading
    
    Italy
    
    
    100
    %Enel Green Power S.p.A.
    
    Power generation from renewable
geothermal and alternative resources
    
    Italy
    
    
    100
    %Enel Logistica Combustibili S.r.l.
    
    Fuel logistics
    
    Italy
    
    
    100
    %Conphoebus S.r.l.
    
    Renewable energy related services
    
    Italy
    
    
    100
    %Sales, Infrastructure and NetworksEnel Distribuzione S.p.A.
    
    Electricity distribution, and electricity
sales to Non-Eligible Customers in Italy
    
    
    100
    %
    
    
    100
    %Enel Energia S.p.A. (formerly Enel
Trade S.p.A.)
    
    Sales of electricity to Eligible Customers
    
    Italy
    
    
    100
    %Enel Sole S.r.l.
    
    Public and art lighting
    
    Italy
    
    
    100
    %Enel.si S.r.l.
    
    Electricity systems-related services
    
    Italy
    
    
    100
    %Deval S.p.A.
    
    Electricity distribution and sales to
Non-Eligible Customers
    
    Italy
    
    
    51
    %Enel Distribuzione Gas S.p.A.
    
    Natural gas distribution
    
    Italy
    
    
    100
    %Enel Rete Gas S.p.A. (formerly
Camuzzi Gazometri S.p.A.)
    
    Natural gas distribution
    
    Italy
    
    
    99.72
    %Enel Gas S.p.A.
    
    Sales of natural gas
    
    Italy
    
    
    100
    %
 22




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##### Table of Contents



GroupCountry of
    
    PercentageName
    
    Principal Business
    
    Incorporation
    
    OwnershipGE.AD S.r.l.
    
    Natural gas distribution
    
    Italy
    
    
    100
    %InternationalViesgo Generatiòn S.L.:
    
    Power generation
    
    Spain
    
    
    100
    %Maritza
East III Power Company A.D.
    
    Power generation
    
    Bulgaria
    
    
    60
    %Enel North America Inc. (formerly
CHI Energy Inc.)
    
    Power generation from renewable sources
    
    USA
    
    
    100
    %Enel Latin America LLC (formerly
EGI LLC)
    
    Power generation from renewable sources
    
    USA
    
    
    100
    %Enel
Uniòn Fenosa Renovables S.A.
    
    Power generation from renewable sources
    
    Spain
    
    
    80
    %Electra de Viesgo Distribuciòn S.L.
    
    Electricity distribution and sales
    
    Spain
    
    
    100
    %TransmissionTerna S.p.A.
    
    Transmission of electric power
    
    Italy
    
    
    50
    %TelecommunicationsWIND Telecomunicazioni S.p.A.
    
    Telecommunications and Internet services
    
    Italy
    
    
    100
    %Services and Other activitiesEnel.Hydro S.p.A.
    
    Design, construction and management of
water distribution networks
    
    Italy
    
    
    100
    %Enel Facility Management S.p.A.
    
    General services
    
    Italy
    
    
    100
    %Newreal S.p.A.
    
    Commercial real estate management
    
    Italy
    
    
    100
    %Dalmazia Trieste S.r.l.
    
    Residential real estate management
    
    Italy
    
    
    100
    %Enelpower S.p.A.
    
    Engineering and development of generation
and transmission systems
    
    Italy
    
    
    100
    %Enel.it S.r.l.
    
    Information and communication technology
    
    Italy
    
    
    100
    %Enel.factor S.p.A.
    
    Factoring
    
    Italy
    
    
    80
    %APE Gruppo Enel S.r.l.
    
    Personnel administration and related
services
    
    Italy
    
    
    100
    %Sfera S.r.l.
    
    Professional training services
    
    Italy
    
    
    100
    %
 
 Strategy We are preparing to face the challenges posed by market deregulation by
capitalizing on our expertise in the electricity and gas sectors and by seeking
new opportunities for growth in Italy and abroad. With this intent, we have
identified four strategic objectives:  
    
    focusing on our core energy business;
    
    achieving cost leadership in the generation, distribution and sale of electricity and gas;
    
    making customer care a high priority; and
    
    seeking growth opportunities in Italy and abroad. In the past 18 months we have moved from the diversification strategy we
had been pursuing in recent years, in order to concentrate our resources in
those businesses in which we possess the experience, technology and know-how to
create value. As part of this refocusing, we signed an agreement for the
transfer of the entire share capital of Newreal, a company which holds certain
of our real estate assets, and we announced our intention to divest our
activities in the water sector. We manage our operations through seven
divisions. Each of our divisions has its own strategy to help us achieve our
objectives. We view our telecommunications activities solely as a financial
investment. 23




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##### Table of Contents



Generation and Energy Management The strategic objectives of this division are:  
    
    to have the lowest generation costs in Italy. We aim to
achieve this goal by reducing our fuel costs through the conversion
of generating capacity to combined cycle gas turbine technology and
by improving the fuel mix we use to generate electricity by
increasing our use of low-cost fuels such as orimulsion and coal,
while continuing to comply with applicable environmental
requirements. This improvement should also reduce fluctuations in
our overall fuel costs. We also aim to reduce our operating costs to
achieve international best practice levels by 2005 by adopting
tailored maintenance programs to reduce maintenance costs.
    
    Continuing to keep natural gas procurement costs low through
supply diversification by tapping the Liquefied Natural Gas (LNG)
market. Sales Italy has made significant progress in its transition toward fully
liberalized markets for the sale of electricity and gas. By the end of 2004,
based on current and pending legislation, we expect that, should each customer
eligible to purchase electricity on the free market elect to do so,
approximately 70% of the electricity sold in Italy will be sold on the free
market. See Regulatory Matters. Based on data received from the Gestore della Rete, we estimate that, as a
result of the liberalization, our share of the market for electricity sales has
decreased from 92% in 1999 to 56% in 2003, and we expect this share to decline
further in coming years as liberalization progresses. In this context, our goal
is to retain the leading market share and to defend our margins by identifying
and targeting the most profitable customers. This will require an effective
combination of marketing and sales tools to compete in each segment. In
particular, we are:  
    
    continuing to improve our customer services;
    
    focusing our activities on the free market on sales on which
we may achieve higher margins, rather than on volumes; and
    
    providing customers on the free market the opportunity to
purchase electricity and natural gas from the same provider, a
service few of our competitors are able to provide. In the market for the sale of gas, we aim to expand our operations and to
improve our margins. Our goal is both to increase our customer base, which was
1.8 million customers in 2003, and our volume sold, which was approximately 4.4
billion cubic meters in 2003. To increase our business, we plan to expand the
customer base of the operations we have acquired in recent years by leveraging
the Enel brand name and providing high quality customer service. In this
context, in February 2004, we acquired the Sicilmetano Group, which supplies
gas to 37,000 customers in Sicily. We also plan to participate in tenders for
expiring concessions and make additional acquisitions, if appropriate. To
improve margins, we will focus our efforts on retail consumers and on small
business customers, which we believe represent the more profitable segments of
the market. Infrastructure and Networks In our electricity distribution business, we plan to respond to the
challenges of deregulation by pursuing operating efficiency while providing
high quality customer service. To achieve this goal:  
    
    we have implemented a cost-cutting program supported by an
intensive benchmarking analysis, which has identified a number of
opportunities for cost reductions; 24




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
    
    we are reducing investment and maintenance costs associated
with network management, principally by centralizing procurement
processes and improving these processes through extensive use of
e-business platforms, and by optimizing our investment program;
    
    we seek to continue meeting performance quality targets set
by the Energy Authority. We have consistently outperformed these
targets, and have been granted Euro 114 million in bonus payments
for our 2002 performance in connection with the Energy Authoritys
continuity-of-service performance targets. See Regulatory
MattersElectricity RegulationQuality of service regulation. We
will seek to qualify for additional bonus payments in the future;
and
    
    we are implementing the roll-out of our Telemanagement system
for remote metering. This project, which started in the second half
of 2001, involves the system-wide replacement in Italy of
approximately 30 million traditional mechanical electricity meters
with digital meters, or Telemeters, incorporating sophisticated
technology. We believe that this project will provide us with
operating advantages, including greater flexibility in remotely
assisting our final customers, greater precision in measuring
customer electricity consumption, and lower costs through the
reduced need for physical measurement of consumption by our
personnel. In addition, we recently signed an agreement with IBM for
the use of the know-how we developed in building our Telemanagement
integrated system to provide services to other utilities abroad. In gas distribution, our focus is on integrating the several gas companies
we have acquired in the past three years into a single entity that will operate
more efficiently, thus reducing overhead, optimizing capital investment and
strengthening their position in the market. We began this consolidation in
2002, and expect to complete the restructuring in 2004 through the merger into
a single entity of Enel Distribuzione Gas S.p.A., Enel Rete Gas S.p.A, GE.AD
S.r.l. and Sicilmetano, our newly acquired subsidiary. We hope to realize
operational savings from synergies between our electricity and gas distribution
businesses. International Division The International Division evaluates strategically relevant international
opportunities, both in new markets and in our existing markets. We will seek
opportunities for growth by evaluating acquisitions in power generation, gas
and electricity distribution and supply. The strategic criteria we use in
evaluating such opportunities are:  
    
    geography and macroeconomic climate: We look at countries or
regions where we already operate, like the Iberian peninsula, as
well as at countries where we see synergies with our current
operations and, in the area of renewable energy, in North and
Central America. We also look for countries with attractive and
sustainable economic fundamentals in which we can capitalize our
experience and technical know-how; and
    
    profitability: We seek to make investments that we believe
will begin to be accretive to our earnings in the short term. In line with this strategy, we acquired:  
    
    in March, 2003, a 60% stake in Entergy Power Holding Maritza
BV, a Dutch company which in turn controls 73% of Maritza East III
Power Company AD, a company with power operations in Bulgaria;
    
    in December 2003, an 80% stake in Uniòn Fenosa Energìas
Especiales SA, renamed Enel Uniòn Fenosa Energias Renovables SA, a
company with operations in the field of renewable energy in Spain. We
granted Uniòn Fenosa Generacion SA an option to re-purchase 30%
of Uniòn Fenosas capital stock, which may be exercised
through the end of 2007;
and
    
    on March 1, 2004, a 100% stake into two hydroelectric plants
in North America, Twin Falls, with an aggregate gross installed
capacity of 24 MW, and Lower Saranac, a 9.3 MW plant. We are also looking to acquire electricity distribution companies,
focusing on East Europe. 25




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Transmission As a result of the initial public offering of Terna shares in Italy that
we completed in June 2004, our holding in Terna decreased to 50%. A
governmental decree enacted in May 2004 provides for the transfer to Terna of
the responsibility to manage the national transmission grid and the related
assets by October 31, 2005. Upon the effectiveness of such transfer, no
electricity operator, including us, shall be entitled to voting rights in
excess of 5% with respect to the appointment of Terna directors. Moreover, we
are required by the decree of May 2004, which implemented the
law of October 2003, to reduce our holding in Terna to no
more than 20% by July 1, 2007. As a result of these regulatory requirements, we
expect to deconsolidate Terna by October, 2005. You should read Regulatory
MattersElectricity Regulation for a description of the regulations applicable
to our Transmission division. Telecommunications We no longer view our telecommunications activities, held through WIND, as
potentially synergistic with our energy activities, but rather as a financial
investment. In 2003 and 2004, we supported WIND with aggregate equity
contributions of approximately Euro 979 million, as well as certain credit
support. We expect that WIND will achieve financial independence by the end of
2004 and, accordingly, we do not expect to be required to invest significant
amounts in WIND or otherwise provide additional support to WIND after such
date. For additional details on the support we have provided to WIND, see
Item 5. Operating and Financial Review and ProspectsLiquidity and Capital
Resources and note 9 to our consolidated financial statements. Services and Other Activities In line with our strategic objective of focusing on our core energy
business, on June 3, 2004, we signed an agreement for the transfer of the
entire share capital of Newreal, a company to which we contributed certain of
our real estate assets, to a consortium formed by an investment fund belonging
to the Deutsche Bank group and CDC-IXIS for approximately Euro 1,400 million.
We expect to close this transaction by the first half of July 2004. We also
intend to divest our activities in the water sector. 
 The Enel Group Italian Electricity Demand Demand for electricity in Italy has grown at an average annual rate of
approximately 2.8% during the past five years. The following table shows the
annual rate of growth in Italys GDP in real terms and the annual rate of
growth in electricity demand for the years indicated. CompoundAnnualGrowth Rate1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    1999-2003Growth in
real GDP (1)
    
    
    1.6
    %
    
    
    3.1
    %
    
    
    1.8
    %
    
    
    0.4
    %
    
    
    0.3
    %
    
    
    1.4
    %Growth in
electricity demand (2)
    
    
    2.3
    %
    
    
    4.2
    %
    
    
    2.3
    %
    
    
    1.8
    %
    
    
    2.9
    %
    
    
    2.8
    %
   Sources:(1)
    
    National Institute of Statistics (Istituto Nazionale di Statistica).(2)
    
    The Gestore della Rete. Electricity demand grew by 2.9% in 2003, after having grown by 1.8% in
2002 and by 2.3% in 2001 despite the relatively low rate of growth of the
Italian economy. The International Monetary Fund, in its April 2004 World
Economic Outlook, forecast Italian GDP growth of 1.2% in 2004 and 2% in 2005. Per capita electricity consumption is lower in Italy than in a number of
other leading industrialized countries. On the basis of data provided by the
Gestore della Rete, we calculate that in 2003, electricity consumption in Italy
was approximately 5,160 kWh per capita, compared to 5,017 kWh in 2002. As
differences in the industrial or commercial and service sectors among countries
not related to individual electricity use can distort comparisons 26




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of overall per capita production, we prefer to use per capita residential
electricity use as our basic comparative measure. The following table compares
per capita residential electricity consumption in Italy with that of other
countries in the European Union for 2002, the most recent year for which
complete data is available. Per CapitaResidential
    
    ResidentialInhabitants
    
    Consumption
    
    Consumption(in millions)
    
    (TWh)
    
    (kWh/inhabitants)France
    
    
    59.5
    
    
    
    134.3
    
    
    
    2,258United Kingdom
    
    
    58.9
    
    
    
    116.1
    
    
    
    1,972European Union
    
    
    379.9
    
    
    
    674.7
    
    
    
    1,776Germany
    
    
    82.2
    
    
    
    139.6
    
    
    
    1,693Spain
    
    
    41.7
    
    
    
    51.0
    
    
    
    1,221Italy
    
    
    58.2
    
    
    
    62.7
    
    
    
    1,077
   Source: Enel, based on data established by Enerdata  World Energy database  January 2004. We believe that a reason per capita electricity consumption is lower in
Italy than in the other countries of the European Union indicated in the table
above is that in the past the tariff structure established by government
regulation in Italy discouraged high-volume residential use. Please refer to
Regulatory MattersElectricity RegulationThe tariff structure for a more
detailed discussion of tariffs. The table below shows peak capacity demand, net available capacity at the
winter peak load (net of plants in conservation or unavailable due to
environmental retrofitting), import capacity under contract between us and
foreign producers and our reserve margin in the period indicated. Reserve
margin represents the total of net available capacity and import capacity less
peak capacity demand. 2001
    
    2002
    
    2003(Gigawatts, except percentages)Peak capacity demand
    
    
    52.0
    
    
    
    52.6
    
    
    
    53.4Net available capacity
    
    
    55.9
    
    
    
    55.4
    
    
    
    56.2Import capacity
    
    
    6.5
    
    
    
    7.0
    
    
    
    6.8Reserve Margin
    
    
    10.4
    
    
    
    9.8
    
    
    
    9.6As % of peak capacity demand
    
    
    19.9
    %
    
    
    18.6
    %
    
    
    18
    %
   Source: Enel, based on data provided by the Gestore della Rete. Generation and Energy Management We are the largest producer of electricity in Italy through our Generation
and Energy Management Division, which includes Enel Produzione, our primary
generating company, and Enel Green Power, which specializes in producing
electricity from renewable resources. The Generation and Energy Management
Division also includes our fuel procurement and trading activities, which are
conducted primarily through Enel Trade. Enel Trade also sells electricity to
customers with an annual consumption higher than 100 Gwh and to electricity
resellers and sells gas to gas distribution companies. Unless otherwise
specified, all operating data furnished in this section excludes data for the
Gencos and from our generating companies located outside of Italy. Generating facilities At December 31, 2003, Enel Produzione and Enel Green Power together
operated a total of 593 generating plants. Our Italian generating facilities
include thermal plants (which burn fossil fuels), hydroelectric plants,
geothermal plants and other facilities that generate electricity from renewable
resources. At December 31, 2003, these plants had a total gross installed
capacity of 43 GW, representing approximately 53% of the total gross installed
capacity in Italy. Excluding electricity produced by Eurogen and Interpower,
which we sold in May 2002 and January 2003, respectively, our net electricity
production in 2003 increased by 4.9% from a total of 131.4 TWh 27




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in 2002 to 137.8 TWh in 2003. Including Eurogen and Interpower, our net
electricity production decreased from 145 TWh in 2002 to 137.8 TWh in 2003, or
by approximately 5%. We estimate that our net electricity production in 2003 represented 49.4%
of Italian production during the year. The following table shows the gross installed capacity at December 31,
2003, and the net production in 2003 for the Italian electricity sector as a
whole. Independent power producers include industrial companies that produce
electricity for their own use and for sale to third parties. Imports include
electricity purchased from foreign producers on the spot market or under annual
or long-term contracts. Pumped storage consumption refers to the use of
electricity by pumped storage hydroelectric plants to pump water to elevated
areas for use at a later time to generate electricity. AtDecember31, 2003Gross
    


    2003Installed
    
    Net
    
    PercentageCapacity
    
    Production
    
    of Italian(GW)
    
    (TWh)
    
    ProductionEnel
    
    
    43
    
    
    
    137.8
    
    
    
    49.4Independent power producers
    
    
    35
    
    
    
    133.6
    
    
    
    47.9Municipal utilities
    
    
    3
    
    
    
    7.6
    
    
    
    2.7Total gross installed capacity and net production in Italy
    
    
    81
    
    
    
    279
    
    
    
    100Total net imports into Italy
    
    
    
    
    
    
    51.0Total pumped storage consumption in Italy
    
    
    
    
    
    
    10.4Total demand in Italy
    
    
    
    
    
    
    319.6
   Source: ENELs estimates, based on data provided by Gestore della Rete.You should read Competition in the electricity and gas markets for a
more detailed discussion of the electricity markets in Italy. The following table shows certain statistics about our domestic generating
facilities, broken down by type of plant at December 31, 2003, and for the year
2003. The weighted average age of the plants does not take into account
refurbishments or upgrades after initial construction, but does reflect the
effects of the conversion of thermal plants into combined cycle plants we had
completed at December 31, 2003. The forced outage factor represents the amount
of electricity that was not produced during the period because of unplanned
outages, expressed as a percentage of the maximum theoretical amount of
electricity that could have been produced during the period. At December 31, 2003
    
    2003WeightedGross
    
    average
    
    
    
    
    
    Percentageinstalled
    
    age of
    
    Net
    
    of our net
    
    Forcedcapacity
    
    plant
    
    production
    
    production
    
    outage(GW)
    
    (years)
    
    (GWh)
    
    (percent)
    
    factorThermal
    
    
    27.8
    
    
    
    18.3
    
    
    
    106,669
    
    
    
    77.4
    %
    
    
    4.1
    %Hydroelectric
    
    
    14.3
    
    
    
    36
    
    
    
    26,012
    
    
    
    18.9
    %
    
    
    0.6
    %Geothermal and other renewable
    
    
    0.8
    
    
    
    8
    
    
    
    5,110
    
    
    
    3.7
    %
    
    
    2.1
    %Total
    
    
    42.9
    
    
    
    
    
    
    
    
    
    
    
    100.0
    %
 We have no plans to construct new plants or add significant amounts of
generating capacity, other than from renewable resources, in the near term.
Instead, we have focused our investment plans on our existing generating
plants. You should read #Capital Investment Program#Generation and Energy

Management for a more detailed discussion of these plans. Certain disruptions in the Italian electricity supply were experienced on
June 26, 2003. These disruptions, which we effected upon request of the
Gestore della Rete,were defense procedures which are carried out when the 28




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electricity available cannot satisfy the demand for it and are intended to
prevent the entire electricity system from collapsing. The disruptions lasted
for approximately 90 minutes each and concerned an aggregate of approximately 7
million customers. The Energy Authoritys initial inquiry into these
disruptions was completed in November 2003. In its December 2003 report, the
Energy Authority primarily attributed the low amount of electricity available,
which resulted in the adoption of these defense procedures, to certain
structural causes including insufficient domestic generation capacity, the
resulting dependence of the Italian electricity system on imported electricity,
and the reduction of the available interconnection capacity available
attributable to a heat wave, as well as to certain specific conditions
(including a 800 MW reduction of imports of electricity from France under the
import agreement between Enel and Eléctricité de France). The Energy Authority
censured the Gestore della Reteand generation companies, including us,
arguing that the disruptions were due, among other things, to the
unavailability of certain plants that we were required to maintain in
operations. We have contested the conclusions reached by the Energy Authority.
On April 2, 2004, the Authority decided to initiate a formal inquiry to
determine the responsibilities of the parties involved in the events of June
26, 2003. Please also see Item 3. Key InformationRisk
FactorsRisks relating to Our Energy Business for a description of the possible risks connected to
the inquiry. Thermal production In Italy, at December 31, 2003, we owned 45 thermal plants with an
aggregate gross installed capacity of 27.8 GW, or approximately 64.7% of our
gross installed capacity at that date. In 2003, our thermal net production was
106,669 GWh, or approximately 77.4% of our net production for the year. All our thermal plants consist of two or more generating units and most
have a standardized design, with the generating units being of one of three
types: steam-condensing units, gas turbine units and internal combustion units.
Steam-condensing units consist of closed-cycle plants in which water is
transformed into steam and used in a turbine to generate electricity. Steam is
turned back into water through a cooling process using sea or river water.
Gas-turbine units burn natural gas and diesel fuel to drive a turbine and
generate electricity. Internal combustion units use diesel engines to generate
electricity. In addition to these conventional thermal plants, we own plants
with combined cycle gas turbines. At December 31, 2003, approximately 70% of
the gross installed capacity of our thermal plants consisted of
steam-condensing units, approximately 6% of that capacity was represented by
gas-turbine units in repowered steam plants, approximately 7% of that capacity
was represented by gas-turbine units in open cycle, and approximately 17% was
represented by combined cycle technology units. Internal combustion units
represented a minimal part of our thermal gross installed capacity. Each of our conventional thermal generating units is designed to operate
using one or more kinds of fuel. Single fuel units use either natural gas,
petroleum products or coal, dual fuel units can use petroleum products and
either natural gas or coal or orimulsion and coal, while triple fuel units can
use petroleum products, coal and either natural gas, orimulsion. In 2003,
single fuel units, the vast majority of which are petroleum powered, generated
approximately 65% of our net production from thermal plants and represented
approximately 73% of the gross installed capacity of these plants at year end.
Dual fuel units accounted for approximately 35% of our net production from
thermal plants and approximately 27% of our gross installed capacity of these
plants at December 31, 2003. The average thermal efficiency, or the ratio of
useful energy produced to the energy consumed to produce it, of our thermal
plants improved by more than 2 percentage points in the period from 2000
through 2003, to approximately 39% at December 31, 2003. In 1997, we began converting a number of our conventional thermal plants
into combined cycle plants, generally by installing one or more gas turbines
and replacing conventional boilers with heat recovery steam boilers used to
drive existing steam turbines. Converting plants to combined cycle generation
increases efficiency and reduces emissions. We plan for our new combined cycle
plants to have an expected average thermal efficiency of approximately 56%, in
line with the average thermal efficiency at our existing combined cycle plants. Our original plan for combined cycle conversions covered a total of 14,200
MW of gross installed capacity. However, through the sale of the Gencos, we
disposed of approximately 9,460 MW of such capacity, leaving approximately
4,800 MW of gross installed capacity to be converted. We have already completed
the conversion of approximately 4,000 MW to combined cycle technology and
expect to convert the full 4,800 MW by the end of 2007. We currently estimate
the average costs of conversion over the course of the project to be
approximately Euro 320,000 per MW of gross installed capacity, or a total of
approximately Euro 1,600 million through 2007. At December 31, 2003, we had
spent approximately Euro 1,350 million of this total, not including investments
in the 29




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plants owned by the Gencos, and had completed the conversion of plants for
approximately 2.7 GW of our gross installed capacity to combined cycle
technology. In addition to our combined cycle conversion program, we are planning to
upgrade an additional 4,700 MW of gross installed capacity by:  
    
    converting a fuel oil plant to orimulsion technology;
    
    converting a fuel oil plant to clean coal technology; and
    
    upgrading the coal-burning technology of an existing coal plant. We have an ongoing program of refurbishment and maintenance of our plants,
on which we invested Euro 19 million in 2003, an amount in line with our
expenditures in 2002 and 2001, excluding expenditures on the Gencos. We plan to
invest a similar amount in each of the next five years. We have made significant investments since 1990 to improve the
environmental standards of our thermal plants and to comply with the emission
thresholds established by applicable environmental laws and regulations. These
measures have included installing desulfurization and denitrogenation units and
upgrading burners and units for the treatment of waste water and ash resulting
from the electricity generation process. Installation of desulfurization and
denitrogenation units increases our flexibility to use different types of fuel,
including lower-cost fuels such as high sulfur fuel oil and orimulsion, while
maintaining compliance with emission restrictions. Our environmental capital expenditures for conventional thermal
generation, excluding amounts spent on the Gencos, amounted to approximately
Euro 60 million in 2003. In previous years, these amounts had represented an
increasing percentage of our total capital investments related to generation.
However, in 2004, we expect these expenditures will decrease to approximately
Euro 30 million as a result of the completion of our major environmental
investment program. You should read Regulatory
MattersEnvironmental Matters
for a discussion of the environmental laws and regulations affecting our
generation operations. We operate a number of thermal plants located in state-owned coastal or
fluvial areas pursuant to concessions from the Italian government. These
concessions, for which we pay an annual fee of approximately Euro 2.7 million,
expire at various times through 2020, depending on their individual terms.
Should any of these concessions expire without being renewed, we would be
required to transfer to the government the real estate assets and permanent
fixtures that are located in the areas under concession, which have an
aggregate net book value of Euro 43.2 million at December 31, 2003. Hydroelectric production At December 31, 2003, we had 495 hydroelectric plants in Italy with an
aggregate gross installed capacity of 14.3 GW, or approximately 34% of our
gross installed capacity at that date. In 2003, our hydroelectric net
production was 26,012 GWh, or approximately 18.9% of our net production for the
year. We classify our hydroelectric plants with reservoirs by fill-in rate,
which represents the time required for a plants reservoir to fill from empty
based on normal water flow. Pondage plants have fill-in rates ranging from two
to 400 hours and reservoir plants have fill-in rates exceeding 400 hours. We
also have run-of-river and pumped storage hydroelectric plants. In 2003, pondage plants generated approximately 27% of our net
hydroelectric production and represented approximately 19% of our gross
installed hydroelectric generation capacity at year end, while run-of-river
plants accounted for approximately 23% of our net production from hydroelectric
plants and approximately 12% of our gross installed hydroelectric generating
capacity. Pumped storage (including mixed pumped storage) plants generated
approximately 35% of our net hydroelectric production in 2003, and represented
approximately 52% of our gross installed hydroelectric generating capacity,
with reservoir plants accounting for the remaining approximate 15% of our net
hydroelectric production and 17% of our gross installed hydroelectric capacity
in the same periods. 30




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We invested Euro 57 million in 2003 to refurbish our hydroelectric plants,
in line with amounts spent in 2001 and 2002 (excluding expenditures on the
Gencos), and we plan to invest similar amounts in each of the next five years.
Our hydroelectric plants generate electricity from water streams in the public
domain under licenses from the Italian government. These licenses expire in
2029 and are subject to renewal. Under the Bersani Decree, the Provincial
Authorities of Trento and Bolzano, which enjoy special autonomous status under
Italian law, were entitled to impose earlier license termination dates for
hydroelectric plants in these areas, and, if any of these licenses expire
without being renewed, we will have to transfer the affected hydroelectric
plants to the governmental authority granting the license. The Provincial
Authorities of Trento and Bolzano have set a termination date for the licenses
they have granted of 2010. Our hydroelectric plants in these provinces have an
aggregate gross installed capacity of 1,990 MW, or 4.6% of our current total
gross installed capacity. Production from geothermal and other renewable resources Through our subsidiary Enel Green Power S.p.A., we are one of the worlds
leading producers of energy from renewable resources, and one of the few
companies that combines significant experience in multiple technologies,
including geothermal, wind and solar energy, with its own engineering and
project development capabilities. Enel Green Power also operates substantially
all of our smaller hydroelectric plants. At December 31, 2003, we had 34 geothermal power plants with an aggregate
installed capacity of 707 MW. In 2003, our geothermal net production was 5,036
GWh, or 3.6% of our net production for the year. We also generate electricity from other forms of renewable resources,
including solar photovoltaic systems and wind energy. At December 31, 2003, we
operated 14 wind farms with an aggregate gross installed capacity of about 128
MW and five photovoltaic solar grid connected power plants with an aggregate
gross installed capacity of 3.6 MW. Together, these plants accounted for 77 GWh
of our net production in 2003. Most of Enel Green Powers revenues come from long-term sale agreements
under the CIP 6 regime (see Purchased power for a description of this
regime) and from sales at regulated tariffs of energy produced by its small
hydroelectric plants. Enel Green Power has also begun to sell electricity on
the free market through Enel Trade. We expect that the demand for energy
produced from renewable resources will increase as a result of current
regulations requiring producers to supply a specified amount of electricity
generated from qualifying new renewable resources, as well as the regime of
tradable green certificates issued by the Gestore della Rete, introduced in
2002 and for which a number of Enel Green Powers projects have qualified. To comply with the new regulatory requirements, we can either produce
electricity ourselves, or we can purchase green certificates from other
qualified producers or the Gestore della Rete. Based on our production for
2003, the Bersani Decree will require us to provide
approximately 2.1 TWh of electricity from renewable resources in 2004, a slight
increase from the 2.0 TWh we were required to provide in 2003, based on our
2002 production. In 2003, we generated 0.7 TWh of energy from qualifying
renewable resources, and purchased green certificates for the remaining 1.3
TWh at a cost of approximately Euro 108 million. We expect to generate
approximately 1.1 TWh of electricity from qualifying renewable resources in
2004, and to purchase the remaining 1 TWh. Due to the fact that we imported
15.5 TWh of electricity in 2003, the Bersani Decree will also require us to
provide approximately an additional 0.2 TWh of electricity from renewable
resources in 2004. We expect to purchase green certificates from other
qualified producers or the Gestore della Retefor such amount of electricity
from qualifying renewable resources. We have started a capital investment
program in order to reach a level of qualifying production from renewable
resources of approximately 1.8 TWh by 2005, which we believe will permit us to
meet the regulatory requirements (given the expected decline in our share of
total generation in Italy), and, upon further development, may enable us to
sell green certificates to the market in 2006. This program entails an
additional increase in our renewable capacity (hydro, wind and geothermal) of
about 0.4 GW by 2008. We also expect to increase our installed capacity for production from
renewable resources by 120 MW by the end of 2004 through the development of
additional wind plants. 31




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Fuel We use fuel oil, natural gas, coal, orimulsion and other fuels in
operating our thermal generation plants; we do not use significant amounts of
fuel in operating our hydroelectric, geothermal or other renewable resource
plants. Italy has small reserves of fossil fuels. As a consequence, we depend
on imported oil, natural gas and coal for a large proportion of our energy
needs. Our fuel costs are heavily influenced by prices in the world market for
oil, natural gas, fuel oil and coal. In particular, in the first quarter of
2004, the oil market price per barrel increased from $30.105 as of December 31,
2003, to $32.095, or by 9.4%. The market price for oil could rise further in
2004 as a result of geopolitical factors, including, but not limited to, any
worsening of the current situation in Iraq, increased instability in other
parts of the Middle East and/or a further deterioration of the economic and
political situation in Venezuela. However, we attempt to maintain secure and
flexible fuel supplies by diversifying our geographic sources of fuel and the
types of fuel we purchase and are also partially hedged against rising fuel
prices. Please also see Item 3. Key InformationRisk
FactorsRisks Relating to Our Energy Business for a
description
of the risks connected to significant increases in fuel prices. In 2003, our fuel costs for thermal production, including fuel transport,
were Euro 3,970 million and constituted approximately 74% of our total
operating expenses. In 2002, our fuel costs for thermal production, including
fuel transport and excluding the Gencos, were Euro 3,651 million and
constituted approximately 69% of our total operating expenses. Since July 1997, the tariff structure contains an energy reimbursement
component that is calculated with reference to an index of weighted average
fuel prices and a consumption index based on the efficiencies expected to be
obtained from the fuels comprising the fuel price index. Accordingly, we seek
to use a mix of fuels less expensive in the aggregate than the fuels comprising
the weighted index and to generate energy more efficiently than the efficiency
levels assumed in the calculation of the heat rate used in the Energy
Authoritys consumption index. This tariff structure also included incentives
to reduce production from thermal plants and to increase the use of renewable
resources. Since the start of operation of the pool market on March 31, 2004, the
price paid to electricity producers is determined by competitive bidding. The
Energy Authority is monitoring the pool price to establish its relationship
with the value of the fixed and variable cost-component set so far to take into
account generation costs in the tariff. To this end, the Energy Authority will
set a price that the Single Buyer and the pool market will use as a reference
price. If the pool price differs significantly from the Energy Authoritys
reference price, the Energy Authority may impose its reference price as the
price to be used in calculating the generation cost to be reflected in the
tariffs. On June 9, 2004, the Energy Authority started an investigation to identify
the reasons for the increase of the price of electricity on the pool market for
the days between June 7 and June 10, 2004. The Energy Authority intends to
ascertain whether such increase was caused by an exercise of market power by
any of the entities with a dominant position in the business of supply of
electricity at national or local level. Eventually, the tariff and fuel cost reimbursement structure will be
replaced by a market price for electricity generation, and we will have an
incentive to reduce all costs, including fuel costs, to compete on the market.
You should read Regulatory MattersElectricity Regulation for a discussion
of the new and former tariff structures. The following table provides a breakdown of our net electricity production
in Italy for the periods indicated by primary energy source utilized. Other
thermal energy sources include lignite, light distillate and derived gases.
Data for 2002 represents production by Enel Produzione and Enel Green Power,
and excludes production by Eurogen and Interpower. Data for 2003 represents
production by Enel Produzione and Enel Green Power. 32




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Year ended December 31,2001
    
    2002
    
    2003Net
    
    
    
    
    
    Net
    
    
    
    
    
    Netelectricity
    
    
    
    
    
    electricity
    
    
    
    
    
    electricityproduced
    
    Percentage
    
    produced
    
    Percentage
    
    produced
    
    Percentage(GWh)
    
    of total
    
    (GWh)
    
    of total
    
    (GWh)
    
    of totalOil
    
    
    49,261
    
    
    
    29.1
    %
    
    
    33,949
    
    
    
    26
    %
    
    
    27,838
    
    
    
    20.2Natural gas
    
    
    46,481
    
    
    
    27.5
    
    
    
    36,082
    
    
    
    22
    
    
    
    48,802
    
    
    
    35.4Coal and orimulsion
    
    
    32,381
    
    
    
    19.1
    
    
    
    29,234
    
    
    
    28
    
    
    
    30,030
    
    
    
    21.8Other
    
    
    197
    
    
    
    0.1
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total thermal
    
    
    128,320
    
    
    
    75.9
    
    
    
    99,265
    
    
    
    76
    
    

    
    106,669
    
    
    
    77.4Hydroelectric
    
    
    36,516
    
    
    
    21.6
    
    
    
    27,745
    
    
    
    21
    
    
    
    26,012
    
    
    
    18.9Geothermal
    
    
    4,239
    
    
    
    2.5
    
    
    
    4,382
    
    
    
    3
    
    
    
    5,036
    
    
    
    3.6Wind and photovoltaic
    
    
    31
    
    
    
    0.02
    
    
    
    53
    
    
    
    0
    
    
    
    77
    
    
    
    0.06Total
    
    
    169,106
    
    
    
    100.0
    %
    
    
    131,445
    
    
    
    100.0
    %
    
    
    137,794
    
    
    
    100.0
    %
   Source: Enel. In 2003, the approximate percentages of our net electricity produced by
the thermal generation represented by each of the following fuels was
approximately:  
    
    46% natural gas;
    
    26% fuel oil; and
    
    28% coal, orimulsion and other fuels. We estimate that by 2008, once we have completed our plant conversion
programs, these percentages will be approximately:  
    
    27% natural gas;
    
    1% fuel oil; and
    
    72% coal, orimulsion and other fuels. Our policy is to diversify our sources of fuel supplies and to increase
our use of less expensive fuels, such as orimulsion and coal, as well as fuels
that have less impact on the environment when consumed, such as natural gas.
However, generation using coal and orimulsion generally results in higher
emissions levels compared to natural gas. Our ability to increase use of these
fuels is dependent on our ability to acquire and implement technologies that
will permit us to comply with restrictions on emissions established by national
and European Union authorities. In January 1999, the Italian government introduced a carbon tax based on
fossil fuel consumption in accordance with applicable European Union
directives. Under the current Italian implementing legislation, the amount of
the tax was initially scheduled to increase on an annual basis from 1999
through 2005, but was frozen for each of the years through 2004 at the level
for 1999. On the basis of current forecasts of future fuel prices, we believe
that application of the carbon tax as currently formulated may have a
significant impact on the economic viability of our oil-fired plants by the
year 2005, should the tax rates then reach their maximum levels. As part of an
initiative to address the impact of the carbon tax, we have proposed that the
Italian government adopt a different method for calculating the tax which would
apply an equal amount of tax per unit of CO2 output, without regard for the type
of fuel used to produce the energy in question. We believe that such a policy
would produce the targeted reductions in CO2 emissions without creating unequal
burdens on certain types of generating facilities, particularly oil and coal
fired plants. We manage our fuel supply by entering into term contracts for base
quantities and supplementing these contracts with purchases of fuel on spot
markets both in Italy and abroad. Our long-term fuel contracts, primarily for
the purchase of natural gas, will require us to pay an average of approximately
Euro 1,832 million per year over the next five years, based on current prices.
Please also see Item 5. Operating and Financial Review and
Prospects Contractual Obligations and Commitments. 33




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Our subsidiary Enel Trade is responsible for the purchase and sale of fuel
for all of our domestic generating operations, and our gas operations in the
Italian market, as well as a portion of the requirements of our Spanish
subsidiary Viesgo. In addition, Enel Trade provides such services, on a
contractual basis, to third parties. In 2003, Enel Trade purchased an aggregate
volume of 35 million tons of oil and oil equivalents, including crude oil and
petroleum products, coal and natural gas, of which 8.2 million where for
trading purposes only, compared to 38.1 million tons in 2002. Enel Trade also sells electricity to resellers and customers with annual
consumption higher than 100 Gwh and gas to gas distribution companies. Enel
Trade is also active in fuel trading activities. In 2003, Enel Trade sold
approximately 24.5 TWh of electricity to 50 customers and 17,840 million cubic meters
of gas of which 2,329 million cubic meters to third parties. Fuel oil We are among the worlds largest purchasers of fuel oil, even though we
plan to continue to reduce our need for fuel oil for power generation as a
consequence of the conversions of some of our fuel fire plants to coal and
orimulsion. The following table shows the amount of fuel oil supplied to our
generation companies that we purchased from domestic and foreign suppliers in
each of the periods indicated. Domestic suppliers include suppliers whose
headquarters are in Italy, including Agip, a division of the Italian
state-controlled energy group Eni S.p.A., while foreign suppliers include
suppliers and refiners outside of Italy and traders of primarily non-Italian
sources of oil. Year ended December 31,2001

    
    2002

    
    2003(in millions of tons)Domestic suppliers
    
    
    4.0
    
    
    
    2.4
    
    
    
    1.2Foreign suppliers
    
    
    7.1
    
    
    
    6.9
    
    
    
    5.3Total fuel oil purchased
    
    
    11.1
    
    
    
    9.3
    
    
    
    6.5
 As of December 31, 2003, we purchased approximately 31% of our fuel oil on
the spot market and approximately 69% under contracts ranging in term from one
to twelve months. All purchases made on the basis of term contracts are indexed
to market prices. The following table shows the amounts of fuel oil with low, mid and high
sulfur content that we purchased in each of the periods indicated. Year ended December 31,2001

    
    2002

    
    2003(in millions of tons)Fuel oil purchasedLow sulfur
    
    
    2.7
    
    
    
    3.8
    
    
    
    4.0Mid sulfur
    
    
    8.1
    
    
    
    5.2
    
    
    
    2.5High sulfur
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.0Total
    
    
    11.1
    
    
    
    9.3
    
    
    
    6.5
 Natural gas We purchase most of our natural gas under long-term, take-or-pay
contracts. The price of natural gas under these contracts is generally tied to
market prices for fuel oil. In 2003, we purchased 17.4 billion cubic meters of
natural gas, of which 11.1 billion cubic meters was used for our thermal
production operations. Eni S.p.A., the main Italian gas supplier and
transporter, supplied approximately 42% of this natural gas. To meet our need for gas, in 2003 we continued to purchase large volumes
under our supply contract with Sonatrach, the Algerian gas producer, obtaining
approximately 27% of the natural gas we purchased in 2003 pursuant to our
Algerian gas contract. 34




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In 1992, we entered into a 20-year take-or-pay contract with NLNG, a
Nigerian joint venture, for the supply of 3.5 billion cubic meters of liquefied
natural gas per year, commencing in October 1999. However, due to environmental
concerns, a once-planned Italian regasification facility has never been
constructed. As a result, we are unable to import liquefied natural gas, and
instead, in 1997, entered into a swap agreement with Gaz de France and related
transportation arrangements with Eni whereby Gaz de France takes the liquefied
natural gas supplied by NLNG under the contract and provides us with equivalent
volume of non-liquefied gas. We obtained approximately 23% of the natural gas
we purchased in 2003 pursuant to our Nigerian gas contract. You should read
Regulatory MattersElectricity RegulationThe tariff structureStranded
costs for a discussion of current regulations, which are expected to continue
to provide us with a reimbursement of part of the cost of the NLNG contract. Of the remaining 8% of the gas we purchased, Italian company Edison S.p.A.
supplied approximately 3% and we purchased approximately 5% on a spot basis in
the national and international markets. Coal and orimulsion In 2003, our net production of electricity from coal and orimulsion was
approximately 30.0 TWh, compared to a total of 29.2 TWh in 2002. In 2003, we purchased 13.6 million tons of coal, virtually all of which
was imported, principally from South Africa, South America, the Far East and
Eastern Europe. Approximately 10.9 million tons of coal purchased in 2003 were
used by our generating companies. The remaining 2.7 million tons were sold on
the market by Enel Trade. In 2003, we purchased 1.9 million tons of orimulsion. Approximately 80% of
the orimulsion purchased in 2003 was supplied to Enel Produzione, while the
remaining 20% was supplied to Endesa Italia (formerly Elettrogen). Purchased power In 2003, we purchased approximately 73.6 TWh of power from domestic and
foreign producers to fulfill our legal and regulatory obligations, to diversify
our sources of electricity, and to reduce our costs. Of this purchased power,
21.1 TWh were purchased by the Generation and Energy Management Division. In
2004, since the start of operations of the Single Buyer, which is responsible
for purchasing electricity on behalf of regulated consumers, we have
transferred our contracts with foreign producers for the supply of electricity
to regulated consumers to the Single Buyer. Other modifications of our
contractual obligations may gradually take place as the pool market becomes
fully operational. See Regulatory MattersElectricity
RegulationThe Single
Buyer for additional information on the Single Buyer. The Gestore della Retepurchases all of the production of domestic
producers of electricity that use renewable resources, or CIP 6 Producers, and
in turn makes this energy available for sale to Eligible Customers in the free
market. The amount available on the free market in 2003 was 40.3 TWh, of which
we purchased 5.4 TWh for our Eligible Customers. We purchase power from outside Italy through annual and long-term
electricity supply contracts and on the spot market. Our long-term purchase
contracts include contracts entered into to secure electricity supplies after
we stopped generating electricity from nuclear power in 1988. Since the start
of its operations in January 2004, we sell energy purchased outside Italy to
the Single Buyer at a price which is equal to the wholesale price of
electricity for the last quarter of 2003 subject to a price adjustment to
reflect changes in the variable cost component of the tariff. The table below sets forth the amount of electricity we imported in Italy
under long-term and annual contracts and by spot purchases during each of the
years in the period indicated. 2001

    
    2002

    
    2003(TWh)Long-term contracts
    
    
    20.9
    
    
    
    21.7
    
    
    
    15.5Annual contracts
    
    
    3.4
    
    
    
    0.4
    
    
    
    0.6Spot purchases
    
    
    0.8
    
    
    
    0.4
    
    
    
    0.0Total imports
    
    
    25.1
    
    
    
    22.5
    
    
    
    16
   Source: Enel. 35




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The Italian electricity grid is interconnected to foreign networks through
15 international transmission lines. We believe these lines are currently
operating at full capacity. In order to increase competition in the market for imported energy, the
Energy Authority has ruled that no single importer may use more than 10% of the
total available interconnection capacity of the Italian grid, excluding from
the calculation capacity covered by long-term contracts in force at February
19, 1997. You should read Regulatory
MattersElectricity RegulationThe
tariff structure for a discussion of these rules and their effect on us. Under the new electricity market framework, after the Single Buyer becomes
operational, we may continue to purchase power from third parties inside and
outside Italy through Enel Trade, which acts as our supplier to Eligible
Customers. Disposal of the Gencos In order to increase competition in the Italian electricity generation
market, the Bersani Decree provided that after January 1, 2003, no single
company or group would be allowed to generate or import in aggregate more than
50% of the total amount of electricity generated and imported in Italy.
Accordingly, we were required to dispose of no less than 15,000 MW of our net
generating capacity by that date in order to reduce our market share to an
allowable level. In August 1999, the Italian government approved our plan to
dispose of plants representing approximately 27% of our generating capacity at
that date (15,057 MW of our net installed capacity, which was equivalent to
16,067 MW of our gross installed capacity). As part of this plan, in October 1999 we transferred to the Gencos the
generating plants we selected for disposal, together with the management teams
and employees needed to operate these plants. We subsequently divested each of
the Gencos through a separate auction process in transactions with an aggregate
value of approximately Euro 8,200 million, as follows:  
    
    On September 20, 2001, we sold 100% of the share capital of
Elettrogen (now called Endesa Italia S.r.l.) to a consortium formed
by Endesa S.A., ASM Brescia S.p.A. and Banco Santander Central
Hispano S.A. for total final consideration of Euro 3,585 million,
including Euro 2,687 million in cash and the assumption of Euro 898
million in debt;
    
    On May 31, 2002, we sold 100% of the share capital of Eurogen
(now part of Edipower S.p.A.) to Edipower S.p.A., a consortium
formed by Edison S.p.A., AEM S.p.A., AEM Torino S.p.A., Aar e Ticino
SA di Elettricità (Atel), Unicredito Italiano S.p.A., Interbanca
S.p.A. and Albojo Limited for total final consideration of Euro
3,731 million, including Euro 2,980 million in cash and the
assumption of Euro 751 million in debt; and
    
    On January 29, 2003, we sold 100% of the share capital of
Interpower (now called Tirreno Power S.p.A.) to a consortium of
bidders including the Italian consortium Energia Italiana,
Electrabel S.A. and ACEA S.p.A. for Euro 850 million, including Euro
532 million in cash and the assumption of Euro 318 million in debt.
With the sale of Interpower, we completed the disposals mandated by
the Bersani Decree. The following table provides certain selected operating and financial data
for Interpower at January 1, 2003, the date of its deconsolidation. The
financial data included in the table has been prepared on the basis of Italian
GAAP. 36




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##### Table of Contents



Operating Data InterpowerJan. 1,2003Gross installed capacity of all plants (MW)
    
    
    2,961Gross installed capacity of thermal plants (MW)
    
    
    2,898Gross installed capacity of hydroelectric plants (MW)
    
    
    63Net production 2002 (TWh)
    
    
    5.7Number of employees
    
    
    880Total number of plants
    
    
    20Number of thermal plants
    
    
    3Number of hydroelectric plants
    
    
    17
 Financial Data InterpowerJan. 1,2003(in millionsof euro)Operating revenues
    
    
    332Operating income
    
    
    (6
    )Net income
    
    
    (51
    )Total net assets
    
    
    356
 The generation assets we transferred to the Gencos broadly reflect the
technological features, mix of fuels consumed and geographical distribution of
the generation assets that we have retained. We transferred plants representing
9,460 MW of the 14,200 MW of thermal production capacity covered by our
approved plan to convert fuel burning plants to combined cycle technology. The Gencos operate relatively more base load plants, which tend to operate
on a continuous basis, than mid-merit plants, which we use principally to cover
increases in demand for electricity during higher demand periods. As a result,
our share of the total amount of electricity generated in Italy has declined by
more than the percentage decline in our total gross installed capacity
resulting from the disposals. With the completion of our disposal of the
Gencos, our gross installed capacity has decreased to approximately 53% of
total Italian gross installed capacity, from approximately 66% in 2001 and 57%
in 2002, and we expect to generate approximately 49% of the total amount of
electricity generated and imported in Italy in 2004. Sales, Infrastructure and Networks Our Sales, Infrastructure and Networks Division comprises two business
units, the Sales unit and the Infrastructure and Networks unit, which operate
as independent units under the umbrella of Enel Distribuzione, S.p.A., the
divisions lead company. The division distributes and sells electricity in
Italy in both the regulated and the free markets, provides electricity-related
services and distributes and sells natural gas to end users in Italy. Electricity companies We operate in the electricity market through the following companies:  
    
    Enel Distribuzione, which owns the electricity distribution
network serving the free and regulated markets and sells electricity
on the regulated market;
    
Deval, a subsidiary in which we own a 51% interest, which
engages in similar activities in the Valle dAosta
Region; 37




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##### Table of Contents




    
Enel Energia, which sells electricity on the free market to
customers with annual consumption up to 100 GWh;
    
Enel Sole, which provides public and art lighting services; and
    
Enel.si, which provides electricity-related services. On January 1, 2003, Enel Energia transferred to Enel Trade its business
unit conducting electricity sales to large electricity users, or Eligible
Customers with an annual electricity consumption higher than 100 GWh, in order
to focus Enel Energias sales activities on the Eligible Customers with lower
levels of annual electricity consumption. Distribution and sales of electricity on the regulated market We own and operate the principal electricity distribution network in
Italy. We use the term distribution to refer to the transport of electricity
from the transmission grid to end users. Enel Distribuzione, our wholly owned
subsidiary, holds almost all of our distribution assets and operations, excepts
for the assets and operations held by Deval in Valle dAosta. Its main
responsibilities consist of operating and maintaining the distribution network,
distributing electricity to end users and selling electricity on the regulated
market. The following table sets forth the volumes of electricity transported to
the free market, and transported to (and sold on) the regulated market by Enel
Distribuzione and Deval for the periods indicated. Year ended December 31,2001
    
    2002
    
    2003Transported to free market
    
    
    76,845
    
    
    
    94,043
    
    
    
    107,989Transported to regulated market
    
    
    179,048
    
    
    
    163,950
    
    
    
    157,066Total
    
    
    255,893
    
    
    
    257,993
    
    
    
    265,055
 Growth in distribution of electricity to end users is closely related to
economic growth in Italy. In 2001, 2002 and 2003, the growth of Italian economy
was limited due to the general slowing of the world economy. In 2003, the
growth in distribution of electricity was positively influenced by the weather
conditions and the high temperatures of the spring and summer season. We have focused on reducing operating costs in our distribution and sales
operations. In particular, we have reduced the number of employees involved in
these operations by approximately 14% over the past three years, and by 31%
from December 31, 1999 to December 31, 2003. In the future, we expect this
trend to continue but the volume of reductions to decrease. The following
table shows the number of this divisions employees at the dates indicated: At December 31,2001
    
    2002
    
    2003Employees
    
    
    38,296
    
    
    
    36,103
    
    
    
    33,106
 Electricity distribution network The table below sets forth certain information about our primary and
secondary distribution networks at December 31, 2003. Insulated
    
    BareUnderground
    
    aerial
    
    aerial
    
    Total
    
    
    
    
    
    Transformerlines
    
    lines
    
    lines
    
    lines
    
    Number of
    
    capacityType
    
    (km)
    
    (km)
    
    (km)
    
    (km)
    
    substations
    
    (MVA)Primary:High voltage lines (40-150 kV)
    
    
    374
    
    
    
    
    
    
    
    18,962
    
    
    
    19,336
 38




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##### Table of Contents



Insulated
    
    BareUnderground
    
    aerial
    
    aerial
    
    Total
    
    
    
    
    
    Transformerlines
    
    lines
    
    lines
    
    lines
    
    Number of
    
    capacityType
    
    (km)
    
    (km)
    
    (km)
    
    (km)
    
    substations
    
    (MVA)Primary substations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,996
    
    
    
    87,724Secondary:Medium voltage lines (1-30 kV)
    
    
    120,787
    
    
    
    7,201
    
    
    
    206,559
    
    
    
    334,547Low voltage lines
    
    
    221,651
    
    
    
    379,024
    
    
    
    127,811
    
    
    
    728,486Secondary substations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    409,362
    
    
    
    65,953
 Our replacement and construction of distribution lines and substations are
subject to Italian regulatory limitations on environmental and aesthetic
grounds, including legislation on electromagnetic fields that may make it more
difficult to build new transmission and distribution lines and substations in
the future and may require removing existing transmission and distribution
lines and substations. You should read Item 3. Key InformationRisk FactorsOther Risks Relating to Our BusinessesWe may incur significant capital
expenditures to comply with legislation on electromagnetic fields; we may not
be fully reimbursed for these capital expenditures and Regulatory MattersEnvironmental MattersElectromagnetic fields for a more detailed
description of the environmental laws and regulations affecting our
distribution operations and the risks they pose for our business. Consolidation of electricity distribution networks In some cases, a single municipality has historically been served both by
our distribution network and the distribution network of a municipal utility.
The Bersani Decree provided that a single distribution license would be issued
for each municipality in Italy, thereby creating an incentive for the
consolidation of such multiple distribution networks. Specifically, the Bersani
Decree provided that any distribution company owned or partly owned by a
municipality and serving at least 20% of the customers in that municipality had
until March 31, 2001 to request that we sell our distribution network in that
municipality to it. As a consequence, we have been forced to sell a significant
number of these networks in the past few years. In 2003, we sold eleven local
distribution networks, serving a total of approximately 23,200 clients and
having an annual sales volume of approximately 1.2 billion kWh, for an
aggregate consideration of approximately Euro 68 million. We had previously
sold our networks in Rome and Formello to ACEA, those in Turin to AEM Torino,
those in Milan and Rozzano to AEM Milano and those in Verona and Grezzana to
AGSM Verona. These networks, which served approximately 1.5 million clients and
had an annual sales volume of approximately 10 TWh, were sold for aggregate
consideration of approximately Euro 1,347 million in 2001 and 2002. From
January 1, 2001 through June 30, 2004, we also sold the distribution networks
of another 29 small municipalities, mainly in 2001 and 2002, which served an
aggregate of 35,899 customers, for aggregate consideration of approximately
Euro 91 million, while at the same time acquiring the distribution networks of
49 other small municipalities, serving an aggregate of approximately 14,886
clients, for aggregate consideration of Euro 13 million. Negotiations are
currently pending regarding our sale of the distribution networks of 31 small
municipalities and our acquisition of the distribution networks of certain
another small municipalities. The Bersani Decree also provided that if we had
not agreed by September 30, 2000, on a sale price with any municipality that
had timely requested to purchase a distribution network from us, the price
would be decided by an arbitration panel. Three such municipalities still have
requests for price arbitration pending; nine such requests have already been
dismissed. We do not believe these pending transactions will involve material
amounts of consideration, or that they will have a material effect on our
revenues or the number of customers we serve. The distribution networks that we have sold are more profitable than our
average distribution network, mainly because distribution in metropolitan areas
has lower costs because of the high customer concentration. In 2004, the Energy
Authority put in place an equalization system that compensates for some of the
comparative disadvantages of distributors serving non-urban areas. See Regulatory MattersElectricity RegulationConsolidation of the distribution
industry. The Bersani Decree also contemplates the consolidation of our distribution
networks with those of distribution companies (owned or partly owned by a
municipality) that serve at least 100,000 customers in municipalities adjoining
those where our networks are located. Pursuant to these provisions, certain
municipal distribution companies, including those in Milan, Rome, Trieste and
Modena, have expressed an interest in purchasing our electricity distribution
networks in adjoining municipalities. We believe that, under the Bersani
Decree, any such sale may not occur without the agreement of all parties
concerned. 39




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In May 2003, SET Distribuzione S.p.A., a company controlled by the
Province of Trento, requested the forced transfer of all our plants and
equipment for the distribution and sale of electricity located in that
province, with a capacity of approximately 1.8 MWh and which served
approximately 223,000 customers. Following such request, an expropriation order
was issued on August 2, 2003. We appealed the resolution in front of the Trento
Regional Administrative Court. We are currently exploring the possibility of
out-of-court settlement of this matter. In addition to the divestitures carried out pursuant to the Bersani
Decree, on December 31, 2003, we sold our network in Brescia and 45 neighboring
municipalities, which served an aggregate of 100,205 clients and had an annual
sales volume of 2.8 billion kWh, for total consideration of Euro 168 million. Other divestitures In June 2001, we sold to the Regional Authority of Valle dAosta a 49%
interest in Deval S.p.A., a distribution company which owns and operates
approximately 4,160 km of electricity distribution lines and serves 118,243
customers in that region. In addition, on September 1, 2003, pursuant to a ministerial decree, Enel
Distribuzione transferred to Terna the ownership of approximately 900 km of
high-voltage transmission lines. Sales to regulated electricity market The regulated market for electricity sales in Italy consists of:  
    
All Non-Eligible Customers, or customers who do not meet the
consumption threshold for participation in the free market; and
    
Those Eligible Customers, or customers who meet the
consumption threshold for participation in the free market, that
choose not to participate in it. The consumption threshold for qualification as an Eligible Customer, which
is set by regulation, is decreasing over time, reducing the number of customers
who must buy electricity on the regulated market. The consumption threshold
decreased significantly on January 1, 2002, so that individual end users and
consortia of companies with annual consumption of 9 GWh or more of electricity
became eligible to participate in the free market. On May 1, 2003, the
consumption threshold took another significant drop, to 0.1 GWh per year, which
has resulted in approximately 60% of our electricity customers becoming
eligible to participate in the free market. Italy was expected to implement EU
Directive No. 54/2004, which contains a provision requiring that all customers
(except households) be eligible to participate in the free market by July 1,
2004. Italy has not yet implemented such directive. See Regulatory MattersElectricity RegulationRegulatory frameworkEligible and Non-Eligible
Customers for further information. We supply electricity to four main classes of regulated market end users:
industrial, commercial, household and agricultural users. As of December 31,
2003, we served approximately 23.1 million households, or approximately 90% of
all households in Italy. The following table sets forth the amount of
electricity that we sold in Italy by
class of customer and the amount of electricity sold by other
distributors in each of the periods indicated. 2001
    
    2002
    
    2003(TWh)Industrial
    
    
    52.2
    
    
    
    37.3
    
    
    
    31.9Commercial and other services
    
    
    56.6
    
    
    
    52.5
    
    
    
    50.4Household
    
    
    54.8
    
    
    
    56.4
    
    
    
    55.2Agricultural
    
    
    4.6
    
    
    
    4.7
    
    
    
    4.0Total
    
    
    168.2
    
    
    
    150.9
    
    
    
    141.5Other distributors
    
    
    10.8
    
    
    
    13.0
    
    
    
    15.6Total
    
    
    179.0
    
    
    
    163.9
    
    
    
    157.1
 40




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In 2002 and 2003, our sales to industrial users and to households
decreased mainly due to the liberalization of the electricity market and our
sale of certain municipal distribution networks as required by the Bersani
Decree. As a result of the drop in the consumption threshold described above,
the decrease in sales involved not only industrial users but also commercial
customers. The migration of customers from the regulated to the free market has
not had a significant negative effect on our margins on the transport and sale
of electricity, as we distribute to both the regulated and the free markets,
and the sales component of electricity tariffs has relatively less weight than
the distribution component in the calculation of our overall margins. In 2003, we estimate that Enel sold approximately 56% of the electricity
consumed in Italy in 2003, including electricity sold by Enel Energia and Enel
Trade on the free market. Customer service to Non-Eligible Customers Providing high-quality customer service is an important part of our
commercial strategy. In recent years, Enel Distribuzione has reorganized its
sales network to change the manner in which customer relations are managed. We
have expanded our customer services to provide customers with access to us
through a number of different channels, and we have introduced specialized
departments to manage relations with corporate and individual customers. Among
other things, we have a customer call center, targeted primarily at individual
consumers, and provide a self-service area through our Internet portal. The
call center is supported by both a national documentation center located in
southern Italy, which receives, processes and electronically files all
contractual documentation, and by a national printing center, which prints and
distributes all correspondence with customers. As of December 31, 2003, our
customer service network also included approximately 148 retail locations
managed directly by Enel Distribuzione, 200 key account managers dedicated to
mid-size business customers and 1,061 QuiEnel retail locations, which include
QuiEnel points in Enel.si and WIND stores and in approximately 20 post offices. Quality of network service The Energy Authority has issued guidelines setting targets for electricity
service continuity (based on minutes of service interruptions per year) and
quality (such as waiting time for appointments). The Energy Authority has also
instituted a system in connection with quality targets for continuity of
service, or lack of service interruptions, whereby it grants bonuses to
companies that exceed these targets and imposes penalties on companies that
fail to meet them. See Regulatory MattersElectricity RegulationQuality of service regulation. Because we exceeded our continuity of service targets in 2000, the
Authority granted Enel Distribuzione a Euro 4 million bonus, which was paid in
2002. In 2001 and 2002, we continued to make improvements in the continuity of
service we provide and the Authority granted Enel Distribuzione a Euro 146
million bonus which was paid in 2003, including 32 million paid with respect to
2001 and 114 million with respect to 2002. In 2003, we continued to make
improvements in the continuity of service we provide with our average duration
of service interruptions decreasing by 15% to 88 minutes from 103 minutes in
2002. We believe our investments in customer service-related initiatives are
sufficient to allow us to continue to comply with or exceed the quality
thresholds set by the Authority. Sales of electricity to the free market According to our internal estimates, total Italian electricity consumption
on the free market in 2003 was 112 TWh, or only 37% of total Italian
electricity consumption for the year. The list of Eligible Customers is
publicly available and included 147,821 Eligible Customers (including
qualifying consortia) as of May 13, 2004. In 2003, Enel Energia focused its operation on sales to Eligible Customers
with annual consumption up to 100 GWh. As a result of this new strategy, Enel
Energia sold 6.1 TWh of electricity to 4,166 Eligible Customers during 2003, a
decrease of approximately 79.5% from the 30.3 TWh sold in 2002. Consumers with
annual consumption above 100 GWh are now served by our Generation and Energy
Management Division, which sold 13.7 TWh of such electricity to these consumers
in 2003. 41




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##### Table of Contents



The progressive liberalization of the Italian electricity market requires
that Enel Energia provide its customers with increasingly flexible and
competitive services that go beyond providing a reliable supply of electricity. As part of our marketing efforts, we have implemented a series of customer initiatives including:  
    
specially tailored contract terms for different types of customers; and
    
value-added services such as energy monitoring and management. The number of potential customers increased significantly on May 1, 2003,
when the consumption threshold determining eligibility to participate in the
free market dropped to 0.1 GWh per year from 9 GWh previously and will continue
to increase following the opening of the free market to all customers (except
households). Public and art lighting Enel Sole operates our public lighting services in Italy and abroad. Enel
Sole targets the general market for public lighting, as well as the market for
customized lighting systems for monuments, public squares, churches and other
landmarks and public spaces. Enel Sole offers both indoor and outdoor lighting
systems, and provides maintenance services for the systems and the related
electricity plants. In 2003, Enel Sole built lighting systems for third parties with an
aggregate value of approximately Euro 39 million. In addition, Enel Sole in
2003 signed contracts for approximately 100,000 public lighting points
throughout Italy. As of December 31, 2003, Enel Sole managed approximately 1.8
million public lighting sites in 4,091 client municipalities. In the first half
of 2004, Enel Sole entered into contracts with a total value of approximately
Euro 23.3 million to build lighting systems for third parties. Electricity systems-related services Enel.si offers our clients construction and maintenance services for their
electricity systems and operation and maintenance services for small
co-generation power plants and photovoltaic plants through franchise stores
established in local areas. Enel.si franchises draw on the technical
capabilities of the Enel Group to assist clients in optimizing their use of
electricity, as well as to offer them consulting and personnel training
services. In 2003, 62 new Enel.si local sales and service franchises were opened,
bringing the total number at December 31, 2003, to 672. We plan to increase our
franchising network to approximately 1,000 stores over the next few years.
Enel.si also developed the product range available in its stores in 2003,
focusing on three main lines of products aimed at providing comfort, safety and
energy savings. Gas Companies We operate in the Italian gas market through the following companies:  
    
Enel Distribuzione Gas, GE.AD. and Enel Rete Gas, which own
local distribution networks in certain parts of Italy and were
awarded the related concessions for their use. We plan to merge
these three, together with Sicilmetano, our newly acquired
subsidiary, into one company by the end of 2004; and
    
Enel Gas, which sells natural gas to end users. The Italian natural gas market is also undergoing a process of
liberalization. Under current legislation, the natural gas market was supposed
to have been completely liberalized as of January 1, 2003, with sellers able to
freely set prices to all customers. However, the Energy Authority retained the
right to control prices for those customers that qualified as Gas Non-Eligible
Customers as of January 1, 2003, and imposed a price freeze with respect to
such customers at the levels that were in place on December 31, 2002. Please
see Regulatory 42




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##### Table of Contents



MattersGas RegulationGas Eligible and Non-Eligible Customers for a
definition of Gas Non-Eligible Customers. In December 2003, the Energy
Authority established new tariff criteria that were applicable as of January 1,
2004. The Energy Authority must decide by July 31, 2005 whether to allow
suppliers to freely set the prices charged to Gas Non-Eligible Customers.
Please refer to Regulatory MattersGas Regulation for a more detailed
discussion of gas regulation in Italy. Until the development of full market liberalization, we believe that the
most effective way for us to build our gas business is through acquisitions of
other distributors or client bases. We believe that expanding our gas
distribution activities offers us opportunities for potential synergies,
including, for example, the ability to schedule and perform gas and electric
network maintenance and upgrades in the same area at the same time and the
ability to use call centers for both gas and electricity customers, as well as
certain competitive advantages, including potential cost savings from economies
of scale. We have acquired several gas distribution companies with operations in
various Italian regions over the past three years. These acquisitions include
those of the Colombo Gas Group in 2000, So.ge.gas S.p.A. and Agas S.p.A. in
2001, Camuzzi Gazometri (now Enel ReteGas) in 2002 and Sicilmetano in 2004. In November 2001, we merged twenty previously acquired gas companies into
Enel Distribuzione Gas S.p.A. In January 2002, the sales activities of Enel Distribuzione Gas S.p.A.
were spun off into Enel Gas S.p.A. In May 2002, we acquired 98.58% of the outstanding shares of Camuzzi
Gazometri from Mill Hill Investments for consideration of Euro 1,043 million,
consolidating our position as the second-largest operator in the Italian gas
distribution market, second only to Eni, the incumbent provider, according to a
study of the Italian gas industry by Mediocredito Centrale in April 2004. In
acquiring Camuzzi Gazometri, we acquired both significant gas distribution
assets and Camuzzi Gazometris waste management operations. In February 2004,
we sold Camuzzis waste management operations to Green Holding S.r.l. for
approximately Euro 14 million. In December 2002, Plenia S.p.A., a former sales company of Camuzzi
Gazometri, was merged into Enel Gas S.p.A. In January 2003, the sales
activities of GE.AD and Enel Energia, (with the exception of customers that are
served by Enel Trade) were contributed to Enel Gas S.p.A. As of December 31, 2003, we offered gas distribution services in 1,024
municipalities (as compared to 1,017 in 2002) and operated on approximately
26,000 km of network. In 2003, we distributed 89 million cubic meters of gas on
behalf of companies that sell gas (as compared to 49 million in 2002) and 2,647
million cubic meters to end users (as compared to 2,349 million in 2002), with
an increase of 12.7% with respect to 2002. In 2003, we served 1,785,215 end
users (as compared to 1,716,136 in 2002), representing approximately 11% of the
Italian market. In 2003, we sold approximately 4.4 billion cubic meters of gas (as
compared to 3.9 billion in 2002) to approximately 1.8 million end users (as
compared to 1.7 million in 2002), representing approximately 9% of the Italian
market, not including the 2.3 million cubic meters of gas sold by Enel Trade,
which is part of our Generation and Energy Management Division, to
distributors. Competition in the electricity and gas markets Electricity generation. In 2003, we accounted for approximately 49.4% of
domestic electricity production. We purchased approximately 31% of the
electricity imported into Italy, and also purchased electricity produced by
independent power producers and electricity produced from renewable resources
under the CIP 6 regime. In accordance with the Bersani Decree, we transferred
our long-term purchase contracts with independent power producers under the CIP
6 regime to the Gestore della Retein January 2001. The following table shows our estimates of gross installed capacity in
Italy by category of producer at the dates indicated. 43




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At December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003(GW)Enel
    
    
    59.4
    
    
    
    58.9
    
    
    
    52.0
    
    
    
    45.3
    (1)
    
    
    43Independent and other power producers
    
    
    13.9
    
    
    
    16.5
    
    
    
    24.0
    
    
    
    31.4
    
    
    
    35Municipal utilities
    
    
    2.9
    
    
    
    2.9
    
    
    
    2.9
    
    
    
    2.9
    
    
    
    3Total
    
    
    76.2
    
    
    
    78.3
    
    
    
    78.9
    
    
    
    79.6
    
    
    
    81
   (1)
    
    Including 3 GW of Interpower. As a result of the limitation on the production and import of electricity
imposed by the Bersani Decree, we were required to sell plants with a total
installed net capacity of at least 15.0 GW by January 1, 2003. In order to
comply with the requirement, we created and sold the Gencos after transferring
an aggregate of approximately 16.0 GW of gross installed capacity to them. With
the completion of our disposal of the Gencos in January 2003, our gross
installed capacity has decreased to approximately 53% of total Italian gross
installed capacity from approximately 66% in 2001 and 57% in 2002, and we
expect to generate approximately 49% of the total amount of electricity
generated in Italy in 2004. The disposal of the Gencos has exposed us to increasing competition from
other generating capacity operators on the open market. We expect that our
competitors will also include domestic independent power producers, municipal
utility companies and any foreign operators that export electricity to the
Italian market or acquire Italian generation assets. In addition, up through
2003, other producers were authorized to build about 13 GW of new generating
capacity in Italy. Our main competitors in Italy are Edison, Endesa Italia, Tirreno Power,
Edipower and Eni. Edipower has a reported generation capacity of 7.4 GW, Edison
has a reported capacity of 6.4 GW, Endesa Italia has a reported generation
capacity of 5.7 GW, Tirreno Power has a reported capacity of 3 GW, and Eni has
a reported capacity of 2.8 GW. The main municipal electricity companies are AEM S.p.A., ACEA S.p.A. and
AEM Torino S.p.A. They are each publicly traded, but remain majority-owned by
the relevant municipality. AEM S.p.A. has approximately 1.2 GW of generation
capacity, ACEA S.p.A. through Acea-Electrabel Produzione S.p.A. (a joint
venture in the electricity generation business with Electrabel SA) has
approximately 1.7 GW (including their share in Interpowers generating capacity
as participants in the consortium that acquired that Genco) and AEM Torino
S.p.A. has approximately 0.5 GW of capacity. In addition to their core
electricity business, these companies offer gas and/or water services. We believe that in 2003 we imported pursuant to long-term contracts
approximately 30.3% of the electricity imported into Italy. However, pursuant
to the Bersani Decree we were required to sell approximately 15.5 TWh of such
imported electricity to the Single Buyer. You should read Generation and
Energy ManagementPurchased power for a discussion of these rules. Electricity sales to Eligible Customers. We expect significant
competition to result from the continued opening of the market to Eligible
Customers, who are free to choose the supplier of their electricity. Enel
Energias competitors in sales to Eligible Customers are independent power
producers, importers, wholesalers and brokers. We expect competition in the
free market to increase further in 2004 as a result of the lowering of the
threshold to qualify as Eligible Customer. Gas sales. In our gas business, we compete mainly with Eni, the incumbent
operator that historically held a monopoly for gas distribution activities in
Italy and continues to hold a significant majority of the overall market for
such activities. According to a study of the Italian gas industry published by
Mediocredito Centrale in April of 2004, we are the second-largest operator in
the Italian gas distribution market, following our acquisition of Camuzzi
Gazometri (now Enel Rete Gas). The Italian gas market is currently going through a process of
liberalization. Under current legislation, the natural gas market was supposed
to have been completely liberalized as of January 1, 2003, with sellers able to 44




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freely set prices to all customers. However, the Energy Authority retained
the right to control prices for certain, mainly household, customers and
imposed a price freeze with respect to such customers at the levels that were
in place on December 31, 2002. Please see Regulatory MattersGas
RegulationGas Eligible and Non-Eligible Customers for a definition of Gas
Non-Eligible Customers. In December 2003, the Energy Authority established new
tariff criteria that are applicable as of January 1, 2004. The Energy
Authority must decide by July 31, 2005 whether to allow suppliers to freely set
the prices charged to Gas Non-Eligible Customers. We expect that once the
remaining limitations to the liberalization process have been eliminated, which
we believe will be in the second half of 2004 or in early 2005, the conditions
will be in place for free competition to develop in the gas market. See
Regulatory MattersGas Regulation for a discussion of the regulation of the
gas market. Seasonality of electricity and gas consumption Electricity and gas consumption in Italy is somewhat seasonal. Since use
of artificial light is highest in the winter, electricity and gas consumption
peaks during the winter months. Nevertheless, increased use of air conditioning
has rendered less significant the difference in electricity demand during
winter versus summer months, and increased use of gas for industrial production
has rendered less significant the difference in gas demand during winter versus
summer months. Electricity and gas consumption is particularly low in August,
the traditional vacation period in Italy. International Our International Division includes our electricity generation,
distribution and sale activities outside of Italy and is also in charge of
seeking business development through partnerships and acquisitions abroad. The
International Division currently includes Viesgo Generaciòn, which is our
largest operation abroad, an electricity generation company in Spain with a
gross installed capacity of 2,365 MW; Enel Uniòn Fenosa Renovables, a company
active in Spain in the field of renewable energy with 381 MW of installed
capacity currently in operation, 83 MW that we expect to be in operation by the
end of 2004 and another 15 MW that we expect to be in operation by the end of
2005; Maritza East III, which we acquired in 2003, a generating company with
732 MW of installed capacity in Bulgaria; Enel North America and Enel Latin
America, active in the power generation from renewable sources in North America
and in Central and South America, respectively; and Electra de Viesgo
Distribuciòn and Viesgo Energia, companies active in the electricity
distribution and sale business in Spain. In 2003, this division had revenues of
Euro 921 million, as compared to the Euro 923 million attributable to it in
2002. On January 8, 2002, we acquired 100% of the outstanding shares of Electra
de Viesgo S.A. (Viesgo), a Spanish electricity company with generation and
distribution company subsidiaries, from Endesa S.A. for total consideration of
Euro 2,070 million, including Euro 1,920 million in cash and the assumption of
Euro 150 million in debt. Viesgo, through Viesgo Generaciòn, operates 6
thermal plants and 12 hydroelectric plants in Spain with an aggregate gross
installed capacity of approximately 2,365 MW. Viesgo, through Electra de Viesgo
Distribucion, also owns 25.000 kilometers of distribution network, and
distributed 5,000 GWh of electricity to 600,000 customers in the Spanish
regulated market in 2003; while through Viesgo Energia it sold 210 Gwh of
electricity in the Spanish free market in 2003. In March 2003, we acquired from Entergy Power Bulgaria Ltd., through our
subsidiary Enel Generation Holding BV, 60% of the share capital of Entergy
Power Holding Maritza BV, which in turn holds 73% of Maritza East III, for Euro
75.7 million. Maritza East III is working on the refurbishment, environmental
upgrade and management of a lignite-fired generation plant located in Bulgaria,
on the border with Greece. The total financial outlay of Maritza East III for
the project is estimated to be about Euro 300 million, which is expected to be
financed through project financing. We also have a call option on the
remaining 40% of Entergy Power Holding Maritza BVs share capital currently
hold by Entergy Power Bulgaria Ltd. In December 2003, we acquired 80% of the share capital of Uniòn Fenosa
Energìas Especiales (Uniòn Fenosa), a Spanish company active in the field of
renewable energy from Uniòn Fenosa Generacion SA, which still holds the
remaining 20%. We granted Uniòn Fenosa Generacion SA an option to re-purchase
30% of Uniòn Fenosas capital stock, which may be exercised through the end of
2007.Uniòn Fenosas assets include plants and projects for the generation of
electricity from renewable resources, primarily wind and hydroelectric
facilities. 45




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Uniòn Fenosa has 381 MW of installed capacity currently in operation, 98
MW under construction and plans to develop an additional 324 MW of capacity by
2007. We have generation operations in the United States through Enel North
America, a North American independent power producer specializing in renewable
resources. At December 31, 2003, Enel North America operated 87 power plants in
the United States and 2 in Canada with an aggregate net installed capacity of
325 MW and a net production in 2003 of approximately 1300 GWh. On March 1,
2004, we acquired two hydroelectric plants in North America: Twin Falls,
located in the State of Washington, and Lower Saranac, located in the State of
New York, with an aggregate net installed capacity of 33 MW, from General
Electric Structured Finance Ltd. for $44.4 million, equivalent to approximately
Euro 35.2 million. We also have generation operations in Central and South
America through Enel Latin America, another power producer specializing in
renewable resources. At December 31, 2003, Enel Latin America operated two
hydroelectric plants and a wind plant in Costa Rica, as well as two
hydroelectric plants in Chile and a hydroelectric plant in Guatemala with an
aggregate net installed capacity of 200 MW and net production in 2003 of
approximately 782 GWh. We are currently negotiating the acquisition of two Romanian electricity
distribution companies, Banat and Dobrogea, serving a total of about 1,400,000
customers, representing 20% of the countrys population. The following table shows the net efficient generation capacity of our
foreign generating companies broken down by type of plant at December 31, 2002
and December 31, 2003. Enel Uniòn
    
    Total at
    
    Total atEnel North
    
    Enel Latin
    
    
    
    
    
    
    
    
    
    Fenosa
    
    December 31,
    
    December 31,America
    
    America
    
    Viesgo
    
    Maritza
    
    Renovables
    
    2003
    
    2002(MW)Thermal
    
    
    
    
    
    
    
    
    
    
    1,592
    
    
    
    732
    
    
    
    
    
    
    
    2,324
    
    
    
    1,599Hydroelectric
    
    
    233
    
    
    
    175
    
    
    
    668
    
    
    
    
    
    
    
    69
    
    
    
    1,146
    
    
    
    989Wind
    
    
    67
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    341
    
    
    
    91Biomass and
Biogas
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    25Cogeneration
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62
    
    
    
    62
    
    
    
    Total
    
    
    325
    
    
    
    199
    
    
    
    2,261
    
    
    
    732
    
    
    
    381
    
    
    
    3,898
    
    
    
    2,704
 The electricity generated by our International Division in 2003 amounted
to 11,797 Gwh, as compared to 9,193 Gwh generated by our international
operations in 2002, and include 1,076 Gwh generated by Uniòn Fenosa, 5,886 Gwh
produced by Viesgo Generaciòn (as compared to 7,529 Gwh in 2002), 2,084 Gwh
produced by our North and South American companies (as compared to 1,664 Gwh in
2002), and 2,751 Gwh produced by Maritza East III. The sales of electricity
carried out by our companies operating in Spain totaled to 3,943 Gwh, an
increase of 9.7% as compared to the 3,594 Gwh sold in 2002. The revenues of our International Division for 2003 amounted to Euro 921
million, of which Euro 713 million arose from our activities in Spain (compared
to Euro 825 million for 2002), Euro 100 million from our activities in North
and South America (compared to Euro 98 million for 2002), and Euro 108 million
reported by Maritza in the nine months from its acquisition. The decrease of
Euro 112 million in revenues generated in Spain was due primarily to
regularly-scheduled maintenance work performed on the plants and other
technical reasons. Transmission Terna,
our Transmission Division, owns a large majority of the
Italian national transmission grid. We use the term transmission to refer to
the transportation of electricity on high and very high voltage interconnected
networks from the plants where it is generated (or, in the case of imported
energy, from the points of acquisition) to distribution systems. In June 2004,
we completed an initial public offering and listing in Italy and a private
placement with certain institutional investors (in accordance with Rule 144A and
Regulation S of the Securities Act) of 46




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1,000,000,000 of
Ternas shares, representing 50% of Ternas issued share
capital, receiving gross proceeds of Euro 1,700 million. Terna is responsible for the management, maintenance and development of
the national transmission grid, based on guidelines provided by the Gestore
della Rete. The transmission system in Italy is undergoing significant changes. We are
required by law to reduce our stake in Terna to no more than 20% by July 2007.
You should read Regulatory MattersElectricity Regulation for a more
detailed discussion of these changes. As contemplated by the Bersani Decree:  
    
in June 1999, the Industry Ministry issued a decree formally
defining the Italian national transmission grid. The decree
determined all of our 380 kV and 220 kV transmission lines and
approximately 50% of our 150 kV and 132 kV transmission lines to be
part of the national transmission grid.
    
in August 1999, we transferred dispatching national grid
management and related assets and liabilities to a wholly owned
subsidiary called the Gestore della Rete.
    
in April 2000, we transferred the shares of the Gestore della
Reteto the Treasury free of charge.
    
in December 2002, the Industry Ministry issued a decree that
enlarged the Italian national transmission grid by including 874 km
of lines and 18 transformer stations owned by Enel Distribuzione
S.p.A. and other companies belonging to our Generation and Energy
Management Division. Under the Bersani Decree, owners of the various assets that comprise the
national transmission grid, including Terna, operate and maintain those assets
pursuant to guidelines issued by the Gestore della Rete. In accordance with
this decree, in December 2002, Terna and the Gestore della Retesigned a
service contract relating to the operation of the transmission grid. The
general framework of the contract had been established by governmental decree
in December 2000. For a discussion of this framework see Regulatory
MattersElectricity RegulationTransmission. This framework will change
substantially in the near future. A governmental decree of May 2004 provides
for the transfer to Terna of the management and control of the national
transmission grid together with certain assets owned by the Gestore della Rete
by October 31, 2005. Once this transfer becomes effective, Terna will amend its by-laws in
order to ensure that the national transmission grid is managed in a neutral and
impartial way, without discrimination in favor of electricity operators who
hold its shares. In particular, no electricity operator, including us, shall be
entitled to voting rights in excess of 5% with respect to the appointment of
Terna directors, and a new board of directors shall be appointed in compliance
with these restrictions shortly after the transfer becomes effective. Moreover,
we will have to reduce our shareholding in Terna (currently 50%) to no more
than 20% by July 1, 2007. As a result of these regulatory requirements, we expect to deconsolidate
Terna by October, 2005. You should read Regulatory
MattersElectricity
Regulation for a description of the regulations applicable to our Transmission
division. Under the current regulatory framework, the determination of the
tariff mechanism pursuant to which the owners of the national transmission grid
(including Terna) are remunerated is made by the Italian Energy Authority,
which determines the national transmission tariff by taking into account
recognized costs of the sector. In order to calculate the total of these
recognized costs, the Italian Energy Authority takes into consideration the
operating costs (mainly costs for outside services and work, payroll costs and
costs associated with the purchase of materials), the depreciation of property,
plant and equipment and the remuneration of net invested capital. See Regulatory MattersThe tariff structure for a more detailed description of the
tariff mechanism. As of December 31, 2003, Ternas transmission grid consists of:  
    
approximately 10,073 km of 380kV or 400kV interconnections,
including those connecting Italy and Greece; 47




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
    
approximately 10,155 km of 200kV or 220kV interconnections,
including those connecting Sardinia, Corsica and the Italian
mainland;
    
approximately 18,349 km of interconnections of 150kV, 132kV or less;
    
295 substations; and
    
certain other fixed assets. The following table provides certain data about our transmission grid as
of December 31, 2003. LengthType of facility
    
    Number
    
    (km) (1)Primary transformer stations
    
    
    295
    
    
    
    Transformers
    
    
    565
    
    
    
    Busbar connections
    
    
    3,864
    
    
    
    380kV lines
    
    
    
    
    
    
    10,073220kV lines
    
    
    
    
    
    
    10,155150kV and 132kV lines
    
    
    
    
    
    
    18,349Total lines
    
    
    
    
    
    
    38,577
   (1)
    
    Length in kilometers refers to circuit line length. Our transmission lines make use of rights of way granted by local
authorities in areas where the facilities are located. In addition, we have
rights of eminent domain over private property. We are required to compensate
landowners for any exercise of these rights. The Gestore della Retedecides on the construction and installation of new
connections and new transformer or switching substations, upgrades of existing
facilities or the decommissioning of existing facilities. If such decisions
relate to the transmission grid owned by Terna, Terna is directed by the
Gestore della Reteto implement them. If they relate to new portions of the Italian grid, contracts for such
development projects are put out to tender by the Gestore della Rete. In the
three-year period ended December 31, 2003, 11 out of 17 such contracts were
awarded to Terna. For this type of development activity, Terna receives an
annual fee upon commencement of operations of the facilities and typically
continuing for 20 years, in the case of transformer or switching substations,
and 35 years, in the case of high voltage and very-high voltage electricity
transmission lines. The regulated distribution fees that Terna earns are also based on the
availability of its transmission grid. The following table shows the
availability of Ternas grid reported for each of the periods indicated. Year ended December 31,2000
    
    2001
    
    2002
    
    2003Grid availability
    
    
    98.7
    %
    
    
    98.8
    %
    
    
    99.0
    %
    
    
    99.1
    %
   Source: Enel. This calculation does not take
into account times the network was unavailable due to required
upgrading work and to external causes, including in particular the
blackout on September 28, 2003. In 1998, we began to implement a program aimed at reducing the operating
costs of, and capital expenditures on, our electricity transmission grid. This
program was focused on rationalizing the operations and maintenance of our
transmission lines and transformer stations, simplifying technical
specifications, reducing our personnel costs and the purchasing costs of major
components, and reviewing our project planning and capital expenditure
programs. We have continued to implement this program through the development of a
remotely managed and controlled system, the full deployment of a new
organizational structure based on centralized management and a SAP management
information system. In addition, we have recently implemented the Monitor and
Business Intelligence project, an e-maintenance platform to monitor the
operation and maintenance of Ternas transmission 48




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grid, using particular tools that allow Terna to evaluate the condition of
components of the system and to decide if and when to provide maintenance to
any such components. To diversify the revenue base of our transmission segment, we have begun
to sell maintenance, long-distance metering and monitoring and related
engineering and operating services (as well as telecommunication services) to
third parties which own or utilize high voltage power systems, including other
electric companies, municipal utilities and large industrial plants. In 2003,
we sold such services with an aggregate value of Euro 65 million. We received
73% of this amount from companies belonging to our Group. Through Terna we own Novatrans Energia S.A. and 99.74% of the share
capital of Trasmissora Sudeste-Nordeste S.A., or TSN, which both operate in the
electricity transmission sector in Brazil. Each of TSN and Novatrans Energia is
responsible for the operation and maintenance of a portion of the Brazilian
transmission grid, with respect to which each such company has been granted a
30-year concession by the Brazilian Energy Authority. Each of the concessions
is due to expire on December 20, 2030. Italy, with the exception of Sardinia, suffered a complete blackout of
electrical service on September 28, 2003. After the blackout occurred,
approximately 21 hours were necessary before the electricity became available
again to all customers. The joint report of the Energy Authority and the
French Commission de Régulation de lEnergie, dated April 22, 2004, includes
among the causes of the blackout the inappropriate defense measures taken by
the Swiss transmission grids, the non-compliance by certain Swiss electricity
companies with the rules provided by the Union for the Co-ordination of
Transmission of Electricity (UCTE) and the inappropriate measures taken to cure
certain malfunctions. Other inquiries by Swiss,
French and Italian authorities are still underway. In October 2003, the Energy
Authority issued a release in which it declared that customers should
not have been entitled to request black out-related reimbursements of approximately
Euro 25 each, based on the
terms of the agreement for the supply of electricity. However, approximately
140,000, mostly household, customers requested such reimbursement. We believe
that we were not responsible for the blackout and, accordingly, have not
honored any of these requests. As of June 15, 2004, approximately 2,500 of our
customers have brought legal actions against Enel Distribuzione or Enel S.p.A.
in the Italian courts seeking aggregate damages for approximately 3.5 million
dollars or Euro 2.9 million. So far, the courts issued two decisions, one
favorable to us and one unfavorable to us which imposed on us an obligation to
pay Euro 25 to the plaintiff and that we have appealed. Although the claims of
each of the individual plaintiffs are for relatively minor amounts, an increase
in the decisions holding us responsible for such damages could be expected to
result in an increase in the number of such claims and the magnitude of damages
sought. Italian law does not provide for the award of punitive damages in such
cases, and plaintiffs will be limited to compensatory damages. On June 9, 2004, the Energy Authority published a report with the findings
of its preliminary investigation on the blackout. Though the report focuses on
a reconstruction of the events which caused the blackout and does not indicate
specific responsibilities, it envisions the possibility that the blackout was
also attributable to the conduct of Italian generation and distribution
companies, including us, and anticipates that specific investigations will be
carried out with respect to the role and responsibility of each of the parties
involved. Please see Items 3. Key InformationRisk
FactorsRisks relating to Our Energy Business for a
description of the risks related with such investigations. Telecommunications OverviewWe conduct our telecommunications and Internet service activities through
WIND S.p.A. Since launching its services in 1999, WIND S.p.A. has become one of
the leading alternative providers of mobile and fixed-line telephony, Internet
and data transmission services in Italy. WIND operates throughout Italy with
its own network infrastructure and has rapidly developed its transmission
backbone by using fiber optic cables.We formed WIND as a joint venture in 1997 along with our initial partners,
France Télécom and Deutsche Telekom. Our stake in WIND initially was 51%, with
France Télécom and Deutsche Telekom holding a 24.5% stake each. Following
Deutsche Telekoms exit at the end of July 2000, our stake rose to 56.6% and
France Télécoms share grew to 43.4%. We subsequently purchased Infostrada, a
fixed line telecommunications and Internet company, and contributed it to WIND,
effective July 30, 2001. This contribution increased our stake in WIND to
73.4%. 49




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Infostrada was merged into WIND effective on January 1, 2002. In July
2003, we acquired France Télécoms remaining 26.6% stake in WIND. In 2003, Tellas Telecommunications SA, a joint venture between WIND and
Public Power Corporation, a Greek electricity operator, launched a fixed
telephony and Internet service in Greece. WIND holds approximately 50.1% of the
joint venture. At December 31, 2003, the joint venture had approximately
501,000 fixed lines, corresponding to a market share of approximately 8%. We no longer view our telecommunications activities, held through WIND, as
potentially synergistic with our energy activities, but rather as a financial
investment. In 2003 and 2004, we supported WIND with aggregate equity
contributions of approximately Euro 979 million, as well as certain credit
support. We expect that WIND will achieve financial independence by the end of
2004 and, accordingly, we do not expect to be required to invest significant
amounts in WIND or otherwise provide additional support to WIND after such
date. For additional details on the support we have provided to WIND, see
Item 5. Operating and Financial Review and ProspectsLiquidity and Capital
Resources and note 9 to our consolidated financial statements. The acquisitions of Infostrada and certain assets of Blu On March 29, 2001, Enel Investment Holding BV, a Dutch company fully owned
by us, acquired from Mannesman Investment BV (an indirect, wholly owned
subsidiary of Vodafone Group plc), 100% of the capital stock of Infostrada, one
of Italys leading alternative providers of fixed-line telecommunications
services and the operator of one of Italys leading Internet portals at the
time. The purchase price of the shares, amounting to Euro 7,250 million, was
paid in full on the same date. As provided for in the share acquisition
agreement, we also paid Mannnesman Investment Euro 132 million in respect of a
receivable it has previously renounced in favor of Infostrada. Moreover, on the
same date, Enel Investment Holding BV paid Vodafone Euro 821.2 million that
Infostrada owed Vodafone, and became a creditor of Infostrada for this amount.
In addition, in connection with the acquisition, we incurred certain ancillary
costs amounting to approximately Euro 375 million. Effective July 30, 2001, we contributed all the shares of Infostrada to
WIND in exchange for new shares issued in connection with a reserved capital
increase. Effective January 1, 2002, Infostrada was merged into WIND. On October 4, 2002, WIND acquired certain assets from Blu S.p.A., one of
the four Italian mobile telephony operators active at the time. The acquisition
took place in the context of the winding-up of Blu, with the purchase price
totaling Euro 140 million. The assets purchased from Blu included Blus entire
customer base (1.9 million mobile lines, approximately 700,000 of which were
active at the time of the acquisition), the Blu trademark and logo, certain
network and information technology assets, radio sites, sales points, a call
center and a number of part time and full time employees (in the aggregate,
equivalent to 540 full time employees). Effective April 1, 2003, WIND sold the
network and information technology assets acquired from Blu in October 2002 to
Telecom Italia Mobile S.p.A. The total consideration for this sale was Euro 20
million. In addition, in the context of the winding-up of Blu, each of WIND,
Telecom Italia Mobile S.p.A. and Vodafone Omnitel S.p.A. were assigned, at no
charge, 5 MHZ of the 15 MHZ of GSM/GPRS transmission frequencies originally
assigned to Blu. The Italian communications market Italy is one of the largest telecommunications markets in Europe, with a
population of approximately 58 million people, who, based on the information
provided by the telecommunications operators, utilize an aggregate of
approximately 57 million mobile telephone lines, and comprise more than 27
million fixed line customers, as of December 31, 2003. WIND uses the number of
lines as the primary measure for its customer base and growth for mobile
services. For these services, the number of lines represents the number of
Subscriber Identity Module, or SIM, cards that are active. For Internet
services, WIND uses the number of registered users as the primary measure of
its customer base and growth. For fixed services, WIND recently changed its
measure for customer base and growth from number of lines to number of
customers, being those that use the carrier pre-selection service, have
direct access to WINDs network, or use the carrier selection service but have
used WINDs network at least once in 50




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the last three-month period. As of December 31, 2003, WIND had an
aggregate of approximately 3.1 million fixed line customers, 9.9 million mobile
telephone lines and approximately 15.2 million Internet registered users. Mobile services The Italian mobile telephone market, one of the largest in Europe,
continued to expand in 2003 and reached, according to data provided by the
telecommunications operators, a total of approximately 57 million lines at
December 31, 2003, from approximately 54 million lines at the end of 2002. As of December 31, 2003, Telecom Italia Mobile S.p.A. had approximately
26.1 million lines, accounting for approximately 46% of the Italian total,
while Vodafone Omnitel S.p.A. had more than 20.6 million lines, or
approximately 36% of the total. As of the same date, WIND had approximately 9.9
million lines, or approximately 17% of the total market for Italian mobile
telephony, compared to 8.7 million lines, or a market share of approximately
16%, at the end of 2002. Fixed telephony services As of December 31, 2003, Italy had approximately 27 million fixed line
customers. At the same date, WIND had approximately 3.1 million customers,
corresponding to a market share of approximately 11%. Other major carriers
include Telecom Italia S.p.A., Tele2, Tiscali and Albacom, which focuses on the
corporate market. Competition in the fixed-line telephony market is expected to
evolve with the expanded availability of carrier pre-selection and the
unbundling of the local loop. Please refer to Regulatory MattersTelecommunications Regulation for a detailed discussion of the unbundling of
the local loop. Internet services As of December 31, 2003, WIND had approximately 15.2 million registered
Internet users, of which approximately 3.4 million were active. Other Internet
service providers include, among others, TIN.it and Tiscali, which, according
to research carried out by Eurisko, had a market share of approximately 29% and
15%, respectively, at the end of 2003. Customer base As of March 31, 2004, WIND had approximately:  
    
10.2 million mobile lines, represented by the number of
Subscriber Identity Module, or SIM, cards sold, an increase of
approximately 1.5 million lines since December 31, 2002;
    
2.8 million fixed line customers, a decrease of approximately
0.7 million customers since December 31, 2002, reflecting
an increase in market share by the incumbent operator, Telecom Italia
S.p.A.; and
    
15.2 million registered Internet users, an increase of
approximately 2.8 million users since December 31, 2002. Products and services WIND offers a number of mobile and fixed-line telephony products, Internet
and other value-added services to corporate and residential customers. WIND
also currently provides the Enel Group with most of its key telephony and other
telecommunications services under an outsourcing contract entered into
following the Enel Groups contribution of its telecommunications division to
WIND in 1999. Mobile telephony.WIND offers a wide range of mobile telephony products
and services, including several tariff plans for mobile telephone users and
products that integrate mobile with fixed-line and Internet services. WIND
recently entered into an agreement with NTT DoCoMo (the largest mobile operator
in Japan) for the sale in 51




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Italy of an enhanced mobile service, allowing WIND mobile customers to
access to a wide range of information services and an e-mail account. WIND also signed in September 2003 an agreement with eight other European
mobile operators to offer combined services to corporate clients, with the aim
of implementing synergies, taking advantage of cost savings and exchanging
know-how on the use of advanced technologies. In 2004, WIND changed the tariff plans available to its customers to
increase its tariff transparency and reduce the cost of the calls directed to
customers of other mobile operators. Fixed-line telephony. WIND offers fixed-line telephony services to
business and residential customers using either carrier selection, where
customers dial a predefined access code, to select WINDs network for local,
long distance and international calls on a per call basis, or carrier
pre-selection where WIND arranges with Telecom Italia for automatic switching
to its network without requiring an access code, or direct access to WINDs
network. Costs of fixed-line telephony services are generally calculated on the
basis of the type and length of calls made, however, WIND also offers customers
calling plans tailored to the type of consumer and its patterns of usage. In
2004, WIND announced a change in its available fixed tariff plans in order to
increase its tariff transparency. WIND also offers business customers national toll-free and shared-toll
services. It also sells prepaid and magnetic strip telephone cards and offers
carrier and termination services in Italy to other national and international
carriers. Internet. WIND offers a full array of Internet and data transmission
services to both business and residential customers. Among other things, WIND
manages Libero, a leading Italian portal, and offers high speed Internet access
using ADSL, or Asymmetric Digital Subscriber Line technology, or HDSL, or High
Bit-rate Digital Subscriber Line advanced services, both of which allow high
speed data transmission and Internet navigation. Network access. WIND provides its integrated fixed-line telephony, data
transmission and Internet services to residential and corporate customers using
several access methods: 
    
Indirect access: For its customers, WIND offers indirect
access to its fixed voice and Internet services through either
carrier selection or carrier pre-selection.
    
Direct access: WIND is also able to offer direct access to
its network for its largest corporate customers through microwave
links, direct fiber optic connections or dedicated lines leased from
Telecom Italia. In 2001, following the initial steps in the
unbundling of the local loop that allow alternative carriers to have
access to Telecom Italias local network, WIND began to expand the
availability of direct access to other customers in very limited
areas and continued to do so in 2002 and 2003 as the unbundling
process progressed. Where the unbundling of the local loop is fully
operational, WINDs customers are no longer required to pay
fixed-line access fees to Telecom Italia and WIND is also able to
collect interconnection fees for calls originating on another
operators network and terminating on WINDs network. WIND offers mobile services through its national dual band GSM-900 and
GSM-1800 digital mobile network which applies GPRS and roaming agreements with
other Italian mobile operators. In 2001, WIND began offering its customers
GPRS, the mobile technology that provides greater bandwidth for data
transmission and Internet access. Network infrastructure and licenses Since WIND began its operations, it has focused on developing its
technical infrastructure, as well as entering into agreements with other
telecommunications operators in order to expand its reach and enhance coverage.
WIND uses a common system management software, referred to as its Intelligent
Network, for its fixed- 52




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line and mobile networks, allowing it to provide integrated telephony and
other value-added services to its customers. WINDs network infrastructure
provides high-capacity transmission capabilities, covers most of the domestic
territory and allows the delivery of new and innovative services. As of March 31, 2004, WINDs network infrastructure included:  
    
A GSM/GPRS mobile network covering approximately 98.4% of the
Italian population and an UMTS mobile network covering the Rome and
Milan areas;
    
A 18,300 km fiber optic transmission backbone using
Synchronous Digital Hierarchy, or SDH, and Wavelength Division
Multiplexing, or WDM technology, the European standard for high
speed digital transmission;
    
Metropolitan Area Networks in the main Italian cities,
including Rome, Milan, Turin, Naples, Palermo, Florence, Genoa and
Bologna, comprising 2,240 km of underground cables;
    
A national voice switched network comprising 63 fixed
switches and 50 mobile switches; and
    
A packet switched data network comprising 206 Internet
Protocol and data transmission points of presence for data
transmission. Until February 2004, WIND leased inactive, or dark, fiber optic lines on
its national backbone from us under a renewable 15-year contract that became
effective in 1999. Under that contract, WIND paid us a total initial
consideration of Euro 108.4 million, and an additional Euro 45.1 million per
year in annual fees since 2000. As part of our internal reorganization, the
fiber optic backbone used by WIND was transferred to WIND effective as of March
1, 2004. WIND has also entered into a number of non-exclusive interconnection and
roaming agreements with other Italian and with international telecommunications
operators. Interconnection agreements allow one operator to make use of another
operators network in order to have the necessary connections to terminate a
call originating in that operators network, whereas roaming agreements allow
one mobile operator to have its customers calls hosted by another mobile
operators networks in geographical areas which its network does not cover.
WINDs roaming agreements include terms designed to ensure that WIND customers
receive seamless connections, full access to their subscribed services and
complete mobile network coverage. WIND also offers direct access to its fixed-line customers following the
unbundling of the local loop, a process whereby Telecom Italia is required to
give alternative carriers access to Telecom Italias last-mile connections
that include the wires leading to a customers home or office. As of March 31,
2004, the unbundling of the local loop was operational in a number of parts of
Italy through 488 unbundling sites, covering approximately 28% of the Italian
population. As of the same date, a total of 453,000 WIND customers had
requested direct access to the WIND network through those sites, 367,000 of
whom had already been connected to the WIND network as of that date. You should
read Regulatory MattersTelecommunications Regulation for a detailed
discussion of the unbundling of the local loop. WIND has obtained a number of important licenses and authorizations needed
to build its business, including a license to provide mobile telephone services
in Italy using digital GSM-1800 and GSM-900 technology and one of the five
licenses to provide third-generation UMTS services in Italy auctioned by the
Italian government. The purchase price for WINDs UMTS license totals
approximately Euro 2,447 million, of which approximately Euro 2,194 million has
already been paid and the remainder is to be paid over the next eight years.
The UMTS license became effective January 1, 2002 and expires on December 31,
2021. The process by which the Italian government sold UMTS licenses is the
subject of ongoing investigations by the public prosecutor for Rome and the
Antitrust Authority, as well as other pending legal challenges. Although no
assurance can be given as to the outcome of these proceedings, WIND does not
believe that any of these proceedings will have a material adverse impact on
its ability to offer UMTS services. 53




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Customer care and marketing Since beginning operations in 1999, WIND has focused on creating customer
care systems that are accessible and convenient to use, including an integrated
billing system for fixed-line and mobile phone telephone customers and a system
that allows WINDs corporate clients to pay bills, order supplies or obtain
information electronically. WIND seeks to keep its pricing and billing policies for its fixed-line and
mobile services as transparent and user-friendly as possible and markets its
services and products through a multi-channel commercial distribution network
with over 4,300 points of sale, including dealers, independent agents, business
partners and distributors. Environmental and other regulatory matters Because of its relatively recent start-up of operations, WIND has been
able to take advantage of recently developed technologies in the implementation
of its quality and safety standards. Depending on the installation context,
WIND deploys different network infrastructure elements in order to achieve
radiation emission ranges lower than the minimum levels required by applicable
Italian regulations, which are themselves more than 50% lower than the minimum
radiation emission levels set by a number of other European countries. In
addition, all plans for WINDs base transceiver stations include a report on
electromagnetic emissions that is submitted to the relevant public authorities.
However, if the Italian government were to set limits on electromagnetic
emissions that are stricter than those currently in effect, we could be
required to upgrade, move or make other changes to our mobile telephony
infrastructure. You should read Item 3. Key InformationRisk FactorsOther
 Risks Relating to Our BusinessesWe may incur significant capital
expenditures to comply with legislation on electromagnetic fields; we may not
be fully reimbursed for these capital expenditures. WIND, like other telecommunications providers in Italy, is subject to
regulation by both the Italian government and the European Union. You should
read Regulatory MattersTelecommunications Regulation for a discussion
of the regulatory framework in which WIND operates. Services and Other Activities Real estate and other services On December 31, 2003, Enel Facility Management (previously Enel Real
Estate), the company through which we had conducted our commercial real estate
management activities, transferred real estate assets with a net book value of
approximately Euro 1,522 million to Newreal, a company that we constituted with
the purpose of divesting the real estate assets contributed to it. On June 3,
2004, we signed an agreement for the transfer of the entire share capital of
Newreal to a consortium formed by an investment fund belonging to the Deutsche
Bank group and CDC-IXIS for approximately Euro 1,400 million. The agreement
provides for a price adjustment mechanism and requires that, before the closing
of this transaction, Newreal will transfer real estate assets with a net book
value of approximately Euro 380 million to our subsidiary Dalmazia Trieste. We
expect to close this transaction by the first half of July 2004. We also currently own, mostly through Dalmazia Trieste S.r.l., real estate
assets with a net book value of approximately Euro 355 million, that we intend
to divest, together with the additional assets which we will transfer to
Dalmazia Trieste before the end of July 2004, by 2007. Enel Facility Management is still responsible for providing building
cleaning, maintenance, security, canteen and other services to both Group
companies (including Newreal) and third parties. In 2003, the revenues of Enel
Facility Management amounted to Euro 293 million, of which 29 million arose
from services provided to third parties. Enel Facility Management is also
focusing on pursuing the reduction of costs we incur for rents of commercial
offices. 54




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Engineering and contracting We conduct our engineering, procurement and construction, or EPC,
operations through Enelpower S.p.A. Enelpower operates - directly or through
its subsidiaries - as an engineering and contracting company and supplier of
integrated power systems on a turnkey basis. During the last 34 years, our
engineering and construction operations designed and built power plants with a
total of 54,000 MW of gross generating capacity, and installed or constructed
almost all of the electricity transmission and distribution facilities built in
Italy. In addition to serving as the primary EPC contractor for our Generation
and Energy Management Division, Enelpower provides EPC services to third
parties. During 2002, as part of the re-organization of the Groups activities,
Enelpower has redefined its corporate mission. Pursuant to such
re-organization, Enelpower will no longer target international markets except
for the completion of the projects to which it is already committed and will
focus its operations on the Italian market. In 2003, Enelpower earned approximately 74% of its revenues from projects
for parties not belonging to the Enel Group. We expect this percentage to
decline to approximately 52% in 2004. In February 2003, the public prosecutor of Milan initiated a criminal
investigation of the former chief executive officer of Enelpower, a former
senior executive of Enelpower, and 12 other persons for the alleged commission
of certain crimes, including embezzlement, fraud, corruption, and false
statements to shareholders, in connection with certain transactions carried out
by Enelpower in the Middle East and Italy, including transactions with the
Siemens and Alstom groups. On March 5, 2003, Enelpower was notified of the
pending investigation and the possible administrative liability it may incur in
relation to the alleged crimes. On June 6, 2003, the Court of Milan, upon
request by the public prosecutor, ordered the arrest of the former chief
executive officer and the former senior executive of Enelpower on suspicion of
such charges. In response to this criminal proceeding, we and our subsidiary,
Enelpower, initiated legal actions against all Enelpower employees involved in
the alleged offenses, aimed at protecting the interests of the Enel Group and
those of our shareholders. In addition, Enelpower notified its suppliers
involved in the investigation that, in the event, the alleged illegal conduct
should be proven, Enelpower would seek compensation for damages suffered as a
result. On July 11, 2003, the former Chairman of Enel Produzione resigned after
voluntarily disclosing to the public prosecutor of Milan the extent of his
involvement in the conduct that is the subject of the prosecutors
investigation. We submitted to the Court of Milan a copy of a settlement
agreement between us and Siemens S.p.A. under which we will receive Euro 20
million from Siemens S.p.A. for damages to our reputation, as well as the right
to renegotiate existing agreements between Siemens S.p.A. and Enel Produzione.
In April 2004, the Court of Milan, as a cautionary measure, banned Siemens AG
from receiving contracts from public entities in Italy related to the supply of
gas turbines because of its alleged illicit relationship with members of
management of Enelpower and the former Chairman of Enel Produzione. On February
19, 2004, we entered into a settlement with Alstom Holdings SA, Alstom Power
Inc. and Alstom Power Italia S.p.A. providing for their payment of damages
 to us for injury to
our reputation of Euro 4.5 million in the form of credits applicable to
purchases by any Enel Group company from any Alstom Group company, of which
Euro 2 million must relate to future purchases. See Item 8. Financial Information
Other Financial InformationLegal Proceedings. Information technology Enel.it S.p.A., now Enel.it S.r.l., which we formed in October 1999,
designs new tools and services to support development of our new products and
to enhance the efficiency and effectiveness of our information technology
systems. In the period from 2001 through 2003, Enel.it implemented an integrated
SAP information management system in almost all of the Groups companies. In
addition, in 2003, Enel.it supported Enel Distribuzione in implementing the
roll-out of the Telemanagement system for remote metering. This project, which
started in the second half of 2001, involves the system-wide replacement of
approximately 30 million traditional mechanical electricity meters with digital
meters, or Telemeters, incorporating sophisticated technology. Also in 2003,
Enel.it, in cooperation with Enel Distribuzione, started a project aimed at
implementing a software and hardware platform to support the invoicing
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In 2003, Enel.it and our domestic generation companies have cooperated in
creating and developing an integrated platform to support the sale of the
energy on the pool market. Together with WIND and Enel Distribuzione, Enel.it has continued to
develop the Power Line Communication project for the transmission of data
signals through the electricity distribution system, so as to offer
Internet-based and other on-line services, as well as indoor communications
technology services, to our customers. Enel.it is also advising other companies
of the Group on possible uses and enhancements of their websites, including the
implementation of e-commerce portals. According to the new core-business oriented strategy of the Group, Enel.it
is now focusing its activities on providing services to other Group companies. Water We operate our water business mainly through our wholly owned subsidiary
Enel.Hydro S.p.A. Enel.Hydro participates in four main consortia that hold
interests in entities that have been awarded contracts for the supply of water
in certain geographical areas with a total of approximately 6.1 million
residents. We no longer view our water activities as strategic and we intend to
divest almost all of these activities by the end of 2004. Research and development We maintain our own research and development program to provide
technological innovations to our businesses. The objective of our research and
development activity is to improve the efficiency and capacity, and innovate
and expand the service offerings, of our core energy businesses, as well as to
reduce their environmental impact. We develop new products and processes
internally and also acquire technology in the market which we then customize
for our own purposes. During the past three years, we have conducted research and development
activities mainly to improve the efficiency of our generation plants and our
transmission and distribution networks, to minimize the environmental impact of
electricity generation, and to develop innovative technologies so as to deliver
new services through our network infrastructure. We also receive research and
development activities mainly through Enel Produzione and Enel Green Power. We
also receive research and development activity services from CESI S.p.A., which
was one of our consolidated subsidiaries until 2002, and in which we currently
hold a 40.92% participation. CESI S.p.A. is dedicated mainly to the testing of
electrical and electronic equipment and to research on new electrical systems,
plants, components and applications thereof. We historically have conducted and
funded research for the national electricity system. We expect to reduce our
shareholding in CESI over time. Research and development programs involved about 200 of our qualified
employees in 2003. Our expenditures on research and development were
approximately Euro 16 million for 2003, Euro 100 million for 2002 and Euro 100
million for 2001. The sharp decrease in our expenditures is mainly due to the
deconsolidation of CESI, that we effected in 2003. Personnel administration In January 2001, we formed APE Gruppo Enel S.p.A., now APE Gruppo Enel
S.r.l., a wholly owned company that manages personnel payrolls, pension funds
and social security funds, and provides related administration services for the
Enel Group, as well as offering similar services to third parties. As of
December 31, 2003, the company had 836 employees of its own, and provided
services to a total of approximately 69,430 employees, of which 5,807 belonged
to companies outside the Enel Group. 56




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Professional training services Our subsidiary Sfera S.r.l. is responsible for providing professional
training services to our employees. In 2001, Sfera launched an integrated
remote training system for employees of our Group (Enel Distance Learning
System), reaching 34,181 registered users at the end of 2003. In 2003, Sfera
developed a total of 60,861 full-time equivalent classroom days of
instruction. Factoring Enel.factor S.p.A., a captive factoring company 80% owned by us and 20%
owned by Meliorbanca, an Italian bank, engages in the factoring of receivables
owned by third parties against companies of our group. In 2003, Enel.factor
registered a turnover of Euro 2,253 million. The number of customers at the end
of the year amounted to 380. Capital Investment Program Outlook and capital investments We have summarized in the table below our capital expenditures on tangible
assets by division during each of 2001, 2002 and 2003. During such period, we
have not incurred capital expenditures with respect to activities of our
Corporate division. The table includes expenditures made on the Gencos during
these years. 2001
    
    2002
    
    2003(in millions of euro)Generation and Energy Management
    
    
    755
    
    
    
    939
    
    
    
    652Sales, Infrastructure and Networks
    
    
    1,366
    
    
    
    1,855
    
    
    
    1,620International
    
    
    73
    
    
    
    93
    
    
    
    223Transmission
    
    
    173
    
    
    
    178
    
    
    
    183Telecommunications
    
    
    1,185
    
    
    
    1,550
    
    
    
    685Others
    
    
    531
    
    
    
    494
    
    
    
    260Total
    
    
    4,083
    
    
    
    5,109
    
    
    
    3,623
 We incurred total capital expenditures in our core electricity and gas
distribution businesses of approximately Euro 2,495 million in 2003, and we
expect to incur capital expenditures of approximately Euro 3,340 million in
2004 and approximately Euro 3,500 million in 2005. We expect to reduce the
amount of investment on tangible assets in our Telecommunications Division to
approximately Euro 680 million in 2004 and Euro 740 million in 2005. Generation and Energy Management In 2003, the Generation and Energy Management divisions capital
expenditures were Euro 652 million, a decrease of Euro 287 million, or 30.6%,
from 939 million of 2002, primarily reflecting the ongoing implementation of
our conversion program of certain thermal generation plants to combined cycle
technology, involving total gross installed capacity of approximately 4.8 GW.
We have spent approximately Euro 1,350 million since the conversion program
started in 1998 through the end of 2003, and we plan to spend a further Euro
250 million by 2007 in order to complete this program. In addition to the combined cycle technology conversions, we have begun an
investment program to convert two oil fired thermal plants to burn lower-cost
fuels such as coal and orimulsion, and to upgrade the technology at an existing
coal plant to improve its efficiency. The total gross installed capacity
involved in these projects is approximately 4.7 GW, and we expect to make
approximately Euro 2,200 million in capital expenditures during the period from
2004 to 2008 to complete these projects. We also continued implementing a strategic plan begun in 2001 to increase
investment in renewable generation resources (wind, hydroelectric, geothermal)
to allow us to comply with the regulations requiring us to 57




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provide a specified amount of green energy each year. We expect this
program, on which we spent approximately Euro 201 million in 2003 and on which
we plan to invest Euro 1,000 million in the 2004-2008 period, to permit us to
be self-sufficient in meeting the requirements regarding the production of
qualified renewable energy by 2005 (given the expected decline in our share of
total generation in Italy), at which time we believe we will no longer have to
purchase green certificates to make up for a shortfall in our own production.
In 2003, we generated 0.7 TWh of energy from new qualifying renewable
resources, out of the 2.0 TWh we were required to produce, and we expect to
produce 1.1 TWh of the 2.3 TWh we are required to produce for 2004. If we
achieve the goals set under this investment program, we expect that beginning
in 2006 we will be producing more qualifying renewable energy than required,
and that we will be able to sell the rest to other power producers in the form
of green certificates. Sales, Infrastructure and Networks Capital expenditures in tangible assets for the Sales, Infrastructure and
Network division decreased 13% to Euro 1,620 million in 2003 from Euro 1,855
million in 2002. Capital expenditures on our electricity distribution networks
decreased 14% to Euro 1,444 million in 2003 from Euro 1,680 million in 2002.
This decrease was primarily due to a reduced need for investments aimed at
improving the quality of our service following significant spending in that
area in recent years. In 1999, Enel Distribuzione began a project for the
development of a digital meter to replace the 30 million analog meters
currently installed in Italy. In June 2000, we signed an agreement with Echelon
Corporation of the U.S. that will allow us to use Echelons LonWorks network
control technology in our digital meter project. The installation of the new
meters is expected to be completed in 2005. The project, which we expect will
entail total investments of approximately Euro 2,000 million, is intended to
create an integrated system able remotely to manage metering, communications
and electricity supply contracts, allowing for a significant reduction in
operating costs and more effective monitoring of fraud. We intend to explore
the possibility of using the Telemanagement system to develop a more advanced
metering system that would allow us to tailor prices to patterns of customer
electricity consumption. In 2003, we installed approximately 7.7 million new
meters, for a cost of approximately Euro 451 million. At
December 31, 2003, the total number of new meters installed was
13.4 million. Of this total, 9.9 million were already
connected to the remote terminals, 5.2 million of which were
operational. We also continued to invest in our distribution network in 2003 to enable
our secondary transformer substations to better respond to requests of
customers, and improve the quality of our service in line with guidelines
provided by the Energy Authority. For a discussion of these guidelines, please
see Regulatory MattersElectricity RegulationQuality of service
regulation. We plan to invest approximately Euro 7,200 million, financed mainly
through our cash flow, between 2004 and 2008 in our distribution business.
Of this total, future planned investments in the Telemanagement
integrated system represent approximately Euro 1,200 million. Other network investments will target
improving service quality, with the goal of exceeding targets established by
the Energy Authority, as well as ensuring connection of the new customers,
improving load factor and plant safety. We also plan to invest in developing our gas distribution networks. These
investments are mainly for new pipelines built either as a consequence of
customers requests or as part of our business development policies. We also
intend to invest in improving our service levels and plant safety. We also plan
significant capital expenditures in information technology in the 2004-2008
period, in particular on a new more customer-friendly billing system. In
addition, we plan to implement an internal resource planning software to
improve the efficiency of both our distribution activity and our accounting
system. We also expect to make investments in order to better support customer
relationships and sales activity. International Capital expenditures for our International division more than doubled to
Euro 231 million in 2003 from Euro 93 million in 2002, primarily due to
expenditure of Euro 131 million for the revamping of a plant owned by Maritza
East III, a company which we acquired control of in 2003, and of Euro 46
million for work performed on our distribution networks in Spain. In 2003, Viesgo Generaciòn made capital expenditures of approximately Euro
18 million to improve the capacity, efficiency and production of its 18 power
plants, which at the end of 2003 had gross installed capacity of 2,365 MW. In
2003, Viesgo Generaciòn began to implement a program to convert certain of its
coal plants to 58




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combined cycle technology and orimulsion, as well as to acquire additional
plants. Viesgo Generaciòn will begin incurring related capital expenditures in
2004, which we estimate will total approximately Euro
166 million over a multiyear period. Electra de Viesgo
Distribuciòn made capital expenditures of Euro 46.4 million in 2003, primarily
to upgrade its distribution network in compliance with regulatory requirements.
It is also planning to make additional capital expenditures to increase service
performance and network safety requirements. We plan to spend Euro 1,480
million by 2008 in order to implement this program. In 2003, Enel North America made capital expenditures for approximately
Euro 3.6 million. In 2003, Enel Latin America made capital expenditures of
approximately Euro 34.3 million, mainly due to the construction of a new
hydroelectric plant. In 2004, Enel North America expects to make capital
expenditures of approximately Euro 0.6 million, primarily on maintenance of its
existing plants, while Enel Latin America expects to make capital expenditures
of Euro 0.4 million. Transmission Capital expenditures in our transmission segment rose to Euro 183 million
in 2003 from Euro 178 million in 2002. Such expenditures mainly relate to the
development of station lines. We expect to incur expenditures of approximately
Euro 990 million from 2004 to the end of 2007. Telecommunications We have made significant investments in developing our telecommunications
business. In March 2001, we acquired 100% of the capital stock of Infostrada,
one of Italys leading alternative providers of fixed-line telecommunications
services and the owner and operator of one of Italys leading Internet portals,
for Euro 7,250 million. Please see BusinessThe Enel GroupTelecommunicationsThe acquisitions of Infostrada and certain assets of Blu
for further details on the transaction. In 2003, we incurred total capital
expenditures in tangible assets in our telecommunications business of Euro 685
million, and we expect to incur expenditures of approximately Euro 707 million
(Euro 876 million including intangible assets) in 2004, Euro 742 million (Euro
865 million including intangible assets) in 2005 and Euro 558 million (Euro 659
million including intangible assets) in 2006. Services and Other Activities With respect to our other non-core businesses, we incurred total capital
expenditures of approximately Euro 312 million in 2003, as compared to 582
million in 2002, and expect to incur total capital expenditures in all those
businesses of approximately Euro 186 million in 2004 and Euro 180 million in
2005. 
 Regulatory Matters 
 Overview of Regulation in the Energy Sector The Industry Ministry and the Energy Authority share responsibility for
overall supervision and regulation of the Italian energy sector, comprising
both electricity and gas. The Industry Ministry is responsible for establishing the strategic
guidelines for the energy sector and for ensuring the safety and economic
soundness of the electricity and gas sectors. The Energy Authority is responsible for:  
    
Setting and adjusting tariffs on the basis of general criteria established by law;
    
Advising the Industry Ministry on the structuring and
administration of licensing and authorization regimes for the energy
sector;
    
Ensuring the quality of services provided to customers; 59




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
    
Overseeing the separation of utility companies into distinct
units for accounting and management purposes; and
    
Otherwise protecting the interests of consumers. For this
purpose, the Energy Authority has the authority to mediate disputes
and preside over arbitration proceedings between utilities and
consumers, and to impose fines and other sanctions for violations of
regulations. 
 Electricity Regulation  Prior to April 1999, the regulatory framework for the Italian electricity
industry:  
    
gave ultimate authority for the generation, transmission and
distribution of electricity to the Italian government, which
licensed such activities to us and to municipal electricity
utilities;
    
restricted power generation to authorized producers and
restricted other electricity producers to using their production
only for their own consumption, for sales to affiliated companies,
or for sales to us; and
    
provided that each year the Energy Authority determined
electricity tariffs based on a cost-plus system. The regulatory framework for the Italian electricity sector has changed
significantly as a result of an EU directive issued in December 1996, commonly
referred to as the Electricity Directive, that required EU member states to
liberalize their electricity sectors. In particular, the Electricity Directive
sought to liberalize the market for electricity by providing for the separation
of generation, transmission and distribution activities and introducing
competition in generation activities. In addition, the Electricity Directive
required each EU member state to ensure that a specified percentage of its
electricity market (as established yearly by the EU Commission) was open to
competition. On April 1, 1999, the Bersani Decree, which implemented the principles
contained in the Electricity Directive, became effective in Italy. It began the
transformation of the electricity sector from a highly regulated industry to
one in which energy prices charged by generators will eventually be determined
by competitive bidding. The Bersani Decree, among other things, required that
distribution companies servicing the same municipality consolidate their
networks. It also provided for a gradual liberalization of the electricity
market so that customers whose annual consumption of electricity exceeded
specified amounts would be able to contract freely with power generation
companies, wholesalers or distributors to buy electric power. The Energy Authority has also replaced the cost-plus system for setting
electricity tariffs with a price-cap tariff methodology. Under the price-cap
methodology, tariffs are reduced by a fixed percentage each year. This system
creates incentives for operators to improve efficiency and gradually passes on
savings to final customers. In 2003, the EU adopted a new Directive and a Regulation to further
liberalize the electricity market. The new Electricity Directive retains the
main principles of the old Directive, which it replaces. It enables all
consumers to freely choose their supplier by 2007, irrespective of consumption
levels, with all non-household consumers enjoying this right of choice from
2004. Further, the new Electricity Directive introduces new definitions of
public service obligations and security of supply, establishes a regulator in
all EU member states with well defined functions, and, finally, requires legal
unbundling of network activities from generation and supply. EU member states
have until July 1, 2004, to pass implementing legislation. Italy has not yet
implemented such Directive. The Regulation establishes common rules for the
cross-border trade in electricity; it lays down principles on charges to be
paid as a result of transit flows and access to networks as well as on
congestion management; more detailed rules can be issued by the EU Commission,
acting together with a special committee. Regulatory framework 60




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The Bersani Decree established a general regulatory framework for the
Italian electricity industry that has gradually introduced free competition in
power generation and sales to consumers meeting certain consumption thresholds
while maintaining a regulated monopoly structure for power transmission,
distribution and sales to other consumers. In particular, the Bersani Decree
and the subsequent implementing regulations:  
    
liberalized, as of April 1, 1999, the generation, import and
export of electricity;
    
liberalized the sale of electricity to consumers meeting
certain consumption thresholds, or Eligible Customers, who may
negotiate supply agreements directly with any domestic or foreign
producer, wholesaler or distributor of electricity, and provided
that other consumers, or Non-Eligible Customers, would have to
purchase electricity from the distributor serving the area in which
they are located and pay tariffs determined by the Energy Authority;
    
provided that after January 1, 2003, no electricity company
is allowed to produce or import more than 50% of the total of
imported and domestically produced electricity in Italy in order to
increase competition in power generation; as a result of this limit,
we were required to sell not less than 15,000 MW of our generating
capacity by January 1, 2003;
    
provided for the establishment of the Single Buyer, a central
purchaser of electricity from producers on behalf of all
Non-Eligible Customers;
    
provided for the creation of the Borsa dellEnergia
Elettrica, or pool market for electricity, in which producers,
importers, wholesalers, distributors, the Gestore della Rete, other
Eligible Customers and the Single Buyer participate, with prices
being determined through a competitive bidding process;
    
provided for the creation of the Gestore del Mercato, or
Market Operator, charged with managing the pool market;
    
provided that the transmission and distribution of
electricity are reserved to the Italian government and performed by
licensed operators, and in this respect:
    
provided that management and operation of the national
transmission grid is licensed to an independent system operator, the
Gestore della Rete, with owners of the transmission grid such as
ourselves retaining ownership of the grid assets; and
    
established a new licensing regime for electricity
distribution and provided incentives for the consolidation of
electricity distribution networks within each municipality. The Bersani Decree has been amended following the enactment of a law in
October 2003 that provides, among other things, that management and operation
of the national transmission grid be entrusted to a single entity, which will
also own the grid assets and that will be privatized. A governmental decree
enacted in May 2004 provides for the transfer to Terna of the responsibility to
manage the national transmission grid and the related assets by October 31,
2005. Upon this transfer, we will no longer control Terna as no electricity
operator, including us, shall be entitled to voting rights in excess of 5% with
respect to the appointment of Ternas directors. In any event, we are required
to reduce our holding in Terna to no more than 20% by July 1, 2007. Generation The Bersani Decree liberalized the regime for the generation of electric
power. In order to increase the level of competition in the market, the Bersani
Decree provided that, by January 1, 2003:  
    
Neither we nor any other generation company would be
permitted to produce or import more than 50% of the total amount of
electricity produced or imported in Italy. 61




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
    
We would have to sell not less than 15,000 MW of our gross
installed generating capacity, so as to reduce our market share. We
complied with this requirement through disposal of the three Gencos.
Please refer to BusinessThe Enel GroupDisposal of the
Gencos for further information. In 2003, a law was approved which, among other things, streamlined the
authorization procedures relating to the construction of new power generation
plants and the renovation and expansion of existing plants. Promotion of renewable resources In order to promote the generation of electricity from renewable
resources, the Bersani Decree provided that, starting in 2001, all companies
introducing more than 100 GWh of electricity generated from conventional
sources into the national transmission grid in any year must, in the following
year, introduce into the national transmission grid an amount of electricity
produced from newly qualified renewable resources equal to at least 2% of the
amount of such excess over 100 GWh, net of co-generation, self-consumption and
exports. This electricity from renewable resources may be produced directly,
purchased from other producers or purchased from the Gestore della Rete.
Renewable resources include geothermal and hydroelectric energy sources. The
electricity generated from those resources must be from generating capacity
installed after April 1, 1999, the date the Bersani Decree became effective.
Electricity generated from qualifying renewable resources is certified by means
of tradable green certificates issued by the Gestore della Rete. In addition, the Bersani Decree directs the Gestore della Reteto dispatch
electricity into the national transmission grid in the following order of
priority: first, energy produced from qualified renewable resources, then that
from co-generation and finally electricity produced from domestic fuel sources
that the government seeks to favor. An EU Directive issued in September 2001 set targets for production from
renewable energy resources. In particular, the Directive envisages that by
2010, a share equal to 22% of total electricity consumed in the EU must be from
renewable energy resources and sets recommended national targets. Member states should
 have adopted legislation to implement this Directive by
October 2003. Italy implemented this Directive in December 2003 and set a
target equal to 22.5%, lower than the recommended EU target 25%. Hydroelectric power Under the Bersani Decree, all of our licenses for the generation of
electricity from large bodies of water, which had originally been granted to us
for an indeterminate period of time, will now expire in April 2029. In
addition, the Bersani Decree automatically extended to December 31, 2010 the
term of all hydroelectric licenses for the generation of electricity from large
bodies of water that were granted to other electricity producers and were
scheduled to expire before such date. All hydroelectric licenses expiring after
December 31, 2010 retain their original expiration date. After the expiration
of any licenses we hold, we may bid for new licenses, which will have a
duration of 30 years. We, like any current license holder, would enjoy
preferential treatment in a bidding contest in a case of equal bids. A law issued in August 2000 states that hydroelectric licenses for the
generation of electricity from small bodies of water, which had also previously
been granted for an indefinite term, will also expire in 2029. The Bersani
Decree also provides that the Provincial Authorities of Trento and Bolzano and
the Regional Authority of Valle dAosta, which enjoy special autonomous status
under Italian law, may reduce the duration of hydroelectric licenses in their
jurisdiction to less than thirty years. Pursuant to a governmental decree of 1999, all of our hydroelectric
licenses for the provinces of Trento and Bolzano, as well as all licenses held
by other electricity producers in the same provinces which expire before
December 31, 2010, will now expire on December 31, 2010, and, from that date,
will be granted for 30-year periods. Finally, certain of our hydroelectric
licenses were transferred to the Gencos pursuant to a law enacted in November
2000. 62




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In June 2001, we sold to the Regional Authority of Valle dAosta all our
hydroelectric plants in that region and a 49% interest in our distribution
subsidiary in that region. In 2004, the EU Commission challenged the provisions of the Bersani Decree
that extended the duration of our hydroelectric concessions as well as those
which accord to us and all other current license holders preferential treatment
in the bidding contest, on the grounds that these provisions do not comply with
EU law. While these proceedings are pending, the Decrees provisions remain
valid and enforceable, although we cannot provide any assurances as to the
ultimate outcome of the Commissions challenge. Imports The volume of electricity that can be imported into Italy is limited by
the capacity of transmission lines that connect the Italian grid with those of
other countries and by concerns relating to the security of the system.
Currently, a maximum import capacity of approximately 6,050 MW is available to
import energy safely. A law passed in 2003 provides incentives to the
development of new transmission infrastructures. In 2003, we controlled approximately 2,055 MW of the total import capacity
pursuant to long-term contracts between us and foreign producers and
wholesalers. In order to address the allocation of the remaining capacity, the
Bersani Decree authorizes the Industry Ministry to set terms and conditions on
import capacity, taking into account a fair allocation between Eligible and
Non-Eligible Customers if import demand exceeds total interconnection capacity.
In 2003, the Industry Ministry established the main criteria for the allocation
of import quotas for the year 2004, entrusting the Energy Authority and the
Gestore della Retewith the tasks of issuing more detailed rules and entering
into agreements with neighboring operators. The allocation mechanism considers the total interconnection capacity
available at the borders with France and Switzerland (the north-west pool) and
Austria and Slovenia (the north-east pool) separately. Interconnection capacity
is allocated on a pro-rata basis; in addition, in no case may a single importer
hold more than 10% of the interconnection capacity available in any given pool.
The Energy Authority and the French energy authority have agreed that they will
jointly decide how to allocate the interconnection capacity in the north-west
pool. Eligible and Non-Eligible Customers One of the most important features of the new regulatory framework
established by the Bersani Decree is the distinction between Eligible Customers
and Non-Eligible Customers. All customers that do not qualify as Eligible
Customers are considered Non-Eligible Customers. As of January 1, 2004, Eligible Customers consisted of:  
    
Individual customers or consortia of business customers whose
annual consumption of electricity in the prior year exceeded 0.1 GWh
at a single delivery point;
    
Entities outside Italy that have the right to choose freely
their supplier of electricity with respect to electricity consumed
outside of Italy;
    
The local distribution company that serves the provinces of
Trento and Bolzano;
    
Local distribution companies only with respect to electricity
distributed by them to other Eligible Customers; and
    
Electricity resellers, but only with respect to electricity
sold by them to other Eligible Customers. Eligible Customers may negotiate supply agreements directly with any
domestic or foreign producer, reseller or distributor of electric power.
Resellers, including our subsidiary Enel Energia, may buy electricity from any
producer or on the pool market for resale to Eligible Customers. 63




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Non-Eligible Customers may purchase electricity only from the distribution
company serving the geographic area in which they are located. The tariffs
applicable to residential Non-Eligible Customers and tariff limits applicable
to other Non-Eligible Customers are established by the Energy Authority and are
intended to be the same throughout Italy for each category of customers. In
addition to the price of electricity, both Eligible and Non-Eligible Customers
also pay transmission fees and system charges as set by the Energy Authority.
You should read The tariff structure for a discussion of tariffs and
tariff limits. Eligible Customers may choose to remain subject to the regime and tariff
structure applicable to Non-Eligible Customers for a period of two years from
the date they first qualify as Eligible Customers. This period may be extended
by an Eligible Customer for two additional years. In 2003, the EU adopted a new Directive and a Regulation to further
liberalize the electricity market. The new Electricity Directive enables all
consumers to freely choose their supplier by 2007, irrespective of consumption
levels, with all non-household consumers enjoying this right of choice starting
from 2004. See Electricity Regulation. In 2003, if Eligible Customers had made all of their purchases on the free
market, the percentage of electricity purchases made on the free market by
Eligible Customers would have been equal to 64%. Actual sales in 2003 were
equal to 37%. The list of Eligible Customers is publicly available and included 147,821
Eligible Customers (including qualifying consortia) as of May 13, 2004. On January 1, 2001, all energy produced from renewable sources under the
CIP 6 regime was transferred to the Gestore della Rete. The Gestore della Rete
in turn is making this energy available for sale to Eligible Customers in the
free market by means of an auction system. We formerly had been required to
purchase substantially all of the electricity produced under the CIP 6 regime
at fixed prices. Please refer to BusinessThe Enel GroupPurchased
power for a more detailed discussion of these contracts. The Single Buyer The Single Buyer is a joint stock company formed in November 1999 and
wholly owned by the Gestore della Rete. It is responsible for ensuring the
efficient, adequate and non-discriminatory supply of electricity to
Non-Eligible Customers until they are allowed to freely choose their supplier.
The Single Buyer became operational on January 1, 2004, and is expected to
cease operations in 2007, when all customers will be able to choose their
supplier. Electricity distribution companies, including us, may take stakes of
up to 10% in the Single Buyer, although the Gestore della Retemust remain the
majority shareholder. In order to supply electricity to Non-Eligible Customers, the Single Buyer
may purchase electricity on the pool market, directly from domestic and foreign
producers or from the Gestore della Reteunder the CIP 6 regime, on the basis
of its own periodic estimates of future electricity demand and Industry
Ministry guidelines. The total payments by the Single Buyer to electricity producers (plus its
own operating costs) will need to match the total revenues it earns from
Non-Eligible Customers under the regulated tariff structure. As a consequence,
the tariffs may need to be readjusted from time to time to reflect the prices
actually paid by the Single Buyer, as well as other factors. Pool Market The Bersani Decree provides for the creation of the Borsa dellEnergia
Elettrica, or pool market for spot trading electricity, to be administered by
an independent entity that serves as the Market Operator. The pool market
started operations on March 31, 2004. Transactions currently take place between producers and Eligible
Customers, although it is expected that active bidding by Eligible Customers
will not be available before 2005. Pending this period, the Gestore della Rete 64




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will determine the aggregate electricity demand based on its estimates.
The pool market is organized in three different markets in order to ensure a
steady supply of electricity. In particular, sellers and buyers  when the
temporary period ending in 2005 expires  will submit bids and offers for
electricity to be supplied on the day following the transaction in the
day-ahead market under the supervision of the Market Operator. The Market
Operator will be responsible for matching electricity demand and supply and
consequently, for the definition of power injection (supply) and withdrawal
(demand) schedules to be communicated to the Gestore della Rete, who is
responsible for physical delivery of energy. Variations in the schedules agreed
upon in the day-ahead market will be negotiated through an adjustment
market. In the day-ahead market and in the adjustment market prices are
set once bids and offers have been aggregated, starting, respectively, from the
highest bid and the lowest offer. This results into a single price/quantity at
which all transactions must take place. The physical delivery of energy requires that agreed upon schedules are
compatible with network constraints. To this end, a market splitting mechanism
has been adopted that enables the Market Operator, should network constraints
occur, to aggregate bids and offers according to their location, thus giving
rise to different price zones. Physical delivery also requires real time
balancing of demand and supply. The energy needed to ensure such balancing is
procured through a third market, the ancillary service market where producers
submit to the Gestore della Retebids and offers to increase (or decrease) the
volume of energy to be supplied (or withdrawn). Reserve production capacity
will be guaranteed by power plants previously identified by Gestore della Rete
as power plants that will ensure the availability of reserve power. The
ancillary service market also manages network congestions resulting from
transactions negotiated on the day ahead market and the adjustment market that
are not solved through market splitting. In the ancillary service market
prices are determined on the basis of individual negotiations between producers
and Gestore della Rete. The pool market seeks to improve competitive behavior of operators and to
enhance the efficiency of Italian electricity system. On June 9, 2004, the Energy Authority started an investigation to identify
the reasons of the increase of the price of electricity on the pool market for
the days between June 7 and June 10, 2004. Please refer to
Item 3. Key Information  Risk Factors  Risks
Relating to Our Energy Business  for a description of the risks
related to such investigations. Transmission As noted, we use the term transmission to refer to the transportation of
electricity on high and very high voltage interconnected networks from the
plants where it is generated or, in the case of imported energy, from the
points of acquisition, to distribution systems. As part of the implementation
of the Bersani Decree, the Industry Ministry has determined that the national
electricity transmission grid includes all of our very high voltage lines
(380/220 kV) and approximately 50% of our high voltage lines (150/132 kV). The Bersani Decree provided that the ownership and the management of the
transmission grid be entrusted to different entities, our subsidiary Terna (and
other operators) and a state-owned company, the Gestore della Rete,
respectively. Grid owners act under the criteria set by the Gestore della Rete.
Relationships between the Gestore della Reteand grid owners, such as Terna,
are represented in the following table: Gestore della Rete
    
    
    
    Terna
    
    Manages the flow of electricity over the grid
    
    
    
    Owns and operates
the grid in
accordance with the
guidelines and
directives issued
by the Gestore
della Rete
    
    Decides maintenance activities
    
    
    
    Makes proposals to,
and implements the
directives of, the
Gestore della Rete
regarding
maintenance
    
    Decides on development projects
    
    
    
    Implements Gestore
della Retes
directives for
development
projects
 This structure will substantially change in the near future. A law passed
in 2003 requires the reunification of ownership and management of the grid. A
governmental decree enacted in May 2004 provides for the transfer to Terna of
the responsibility to manage the national transmission grid and the related
assets by October 31, 2005. Upon this transfer, we will no longer control Terna
as no electricity operator, including us, shall be entitled to voting 65




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rights in excess of 5% with respect to the appointment of Ternas
directors. In any event, we are required to reduce our holding in Terna to no
more than 20% by July 1, 2007. Distribution of Electricity As noted, we use the term distribution to refer to transportation of
electricity from the transmission grid to end users of electricity. The principal effects of the Bersani Decree on distribution were:  
    
The formal adoption of a licensing regime applicable to the distribution of electricity; and
    
The promotion of the consolidation of electricity distribution activities. Requirements The Bersani Decree required distribution companies to provide service to
all customers who request it, subject to payment of applicable tariffs and to
compliance with technical and safety requirements. In addition, the Bersani
Decree required distribution companies serving more than 300,000 customers to
distribute electricity to Non-Eligible Customers through separate companies
that have such activity as their exclusive purpose. We began operating a
separate subsidiary, Enel Distribuzione, for this purpose in October 1999. Consolidation of the distribution industry The Bersani Decree sought to promote the consolidation of the Italian
electricity distribution industry by providing for the issuance of only one
distribution license within each municipality and establishing procedures to
consolidate distribution activities under a single operator in municipalities
where both we and a local distribution company were engaged in electricity
distribution. The decree asked operators with distribution networks in the same
municipality to submit joint consolidation proposals to the Industry Ministry
by March 31, 2000; these proposals were considered to be approved unless the
Industry Ministry objected within 60 days. If a joint proposal for the consolidation of networks in the same
municipality was not submitted, or was not approved by the Industry Ministry,
any local distribution companies owned or partly owned by a municipality that
served at least 20% of the electricity customers of that municipality could
request, by March 31, 2001, that we sell to it our distribution assets in that
municipality at a price to be determined by agreement between us and the
relevant local distribution company. To date, we have sold our local
distribution network in 39 municipalities and we expect to sell another 31
distribution networks. Substantially all of the other qualifying distribution companies in
municipalities with co-existing networks have made requests to purchase our
networks in these cities; for more details on these agreements and the
consolidation process, please refer to BusinessThe Enel GroupSales,
 Infrastructure and NetworksConsolidation
of the electricity distribution network. The Bersani Decree provided that if we had not agreed on a sale price with
any of the parties who had made a timely request to purchase a distribution
network by September 30, 2000, the price would be determined by an arbitration
panel using accepted valuation methodologies that take into account market
prices. The panels consist of one person nominated by each of the parties and a
third person nominated by the President of the court having jurisdiction over
the geographic area in which the local distribution company is located. To
date, three qualifying companies have issued formal requests for price
arbitration that are still pending, and another nine requests for price
arbitration have been dismissed. On average, the distribution networks that we have been required to sell
were more profitable than our other distribution networks, mainly because
distribution in metropolitan areas has lower costs. However, starting from
2004, the Energy Authority has put in place an equalization system for period
2004-2007 that compensates us for the higher costs associated with serving
non-urban areas. These costs are to be based on infrastructural elements 66




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such as length of cables and installation type (aerial or underground),
but have not yet been fixed. We are waiting for the quantification of this
amount. Under the Bersani Decree, local distribution companies owned or partly
owned by a municipality that serves at least 100,000 customers may also request
an authorization from the Industry Ministry to submit a joint proposal with us
for the consolidation of their electricity distribution networks with our
networks in adjoining municipalities. Certain distribution companies, including
those in Rome, Milan, Trieste and Modena, have expressed their interest in
purchasing our electricity distribution networks in adjoining municipalities.
We believe that, under the Bersani Decree, any such sale may not occur without
the agreement of all the parties concerned. Quality of service regulation Beginning in July 1, 2000, the Energy Authority has issued guidelines
setting targets for electricity service continuity and quality. Continuity of
service is measured by the frequency and total duration in minutes of service
interruptions and is assessed with reference to annual targets set by the
Energy Authority. Quality of service is measured in terms of waiting time for
the performance of the most frequent commercial activities (such as connection
cost estimates, connections, disconnections and reconnections). The Energy Authority has instituted a system in connection with quality
targets for continuity of service, or lack of service interruptions, whereby it
grants bonuses to companies that exceed these targets and imposes penalties on
companies that fail to meet them. Distributors that outperform the targets are paid their bonuses through a
component of the tariff structure. Since we exceeded our continuity
of service targets in 2000, the Authority granted Enel Distribuzione a
Euro 4 million bonus, which was paid in 2002. In 2001 and 2002, we
continued to make improvements in the continuity of service we
provide and the Authority granted Enel Distribuzione a Euro 146
million bonus which was paid in 2003, including Euro 32 million paid with
respect to 2001 and Euro 114 million with respect to 2002. We believe that the level of revenues expected under the current tariff
structure will allow us and other distributors to cover the costs we need to
incur to meet the continuity and quality of service targets set by the Energy
Authority. See BusinessThe Enel GroupSales, Infrastructure and
NetworksQuality of network service. The tariff structure The current electricity tariff regime set by the Energy Authority first
came into effect on January 1, 2000, with its main revisions being introduced
at the beginning of 2002 and 2004. The regime regulates, for both Eligible and Non-Eligible Customers,
transmission and distribution components and system charges. In addition, it
sets the generation component of the tariff for Non-Eligible Customers, while
Eligible Customers pay market prices. The Energy Authority sets transmission and distribution charges pursuant
to a price cap methodology that has been in place since January 1, 2000. Prior
to January 1, 2002, the Energy Authority set different prices to cover
transmission and distribution costs for Eligible and Non-Eligible Customers.
Effective as of January 1, 2002, the Energy Authority established one set of
transport charges for both Eligible and Non-Eligible Customers that are meant
to cover transmission and distribution costs. In setting tariffs from 2000, the Energy Authority included: Operating costs of generation, transmission and distribution activities,
including procurement costs, and amortization and depreciation. In order to be
recovered, these costs must be both actually incurred by the electricity
companies and recognized by the Energy Authority;  
    
    An appropriate return on invested capital, including both equity and debt financing; and 67




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
    
    The costs associated with system charges. In 2004, the Energy Authority set new tariffs which have been in force
since February 1, 2004. With respect to transmission and distribution charges, changes have
occurred in the way depreciation and invested capital are calculated by the
Energy Authority (new criteria consistent with international regulatory
practices have been used). With respect to the price paid by Non-Eligible Customers, other than the
price to cover transport and system charges, changes have occurred in the way
the Energy Authority sets the tariff due to the start of operations of the pool
market since March 31, 2004. Tariffs for Non-Eligible Customers The Energy Authority sets tariffs for residential customers. Prior to 2002, tariffs for all other classes of Non-Eligible Customers
were set by distributors within certain limits established by the Energy
Authority that was still retaining a right of approval. The limits set by the Energy Authority on tariffs for non-residential
customers were of two types. One limit set an aggregate maximum amount of
tariff revenues that each distributor was allowed to receive from all customers
belonging to the same category in a single year. A second limit set the maximum
amount of tariff revenues that any distributor was allowed to receive from a
single customer of a given category. If the aggregate limit was exceeded, the
distributor had to compensate customers for the amount of the excess. If the
limit was exceeded by less than a set threshold, the distributor could elect to
apply a proportional reduction of tariffs in the following year; if the limit
was exceeded by more than that threshold, each customer had to be reimbursed in
the following year for an amount equal to its proportionate share of the excess
revenues. The threshold was raised to 10% by the Energy Authority decision
adopted in October 2001 and effective as of January 1, 2002. Compliance with the individual limit was ensured at the time tariffs were
set by the distributors and approved by the Energy Authority. Within these
limits, each distributor was free to offer tariff options to its customers in
accordance with a trade policy code aimed at ensuring transparency. This mechanism was applied only to the distribution and transmission
components of the tariff starting from 2002, while starting from 2004, it will
be applied only to the distribution component, as described in more detail
below. Generation costs Before the start of operations of the pool market, the Energy Authority
determined generation costs based on fixed-cost and variable-cost components of
production costs. The fixed-cost component, which was intended to reflect
non-fuel operating costs, was based on an estimate of the average recognized
fixed cost associated with generation plants in Italy and was set on annual
basis. The variable-cost component of the tariffs, which used to be referred to
as Component B, was principally intended to reflect fuel costs associated
with thermal power generation. An Energy Authority decision issued in November
2002 and in effect since January 1, 2003, aimed at limiting the impact of oil
price volatility, provided that the fuel cost component in a three-month period
was to reflect changes in the average price of fuel in the previous six months
only if in excess of 3%. The variable cost component of the tariffs aimed at
covering fuel costs decreased on average by 16.4% in 2002 when compared to the
level of such component calculated on average for the year 2001, mainly due to
a decline in fuel prices. In 2003 the variable average cost increased by 13%,
reflecting higher market prices for oil and gas. This price set for producers
applies to electricity produced by all types of generating plants. This
resulted in an increase in the relative profitability of: 68




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
    
    Hydroelectric or geothermal generation, since these tariffs
included a component calculated with reference to fuel costs, which
hydroelectric or geothermal plants did not incur; and
    
    The resale of electricity imported under long-term contracts
already effective as of the date of the entry into force of the old
Electricity Directive of February 19, 1997, which may be cheaper
than electricity generated in Italy. The Energy Authority decided to reduce this potential windfall profit for
hydroelectric or geothermal producers by establishing a new surcharge to be
paid by these producers to the Gestore della Retewith respect to the
electricity sold by them. This surcharge applied until December 2001. Pursuant
to the rules on stranded costs enacted in 2002, the surcharge on hydroelectric
and geothermal generation has been abolished as of January 1, 2002. You should
read Stranded costs for a more detailed discussion of this surcharge. Following the start of operation of the pool market, the generation
component of the tariff is set by the Energy Authority on the basis of the
average costs incurred by the Single Buyer for the procurement of electricity,
either on the pool market or directly from producers. Transmission and distribution costs Prior to 2004, both Eligible and Non-Eligible Customers other than
residential customers used to pay transmission and distribution fees to
distributors on the basis of tariff options proposed by each distributor and
approved by the Energy Authority. Transmission and distribution fees for
residential customers were set directly by the Energy Authority as part of the
tariff paid by such customers to distributors. Pursuant to a decision by the Energy Authority, in 2002 and 2003,
transmission and distribution fees collected by distributors from Eligible and
Non-Eligible Customers under any given tariff option reflected:  
    
    the fee paid by distributors to the Gestore della Rete for
the transportation of electricity on high and very high voltage
interconnected networks from the plants where it is generated (or,
in the case of imported energy, from the points of acquisition) to
distribution systems; plus
    
    distribution costs, defined as the costs incurred by
distributors for transportation of electricity through the local
distribution network and for the sales-related services they provide
to final consumers; plus
    
    a specified return on invested capital. Prior to January 1, 2002, the Energy Authority set different prices to
cover transmission and distribution costs for Eligible and Non-Eligible
Customers. As a result of its decision of October 2001, and effective as of
January 1, 2002, the Energy Authority established so-called transport charges
which are equal for both Eligible and Non-Eligible Customers and are meant to
cover transmission and distribution costs. Starting from 2004, the Energy Authority directly sets the transmission
component of the tariff for both Eligible and Non-Eligible customers. This
component is based on the costs incurred by the Gestore della Reteand by
transmission companies for transportation of electricity on high and very high
voltage networks plus a specified return on invested capital. Depreciation and
invested capital are calculated by the Authority with new criteria consistent
with international regulatory practices. The Authority now sets the distribution component only for residential
customers. For all other classes of Customers, both Eligible and Non-Eligible,
the distribution component is set by distributors within certain limits
established by the Energy Authority, which still retains a right of approval.
These limits are of two types. One limit sets an aggregate maximum amount of
tariff revenues that each distributor will be allowed to receive from all
customers belonging to the same category in a single year. A second limit sets
the maximum amount of tariff revenues that any distributor will be allowed to
receive from a single customer of a given category. If the aggregate limit is
exceeded, the distributor must compensate customers for the amount of the
excess. Compliance with the individual limit is ensured at the time tariffs are
set by the distributors and approved by the Energy Authority. 69




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Within these limits, each distributor is free to offer tariff options to
its customers in accordance with a trade policy code aimed at ensuring
transparency. The distribution component set by the Authority (directly or through the
above mentioned limits) is based on the average costs incurred by the main
distributors for transportation of electricity through the local distribution
networks and for the sales-related services they provide to final consumers
plus a specified return on invested capital. Depreciation and invested capital
are calculated by the Authority with new criteria consistent with international
regulatory practices. These new criteria are based on the updating of
historical book values, with the aim of reflecting inflations effects. All consumers in the same category pay the same price for the delivery of
electricity regardless of where in Italy they are located. You should read
Tariff categories for a description of these categories. In 2004, the Energy
Authority put in place an equalization system to compensate distributors that
serve areas where costs are significantly different from the national average
due to uncontrollable factors such as population density and geography. Adjustment of transmission and distribution cost components In order to reduce electricity prices over time based on efficiency
targets set by the Energy Authority, the components of electricity tariffs
relating to the costs of transmission and distribution have been adjusted in
each of 2001, 2002 and 2003 through a price cap mechanism. During this
2001-2003 period, tariffs have reflected an annual decrease in real terms of 4%
in each of the transmission and distribution components of the tariff. Any
improvement in productivity in excess of the target level set by the Energy
Authority increases the profits during the 2001-2003 period. In 2004, the Energy Authority has determined the new base tariff level for
the period 2004-2007 on the basis of, among other things, a mechanism that
allocates in equal portions between electricity companies and consumers the
benefits resulting from improvements in productivity in excess of the target
set for the previous period. The Energy Authority has also indicated the
annual percentage decrease in the transmission and distribution components of
electricity tariffs for the period 2005-2007, set equal to 2.5% and 3.5% for
transmission and distribution, respectively. Implementation of tariff options In September 2000, we proposed a new set of tariff options for the year
2001 which was approved by the Energy Authority, in line with its parameters
and the price cap mechanism. The new tariff structure allows customers to
choose among more flexible options, with prices decreasing for high levels of
consumption. In particular, for residential customers, we offered specific new
tariff options designed for customers with levels of demand equal to 4.5 kW as
well as 6.6 kW and over. For customers other than residential users, we offer
several tariff options in addition to those established by the Energy
Authority, taking into account variations in seasonal and time-of-day demand. The Energy Authority has also approved the tariff options we proposed for
2002 and 2003, which share the same basic structure. The tariff options of the year 2003 have been in force also for the first
half of 2004. We presented new tariff options, which were approved by the
Authority in June 2004, to offer to customers in the second half of 2004. One
of the new tariff options is the so-called night and day tariff, which sets
electricity prices according to the time of day in which energy is used, therefore
allowing customers to more effectively control their electricity expenses. System charges and other charges The tariff structure also addresses the need to cover various costs
resulting from public policy-related requirements imposed on the Italian
electricity industry by providing for the following charges: 70




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
    
    Charges concerning the electricity system, established by the
Industry Ministry, that consist of:  
    
    A nuclear surcharge, covering part of the costs
incurred by So.g.i.n., the company to which we transferred our
discontinued nuclear operations, in connection with the
dismantling of nuclear plants and decommissioning of nuclear
fuels; this surcharge is designed to cover substantially all of
such costs when added to the funds that we transferred to
So.g.i.n.;
    
    A surcharge that benefits producers from renewable
resources;
    
    Special surcharges covering the cost of supplying
electricity at mandated discounts to certain customers (primarily
the Italian state-owned railway company and Acciai Speciali Terni
S.p.A., both of which transferred electricity assets to us as
part of the nationalization of the Italian electricity industry
in 1962);
    
    Research and development surcharges, covering related
costs; and
    
    Certain stranded costs that have not yet been
recovered. You should read Stranded costs for a discussion of
these costs and the new rules applicable to them.  
    
    Other general interest charges established by the Energy
Authority to adjust or refine the operation of the tariff mechanism,
which include adjustments to the equalization mechanism, covering
possible differences between costs recognized as recoverable by
distributors under the current tariff structure and actual tariff
revenues.
    
    Charges recovered through upward adjustments to the price
caps, as established by the Energy Authority, which cover:  
    
    Incentives for the enhancement of the quality of
service;
    
    Costs deriving from unforeseeable events, changes in
the regulatory framework or new obligations for universal
service;
    
    Costs deriving from demand-side management initiatives
intended to promote a more efficient use of resources by
electricity customers, including information campaigns; and
    
    Additional recognized costs incurred in connection with
the offer of value-added services in addition to basic options. The new tariff system in force from 2004 substantially confirmed the above
mentioned structure of charges. As far as the incentives for the enhancement
of the quality of service are concerned, a specific tariff component was
established by the Energy Authority. Stranded costs Stranded costs are current costs deriving from contractual commitments or
investment decisions that electricity companies:  
    
    undertook for reasons of public policy;
    
    undertook at a time when the electricity markets were not yet open to competition; and
    
    could have been recovered in a monopoly regime but cannot be
recovered under a regime of competitive electricity pricing. 71




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To facilitate the transition to open electricity markets, the European
Commission has stated that electricity companies should be refunded their
stranded costs provided that:  
    
    they minimize the impact of those costs (and, hence, the
amount of the refund) on their future operations; and
    
    they submit an industrial plan demonstrating the long-term
profitability of the activity related to the stranded costs. Our stranded costs mainly consist of costs resulting from requirements
that were imposed in the past on the design and operation of our generation
plants. In particular, because of governmental policies, we built most of our
plants to ensure a high degree of flexibility in the types of fuel that they
can use. The Industry Ministry and the Treasury Ministry determine which costs are
to be considered as recoverable stranded costs and have established a system to
recover them. Commitments for investments we undertook prior to February 19,
1997 relating to generating plants currently in service are regarded as
stranded costs, except for investments in plants that benefit from the CIP 6
regime and hydroelectric and geothermal plants. You should read BusinessThe
Enel GroupGeneration and Energy ManagementPurchased power for a description
of the CIP 6 regime. Under a recovery program adopted by the Industry Ministry
in January 2000 and amended in April 2001, we were to be allowed to recover a
significant portion of our stranded costs during the period from 2000 through
2006. However, a law enacted in April 2003 has narrowed the type of stranded
costs that we will be able to recover after January 1, 2004 to those incurred
in connection with our imports of liquefied natural gas from Nigeria
until 2009. This law
also provides that our recoverable stranded costs for the 2000-2003 period, if
any, will be determined under parameters to be set by the Industry Ministry and
the Treasury Ministry, after consultation with the Energy Authority. In addition, a surcharge on production of hydroelectric and geothermal
power put in place by the January 2000 program was abolished effective as of
January 1, 2002. See Generation costs. Charges payable to the Equalization Fund Revenues from certain tariff components are remitted to and managed by the
Cassa Conguaglio per il Settore Elettrico, or the Equalization Fund, a public
entity charged with redistributing such revenues to the electricity companies
entitled to receive them. These revenues include those deriving from specific
system charges. Tariff categories The Energy Authority currently defines the following six tariff categories of electricity consumer:  
    
    low-voltage domestic consumers (residential customers);
    
    low-voltage public lighting;
    
    other low-voltage end users;
    
    medium-voltage public lighting;
    
    other medium-voltage end users; and
    
    high-voltage end users. The Energy Authority established a new tariff system for residential
customers that was expected to enter into force in January 2003, but which for
administrative reasons has not yet been implemented. This system will require
that all residential customers pay the same tariff, regardless of their
location. Tariffs for customers in the other five categories will be set by
distributors and may vary within limits set by the Energy Authority. These
limits may differ for each category, but will not reflect differences in
customers location. The changes in the tariff structure first introduced in
2000 have benefited to low voltage non-residential customers, such as those in
the commercial and other services sectors. The Energy Authority set these
tariffs to reflect the cost of delivery, reducing or eliminating
cross-subsidies between electricity users. 72




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Changes in tariff levels and prices of electricity In
2004, the Energy Authority determined a new level for the
distribution and transmission components of the base tariff for the
period 2004-2007 on the basis of, among other things, a mechanism that
allocates in equal portions between electricity companies and consumers the
benefits resulting from improvements in productivity in excess of the target
set for the previous period. These new levels are effective from
February 2004 and are 6% lower than those applied in 2003 and in
January 2004. The total base tariff, including the fixed generation
costs component, decreased by 2.9% in 2004 as compared to 2003. Average
tariff levels, including the fixed generation costs component, increased by approximately 6% (+2.9% in real terms)
in January 2003 as compared to January 2002, in particular as result of
increased fuel costs (+11.4%). The average tariff level
decreased by 3.2% (-5.4% in real terms) in February
2004 (the first month of its application) as compared to January
2003, as a result of reductions in all tariff elements. The actual impact of tariff levels on our revenues depends on a number of
factors, including the volume of electricity we sell in the regulated market
and the mix of types of electricity we sell and customers we serve. We sell electricity to Eligible Customers at prices that are negotiated
with each customer and that may vary based on several elements, such as
quantity purchased, type of electricity sold, duration of the contract, etc.
According to our internal estimates, total Italian electricity consumption on
the free market in 2003 was 112 TWh, or only 37% of total Italian electricity
consumption for the year. Our market share was about 10% and our total revenues from the free market sales
in 2003 were equal to Euro 510 million. The table below shows the average of electricity prices paid by direct
customers, including both Eligible and Non-Eligible Customers. Average Paid by Direct Customers
    
    New tariff impact% change
    
    % change
    
    % change
    
    % change
    
    % changeJan-1999
    
    Jan-2000
    
    Jan-2001
    
    Jan-2002
    
    Jan-2003
    
    Feb(*)-2004
    
    99-01
    
    01-02
    
    02-03
    
    03-04
    
    99-04Base tariff
    
    
    6.15
    
    
    
    5.50
    
    
    
    4.80
    
    
    
    4.92
    
    
    
    4.88
    
    
    
    4.74
    
    
    
    -22.0
    
    
    
    2.5
    
    
    
    -0.8
    
    
    
    -2.9
    
    
    
    -22.9Fuel
    
    
    2.16
    
    
    
    3.16
    
    
    
    5.49
    
    
    
    4.02
    
    
    
    4.48
    
    
    
    4.40
    
    
    
    154.2
    
    
    
    -26.8
    
    
    
    11.4
    
    
    
    -1.8
    
    
    
    103.7System charges
    
    
    0.99
    
    
    
    1.07
    
    
    
    0.56
    
    
    
    1.21
    
    
    
    1.42
    
    
    
    1.27
    
    
    
    -43.4
    
    
    
    116.1
    
    
    
    17.4
    
    
    
    -10.6
    
    
    
    28.3Taxes
    
    
    1.60
    
    
    
    1.62
    
    
    
    1.25
    
    
    
    1.23
    
    
    
    1.25
    
    
    
    1.24
    
    
    
    -21.9
    
    
    
    -1.6
    
    
    
    1.6
    
    
    
    -0.8
    
    
    
    -22.5Total
    
    
    10.89
    
    
    
    11.35
    
    
    
    12.10
    
    
    
    11.38
    
    
    
    12.02
    
    
    
    11.64
    
    
    
    11.0
    
    
    
    -6.0
    
    
    
    5.6
    
    
    
    -3.2
    
    
    
    6.8Total % change in
real
terms
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.5
    
    
    
    -8.0
    
    
    
    2.9
    
    
    
    -5.4
    
    
    
    -5.6
 (*) New tariff started from February. Taxes Since January 1, 2001, consumers of electricity services are subject to
three indirect taxes, the first two of which are not applicable to residential
customers who qualify for the social protection pricing scheme:  
    
    A state tax for residential uses (of Euro 0.0047/kWh) and for
other uses (of Euro 0.0031/kWh excluding users with consumption over
1.2 GWh per month);
    
    Additional local taxes that vary from Euro 0.0093/kWh up to a
maximum of Euro 0.0204/kWh; and
    
    Value-added tax of 20% for all users with the exception of
residential and industrial customers (who are taxed at a rate of
10%). A previous additional state tax that varied from Euro 0.0023/kWh to Euro
0.0054/kWh was abolished in January 2001. 73




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Gas Regulation Italian regulations enacted in May 2000 pursuant to EU Directive 98/30
(which mandated the general liberalization of natural gas markets in the member
states) seek to introduce competition into the Italian natural gas market
through the liberalization of the import, export, transport, dispatching,
distribution and sale of gas. Gas Eligible and Non-Eligible Customers Current regulations permit customers meeting certain requirements, or Gas
Eligible Customers, to have direct access to the natural gas system and to
freely choose their supplier of natural gas. Until December 31, 2002, Gas Eligible Customers were: (i) customers
consuming more than 200,000 cubic meters per year; (ii) wholesalers and
distributors of natural gas; (iii) electricity producers, including producers
of electricity and thermal energy; and (iv) consortia of customers consuming in
the aggregate more than 200,000 cubic meters per year, provided that each
member of the consortium consumes at least 50,000 cubic meters per year.
Producers of gas are considered Gas Eligible Customers with respect to the
quantities they produce. During the same period, customers who did not qualify
as Gas Eligible Customers, or Gas Non-Eligible Customers, were obliged to
purchase gas from distributors operating in their local area. From January 1,
2003, all customers have become Gas Eligible Customers, and therefore most
limitations on contractual freedom ceased. You should read Sale and
distribution tariffs for Gas Non-Eligible Customers for a discussion of the
limitations still in force. Transport and Storage Companies engaged in the transport and dispatching of gas must allow
access to their gas transport networks to third parties, provided that they
have enough capacity and that giving such access is economically and
technically feasible. Transport fees are established by the Energy Authority
based on proposals from the operators. Operators of natural gas storage facilities must obtain a concession from
the Industry Ministry and are required to provide storage services to third
parties, upon request, provided that they have enough capacity and that giving
such storage services is economically and technically feasible. In addition,
importers are required to maintain storage reserves equal to 10% of the gas
they import from countries outside the EU. Distribution and sale of gas The term distribution refers to the transport of gas through local
networks for delivery to customer premises. After January 1, 2002, gas
distribution activities may be carried out only by companies that are not
otherwise engaged in the natural gas industry. The sale of gas to end users
may be made only by companies that are not otherwise engaged in the natural gas
industry except as importers, producers or wholesalers. Restrictions on sale and imports of gas Sale of gas to end users is made under an authorization granted by the
Industry Ministry, which Enel Trade has obtained. For each year from January
1, 2003, to December 31, 2010, no single operator is allowed to hold a market
share higher than 50% of domestic sales to final customers. In addition, no
single operator is allowed to introduce imported or national gas in the
domestic transmission grid for quantities exceeding a specified percentage of
the total, set at 75% in 2002 and decreasing by two percentage points each year
thereafter, to 61% in 2010. The applicable percentage will be calculated net
of quantities of gas consumed by the relevant operator or by its controlled or
affiliated companies. Rules governing distribution of gas Under Italian regulations, distributors operate under concessions awarded
by local authorities pursuant to tender procedures for periods not longer than
12 years. Through service agreements, local authorities may regulate the terms
and conditions for the provision of the service and the quality objectives to
be achieved. The tenders are awarded based on financial terms, quality and
safety standards, investment plans and technological and management 74




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skills offered. Distributors are required to connect to the distribution
network any customer who so requests. Existing concessions including ours will
expire at the earliest of their original expiration date and December 31, 2005
though under certain conditions the expiration date of December 31, 2005 may
be extended by up to another five years. Sale and distribution tariffs for Gas Non-Eligible Customers In December 2000, pursuant to Italian regulations, the Energy Authority
identified tariff criteria that we and other gas distributors and suppliers
must apply in setting tariffs for the distribution and the supply of gas to Gas
Non-Eligible Customers. The tariff criteria for both distribution and supply
include a fixed and a variable component reflecting the balance between fixed
and variable costs incurred by distributors and suppliers, respectively, and
operate to impose a cap on the rates gas distributors and suppliers may charge.
The portion of the variable component relating to the cost of natural gas is
revised on a quarterly basis. For distributors, the tariff criteria generally take into account average
capital costs, as determined by the Energy Authority based on a sample of
selected operators. However, since June 2002, the Energy Authority has
permitted distributors to set their rates based on actually incurred capital
costs if such costs can be adequately proven. For suppliers, prices charged to Gas Non-Eligible Customers were supposed
to be freely set from January 1, 2003. However, in December 2002, the Energy
Authority imposed a transitory regime under which suppliers were obliged to
continue to supply former Gas Non-Eligible Customers using the tariff criteria
established by the Energy Authority and in effect at December 31, 2002. In
December 2003, the Energy Authority established new tariff criteria applicable
as of January 1, 2004. The Energy Authority is considering the possibility of allowing
suppliers to freely set the prices charged to Gas Non-Eligible Customers
by July 31, 2005. 
 Telecommunications Regulation The Communications Authority and the Minister of Communications regulate
all aspects of the fixed-line telephony and mobile telephony services and
Internet markets. Their regulatory powers include licensing, interconnection,
frequency allocation, numbering, universal service obligation, tariff
regulation and rebalancing and arbitration of disputes between carriers.
Current Italian regulations require telecommunications operators to obtain a
license from the Minister of Communications to provide fixed-line voice or
mobile telephony, or an authorization to provide data transmission, Internet
services and all other services; an authorization is considered to have been
obtained by the operator upon such operators notice to the Minister of
Communications of its intention to start offering telecommunications services
subject to authorization unless the Minister of Communications objects to such
intention. Following the implementation of European directives that create a new
regulatory framework for telecommunications in 2003, fixed-line voice telephony
services and mobile telephony services will no longer be subject to a license
requirement, although existing license holders, including mobile telephony
operators, will continue to operate under existing licenses until they expire.
Under the new framework, all operators will simply need an authorization from
the Communications Authority. Furthermore, under the new regulatory framework, all the existing
obligations imposed on operators considered as having significant market power
need to be extensively reviewed. Such obligations can be confirmed, amended or
withdrawn. In addition, new obligations can also be imposed, but only subject
to stringent requirements. The revision is entrusted to the Communications
Authority and is currently on-going. In its Annual Reports since 1998, the Communications Authority has set
forth the following main objectives:  
    
    To promote convergence among mobile telephony, fixed-line
telephony, television and Internet services as well as the
development of third-generation wireless and mobile systems; 75




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
    
    To introduce further competition into the Italian telecommunications market;
    
    To promote liberalization in the broadcasting and media industry;
    
    Easing barriers to entry;
    
    Fostering the growth of new markets; and
    
    Protecting consumers. Interconnection Telecom Italia, the former monopoly telephone services provider, owns and
operates the largest fixed-line voice telephony network in Italy. As a result,
other operators ability to interconnect with Telecom Italias network
significantly affects their ability to provide fixed-line voice telephony and
other telecommunications services. Currently, Telecom Italia is required to set
interconnection rates subject to Communications Authority approval to ensure
that interconnection rates are consistent with targets set by the
Communications Authority under a price cap regime for interconnection rates
introduced in 2003. Under a law enacted in 2002, Internet service providers are entitled to
enter into interconnection agreements with Telecom Italia and other operators
considered as having significant market power. In a decision issued in July
2002, the Communications Authority established that WIND is an operator having
significant market power with respect to termination of calls onto the numbers
of Internet operators. As a consequence, WIND is under an obligation to enter
into interconnection agreements with operators that so request at rates that
reflect costs. This obligation will be re-examined during the process of
implementing the new European regulatory framework. The Communications Authority must also approve the interconnection rates
Telecom Italia charges for calls originated on its fixed network and terminated
on mobile networks. Universal Service Current regulations allow the Communications Authority to require other
voice telephony operators to compensate Telecom Italia for the costs the former
incumbent provider incurs in connection with its obligation to provide
universal service, defined as a minimum set of services of a given quality,
available to end users regardless of their geographical location and at an
affordable price. In 2001 and 2002, the Communications Authority determined
that Telecom Italia, Infostrada, Telecom Italia Mobile and Vodafone Omnitel
would have to make contributions to the universal service fund established for
the years 2000 and 2001, with total contributions equal to approximately Euro
58 million and Euro 40 million for each year respectively, taking into account
for the year 2001 both WINDs and Infostradas activities. WIND and Infostrada
were required to pay approximately Euro 1.5 million and Euro
0.8 million, respectively, in respect of this obligation for
the year 2001. No decision has yet been taken on amounts due for the year 2002. Fixed-line voice telephony The Communications Authority and the Minister of Communications have
implemented measures to promote competition in the fixed-line voice telephony
services market, such as:  
    
    carrier selection, which allows customers to select carriers
on a call-by-call basis for both long-distance and local calls by
dialing a set prefix before making a call;
    
    carrier pre-selection, which allows customers to use
alternative carriers networks for all of their local,
long-distance, fixed- to-mobile and international calls without
dialing a carrier selection code;
    
    number portability, which allows customers to keep the same
telephone number when they change carrier; and 76




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
    
    unbundling of the local loop of Telecom Italia, which allows
competing carriers access to the so-called last mile, or the wires
leading directly into customers homes or offices. In addition, Telecom Italia is subject to a price cap for fixed-line
telephony services to final customers. As a result, according to the 2003
Communications Authority annual report, Telecom Italias market share in voice
telephony has decreased to 70% in 2002. Also, Telecom Italia is required to
offer access to its network so as to enable its competitors to offer high-speed
Internet access or x-DSL services under economic conditions set forth by the
Communications Authority. Mobile telephony Telecom Italia Mobile, Vodafone Omnitel, WIND and 3 are the current
operators in the Italian mobile telephony services market. Pursuant to a
Communications Authority determination adopted originally in 1999 and
subsequently confirmed in 2002 and 2003, Telecom Italia Mobile and Vodafone
Omnitel are operators with significant market power and, as such, must offer
fixed-line operators non-discriminatory and cost-based interconnection rates
for terminating calls originated in the fixed networks. In October 2000, WIND was awarded one of five government-auctioned
licenses for UMTS, or third-generation mobile services, at the price of Euro
2,427.3 million. The UMTS license became effective on January 1, 2002 for a
term of 15 years, which has been subsequently extended to 20 years. In 2001, the Communications Authority extended number portability to
mobile telephony. As a result, competition in the mobile market has increased. Internet and electronic commerce Currently, Internet operators must obtain an authorization to provide
Internet services from the Communications Authority. However, Internet service
providers are not subject to universal service obligations, the tariff regime
or the other strict regulatory requirements applicable to fixed-line voice
telephony and mobile telephony services operators. 
 Environmental Matters Our electricity and other operations are subject to extensive
environmental regulation, including laws adopted by the Italian parliament or
government to implement regulations and directives adopted by the European
Union and international agreements on the environment. The principal objective of our environmental policy is to comply with all
relevant legislation and to seek to reduce adverse effects that our activities
may have on the environment. Since 1996, we have issued a public environmental
report on a yearly basis. In 2002, we started publishing also a sustainability
report, which contains an environmental section. We believe that environmental
performance will represent an increasingly important competitive factor in a
liberalized market. Environmental regulations affecting our business primarily relate to air
emissions, water pollution, waste disposal, noise and the clean up of
contaminated sites. The principal air emissions of fossil-fueled electricity
generation are sulfur dioxide (SO2), nitrogen oxides NOx, and particulate
matter such as dust and ash. A primary focus of the environmental regulations
applicable to our business is an effort to reduce these emissions. Furthermore,
particular attention has been given to electromagnetic fields and carbon
dioxide (CO2). You should read BusinessThe Enel GroupGeneration and Energy
ManagementThermal production for a discussion of our investments to comply
with these regulations. Electromagnetic fields 77




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In 1992, the Italian government adopted a regulation relating to exposure
to electromagnetic fields, which applies to the extremely low frequency (50 Hz)
used for the transmission, distribution and consumption of electricity. The
government supplemented the regulation with an additional decree in 1995. This
regulation sets:  
    
    Maximum levels of exposure to electromagnetic fields from new
and existing transmission and distribution lines and distribution
substations. Compliance with maximum exposure limits for already
installed lines generally involves increasing the height of towers
carrying lines where necessary. We have submitted to the Environment
Ministry plans to bring into compliance each of our approximately
130 transmission and distribution lines and distribution substations
affected by the regulations.
    
    Minimum distances between transmission or high-voltage
distribution lines or substations and residential buildings, office
buildings and similar areas for lines built after the adoption of
the 1992 regulation. The minimum distance requirements for
transmission and distribution lines installed after the adoption of
the 1992 regulation result in distances for these lines that exceed
what would be required to comply with the maximum exposure levels.
All of our lines installed after the adoption of the 1992 regulation
are in compliance with the minimum distance requirements. The regulation on electromagnetic exposure summarized above complies with
the maximum exposure limits set by international organizations such as the
International Radiation Protection Association, the International Non-Ionizing
Radiation Committee and the International Commission on Non-Ionizing Radiation
Protection, and those set by a European Union recommendation issued on July 12,
1999. In September 1998, the Italian government adopted a regulation setting
limits to exposure to electromagnetic fields generated by high frequency
infrastructure such as the transmission stations that WIND uses to provide
mobile telephone services. This regulation:  
    
    Sets maximum exposure levels;
    
    Sets caution levels (for buildings that are occupied for at
least four hours per day) and quality targets to be met by
operators;
    
    Gives Italian regional authorities the power to regulate the
installation and modification of high-frequency infrastructure to
ensure implementation of the regulation and responsibility for
monitoring compliance with the maximum exposure levels and required
preventive measures; and
    
    Requires owners of high-frequency infrastructures that do not
comply with the maximum exposure levels and with the preventive
measures to undertake any remediation measures that the regional
authorities require. We believe that WINDs high-frequency infrastructures comply with the
above requirements. In February 2001, the Italian parliament passed a framework law on
electromagnetic field exposure. The law is intended to protect the general
public and workers against alleged potential long-term health effects of
exposure to electromagnetic fields generated by both low frequency
infrastructures, such as electricity transmission and distribution lines and
substations, and high-frequency infrastructures, such as the transmission
stations that WIND uses to provide mobile telephone services. The law made it
more difficult to install new transmission and distribution lines and
substations in the future and may limit WINDs ability to expand the radio
coverage for its operations. Furthermore, the 2001 law provides for the adoption and implementation of
programs to restructure electricity transmission and distribution lines,
substations and high frequency infrastructures, in accordance with maximum
exposure levels. In 2003, a governmental decree was enacted providing for
measures to implement the 2001 law and setting the maximum exposure levels,
precaution levels and quality targets. However, these measures have not yet
come into effect, as they require action from the Italian Authority for
Environmental Protection that has not been taken. 78




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We believe that the costs of complying with these measures, including
costs for the related restructuring of electricity power lines, will not have a
material impact on our results of operations. In addition, the Bersani Decree requires that the Gestore della Retepay
to the owners of transmission lines consideration for the use of the lines
which adequately reflects the costs which these owners have incurred to comply
with regulatory requirements. You should read BusinessThe Enel
GroupTransmission and Electricity RegulationRegulatory
frameworkTransmission for a more detailed discussion of the Gestore della
Reteand Item 3. Key InformationRisk FactorsOther Risks Relating to Our
Businesses for a more detailed discussion of the risks electromagnetic
field-related regulation poses for our business. You should also read Item 8.
Financial InformationOther Financial InformationLegal Proceedings for a
discussion of certain legal proceedings against us relating to electromagnetic
fields. Principal EU legislation and international treaties regarding SO2 and NOx The principal EU directive on air emissions affecting the electricity
industry is the large combustion plants directive, or LCPD. The LCPD requires
each EU member states to establish and implement a program of
progressive reduction of total SO2 emissions and total NOx emissions from
generation plants licensed before July 1, 1988 and to establish emission limits
for SO2, NOx and particulate matter from individual generation plants licensed
after July 1, 1987. In 2001, new emission limits were set by a Directive
amending the LCPD. Member states had to implement the provisions of these
Directives by November 2002. In addition, in 2001 the EU issued a directive on
air pollution, whereby it mandated that member states achieve specified
reduction targets on SO2, NOx, CO2 and
NH3 emissions by 2010. To this end,
member states are required to establish and implement a program of emission
reduction in order to achieve the targets set in the directive. The 2001 amendment to the LCPD affected the electricity sector in so far
as it set more stringent emission limits. However, the impact of the amendment
on our operations was limited due to the fact that Italian legislation
implementing the LCPD had already set more stringent standards that those
required under the original provisions. Italy is a member of the Helsinki Protocol and the Oslo Protocol, which
require signatory countries to reduce SO2 emissions, and the Sofia Protocol,
which requires signatories to reduce NOx emissions. The requirements under
these protocols have been reflected in Italian law. Principal Italian legislation regarding SO2 and NOx Italy implemented the LCPD by a ministerial decree in 1989, which
established strict limits on emissions from new plants and required the gradual
reduction of aggregate emissions from plants licensed prior to July 1, 1988 by
setting 5-year targets. In some cases the Italian applicable limits are
stricter than those imposed by the protocols and the LCPD. The following tables show our actual level of SO2 and NOx emission
reductions with references to the 1989 Italian ministerial decree for, in each
case, 1993, 1998, 2000 and 2003. The decree set aggregate emission
reduction targets for SO2 for the years 1993, 1998 and
2003. No reduction targets were set
for SO2 emissions in 2000 or for NOx emissions in 2000 and 2003. Reductions of SO2 emissions against 1980 levelsEnelsYear
    
    Target
    
    result1993
    
    
    
    30
    %
    
    
    57
    %1998
    
    
    
    39
    %
    
    
    62
    %2000
    
    
    
    
    
    
    
    73
    %2003
    
    
    
    63
    %
    
    
    83
    %
 79




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Reductions of NOx emissions against 1980 levelsEnelsYear

    
    Target
    
    Result1993
    
    
    
    2
    %
    
    
    19
    %1998
    
    
    
    30
    %
    
    
    51
    %2000
    
    
    
    
    
    
    
    64
    %2003
    
    
    
    
    
    
    
    79
    %
 In addition, in 1990 Italy established a regulation limiting emissions of
polluting substances from thermal plants licensed before July 1, 1988 that is
more strict than the LCPD and covers a much broader range of pollutants. This
regulation required that individual existing thermal plants in Italy reduce
emissions to levels similar to those established under the LCPD for individual
plants licensed after July 1, 1988. This regulation also provided a time
schedule for the implementation of environmental compliance measures at
existing plants. In response to this regulation, we implemented in 1990 a significant
program of environmental measures that affect our entire thermal generation
operation. We submitted this program to the relevant ministries of the Italian
government, including those for industry, environment and health. The program
was approved and provided for modifications to both physical plant and
operating practices. The following table shows the targets the Italian
regulation provided for the implementation of these environmental compliance
measures for generating facilities and our levels of implementation for the
relevant periods. Both the targets and our results are expressed as percentages
of the total installed thermal capacity of generating facilities for the
periods indicated. At December 31,
    
    Target
    
    Enels adopted
or planned measures1997
    
    
    35
    %
    
    
    41.5
    %1999
    
    
    60
    %
    
    
    62.3
    %2002
    
    
    100
    %
    
    
    92.6
    %
 We have not yet reached the target set for 2002 because we have not
completed the conversion of one plant located in Porto Tolle. We expect to
complete such conversion and meet the 100% reduction target as soon as we
receive the approval of the Minister of the Environment needed to complete such
conversion. In
1997, the Italian parliament imposed a tax on total SO2
and NOx emissions from thermal plants that have a nominal capacity of greater than 50
MWh. These plants are the same plants as those regulated under the LCPD. In
2001, 2002 and 2003, our costs in connection with this tax were approximately
Euro 21.7 million, Euro 14.4 million and Euro 9 million, respectively. CO2emissions Both the European Union and Italy are signatories to the Kyoto Protocol,
which was signed under the United Nations Framework Convention on Climate
Change. In accordance with a burden-sharing agreement among EU member states,
Italy has set a target to reduce emissions of CO2 and the other greenhouse
gases, or GHGs, listed in the Kyoto Protocol over the 2008-2012 period by 6.5%
from their 1990 levels. In implementing the Kyoto protocol, on November 19, 1998, the Italian
interministerial committee for economic planning issued the guidelines for
Italian policies and measures for the reduction of GHG emissions in order to
implement the Kyoto Protocol. These guidelines set targets for
CO2 and other
GHG emissions to be achieved through measures concerning various sectors of the
Italian economy, including reduction of carbon produced in thermal electricity
generation, increased use of electricity generation from renewable resources
and demand side management to increase the efficiency of energy use.
Furthermore, the guidelines promote certain projects aimed at the development
of so called clean energy. The proposals contained in the guidelines have
facilitated the participation of Italy in the Emission Trading mechanism. As of
2001, we produced approximately 14% of total GHG emissions in Italy. In July 2000, we signed a voluntary undertaking with the Environment
Ministry and the Industry Ministry. Under this agreement, we undertook to
reduce the annual level of CO2 emissions produced by our plants during the 80




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period between 2002 and 2006 from our level of emissions in 1990. The
undertaking anticipates a number of measures to reduce GHGs emissions,
including employing high-efficiency technologies, such as combined cycle
conversions, promoting the use of renewable resources and developing innovative
generation technologies using biomass. We also expect to take advantage of the
flexibility provided under the Kyoto Protocol for reducing GHGs emissions
through joint projects in industrialized and developing countries and through
the national or international trading of carbon or emission credits. In January 1999, the Italian government introduced a carbon tax in
accordance with applicable European Union directives. Under the current Italian
implementing legislation, the amount of the tax, which is based on fossil fuel
consumption, was initially scheduled to increase on an annual basis from 1999
through 2005, but has been frozen for the years 2000 through 2004 at the
level for 1999. The legislation also establishes the possibility of review or
cancellation of the tax if other EU member states have not adopted similar
measures by 2001. On the basis of current forecasts of future fuel prices, we
believe that application of the carbon tax as currently formulated could have a
significant impact on the economic viability of our oil-fired plants by the
year 2005, should the tax rates then reach their maximum levels. As part of an initiative to address the impact of the carbon tax, we have
proposed that the Italian government adopt a different method for calculating
the tax which would apply an equal amount of tax per unit of CO2 output,
without regard for the type of fuel used to produce the energy in question. We
believe that such a policy would produce the targeted reductions in CO2
emissions without creating unequal burdens on certain types of generating
facilities, particularly oil fired and base load plants. In 2001, our carbon
tax liability amounted to approximately Euro 42.5 million and it did not change
significantly in 2002. In 2003, our carbon tax liability amounted to
approximately Euro 39.8 million. In 2003, the EU adopted a directive that establishes a scheme for
greenhouse gas emission allowance trading. Italian legislation implementing
this directive will come into force by the end of 2004. In April 2004, the EU
has also passed another directive (the so-called linking directive), which
amended the emission trading directive allowing the use of other flexible
mechanisms for limiting greenhouse emissions. PCBs and asbestos In May 1999, the Italian government adopted a legislative decree
concerning the recovery and disposal of electric transformers and other
equipment containing polychlorinated biphenyls, or PCBs. Pursuant to this
decree, we are delivering all of our equipment containing PCBs to companies
authorized to recover and dispose of such equipment. In December 2003, we
adopted a disposal plan aimed at the phasing out of all equipment with a
concentration of PCBs over 500 parts per million. We also deliver waste products containing asbestos to specialized
companies authorized to treat and dispose of asbestos. Such waste products
derive from the clean up of our plants we conduct in accordance with our
general maintenance and environmental clean-up programs. Water pollution prevention We are subject to environmental laws and regulations limiting heat and
other characteristics of water discharges from our thermal plants and liquid
waste from our hydroelectric plants. In May 1999, the Italian parliament
adopted a new law for the prevention of the pollution of fresh and salt water,
which was amended in August 2000. We believe that the legislation does not
affect the operation of our plants, which are already in line with the limits
set by those rules. Similarly, we believe that the water treatment facilities
already operating in our generation plants are in line with the new
requirements on liquid waste. Solid waste management In February 1997, the Italian government issued a legislative decree
implementing the EU directives on solid waste management. In accordance with
this decree, we increased the level of recycling of our waste. 81




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Site clearance

Italian legislation provides for ground and underground inspections to
evaluate the possible contamination of sites, particularly in areas declared to
be of national interest, using specific chemical, physical and historical
analyses. If sites we own are found to be contaminated, the current regulation
requires that we undertake a program of site clearance and restoration. In that
case, under new legislation the Italian government may provide financial
support for the restoration of contaminated sites located in areas of national
interest. Based on our environmental compliance practices and the current
regulatory regime, we do not expect to have significant liability associated
with contamination of sites being inspected.

Landscape safeguards

We have taken the following actions to reduce the environmental impact of
our transmission and distribution lines:



| |  | Re-using routes of previous power lines wherever possible;                                                                                                                                                       
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Soliciting proposals internationally for the design of new
towers for our transmission lines aimed at reducing the
environmental and aesthetic impact of towers in non-urban areas of
particular landscape value;
| 
| |  | Acting to reduce the impact of lines in environmentally
sensitive or protected areas;                                                                                                                            
| 
| |  | For medium-voltage lines, placing underground cables in urban
areas and aerial cables with low environmental impact in other areas
with specific environmental value; and                                        
| 
| |  | Using aerial insulated cables or underground cables in low
voltage networks (at present, we have built approximately two-thirds
of our network in this way).                                                     

We limit our use of underground high-voltage cables to urban areas because
they are significantly more expensive than aerial cables and the process of
installing them may involve significant logistic and environmental problems.
Between 1994 and 2002:



| |  | In 2002, aerial insulated cables and underground cables were
123,253 km, which represented 37.1% of our medium voltage lines,
compared to 29.8% in 1994; and
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | In 2002, our aerial insulated cables and underground cables
were 580,908 km, which represented 81.7% of our low voltage lines,
compared to 72.8% in 1994.   

In 2003, due to further work on our network, the percentage of aerial
insulated cables and underground cables rose to 38.3% and 82.5% for medium and
low voltage lines, respectively.

Environmental registrations, certifications and authorizations

We have joined EMAS, a European Union initiative to implement a voluntary
environmental management and registration system, which seeks to improve the
level of environmental efficiency and disclosure of European industrial
companies, and includes ISO 14001 certification for registered plants and
assets. Rules concerning EMAS are contained in an EU Regulation issued in 1993.
In 2001, the EU passed a new regulation which permitted the utilization of the
EMAS system also for assets not used in production. As a consequence, we
started an experimental study in order to adapt the environmental management
and registration system to the high voltage transmission grid.

As of December 2003, 58 of our plants, representing approximately 51% of
our installed generating capacity, had obtained environmental certifications.
All of these have obtained ISO 14001 certification and ten have also obtained
EMAS registration.

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In August 1999, the Italian government enacted a legislative decree
implementing the 1996 EU directive on the prevention and reduction of
pollution. This legislative decree requires all industrial plants to operate
under a new integrated environmental license by 2007 and make use of the best
techniques available for the prevention and reduction of pollution. The new
license set pollution limits and are reviewed every five years or at any time
plants undergo significant renovation. Licenses for EMAS-registered plants are
reviewed every eight years. In 2001, legislative measures were passed with a view to improve energy
efficiency in the use of electrical and gas appliances by final customers.
Improved efficiency targets were set for 2002 and for a period of five years
thereafter. However, these measures have not yet been implemented, and are
currently subject to review. Cost of compliance The costs of ensuring compliance with applicable environmental regulation
generally consist of costs associated with equipping newly constructed
facilities with required technology or modifying existing facilities to comply
with applicable regulation. In 2001 and 2002, respectively, these environmental
capital expenditures totaled Euro 225 million and Euro 140 million,
respectively, representing 5.5% and 2.5%, respectively, of our total capital
expenditures. In 2003, environmental capital expenditures were equal to Euro
131 million (3.5% of the total). Discontinued nuclear operations Since November 2000, we have not owned any nuclear power plants. We have
not produced electricity from nuclear power plants since 1988. Following a national referendum in 1987 in which the Italian electorate
expressed its opposition to the use of nuclear power, the Italian government
ordered the interruption of power production from nuclear fuels and we ceased
operations at our four nuclear plants in Italy, which had an aggregate net
installed capacity of 1,500 MW. In addition to our nuclear power plants, we owned a 33% stake in NERSA, an
electricity generation company that operated a nuclear power plant located in
France. French and German utilities owned the balance of NERSA. In July 1998,
we sold our stake in NERSA. We, however, retained ownership and responsibility
for the decommissioning of our share of the nuclear fuel in the plant. Pursuant to the Bersani Decree, we transferred our discontinued nuclear
operations to So.g.i.n., then one of our wholly owned subsidiaries. The
principal activity of So.g.i.n. will be the decommissioning of the nuclear
plants and of our share of the nuclear fuel in the NERSA plant in France,
including disposal of nuclear fuel and nuclear waste. Under the Bersani Decree, we were required to transfer to the Treasury
Ministry all the shares of So.g.i.n. at no cost. The transfer was completed on
November 3, 2000. Nuclear liability Italy is a party to the 1960 Paris Convention on Third Party Liability in
the Field of Nuclear Energy and the 1963 Brussels Supplementary Convention.
Italian law implementing the conventions imposes strict liability for claims
relating to nuclear plants and the transportation and storage of nuclear
matter. Strict liability under Italian law means that someone does not need to
be negligent in order to be found liable. The law imposes strict liability for
nuclear accidents only on the entity that is the operator of the plant at the
time of the accident. Consequently, we are not liable for any accident that may
occur after the transfer to the Treasury Ministry of So.g.i.n.s shares on
November 3, 2000, even if the cause of the accident predates the transfer.
Although we are not aware of any accident that predates the transfer, we will
remain liable for any accident that occurred before the transfer, even if the
damage, or the accident itself, is discovered in the future. The operator of
the plant may claim reimbursement from a third party which has contributed to
the cause of the accident for any sums it may have to pay but only if that
party has accepted liability contractually or is a physical person who has
intentionally caused the damage. Italian law implementing the conventions
imposes a maximum period of ten years from the date of the accident in which
someone claiming damages must bring claims. At the time of our transfer of
So.g.i.n.s shares, we represented to the 83




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Treasury that we had performed, on a regular basis, every required test on
our nuclear plants and that we were not aware, with respect to all nuclear
assets owned by So.g.i.n., of any event which might be the source of civil
liability for nuclear operations. Under the Paris Convention and Italian law, direct liability arising from
nuclear liability claims is limited to five million International Monetary Fund
Special Drawing Rights, or SDRs, per accident. Under Italian law, to the extent
any claim exceeds five million SDRs, someone claiming damages may sue us for
only five million SDRs and must sue the Italian government for the excess
liability up to 175 million SDRs. If the claim is in excess of 175 million
SDRs, that person must sue the signatories to the conventions, but then only
for the excess liability up to 300 million SDRs. However, the Italian
government can claim reimbursement from us for any sums it may have to pay
because of a nuclear accident arising from negligence on our part. On May 13,
2004, five million SDRs equaled approximately Euro 4 million. A provision of the Italian law implementing the conventions states that
when damage has been caused concurrently by a nuclear accident and the emission
of ionizing radiation, the liability of the person that caused this radiation
is not subject to the limitations described above for damages caused by that
emission. This provision does not fully conform to the conventions because it
does not specify that the ionizing radiation must not independently qualify as
a nuclear accident in order to give rise to unlimited liability. We believe,
however, that the correct interpretation of Italian law implementing the
conventions is that only radiation not classified as a nuclear accident gives
rise to liability outside the limitations described above. We believe all
emissions of radiation originating from within nuclear plants would qualify as
nuclear accidents. As a consequence, because we held nuclear material inside
our plants, we believe that we could only be liable for amounts beyond the limitations
described above under remote circumstances. 
 Properties, Plants and Equipment At December 31, 2003, we had 593 generating plants, consisting of thermal,
hydroelectric, geothermal and other renewable resources facilities, most of
which were located in Italy. For further information with respect to our
plants, see BusinessThe Enel GroupGeneration and Energy Management.
Our 50% subsidiary Terna owns Italys transmission grid of high voltage 380 kV lines, which
consisted, at December 31, 2003, of a total of 38,577 km of lines and 295
primary transformer stations. For a description of such properties and related
construction, expansion and improvement plans see BusinessThe Enel
GroupTransmission. We own the principal electricity distribution network in
Italy, which consisted, at December 31, 2003 of a total of 1,082,368 km of
lines, mostly medium and low voltage, and 411,358 primary and secondary
transformer substations. For a description of such properties and related
construction, expansion and improvement plans, see BusinessThe Enel
GroupSales, Infrastructure and Networks. At December 31, 2003, through WIND,
we owned approximately 18,000 km of fiber optic cable for the provision of
telecommunications services. For a description of such properties and related
construction, expansion and improvement plans see BusinessThe Enel
GroupTelecommunications. At December 31, 2003, we owned real estate, mainly
in Italy, with an approximate net book value of Euro 1,961 million, consisting
mainly of office buildings and other commercial properties and to a lesser
extent residential real estate. On June 3, 2004, we signed an agreement for the
transfer of the entire share capital of Newreal, a subsidiary holding real
estate assets with a net book value of Euro 1,142 million, to a consortium
formed by an investment fund belonging to the Deutsche Bank group and CDC-IXIS
for approximately Euro 1,400 million. For a description of our real estate
properties and activities see BusinessThe Enel GroupServices and Other
ActivitiesReal estate and other services. Management believes that our significant properties are in good condition
and that they are adequate to meet our needs. 
 Item 5. Operating and Financial Review and Prospects 
 Summary of Results In 2003, our consolidated operating revenues increased by 4.5%, from Euro
29,977 million in 2002 to Euro 31,317 million. Our operating income increased
by 64.3%, from Euro 2,880 million in 2002 to Euro 4,732 million. Our net
financial expenses amounted to Euro 1,130 million, as compared to Euro 1,178
million in 2002. Total 84




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extraordinary income and expenses amounted to net expenses of Euro 136
million, as compared with net income of Euro 736 million recorded in 2002. Our
net income increased by 25.0% from Euro 2,008 million in 2002 to Euro 2,509
million in 2003. These results of operations are based on the application of
Italian GAAP. Our principal measure of liquidity is net financial
indebtedness, which was Euro 24,174 million at December 31, 2003, as compared
to Euro 24,467 million at December 31, 2002. Net financial indebtedness is a
non-GAAP measure and Cash at banks and marketable securities, the most directly
comparable Italian GAAP measure, was Euro 452 million at December 31, 2003, as
compared to Euro 400 million at December 31, 2002. Please
see Liquidity and
Capital ResourcesCapital resources for a reconciliation of net financial
indebtedness to cash at banks and marketable securities. 
 The Electricity Market under the New Regulatory Framework Our financial results have been and will be affected to a large extent by
developments in the regulatory framework for the Italian electricity market. In
particular, the Bersani Decree has significantly restructured the electricity
market to increase competition and achieve other public policy goals. The
significant changes introduced by the Bersani Decree include:  Liberalization. The generation, import and export of electricity, as
well as the sale of electricity to major consumers of electricity known as
Eligible Customers, have been liberalized as of April 1, 1999.  Maximum market share levels for producers. In order to ensure
competition among electricity producers, the Bersani Decree provides that no
single company or group may have more than a 50% market share of the
electricity generation and import market after January 1, 2003. The decree
required us to sell at least 15,000 MW of our generating capacity by that
date in order to comply with this requirement. We have met this requirement
through the disposal of three companies formed for this purpose that we
called the Gencos, Elettrogen S.p.A., Eurogen S.p.A. and Interpower S.p.A.
We completed the sales of Elettrogen, Eurogen and Interpower in September
2001, May 2002 and January 2003, respectively.  Distinction between classes of customers. Electricity customers are
classified as follows:  Eligible Customers are principally medium-high volume
users such as manufacturing and industrial companies or consortia
that meet specified thresholds of annual electricity consumption
the level of which decreases over time. Starting from July 1, 2004,
all non-household consumers will be able to freely choose their
suppliers. Under the Bersani Decree, Eligible Customers are free to
purchase electricity either from power producers or from wholesale
suppliers. Sales to Eligible Customers are made on the basis of
contracts between the customer and the producer or wholesale
supplier and are intended to be competitive.  Non-Eligible Customers are customers who do not meet the
criteria to be Eligible Customers, such as residential and small
and medium-sized business customers, and as a result are not
eligible to participate in the competitive market. Non-Eligible
Customers must purchase electricity from the distributor that
serves the area in which they are located. Sales to Non-Eligible
Customers, and to Eligible Customers that choose not to participate
in the free market, are regulated by the Energy Authority, an
Italian governmental entity that acts under the supervision of the
Industry Ministry.  Introduction of a pool market with competitive bidding. On March 31,
2004, a pool market for the spot trading of electricity at prices to be
determined by competitive bidding among generating companies, importers,
wholesalers, distributors, other Eligible Customers and the Single Buyer
described below started operations.  Creation of a Single Buyer. In 2004, a state-owned entity referred
to as the Single Buyer began operations, being responsible for purchasing
all of the electricity to be supplied to the regulated market.  New tariff regime. A new tariff regime administered by the Energy
Authority took effect on January 1, 2000, significantly lowering the fixed
tariff components for generation, transmission and distribution. In
2001, 2002 and
2003, reductions in fees also resulted from the application of the price-cap
mechanism to transmission and distribution charges established by the Energy
Authority. Following the start of operations 85




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by the pool market on March 31, 2004, the tariff component for
generation is periodically adjusted to reflect prices on this market, while
the tariff components for transmission and distribution continues to be
subject to a system of price-caps.  Creation of a system operator for the national transmission network.
In 1999, we transferred our electricity dispatching and national
transmission network grid management operations to the Gestore della Rete, a
separate state-owned entity responsible for those functions. A governmental
decree of May 2004 provides for the transfer of these management operations
back to Terna, a company that we control and that owns 94% of the national
transmission grid, by October 31, 2005. We shall not be entitled to voting
rights in excess of 5% with respect to the appointment of Terna directors
following such transfer. Also, we are required to reduce our holding in
Terna to no more than 20% by July 1, 2007.  Consolidation of distribution networks. Only one license for the
distribution of electricity is to be granted in each municipality;
distribution companies that now serve the same municipality are required to
consolidate their local networks. As of June 15, 2004, we have sold, among
others, our distribution networks in Milan, Rome, Turin, Trieste, Verona,
Cremona and Parma. You
should read Item 4. Information on the CompanyRegulatory
MattersElectricity Regulation for a more detailed discussion of the new
regulatory and tariff regimes changing the Italian electricity sector and to
Item 3. Key InformationRisk FactorsRisks Relating to Our Energy Business
for a discussion of the principal regulatory risks we face. The restructuring of the Italian electricity market is still in progress.
The following chart illustrates the expected structure of the electricity
market following the introduction of the Single Buyer and the pool market in
2004. In the chart, contracts for differences represent swap or similar
arrangements relating to electricity supply among power producers and the
Single Buyer, retail suppliers or Eligible Customers. (FLOW CHART)  86




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Overview Changes in tariffs and regulation Most of our operating revenues come from the sale of electricity. The
price of electricity has historically been determined by a system of tariffs.
These tariffs are currently set by the Energy Authority, the independent
regulator for the electricity industry, which acts under the supervision of the
Industry Ministry. Our operating revenues are directly related to the level of
tariffs, except for revenues from sales to Eligible Customers, which currently
represent a relatively minor portion of our revenues from the sale of
electricity. For the years covered by the financial statements included in this
annual report, our revenues from the sale of electricity consisted of:  
    
    electricity sales, which include both revenues derived from
sales at the regulated tariffs, with the actual amount of revenues
being determined by the contracted capacity required by a consumer
and on the amount of electricity the customer actually consumed, and
revenues from direct sales to Eligible Customers based on negotiated
contracts; and
    
    Equalization Fund contributions that related to amounts paid
to the Cassa Conguaglio per il Settore Elettrico, the Equalization
Fund for the Electricity Industry, or the Equalization Fund, as
system charges and redistributed to us (as well to other electricity
companies). From July 1996 through 1999, tariffs remained largely unchanged. However,
a new tariff framework came into effect on January 1, 2000 that resulted in:  
    
    significant reductions in generation, transmission and distribution tariffs in 2000;
    
    the inclusion of a fuel cost component in the tariff; and
    
    the application of global price-cap reductions to
transmission and distribution tariffs in 2001, 2002 and 2003. Average tariff levels declined by 6.0% in 2002, as compared to 2001,
mainly as a result of a 16.4% decline in the tariff component aimed at covering
fuel costs. Average tariff levels increased by 5.5% in 2003 as a result of the
impact on the tariff of higher fuel costs. We expect that average
tariff levels
will increase in 2004 as a result of higher fuel (mainly oil) costs. The actual
impact of these tariff changes on our revenues depends on a number of factors,
including the volume of electricity we sell in the regulated market and the mix
of types of electricity we sell and customers we serve. Macroeconomic factors Historically, the level of demand for electricity in Italy has been
closely related to the general level of economic activity in the country. In
recent years, economic growth in Italy has been lower than in the European
Union on average. For example, from 2001 to 2003, Italys real gross domestic
product or GDP grew at an average annual rate of 0.35%, while the average
annual rate for the European Union was 0.86%. On the other hand, growth in
electricity demand in Italy has historically exceeded growth in gross domestic
product, principally because electricity consumption has grown faster than
total energy consumption. We estimate that electricity demand in Italy grew at
an annual average of approximately 2.35% from 2001 to 2003. Interest rates in Italy and the rest of Europe rose through the first half
of 2001, after which they started declining following the general slowdown of the
economy. Interest rates continued to decline in 2002 and in 2003. The weighted
average interest rate on our long-term debt declined from 4.9% as of December
31, 2001 to 4.6% as of December 31, 2002 and 4.1% as of December 31, 2003. Our
financing costs increase or decrease in line with changes in interest rates. 87




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Although we are insulated to a significant extent from the economic effect
of fluctuations in fuel prices through the application of the fuel cost
component of the tariff described above, time lags between our actual purchase
of fuel and the calculation and payment to us of such fuel cost component can
affect our revenues and income. As a result of the introduction of the pool
market, which began operations on March 31, 2004, and increases in the number
of consumers qualifying as Eligible Customers, we now face increased risks
relating to fuel price fluctuations, which we intend to attempt to manage
through implementation of our hedging policy. Please refer to Item 11.
Quantitative and Qualitative Disclosure About Market RiskPrice Risk Management
and Market Risk Information for a more detailed description of our hedging
policy. Critical accounting policies The results of operations, as presented below, are based on the
application of Italian GAAP. The application of these principles often requires
management to make certain judgments, assumptions and estimates that may result
in different financial presentations. We believe that certain accounting
principles are critical in terms of understanding our financial statements. We
believe that our most critical accounting policies relate to the following. Use of estimates. The preparation of financial statements in conformity
with Italian GAAP requires management to make judgments, estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Certain accounting principles require subjective and complex
judgments used in the preparation of financial statements. Accordingly, a
different financial presentation could result depending on the judgment,
estimates or assumptions that are used. Such estimates and assumptions,
include, but are not specifically limited to: depreciation, amortization,
interest rates, discount rates, future commodity prices, investment returns,
impact of new accounting standards, international economic policy, future costs
associated with long-term contractual obligations and future compliance costs
associated with environmental regulations. Actual results could materially
differ from those estimates or assumptions. Effective January 1, 2003 the
economic depreciation rates of high voltage and very high voltage plant of our
Transmission segment were revised in order to better reflect the estimated
economic useful life of these facilities. Recoverability of long-lived assets. We periodically review the carrying
value of our long-lived assets held and used and that of assets to be disposed
of, including goodwill and other intangible assets, when events and
circumstances warrant such a review. If the carrying value of a long-lived
asset group is considered impaired, an impairment charge is recorded for the
amount by which the carrying value of the long-lived asset group exceeds its
estimated recovery value, in relation to its use or realization, as determined
by reference to the most recent corporate plans. Management believes that the
estimates of these recovery values are reasonable; however, changes in
estimates of such recovery values could affect the relevant valuations. The
analysis of each long-lived asset group is unique and requires management to
use certain estimates and assumptions that are deemed prudent and reasonable
for a particular set of circumstances. Realization of deferred tax assets. As of December 31, 2003, we had assets
recorded for tax loss carry-forwards related primarily to our
telecommunications segment. We have recorded our deferred tax assets in an
amount that we believe is more likely than not to be recovered. The
recoverability of the deferred tax assets associated with the tax loss
carry-forwards of such entities are subject to the achievement of future
profitability by the merged entities. While we have considered future taxable
income and used ongoing prudent tax planning strategies in assessing the need
for valuation allowances, should we determine that we would not be able to
realize all or part of our net deferred tax assets in the future, the resulting
adjustment to the deferred tax assets would be charged to income in the period
such determination was made. Litigation. We are defendants in a number of legal proceedings incidental
to the generation, transmission and distribution of electricity. Because of the
nature of these proceedings, it is not possible to predict the ultimate
outcomes of certain of these matters, some of which may be unfavorable to us.
However, provisions are made for all significant liabilities where it has been
determined by legal advisors that an unfavorable outcome is probable. A number
of disputes are pending in relation to urban planning, landscape and
environmental matters (mainly related to exposure to electromagnetic fields)
linked to the construction and operation of several of our generating plants
and power lines. The examination of such disputes, also on the basis of legal
advice, leads us to believe that 88




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unfavorable outcomes would be a remote possibility. While the possibility
is remote, the risk that a limited number of cases might have unfavorable
outcomes cannot be ruled out, whose consequences could entail the payment of
damages. At the present time, the possible imposition and magnitude of any such
damages are not predictable and therefore, we have not accrued any liabilities
for these disputes. Allowance for doubtful accounts. The allowance for doubtful accounts
reflects our estimate of losses inherent in our credit portfolio. We have
reserved for expected credit losses, based on past experience with similar
receivables, including current and historical past due amounts, write-offs and
collections, the careful monitoring of portfolio credit quality and the current
and projected economic and market conditions. We believe that our reserves are
adequate; however, different assumptions or changes in economic circumstances
could result in changes to the allowance for doubtful accounts and therefore
could affect earnings. Stranded costs. Our so called stranded costs mainly consist of costs
resulting from requirements that were imposed in the past on the design and
operation of our generation plants. In particular, because of governmental
policies, we built most of our plants to ensure a high degree of flexibility in
the types of fuel that they can use. A law enacted in April 2003 has narrowed
the type of stranded costs that we are able to recover after January 1, 2004 to
those incurred in connection with our imports of liquefied natural gas from
Nigeria. Also, under this law, the Industry Ministry and the Treasury Ministry,
after consultation with the Energy Authority, will set the parameters for the
calculation of the stranded costs for the period 2000-2003 that we will be able
to recover. The relevant accounts will reflect revenues associated with the new
stranded cost mechanism once these parameters have been defined and
implemented. Comparability of information The inter-period comparability of the information presented in this
section is significantly affected by changes in the scope of consolidation of
the Group and several other factors that should be considered when reviewing
the performance of the individual segments and of the Group as a whole. The
most significant transactions that resulted in a change in the scope of
consolidation during the periods presented include:  
    
    the deconsolidation of Interpower S.p.A., the third and last
Genco we sold, effective as of, January 1, 2003;
    
    the deconsolidation of CESI S.p.A. effective as of January 1,
2003, reflecting the decline of our holding to 40.9%, following the
disposal of Interpower, through which we held part of our interest
in CESI. CESI provided research and development services;
    
    the consolidation on a
line-by-line basis, effective April 1, 2003, of Entergy Power
Holding Maritza BV, which in turn controls the Bulgarian Company
Maritza East III Power Company A.D., which operates in the
generation of electricity;
    
    the consolidation on a line-by-line basis, effective January
1, 2002, of the companies resulting from the restructuring of
Electra de Viesgo SL and its subsidiaries, or Viesgo, following our
acquisition of this company. Viesgo operates in Spain in the
generation and distribution of electricity;
    
    the consolidation on a line-by-line basis of Camuzzi
Gazometri (now called Enel Rete Gas), effective July 1, 2002,
following our acquisition of this company. Enel Rete Gas operates in
natural gas distribution and sales activities in Italy;
    
    the deconsolidation of Eurogen S.p.A., the second Genco we
sold, effective as of the date of its disposal, May 31, 2002;
    
    the deconsolidation of the activity of the distribution
network in the metropolitan area of Milan, effective November 1,
2002, the date of its disposal;
    
    the consolidation on a line-by-line basis of the results of
WIND effective January 1, 2001 and the consolidation on a
line-by-line basis of Infostrada S.p.A. effective March 31, 2001,
following our acquisition of this company; 89




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
    
    the consolidation on a line-by-line basis, effective January
1, 2001, of Enel Distribuzione Gas S.p.A., a company into which in
November 2001 we merged twenty gas companies, most of which we
acquired in 2001;
    
    the deconsolidation of Elettrogen S.p.A., the first Genco we
sold, effective as of the date of its disposal, September 20, 2001;
    
    the deconsolidation as of the date of their divestiture of
the activities of the distribution networks in the metropolitan
areas of Rome and Formello, effective July 1, 2001, and Turin,
effective December 31, 2001; and
    
    the deconsolidation of Valgen S.p.A., effective July 1, 2001,
following the divestiture of this company to which we had previously
contributed our generation activities in the Valle dAosta region. Other factors that significantly affect the comparability of information
for the period presented include:  
    
    the major changes which the Italian electricity sector is
currently undergoing and which significantly affect our electricity
activities, as described in more detail in The Electricity Market
under the New Regulatory Framework. These changes include, but are
not limited to, changing tariff rates and the abolition, enacted in
2003 and effective as of January 1, 2002, of a surcharge on
production of hydroelectric and geothermal power; and
    
    the fact that currently, most of the revenues and costs
recorded by our Generation and Energy Management, Sales,
Infrastructure and Networks and Corporate segments arise from
inter-segment transactions at market prices, reflecting our
integrated structure and leading position in each of the core
segments of the Italian electricity market. However, since the
Single Buyer and the pool market started operations on March 31,
2004, we expect that the majority of operating revenues and costs
for each segment will involve third parties in the future. This
change will further reduce the comparability of our segment
information for 2002 and 2003 with that in future periods. Business segments In 2002, our new management team made a strategic decision to move away
from the diversification strategy we had been pursuing in recent years to
refocus on our core energy business. To support this strategy, in July 2002, we
reorganized our operations into six business divisions in order to increase the
focus of our activities on the market and to better control costs and enhance
synergies among our various subsidiaries. These divisions were: Generation and
Energy Management; Sales, Infrastructure and Networks; Transmission;
Telecommunications; Services and Other Activities and Corporate. In 2003, we
added a seventh division: International. Each division has its own management
structure, headed by a senior manager who reports directly to the Chief
Executive Officer of Enel S.p.A. Our Corporate division includes Enel S.p.A.,
which as the parent company, defines the strategic objectives for the Enel
Group and coordinates the activities of the other divisions. The parent company
also manages finance operations and insurance risk coverage for all Group
companies and provides
assistance and guidelines on organizational, industrial relations, accounting,
administrative, tax and legal issues. In line with this new approach to managing our business, we have
identified reportable segments corresponding to these divisions. In order to
present segment information for the three years ended December 31, 2003, 2002
and 2001, on a comparable basis, we have reclassified certain segment
information for 2002 and 2001 to conform to the 2003 presentation. Our
reportable segments are the following: Generation and Energy Management. This segment corresponds to the division
that is responsible for our electricity generation and fuel procurement
operations, as well as fuel trading and risk management activities, in the
domestic market. This division generates operating revenues mainly from the
sale of electricity to our Sales, Infrastructure and Networks Division, to the
Gestore della Reteand to other operators in the domestic electricity market,
as well as through fuel trading. The division, which procures fuel for all of
the companies of the Group, also 90




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sells natural gas to our Sales, Infrastructure and Networks Division. By
law, we were required to sell 15,000 MW of our generating capacity, which we
did through the sales of Elettrogen, Eurogen and Interpower, in September 2001,
May 2002 and January 2003, respectively. Starting from January 1, 2003, this
division carries out electricity sales to large electricity users, or Eligible
Customers with an annual electricity consumption higher than 100
GWh, that were previously carried out by our Sales, Infrastructure and Network
division. These sales activities accounted for approximately 7% of operating
revenues and 8% of operating expenses and did not have a significant impact on
the operating income of the Generation and Energy Management segment in 2003.
The main companies in this division include the following: in Italy, Enel
Produzione (thermal and hydroelectric generation), Enel Green Power
(geothermal, hydroelectric and wind power generation), and Enel Trade (fuel
procurement and trading, risk management, sales to large electricity users). Sales, Infrastructure and Networks. This segment corresponds to the
division that includes our electricity and gas network operations and carries
out sales of electricity and gas sales to Non-Eligible Customers and to
Eligible Customers with an annual electricity consumption of 100 GWh or lower
in Italy. It also provides public and art lighting services and electricity
systems-related services. Operating revenues at this division derive primarily
from fees for transport of electricity and gas on our distribution networks,
the sale of electricity to Eligible and Non-Eligible Customers and the sale of
natural gas to end users. Starting from January 1, 2003, electricity sales to
large electricity users, that were previously carried out by this division, are
carried out by our Generation and Energy Management division. These sales
activities accounted for approximately 9% of operating revenues, 10% of
operating expenses and did not have a significant impact on the operating
income of the Sales, Infrastructure and Network segment in 2002. The
divisions electricity-related activities are carried out primarily through
Enel Distribuzione (sale of electricity on the regulated market and transport
of electricity on our distribution network), Enel Energia (sale of electricity
to Eligible Customers), Enel Sole (public and art lighting) and Enel.si
(electricity systems-related services). The divisions natural gas operations
are carried out primarily through Enel Distribuzione Gas, Enel Rete Gas and
GE.AD (ownership and management of the networks) and Enel Gas (sales). We
expect to merge Enel Distribuzione Gas, Enel Rete Gas, GE.AD, and other minor
gas companies into a single entity by the end of 2004. International. Our International segment includes our operations in
electricity generation and distribution outside of Italy. The main companies in
this division include the following: Viesgo Generaciòn, Electra de Viesgo
Distribuciòn, Viesgo Energia and Enel Union Fenosa Renovables in Spain, Enel
North America in the U.S., Enel Latin America, in Central and South America,
and Maritza East III in Bulgaria. Transmission. Our transmission segment includes the operations of Terna.
Terna owns approximately 94% of Italys national electricity transmission grid.
Terna derives its operating revenues from the transportation of electricity on
the portion of the national transmission grid that is owned by Terna, but
operated by the Gestore della Rete. Telecommunications. Our Telecommunications segment includes the operations
of WIND. For the period from April 1, 2001, our Telecommunications segment also
includes the operations of Infostrada, which we acquired in March 2001 and
merged into WIND effective January 1, 2002, and certain assets of Blu S.p.A.
that we acquired in October 2002. Our telecommunications activities include the
offer of mobile telecommunications services, fixed-line telephony services,
Internet and other telecommunications related services. We formed WIND as a
joint venture in 1997. Our stake in WIND initially was 51%, with France Télécom
and Deutsche Telekom holding 24.5% each. As a result of Deutsche Telekoms exit
at the end of July 2000, our stake increased to 56.6% and France Télécoms
share grew to 43.4%. Effective July 30, 2001, we contributed all the shares of
Infostrada to WIND, which resulted in an increase in our stake in WIND to
73.4%, while France Télécoms stake decreased to 26.6%. In July, 2003 we
acquired France Télécoms stake and became WINDs sole shareholder. Corporate. We consider Enel S.p.A., the parent company of the Enel Group,
as a separate reportable segment because it engages in electricity purchasing
activities and has engaged, in 2001 and 2002, in limited fuel procurement
activities. We are reducing these activities as a result of regulations
governing the electricity sector and the reorganization of our corporate
structure in 2002. Corporate purchases of electricity consist of electricity
imports. Enel S.p.A. sells electricity purchased from third parties to the
Sales, Infrastructure and Networks Division at prices established by the Energy
Authority. Fuel purchase contracts that had been held by Enel S.p.A. were
gradually transferred to Enel Trade, of our Generation and Energy Management
Division, which transfer was 91




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completed in the second half of 2002. Until 2001, Enel S.p.A. also sold
purchased fuel at cost to the Generation and Energy Management Division. Enel
S.p.A., as the parent company, defines the strategic objectives for the Enel
Group and coordinates the activities of these divisions. In addition, Enel
S.p.A. manages finance operations and insurance risk coverage for all Group
companies and provides
assistance and guidelines on organizational, industrial relations, accounting,
administrative, tax and legal issues. Services and Other Activities. This division includes non-core business
operations, including Enelpower, which provides power-related engineering and
contracting services; Enel Facility Management, which provides commercial real
estate management services; and Enel.it, our group-wide information technology
unit and other minor businesses. 
 Outlook We expect that the ongoing liberalization of the Italian electricity
sector will materially affect our financial condition and results of operations
over the next several years. Factors likely to have the most significant
impact include:  
    
    The introduction of the pool market effective as of March 31,
2004, which causes a portion of our generation activities to be remunerated based
on competitive electricity prices rather than set tariffs. According to
information provided by the Gestore del Mercato, or Market Operator,
in these first months of operations of the pool market, prices of
electricity sold in this market have tended to rise on average
reflecting increases in prices of fuel. We expect that prices in
the pool market will continue to rise or decline in close relation
to rises or declines in prices of fuels until significant volumes of
electricity generated at generation costs lower than current average
generation costs in Italy shall be available as a result of
increased imports and/or the construction of new plants in Italy;
and
    
    Our exposure to increased competition resulting from the
construction of new generation facilities by our competitors and the
development of new interconnection lines that would increase the
volume of electricity that might be imported in Italy. We also expect that the profitability of our telecommunications business
will materially affect our financial condition and results of operations over
the next several years. You should read Item 4. Information on the CompanyBusinessThe Enel
Group, Item 4. Information on the CompanyRegulatory Matters and Item 3.
Key InformationRisk Factors for a more detailed discussion of these changes
to our business. We believe that in 2004 we will produce less electricity than in 2003, due
to the increase in production by independent power producers, and increased
sales by importers. We also expect that in 2004 our sales of electricity to
Non-Eligible Customers will decrease due to the ongoing liberalization of the
market. However, we expect that the impact of any such decrease will be offset
to some extent by increased sales to Eligible Customers through Enel Energia,
as well as increased fees paid by third parties for transport of power on our
network. Effective
January 1, 2004, we increased the useful lives of certain assets
related to the distribution networks of our Sales, Infrastructure and
Networks segment, following the results of technical tests supporting
this decision. As a result, this segments depreciation expenses are
expected to decrease in 2004 and subsequent years. We will seek to reduce our costs significantly over the next several years
in order to offset the impact of tariff reductions as well as to improve our
operating margins. We expect that declining personnel costs resulting from
headcount reductions, primarily due to attrition and early retirements, will be
a major source of these cost reductions. Our goal is to reduce our total
headcount by at least 5,800 between December 31, 2003 and the end of 2008,
equivalent to approximately 9% of our workforce of 64,770 persons at December
31, 2003. This estimate includes reductions resulting from the divestiture of
certain non-core subsidiaries, retirements of personnel and early retirements
spurred by incentives. In this regard, we have already reduced our total number
of employees by 27% between the end of 1997 and the end of 2003,
notwithstanding the increase of the number of employees in our
Telecommunications segment due to the consolidation of WIND, the acquisition
of Infostrada in 2001 and the acquisition of certain assets of Blu in 2002,
which together accounted for 8,428 employees at December 31, 2001, 8,602
employees at December 31, 2002, and 8,769 employees at December 31, 2003. We
also expect to reduce our costs by reducing our fuel costs for thermal
generation through the conversion of generating capacity to combined 92




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cycle gas turbine technology and the improvement of the fuel mix we use,
and by adopting maintenance tailored to reduce maintenance costs. Finally, we
expect to achieve cost reductions in our domestic electricity distribution
business by implementing a cost-cutting program aimed at reducing procurement
costs and by reducing investment and maintenance costs associated with network
management, principally by centralizing procurement processes and improving
these processes through extensive use of e-business platforms. In addition, following the introduction of the Single Buyer in March 2004,
we sell the electricity we produce to the Single Buyer, and purchase
electricity back from the Single Buyer in order to distribute it to our
customers. As a result, on a consolidated basis, our operating revenues and
costs will both increase because we will record revenues from sales to the
Single Buyer and from sales to end users of electricity and record costs
relating to both the generation of electricity and the purchase of electricity
from the Single Buyer. We expect that these increases in costs and revenues
will largely offset each other, and that these changes will therefore not have
a significant effect on our operating income. As part of our required restructuring under the Bersani Decree: We sold
all of the outstanding shares of Elettrogen (now called Endesa Italia S.r.l.)
for total final consideration of Euro 3,585 million, including Euro 2,687
million in cash and the assumption of Euro 898 million in debt on September 20,
2001. We sold all of the outstanding shares of Eurogen (now part of Edipower
S.p.A.) for total final consideration of Euro 3,731 million, including Euro
2,980 million in cash and the assumption of Euro 751 million in debt, on May
31, 2002. We sold all of the outstanding shares of Interpower (now called
Tirreno Power S.p.A.) for total consideration of Euro 850 million, including
Euro 532 million in cash and the assumption of Euro 318 million in debt, on
January 29, 2003. You should read Item 4. Information on the CompanyBusinessThe Enel
GroupGeneration and Energy ManagementDisposal of the Gencos for detail on
the Gencos and their disposal. Intercompany purchases and sales of energy
between the Gencos and the other members of the Enel Group have been based on
market prices. As separate legal entities, since their formation in 1999,
Elettrogen, Eurogen and Interpower have maintained individual management,
financial reporting and legal personnel and related resources that simply were
not needed when they were completely integrated with the Enel Group. Most
purchasing and procurement decisions for inputs other than fuel, which had
previously been made on a Group-wide or regional basis, have been made by the
Gencos individually. In addition, since their formation, Elettrogen, Eurogen
and Interpower have made their own production decisions on the basis of
instructions from the Gestore della Rete, with a concomitant effect on their
revenues. Moreover, we expect that the ongoing liberalization of the Italian
electricity market will only accentuate these differences in future years. We
continued to fully include the results of the Gencos in our consolidated
results until the date of their disposal. Acquisition of Infostrada and sole ownership of WIND In 2001 we acquired Infostrada, a provider of fixed line telecommunication
services, that we subsequently merged into WIND. In 2003, we acquired the
stake in WIND held by France Télécom, and become WINDs sole shareholder.
These transactions gave rise to goodwill that represented approximately 92%
of the total goodwill related to our telecommunication segment at December 31,
2003, which was equal to Euro 6,760 million. Under Italian GAAP, we will have
to amortize each portion of this goodwill over a period of 15 years starting
from the date on which each such portion arose. As a result, the amortization
of this goodwill will continue to have a significant effect on our results of
operations and financial condition in the following years. On March 29, 2001, Enel Investment Holding BV, a Dutch company wholly
owned by us, acquired from Mannesman Investment BV (an indirect, wholly owned
subsidiary of Vodafone Group plc) 100% of the capital stock of Infostrada, one
of Italys leading alternative providers of fixed line telecommunications
services and the owner and operator of one of Italys leading Internet portals.
The purchase price for the shares, amounting to Euro 7,250 million, was paid in
full on the same date. As provided for in the share purchase agreement,
Mannesman Investment BV was also repaid by us Euro 132 million representing a
receivable against Infostrada that Mannesman Investment BV had previously
renounced in favor of Infostrada. Moreover, on the same date, Enel Investment
Holding BV paid Vodafone Euro 821.2 million due to Vodafone by Infostrada and
became a creditor of Infostrada for the same amount. In addition, in connection
with the acquisition, we incurred certain ancillary costs amounting to
approximately Euro 375 million. 93




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We originally financed our acquisition of Infostrada with funds that we
obtained under a Euro 10,000 million revolving credit facility that we entered
into with a pool of banks in November 2000 and transferred to Enel Investment
Holding BV through an intercompany loan. In June 2001, Enel Investment Holding
BV refinanced a portion of this debt through the issuance of Euro 2,000 million
in medium term notes with a maturity of three years (see Liquidity and
Capital ResourcesCapital resources). We merged Infostrada into WIND effective
January 2002 and integrated the operations of Infostrada and Wind. Our acquisition of Infostrada will continue to have a significant effect
on our results of operations and financial condition, primarily as a result of
the amortization of goodwill arising from the transaction and the debt incurred
in order to finance the acquisition. The purchase price of Euro 7,250 million,
and the Euro 132 million paid to Mannesman Investment BV at the time of the
acquisition, are approximately Euro 7,256 million greater than the consolidated
net book value of Infostrada as of March 31, 2001, thus giving rise to an
equivalent amount of goodwill as of such date. In addition, in connection with
the acquisition, we incurred certain ancillary costs amounting to Euro 375
million, which increased the goodwill associated with our purchase of
Infostrada to Euro 7,631 million. Under Italian GAAP, we will have to amortize
this goodwill over a period of 15 years. At December 31, 2003, we had amortized
an aggregate of Euro 1,285 million of this goodwill. In 2002, we wrote-down
Euro 1,511 million in the value of this goodwill, reflecting downward revision
of expectations of growth of the telecommunications sector and applying a
discounted cash flows approach. In July 2003, we acquired France Télécoms 26.6% stake in WIND for the
purchase price of Euro 1,330 million. We also reimbursed France Télécom of a
capital contribution of Euro 59 million it had made to WIND. The acquisition
of France Télécoms stake gave rise to an amount of goodwill equivalent, as of
its date, to Euro 1,411 million, corresponding to the difference between the
total of the purchase price and other costs incurred and a negative
net book value of Euro 22 million. Under the agreement with France Télécom, in the
event we sell any WIND shares before December 31, 2004 and
receive a cash price per
share higher than that we paid to France Télécom, we will have to transfer this
difference to France Télécom in proportion to the stake we purchased from it.
For further detail on the treatment of the goodwill associated with our
purchase of Infostrada and France Télécoms stake in WIND, please see note 7 to
our consolidated financial statements for a discussion of treatment under
Italian GAAP and note 23 to our consolidated financial statements for a
discussion of the difference in the treatment of this goodwill under Italian
GAAP and U.S. GAAP. 
 Results of Operations The following table shows certain financial data for the years ended
December 31, 2001, 2002 and 2003, expressed in each case as a percentage of our
operating revenues: Year ended December 31,2001
    
    2002
    
    2003Operating revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating expensesPersonnel
    
    
    (12.9
    )
    
    
    (12.0
    )
    
    
    (11.0
    )Fuel for thermal generation
    
    
    (18.2
    )
    
    
    (14.2
    )
    
    
    (13.1
    )Purchased power
    
    
    (12.7
    )
    
    
    (16.0
    )
    
    
    (14.8
    )Depreciation and amortization
    
    
    (15.5
    )
    
    
    (14.9
    )
    
    
    (14.4
    )Other operating expenses
    
    
    (28.6
    )
    
    
    (33.3
    )
    
    
    (31.6
    )Total
    
    
    (87.9
    )
    
    
    (90.4
    )
    
    
    (84.9
    )Operating income
    
    
    12.1
    
    
    
    9.6
    
    
    
    15.1Financial expense
    
    
    (3.9
    )
    
    
    (3.9
    )
    
    
    (3.6
    )Equity losses
    
    
    (0.3
    )
    
    
    (0.2
    )
    
    
    (0.2
    )Extraordinary income (expense)
    
    
    8.1
    
    
    
    2.4
    
    
    
    (0.5
    )Income before taxes
    
    
    16.0
    
    
    
    7.9
    
    
    
    10.8Income taxes
    
    
    (2.3
    )
    
    
    (2.0
    )
    
    
    (3.1
    )Income (before minority interests)
    
    
    13.7
    %
    
    
    5.9
    %
    
    
    7.7
    %
 94




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2003 compared with 2002 Operating revenues The following table shows the different sources of our operating revenues
for the years ended December 31, 2003 and 2002. Year ended December 31,2002
    
    2003(in millions of euro)Electricity sales:Tariff revenues from sales to Non-Eligible Customers and transport of electricity on our
distribution network
    
    
    16,244
    
    
    
    16,740Sales to Eligible Customers, sales to the Gestore della Reteand sales on foreign markets
    
    
    3,964
    
    
    
    3,094Equalization Fund contributions
    
    
    187
    
    
    
    179Total
    
    
    20,395
    
    
    
    20,013Telecommunications services
    
    
    3,642
    
    
    
    3,959Gas sales to end users
    
    
    780
    
    
    
    1,254Fees for customer connections, inspections and repositioning services
    
    
    645
    
    
    
    684Other revenues1
    
    
    4,515
    
    
    
    5,407Total operating revenues
    
    
    29,977
    
    
    
    31,317
  
 (1)
    
    Other revenues mainly includes revenues from our engineering and
contracting, fuel trading, public lighting and franchising operations,
reimbursements and sales of materials. Our consolidated operating revenues for 2003 increased by Euro 1,340
million, or 4.5%, compared to 2002. As explained in more detail below, the
overall increase was primarily due to an increase of Euro 892 million, or
19.8%, in other revenues, an increase of Euro 474 million, or 60.8%, in
revenues from gas sold to end users and an increase of Euro 317 million, or
8.7%, in revenues from telecommunications services. The impact of these factors
on the overall results was partially offset by a decrease of Euro 382 million,
or 1.9%, in revenues from electricity sales and Equalization Fund
contributions. In 2003, our revenues from electricity sales and Equalization Fund
contributions decreased by Euro 382 million, or 1.9%, as compared to 2002. The
decline was primarily due to a decrease of Euro 870 million, or 21.9%, in
revenues from sales to Eligible Customers, to the Gestore della Reteand on
foreign markets, mainly attributable to a decrease of Euro 665 million, or
34.8%, in revenues from sales to Eligible Customers reflecting our new strategy
to focus our efforts in this market on sales producing higher margins, rather
than on volumes, a decrease of Euro 102 million, or 10.5%, in sales to
wholesalers made directly by our generation companies, and a decrease of Euro
45 million, or 4.4%, in sales made by our companies outside of Italy, with the
latter being mainly attributable to the unavailability of certain plants in
Spain for part of the year. The decline in revenues from sales to Eligible
Customers, to the Gestore della Reteand on foreign markets was only partially
offset by an increase in tariff revenues from sales to Non-Eligible Customers
and transport of electricity on our distribution network. In 2003, these
revenues increased by Euro 496 million, or 3.1%, mainly due to higher volumes
transported for the free market (which increased by 11.3%) and to an increase
in the tariff component aimed at covering the cost of fuel (which increased by
11.1%), the effects of which were partially offset by a reduction in the
volumes of electricity we sold on the regulated market (which decreased by
6.3%) reflecting increased competition and our disposal of certain local
distribution networks. In 2003, our revenues from telecommunications services increased by Euro
317 million, or 8.7%, primarily due to an increase of Euro 409 million in
revenues from the sale of mobile services. In 2003, our revenues from gas sales to end users increased by Euro 474
million, or 60.8%. The increase was mainly attributable to the inclusion of a
full years results of Camuzzi, which had only been consolidated for the last
six months of 2002. 95




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In 2003, our revenues from fees for customer connections, inspections and
repositioning services increased by Euro 39 million, or 6.0%. Revenues from
businesses other than electricity and gas sales and telecommunications services
increased by Euro 892 million, or 19.8%. This increase reflected primarily
revenues of Euro 410 million connected with the reversal of the hydroelectric
surcharge that we had accounted in 2002, following the retroactive abolition
of such surcharge in 2003. The increase in other revenues also reflected an
increase of Euro 246 million, or 24.7%, in revenues from engineering and
contracting activities to third parties, an increase of Euro 143 million (from
Euro 4 million in 2002 to Euro 147 million in 2003) in bonuses that the Energy
Authority granted to us for having achieved the quality targets set for 2002
and 2001, a Euro 52 million increase in revenues from tariffs paid for the use
of the Italian national transmission grid, and a Euro 52 million increase in
revenues from the transmission grid operators we own in Brazil. The overall
increase also reflected an increase of Euro 31 million in revenues from
recycling and waste management services provided by our gas companies, a Euro
30 million increase attributable to revenues connected with the reassessment of
interconnection charges that had been accounted by WIND in 2002 after the rates
to interconnect with the Telecom Italias network that were applicable for 2002
were set in 2003 (see Item 4. Information on the CompanyRegulatory
MattersTelecommunications RegulationInterconnection), a Euro 25 million
increase in revenues from the disposal of real estate assets, a Euro 16 million
increase in revenues from franchising activities, and a Euro 4 million increase
in revenues from public lighting. The overall increase was offset to a limited
extent by a decrease of Euro 128 million in revenues from fuel trading
activities. The following table shows operating revenues for each of our business
segments for the periods presented. In 2003, we added a new reportable segment
corresponding to our newly-created International division (see
OverviewBusiness segments). Accordingly, in order to present segment
information for the three years ended December 31, 2003, 2002 and 2001, on a
comparable basis, we have reclassified certain segment information for 2002 and
2001 to conform to the 2003 presentation. Year ended December 31,2002
    
    2003(in millions of euro)Generation and Energy Management
    
    
    10,881
    
    
    
    12,111Sales, Infrastructure and Networks
    
    
    20,586
    
    
    
    20,047International
    
    
    923
    
    
    
    921Transmission
    
    
    828
    
    
    
    874Telecommunications
    
    
    3,921
    
    
    
    4,383Corporate
    
    
    1,973
    
    
    
    1,139Services and Other Activities
    
    
    2,874
    
    
    
    2,778Eliminations
    
    
    (12,009
    )
    
    
    (10,936
    )Total
    
    
    29,977
    
    
    
    31,317
 Generation and Energy Management. In 2003, operating revenues of our
Generation and Energy Management segment, prior to eliminations, increased by
Euro 1,230 million, or 11.3%, as compared to 2002. The increase primarily
reflected our transfer to this segment of sale activities for electricity
customers with an annual consumption higher than 100 GWh (approximately Euro
560 million of the increase) and gas wholesalers (approximately Euro 330
million of the increase), that were carried out by our Sales, Infrastructure
and Networks segment in 2002. We estimate that approximately Euro 640 million
of the overall increase was due to an increase of 11.1% in the tariff component
aimed at covering the cost of fuel. The increase also reflected revenues of
Euro 410 million connected with the reversal of the hydroelectric surcharge
that we had accounted for in 2002, and a Euro 102 million reimbursement
through the Equalization Fund of certain charges we
incurred in 2002 for the purchase of green certificates. The positive impact
of these factors was only partially offset by the deconsolidation of Eurogen
and Interpower, which we estimate had a negative effect on the segments sales
of approximately Euro 820 million. Sales, Infrastructure and Networks. In 2003, operating revenues of our
Sales, Infrastructure and Networks segment, prior to eliminations, decreased by
Euro 539 million, or 2.6%, as compared to 2002. Euro 1,485 million of the increase was
attributable to the
transfer to the Generation & Energy Management segment of the operations
described above, 96




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and to the strategic change in
focus of our free market sales. The negative impact of these factors was only
partially offset by increases of Euro 305 million in revenues from the
distribution and sales of natural gas, Euro 250 million in revenues from sales
on the domestic regulated market and the transport of electricity
sold on the free market, Euro 202 million in revenues from electricity supplied to
resellers (primarily due to increased purchases from municipal distributors as
a result of our disposal of certain distribution networks), Euro 143 million
in bonuses that the Energy Authority granted to us for having achieved
the quality targets set for 2002 and 2001, and Euro 61 million in
revenues from our franchising activities. International. In 2003, our International segment reported operating
revenues, prior to eliminations, of Euro 921 million, essentially unchanged
from the Euro 923 million attributed to the segment in 2002 as a result of the
reclassification described above. The slight decrease reflected a decrease of
Euro 112 million in revenues from our Spanish operations that was attributable
to the temporary unavailability of certain plants of Viesgo during to planned
maintenance and a Euro 2 million decrease in revenues from our operations
in Central and South America that were almost completely offset by Euro 108
million in revenues attributable to the first-time consolidation of Maritza
following its acquisition in March 2003 and a Euro 6 million increase in
revenues from our operations in North America. Of the segments total of Euro
921 million in operating revenues, prior to eliminations, Euro 713 million was
attributable to our operations in Spain, Euro 108 million to our operations in
Bulgaria, Euro 65 million to our operations in North America, and Euro 35
million to our operations in Central and South America. Transmission. In 2003, the operating revenues of our Transmission segment,
prior to eliminations, increased by Euro 46 million, or 5.6%, as compared to
2002, primarily due to a Euro 52 million increase in transmission revenues
attributable to higher tariffs, which was only partially offset by a Euro 6
million decrease in revenues for the construction and maintenance of
high-voltage lines. Telecommunications. In 2003, the operating revenues of our
Telecommunications segment, prior to eliminations, increased by Euro 462
million, or 11.8%, as compared to 2002. The increase was primarily attributable
to an increase of Euro 409 million in revenues from mobile services due to
increased traffic on WINDs network. The overall increase also reflected
revenues of Euro 54 million arising from the reassessment of costs for services
provided by other telecommunications operators that had been estimated and
recorded in 2002, the contribution of Euro 44 million from our activities
in Greece launched in 2003 and Euro 30 million relating to the reassessment of interconnection
charges accounted for in 2002. The positive impact of these factors was only
partially offset by a decrease of Euro 104 million in revenues from fixed-line
services in Italy due to a decrease in traffic volumes. Corporate. In 2003, the operating revenues of our Corporate segment,
prior to eliminations, decreased by Euro 834 million, or 42.3%, as compared to
2002. This decrease was primarily attributable to the fact that the 2002
results had included nine months of revenues (approximately Euro 577 million)
for the purchase of fuel by our Generation and Energy Management
segment, reflecting the transfer of contracts for the purchase of
fuel to Enel
Trade of the Generation and Energy Management segment which was
completed at the end of 2002. Approximately Euro 260 million of the decrease was attributable
to the fact that the segment purchased and resold a lower volume of imported
electricity to Enel Distribuzione. Services and Other Activities.In 2003, the operating revenues in our
Services and Other Activities segment, prior to eliminations, decreased by Euro
96 million, or 3.3%, as compared to 2002. This decrease was primarily due to
the deconsolidation of CESI as of January 1, 2003, which we estimate accounted
for a decline in revenues of approximately Euro 115 million, and to the January
1 transfer to the Sales, Infrastructure and Networks segment of certain
materiel and logistic activities from our real estate sector, which had
been accounted for approximately Euro 94 million in revenues from
our real estate activities in 2002. The
decrease also reflected a decline of Euro 61 million in revenues from our
information technology activities due to their transfer to WIND of our fiber
optic backbone network and a reduction in prices at Enel.it. The negative
impact of these factors on the segments revenues was partially offset by a
Euro 126 million increase in revenues from engineering and contracting due to
increased activities to third parties (including a Euro 55 million settlement
of a dispute over a contract for the construction of a plant in Libya), and by
a Euro 48 million increase in revenues from other activities such as personnel
administration, professional training services, and factoring. Of the
segments total of Euro 2,778 million in operating revenues, prior to
eliminations, Euro 1,747 million was attributable to engineering and
contracting, Euro 462 million to 97




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information technology services, Euro 397 million to real estate and
related services, and Euro 172 million to other activities. Approximately 45%
of these revenues were generated by transactions with other Group companies. Eliminations. Eliminations in operating revenues primarily relate to
intersegment sales (primarily of electricity and fuel) and services (primarily
engineering and contracting). In 2003, eliminations decreased by Euro 1,073
million, or 8.9%, as compared to 2002, mainly reflecting the transfer of the
agreements for the purchase of fuel from our Corporate segment to our
Generation and Energy Management segment and the transfer to our Generation and
Energy Management segment of the activities related to sales to large
electricity users and gas wholesalers that in 2002 were carried out by our
Sales, Infrastructure and Network segment, which purchased gas and part of the
electricity sold to these customers from our Generation and Energy Management
segment. Operating expenses The following table shows a breakdown of our operating expenses for each
of the periods presented: Year endedDecember 31,2002
    
    2003(in millions of euro)Operating expensesPersonnel
    
    
    3,589
    
    
    
    3,440Fuel for thermal generation
    
    
    4,255
    
    
    
    4,101Purchased power
    
    
    4,802
    
    
    
    4,620Other operating expenses:Services and rentals
    
    
    5,710
    
    
    
    5,224Materials and supplies
    
    
    4,212
    
    
    
    4,111Provision
    
    
    504
    
    
    
    593Other
    
    
    721
    
    
    
    924Capitalized expense
    
    
    (1,173
    )
    
    
    (944
    )Total
    
    
    22,620
    
    
    
    22,069
 As described in more detail below, our consolidated operating expenses for
2003 decreased by Euro 551 million, or 2.4%, as compared to 2002. Expressed as
a percentage of, operating revenues, operating expenses decreased from 75.5% in
2002 to 70.5% in 2003, reflecting the fact that operating revenues grew while operating expenses decreased. The decrease in the absolute figure was
primarily due to a the abolition of the hydroelectric surcharge which had amounted
to Euro 424 million (of which Euro 14 million related to Eurogen and
Interpower) in 2002, largely as a result, overall expenses for services and
rentals fell by Euro 486 million. The decrease in consolidated operating
expenses also reflected declines of Euro 182 million in costs for purchased
power, Euro 154 million in costs for fuel for thermal generation, Euro 149
million in personnel costs, and Euro 101 million decrease in costs for
materials and supplies. The positive effect of these factors was only
partially offset by a Euro 229 million decrease in capitalized expenses, and
increases of Euro 203 million and Euro 89 million in other costs and
provisions, respectively. Personnel costs decreased by Euro 149 million, or 4.2%, as compared to
2002, primarily due to a 6.6% decline in the average number of employees. The
decline in headcount reflected early retirements spurred by incentives, as well
as the deconsolidation of Eurogen and Interpower. Average costs per employee,
however, increased by 2.6%, reflecting compensation increases required under
the collective labor agreement for the electricity industry. Costs for fuel for thermal generation decreased by Euro 154 million, or
3.6%, as compared to 2002, primarily due to a decrease of 3.9% in the volume of
electricity produced from thermal sources that was itself largely due to the
deconsolidation of Eurogen and Interpower. The decrease was partially offset by
the effect of an 98




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increase of approximately 21.1% and approximately 7.0% in market prices
for low-sulfur fuel oil and coal, respectively, and a Euro 33 million increase
attributable to the first time consolidation of Maritza. Purchased power costs decreased by Euro 182 million, or 3.8%, as compared
to 2002, with the rate of decrease being significantly less than the 10.6%
decline in the volume of power we purchased that was linked to a reduction in
the volume of power we sold on the free market. The increase in average
purchase costs reflected an increase in the percentage of power purchased from
Italian sources (where prices are usually higher than those for imports). Services and rentals costs decreased by Euro 486 million, or 8.5%, as
compared to 2002, primarily due to the abolition of the hydroelectric
surcharge, which had accounted for Euro 424 million (of which Euro 14 million
relating to Eurogen and Interpower) in costs in 2002. The decline was also
attributable to a Euro 45 million decrease in costs for interconnection and
roaming in our telecommunications activities, reflecting our reduced need for
such services due to the development of our telecommunications network, and to
a Euro 17 million decrease in costs for advisory services provided by third
parties. Materials and supplies costs decreased by Euro 101 million, or 2.4%, as
compared to 2002. Costs for materials fell by Euro 242 million, reflecting
lower levels of construction in our Sales, Infrastructure and Networks segment,
while those for fuel for trading activities fell by Euro 146 million due to
reduced sales volumes. The impact of these decreases on the overall figure was
partially offset by an increase of Euro 287 million in costs for gas purchased
for resale to end users reflecting the inclusion of a full years results of
Camuzzi, which had only been consolidated for the last six months of the year
in 2002. Provisions increased by Euro 89 million, or 17.7%, as compared to 2002.
The increase reflected an increase of Euro 124 million in accruals for risks
and charges and write-downs in our Generation and Energy Management segment,
which was primarily due to accruals for Euro 57 million for the risk that we
are subject to additional hydroelectric surcharges related to electricity
produced in 2001 and Euro 38 million for risks on fuel trading and other
contracts. The overall increase also reflected an increase of Euro 30 million
in accruals for risks and charges in our Transmission segment (primarily
related to the risk of payments resulting from the recalculation of the portion
of the fees for the use of the national transmission grid). These were
partially offset by a Euro 53 million decrease in accruals for risks and charges in our
Services and Other Activities segment attributable to our engineering and
contracting sector, and a Euro 17 million decrease in accruals for risks and
charges in our Sales, Infrastructure and Networks segment. Other costs increased by Euro 203 million, or 28.2%, as compared to 2002,
primarily as a result of a Euro 193 million increase in costs incurred by our
Sales, Infrastructure and Networks segment in connection with charges
introduced by new regulations on energy efficiency, the use of clean energy
resources and improvements in the continuity of service. Capitalized expenses decreased by Euro 229 million, or 19.5%, as compared
to 2002, primarily reflecting lower levels of construction activity in our
Sales, Infrastructure and Networks segment. The following table shows a breakdown of our operating expenses by
business segment for each of the periods presented. Year ended December 31,2002
    
    2003(in millions of euro)Generation and Energy Management
    
    
    8,341
    
    
    
    8,642Sales, Infrastructure and Networks
    
    
    17,269
    
    
    
    16,548International
    
    
    680
    
    
    
    665Transmission
    
    
    310
    
    
    
    321Telecommunications
    
    
    3,444
    
    
    
    3,506Corporate
    
    
    1,805
    
    
    
    912Services and Other Activities
    
    
    2,726
    
    
    
    2,331Eliminations
    
    
    (11,955
    )
    
    
    (10,856
    )Total
    
    
    22,620
    
    
    
    22,069
 99




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Generation and Energy Management. Operating expenses for our Generation
and Energy Management segment (which primarily consist of fuel costs, fees paid
to the Gestore della Rete, and personnel and maintenance costs for our power
plants), prior to eliminations, increased by Euro 301 million, or 3.6%, as
compared to 2002. Intersegment transfers of operations had a significant
impact on the result. Sales to electricity customers with an annual
consumption higher than 100 GWh accounted for approximately Euro 560 million in
operating expenses during the year (since we purchased from third parties most
of the electricity sold to these customers), while sales to gas wholesalers
accounted for approximately Euro 306 million in costs. Responsibility for each
of these activities had been transferred from the Sales, Infrastructure and
Networks segment as of January 1. The increase in expenses was also
attributable approximately to a Euro 330 million increase in costs for purchases of fuel for
power generation, and to a Euro 124 million increase in provisions. The impact
of these factors on overall expenses was partially offset by a decrease in
costs of approximately Euro 674 million attributable to the deconsolidation of
Eurogen and Interpower and the impact of the abolition of the hydroelectric
surcharge that had been responsible for Euro 410 million in costs in the prior
year. Sales, Infrastructure and Networks. Operating expenses for our Sales,
Infrastructure and Networks segment (which primarily consist of purchases of
power and natural gas and costs associated with running our distribution
network), prior to eliminations, decreased by Euro 721 million, or 4.2%, as
compared to 2002. The decrease reflected an aggregate decline of
Euro 1,450 million in costs related to the transfer to the Generation and
Energy Management segment of the operations described above and the decrease in costs for the purchase of
imported electricity and electricity from CIP 6 producers. The decrease also
reflected a decrease of Euro 58 million in personnel costs, Euro 45 million
in costs for materials, and Euro 40 million in costs for services.
These declines were only partially offset by a Euro 655 million increase
in costs for purchase of electricity resold on the regulated market
and transport of electricity sold on the free market, a
Euro 166 million increase attributable to the inclusion of a full years
results of Camuzzi Gazometri (now Enel Rete Gas), which had only been
consolidated for the last six months of the year in 2002, and a Euro 59 million
increase in costs in franchising. International. Operating expenses for our International segment, prior to
eliminations, decreased by Euro 15 million, or 2.2%, as compared to 2002,
reflecting a decrease of Euro 89 million in costs at our Spanish plants due to
the shutdown of plants for part of the year, which was only partially offset by
the Euro 65 million in costs attributable to the first time consolidation of
Maritza, and a Euro 9 million increase in provisions and write-downs in our
operations in North America. Transmission. Operating expenses for our Transmission segment, prior to
eliminations, increased by Euro 11 million, or 3.5%, as compared to 2002,
primarily due to a Euro 30 million increase in accruals for the risk of
payments resulting from the recalculation of the portion of the fees for the
use of the national transmission grid pertaining to us. The impact of this
factor was partially offset by an aggregate decrease of Euro 19 million in
costs for services and personnel. Telecommunications. Operating expenses for our Telecommunications segment,
prior to eliminations, increased by Euro 62 million, or 1.8%, as compared to
2002. This increase reflected a Euro 78 million increase in costs for services
(mainly advertising and outsourcing) and a Euro 32 million increase in
personnel costs that were partially offset by a Euro 45 million decrease in
interconnection and roaming costs, reflecting our reduced need for such
services due to the development of our telecommunications network. Corporate. Operating expenses for our Corporate segment, prior to
eliminations, decreased by Euro 893 million, or 49.5%, as compared to 2002,
primarily due to the transfer of the agreements for the purchase of fuel to our
Generation and Energy Management segment, which we estimate accounted for Euro
578 million of the decrease, and a Euro 300 million decrease in costs for
purchased power reflecting reduced imports. Services and Other Activities. Operating expenses in our Services and
Other Activities segment, prior to eliminations, decreased by Euro 395 million,
or 14.5%, as compared to 2002, primarily reflecting a Euro 272 million 100




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decrease in costs for our engineering and contracting operations
attributable to the fact that in 2002 we had recorded accounting accruals
and to losses incurred in certain international operations, a Euro 100
million decrease attributable to the deconsolidation of CESI, and a Euro 54
million decrease in costs in our real estate business reflecting a reduced
level of activities. The impact of these factors on the total was only
partially offset by a Euro 31 million increase in costs for other activities
such as personnel administration, professional training services, factoring and
reinsurance. Eliminations. Eliminations for operating expenses principally consist of
the elimination of intersegment electricity and fuel purchases and costs for
the provision of intersegment services. In 2003, the decrease of Euro 1,099
million, or 9.2%, was generally in line with the corresponding amount relating
to operating revenues. Depreciation and amortization The following table shows depreciation and amortization for each of our
business segments for each of the periods presented: Year ended December 31,2002
    
    2003(in millions of euro)Generation and Energy Management
    
    
    1,167
    
    
    
    1,081Sales, Infrastructure and Networks
    
    
    1,217
    
    
    
    1,200International
    
    
    148
    
    
    
    156Transmission
    
    
    247
    
    
    
    145Telecommunications
    
    
    1,496
    
    
    
    1,717Corporate
    
    
    4
    
    
    
    4Services and Other Activities
    
    
    198
    
    
    
    213Total
    
    
    4,477
    
    
    
    4,516
 Depreciation and amortization for 2003 increased by Euro 39 million, or
0.9%, as compared to 2002, mainly as a result of a Euro 221 million increase in
our Telecommunications segment that was partially offset by a Euro 102 million
decrease in our Transmission segment and a Euro 86 million decrease in our
Generation and Energy Management segment. Depreciation and amortization for our Generation and Energy Management
segment decreased by Euro 86 million, or 7.4%, primarily as a result of the
deconsolidation of Eurogen and Interpower, which we estimate reduced these
expenses by approximately Euro 97 million. Depreciation and amortization for
our Sales, Infrastructure and Networks segment decreased by Euro 17 million, or
1.4%, primarily due to a Euro 63 million decrease attributable to lower
depreciation charges relating to the electricity distribution network following
the sale of certain local distribution networks, as well as reduced
investments, the effect of which was partially offset by an increase of Euro 44
million in depreciation and amortization for our gas activities attributable to
the inclusion of a full years results of Camuzzi, which had only been
consolidated for the last six months of the year in 2002. Depreciation and
amortization for our International segment increased by Euro 8 million, or
5.4%, as a result of the first time consolidation of Maritza. Depreciation and
amortization for our Transmission segment decreased by Euro 102 million, or
41.3%, following our decision to increase the useful life of our transmission
grid from 35 to 40 years following the results of technical tests supporting a
longer useful life for such assets. Depreciation and amortization for our
Telecommunications segment increased by Euro 221 million, or 14.8%, as compared
to 2002, primarily due a Euro 145 million increase attributable to higher
depreciation of our telecommunications network attributable to the
depreciation of the assets we acquired in connection with the development of
our network costing Euro 1,559 million in 2002 and Euro 685 million in 2003, as
well as an increase of Euro 129 million attributable to the amortization of our
UMTS license for the first time in 2003 (when we became able to utilize it).
The impact of these factors on the overall result for the segment was partially
offset by a decrease of Euro 53 million in amortization of goodwill reflecting
the net effect of a decrease of Euro 108 million in the value of the segments goodwill (mainly resulting from the acquisition of Infostrada) due to
the write-downs recorded in 2002 and an increase
of Euro 55 million due to the amortization of the goodwill resulting from our
acquisition of France 101




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Télécoms
stake in WIND. You should read OutlookAcquisition of
Infostrada and sole ownership of WIND for further details on such acquisition. Operating income The following table shows operating income for each of our business
segments for the periods presented: Year ended December 31,2002
    
    2003(in millions of euro)Generation and Energy Management
    
    
    1,373
    
    
    
    2,388Sales, Infrastructure and Networks
    
    
    2,100
    
    
    
    2,299International
    
    
    95
    
    
    
    100Transmission
    
    
    271
    
    
    
    408Telecommunications
    
    
    (1,019
    )
    
    
    (840
    )Corporate
    
    
    164
    
    
    
    223Services and Other Activities
    
    
    (50
    )
    
    
    234Eliminations
    
    
    (54
    )
    
    
    (80
    )Total
    
    
    2,880
    
    
    
    4,732
 Operating income increased by Euro 1,852 million, or 64.3%, as compared to
2002, primarily due to a Euro 1,015 million increase in income in our
Generation and Energy Management segment. The overall increase also reflected a
Euro 137 million increase in income in our Transmission segment, a Euro 284
million increase in income in our Services and Other Activities segment, a Euro
199 million increase in income in our Sales, Infrastructure and Networks
segment, and a Euro 179 million increase in income in our Telecommunications
segment. Generation
and Energy Management. Operating income of our Generation and
Energy Management segment, prior to eliminations, increased by Euro 1,015
million, or 73.9%, as compared to 2002. This increase was primarily
attributable to the impact on operating margins of the abolition of the
hydroelectric surcharge, which had a doubly positive effect on margins in 2003.
The reversal of the hydroelectric surcharge that we had accounted for in 2002,
following the retroactive abolition of such surcharge in 2003, contributed to
our operating revenues for Euro 410 million, while the fact that we did not
have to account for such charges in 2003 reduced our operating expenses by an
equivalent amount. The increase also reflected Euro 310 million in additional
revenues attributable to the increase in the tariff component aimed at covering
fuel costs, and a Euro 102 million increase due to the reimbursement of certain
charges incurred in 2002 for the purchase of green certificates. These positive
factors were partially offset by a Euro 124 million increase in provisions and
a Euro 49 million decrease in operating income attributable to the
deconsolidation of Eurogen and Interpower. Sales, Infrastructure and Networks. Operating income of our Sales,
Infrastructure and Networks segment, prior to eliminations, increased by Euro
199 million, or 9.5%, as compared to 2002. This increase was primarily
attributable to a Euro 143 million increase in bonuses that the Energy
Authority granted to us for having achieved the quality targets set for 2002
and 2001, and to a decrease in costs for personnel, materials and services
totaling an aggregate of Euro 143 million. The increase also reflected the
inclusion of a full years results of Camuzzi, which we estimate accounted for
an additional Euro 80 million in operating income, and Euro 63 million in lower
depreciation charges on the electricity distribution network, as described
above. The impact of these positive factors was partially offset by a Euro 203
million decrease in operating income from the sale of electricity that was
attributable to the combination of lower tariff levels and a decrease in sales
volumes. International. Operating income of our International segment, prior to
eliminations, increased by Euro 5 million, or 5.3%, as compared to 2002,
reflecting a Euro 39 million increase attributable to the first time
consolidation of Maritza, which was partially offset by a Euro 27 million
decrease in operating income of Viesgo and a Euro 7 million decrease in
operating income from our operations in North and Central and South America. 102




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Transmission. Operating income of our Transmission segment, prior to
eliminations, increased by Euro 137 million, or 50.6%, as compared to 2002,
primarily due to a decline of Euro 102 million in depreciation charges on our
electricity transmission grid as a result of the change in useful lives
described above and a Euro 46 million increase in revenues. These factors
were partially offset by a Euro 11 million increase in operating expenses. Telecommunications. Operating loss of our Telecommunications segment,
prior to eliminations, decreased by Euro 179 million, or 17.6%, as compared to
2002, reflecting a higher volume of activity. The increase in revenues reduced
the operating loss of the segment by Euro 462 million, though the effect of
this on the total was partially offset by the Euro 221 million increase in
depreciation and amortization costs and a Euro 62 million increase in operating
expenses discussed above. Corporate. Operating income of our Corporate segment, prior to
eliminations, increased by Euro 59 million, or 36.0%, as compared to 2002,
mainly due to a decline in the operating expenses of this segment described
above. Services and Other Activities. Operating income of our Services and Other
Activities segment, prior to eliminations, was Euro 234 million, as compared to
an operating loss of Euro 50 million in 2002. The improvement in the segments
operating result was primarily due to a Euro 389 million increase in operating
income from our engineering and contracting business, which had recorded losses
attributable to its international operations in 2002. The impact of this
turnaround was partially offset by a Euro 62 million decrease in operating
income from our information technology services and a Euro 48 million decrease
in operating income from our real estate and related services due to
their reduced level of activities. Eliminations. Eliminations for operating income mainly relate to income
from our engineering and contracting activities arising from transactions with
companies in our Generation and Energy Management segment. In 2003, the
increase of Euro 26 million, or 48.1%, reflected an increase in these
intersegment activities. Financial expense Net financial expense decreased by Euro 48 million, or 4.1%, from Euro
1,178 million in 2002 to Euro 1,130 million in 2003, primarily due to the
reduction in the average interest rate applied to our financial debt from 4.7%
in 2002 to 4.4% in 2003, the effect of which was partially offset by an
increase from Euro 23,386 million in 2002 to Euro 24,119 million in 2003 in our
average net financial debt. The total increase in our average net financial
debt was primarily attributable to our financing of the acquisition of France
Télécoms 26.6% stake in WIND. Equity losses The Euro 73 million charge recorded in 2003 (an increase of Euro 14
million or 23.7% from 2002) consisted primarily of write-downs in the value of
investments in other companies, of which Euro 72 million related our holdings
in Leasys, a joint venture we created with Fiat Auto S.p.A. which provides
services of long-term rentals for corporate fleets, due to losses incurred by
the venture. Extraordinary income (expense) In 2003, we recorded net extraordinary expenses of Euro 136 million, as
compared to net extraordinary income of Euro 736 million recorded in 2002. Extraordinary expenses for 2003 principally consisted of:  
    
    Charges connected with early retirement incentives totaling Euro 256 million;
    
    A write-down of Euro 133 million and accruals for Euro 58
million made in connection with the conversion to coal of a plant in
Torrevaldaliga Nord; 103




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
    
    Charges for restructuring and reorganization totaling Euro 92
million, of which Euro 69 million related to our Telecommunications
segment and included losses from the early disposal of certain
computer hardware and software, costs for training of personnel, and penalties for early
termination of certain supply agreements, with the remaining Euro 23 million pertaining to our real estate operations;
    
    Several charges connected with the tax amnesty totaling Euro 83 million;
    
    Adjustments relating to previous years capital grants amounting to Euro 60 million;
    
    Adjustments and other items relating to our
Telecommunications segment, totaling Euro 44 million;
    
    Adjustments amounting to Euro 30 million due to the settlement
of transactions due to extraordinary events;
    
    Write-downs of assets totaling Euro 23 million (of which Euro
19 million related to our Generation and Energy Management segment);
    
    Adjustments amounting to Euro 20 million on the value of stocks of fuel;
    
    Write-downs of assets connected with our combined cycle conversion plan totaling Euro 8 million;
    
    Payment of taxes relating to previous years totaling Euro 6 million;
    
    Extraordinary reimbursements made to customers totaling Euro 4 million. These extraordinary expenses were partially offset by extraordinary income that principally consisted of:  
    
    A capital gain on the disposal of Interpower of Euro 356 million;
    
    Capital gains on the disposal of electricity distribution
networks in several municipalities of aggregate Euro 165 million,
of which Euro 120 million related to the disposal of the
distribution network in Brescia;
    
    Adjustments in income taxes with respect to previous years
for a total of Euro 58 million, resulting from the definition of the
tax treatment of certain items following clarifications on the
application of certain rules provided in 2003;
    
    Indemnities amounting to Euro 44 million;
    
    Write-offs of extraordinary provisions and other items
relating primarily to our Generation and Energy Management segment
totaling Euro 37 million;
    
    Adjustments and other items relating to our
Telecommunications segment, totaling Euro 31 million. You should read note 23 to our consolidated financial statements for a
discussion of the different criteria used under Italian GAAP and U.S. GAAP for
determining what constitutes an extraordinary item. Income taxes The following table shows a breakdown of our income taxes for the periods
indicated. 104




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##### Table of Contents



Year endedDecember 31,2002
    
    2003(in millions of euro)Income taxes:Current and deferred taxes
    
    
    919
    
    
    
    1,388Release of deferred tax provision following freeing-up of accelerated depreciation reserves
    
    
    (60
    )
    
    
    Tax incentives on capital expenditure (Tremonti-bis Law)
    
    
    (213
    )
    
    
    Reversal of deferred tax provision as a result of revaluation of assets carried out in
statutory accounts by Group companies
    
    
    
    
    
    
    (375
    )Resizing of
deferred taxes and deferred tax assets to change in tax rates
    
    
    (38
    )
    
    
    (47
    )Total
    
    
    608
    
    
    
    966
 The total tax charge for 2003 was Euro 966 million, which was Euro 358
million, or 58.9%, higher than the charge for 2002. The increase reflected
primarily a Euro 507 million increase in current and deferred taxes primarily
due to the increase in income. This total tax charge reflected our effective tax rate of 28.5%, net of
the effects of non-recurring items, as opposed to an overall tax rate which
would have amounted approximately to 45% in the absence of such non-recurring
items. The decline in the tax rate is primarily attributable to the partial
release of the deferred tax reserve for an amount of Euro 375 million resulting
from the value of certain classes of assets having been restated by some of our
companies in their statutory accounts. Under Italian tax rules, companies may
accelerate the amortization of certain assets for tax purposes insofar as they
create two special reserves. The first reserve accounts for the accelerated
amortization. The other reserve accounts for the deferred taxes (calculated by
applying the standard corporate tax rate) that will be due on the portion of
amortization reflected in the financial statements, but already deducted for
tax purposes because of the accelerated amortization. In 2003, pursuant to a
special tax regime, certain of our companies stepped up the value of certain
classes of assets amortized on a tax acceleration basis by paying a 19%
substitute tax rate, thereby aligning the value that such assets carried in the
statutory accounts with the value that they carry in the consolidated financial
statements. This resulted in a decrease of our effective corporate tax rate
for an amount equal to the difference between the standard corporate tax rate
(at which the deferred tax reserve had been accounted for by our companies) and
the 19% substitute tax due on the increase in value of the assets amortized on
a tax acceleration basis. Deferred taxes and deferred tax assets were adjusted to take into account
the cut in the corporate tax rate to 33%, resulting in a decrease of the value
of such accounting items equal to Euro 47 million. You
should read 2002 compared with 2001Income taxes for a discussion
of Release of deferred tax provision following freeing-up of accelerated
depreciation reserves and Tax incentives on capital expenditure (Tremonti-bis
Law), which had an impact in 2002 and related to tax regimes no longer
available in 2003. Net income Net income increased by Euro 501 million, or 25.0%, from Euro 2,008
million in 2002 to Euro 2,509 million in 2003. This increase was primarily due
to the Euro 1,852 million increase in operating income and Euro 48 million
decrease in net financial expenses described above. The positive effects of
these factors on net income was partially offset by extraordinary expense of
Euro 136 million (as compared to an extraordinary income of Euro 736 million in
2002), a Euro 358 million increase in income taxes, a Euro 155 million decrease
in losses attributed to minority shareholders reflecting our acquisition of
France Telecoms former minority interest in WIND, and a Euro 14 million
increase in equity losses, each of which is described in more detail above. 105




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2002 compared with 2001 Operating revenues The following table shows the different sources of our operating revenues
for the years ended December 31, 2001 and 2002. Year ended December31,2001
    
    2002(in millions of euro)Electricity sales:Tariff revenues from sales to Non-Eligible Customers and transport of electricity on our
distribution network
    
    
    18,807
    
    
    
    16,244Sales to Eligible Customers, sales to the Gestore della Reteand sales on foreign markets
    
    
    2,516
    
    
    
    3,964Equalization Fund contributions
    
    
    783
    
    
    
    187Total
    
    
    22,106
    
    
    
    20,395Telecommunications services
    
    
    2,817
    
    
    
    3,642Gas sales to end users
    
    
    423
    
    
    
    780Fees for customer connections, inspections and repositioning services
    
    
    591
    
    
    
    645Other
revenues1
    
    
    2,844
    
    
    
    4,515Total operating revenues
    
    
    28,781
    
    
    
    29,977
   (1)
    
    Other revenues mainly includes revenues from our engineering and
contracting, fuel trading, public lighting and franchising operations,
reimbursements and sales of materials. Our consolidated operating revenues for 2002 increased by Euro 1,196
million, or 4.2%, compared to 2001. The increase was primarily due to an
increase of Euro 2,907 million, or 43.6%, in other revenues. This factor was
partially offset by a Euro 1,711 million decrease in revenues from electricity
sales and Equalization Fund contributions. In 2002, our revenues from electricity sales and Equalization Fund
contributions decreased by Euro 1,711 million, or 7.7%, as compared to 2001.
The decline was primarily due to a decrease of Euro 2,563 million, or 13.6%, in
tariff revenues from sales to Non-Eligible Customers and transport of
electricity on our distribution network, which reflected a 8.4% decline in the
total volume of electricity sold and a 16.4% decline in the tariff component
aimed at covering thermal fuel costs. This decline was only partially offset by
a 22.4% increase in the volume of electricity for the domestic free market
transported on our distribution network. The decline in revenues from
electricity sales and Equalization Fund contributions was also attributable to
a decrease of Euro 596 million, or 76.1%, in Equalization Fund contributions
that reflected mainly the abolition, effective January 1, 2002, of the Euro
0.0031 per kWh tariff component for generation of electricity to be sold to
Non-Eligible Customers. The decline in tariff revenues from sales to Non-Eligible Customers and
transport of electricity on our distribution network and in Equalization Fund
contributions was only partially offset by an increase in revenues from sales
to Eligible Customers, to the Gestore della Reteand on foreign markets. In
2002, such revenues increased by Euro 1,448 million, or 57.6%, of which Euro
804 million were attributable to the first time consolidation of Viesgo, Euro
400 million were attributable to increased sales to other operators (in Italy)
and the Gestore della Rete, Euro 121 million were attributable to revenues from
electricity trading, and Euro 64 million were attributable to revenues
resulting from our activities to hedge risks related to the changes in the
tariff component aimed at covering fuel costs. In 2002, revenues from telecommunications services rose by Euro 825
million, or 29.3%, reflecting increased traffic on our network and the
inclusion of a full years results of the former Infostrada operations, which
had been consolidated only for nine months in 2001. 106




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In 2002, revenues from gas sold to end users increased of Euro 357
million, or 84.4%, reflecting the first time consolidation of Enel Rete Gas. In 2002, revenues from reimbursements of our costs for customer
connections, inspections and repositioning services rose by Euro 54 million, or
9.1%. The increase in revenues from businesses other than electricity and gas
sales and telecommunications services (Euro 1,671 million, or 58.8%) was
attributable to fuel trading activities, which rose by Euro 1,008 million,
engineering and contracting, which rose by Euro 466 million, minor activities
(information technology, real estate, public lighting, etc.) which increased by
approximately Euro 90 million, and electricity transmission activities, which
rose by Euro 21 million. The following table shows our operating revenues for each of our business
segments for the periods presented. In 2003, we added a new reportable segment
corresponding to our newly-created International division (see
OverviewBusiness segments). Accordingly, in order to present segment
information for the three years ended December 31, 2003, 2002 and 2001, on a
comparable basis, we have reclassified certain segment information for 2002 and
2001 to conform to the 2003 presentation. Year ended December31,2001
    
    2002(in millions of euro)Generation and Energy Management
    
    
    12,563
    
    
    
    10,881Sales, Infrastructure and Networks
    
    
    22,206
    
    
    
    20,586International
    
    
    68
    
    
    
    923Transmission
    
    
    793
    
    
    
    828Telecommunications
    
    
    3,176
    
    
    
    3,921Corporate
    
    
    3,980
    
    
    
    1,973Services and Other Activities
    
    
    2,321
    
    
    
    2,874Eliminations
    
    
    (16,326
    )
    
    
    (12,009
    )Total
    
    
    28,781
    
    
    
    29,977
 Generation and Energy Management. In 2002, operating revenues of our
Generation and Energy Management segment, prior to eliminations, decreased by
Euro 1,682 million, or 13.4%, as compared to 2001. The decrease was primarily
attributable to changes in the scope of consolidation (mainly related to the
deconsolidation of Elettrogen, Valgen and Eurogen), which we estimate had a
negative impact on the total of approximately Euro 1,600 million. The decrease
also reflected a 16.4% decline in the tariff component aimed at covering fuel
costs and the abolition of the Euro 0.0031 per kWh tariff component for
generation of electricity to be sold on the regulated market. We estimate that
the negative effect of these two factors on the revenues of this segment for
2002 resulted in a decrease of approximately Euro 1,300 million. The negative
impact of these factors on the revenues of our Generation and Energy Management
segment was partially offset by an increase of approximately Euro 700 million
in revenues from sales of fuel, primarily due to the sale of fuel to Elettrogen
and Eurogen, and an increase of approximately Euro 500 million in revenues from
sales of natural gas to the Sales, Infrastructure and Networks segment. Sales, Infrastructure and Networks. In 2002, operating revenues of our
Sales, Infrastructure and Networks segment, prior to eliminations, decreased by
Euro 1,620 million, or 7.3%, as compared to 2001. The decrease was primarily
due to a Euro 2,251 million or 10.3%, decrease in revenues from the electricity
operations of this segment, which decrease was only partially offset by an
increase of Euro 631 million, or 144.1%, in revenues from the distribution and
sales of natural gas that reflected the acquisition and first time
consolidation of Camuzzi Gazometri (now called Enel Rete Gas). The decrease in
revenues from electricity operations was attributable primarily to lower
revenues from sales on the domestic regulated market and transport of
electricity on our distribution network, which revenues decreased by Euro 2,563
million, or 13.6%. The decrease reflected an 8.4% decline in the volume of
electricity sold (reflecting lower sales to Non-Eligible Customers and the
disposal of certain municipal distribution networks), and a 16.4% decline in
the tariff component aimed at covering thermal fuel costs. The decrease in
revenues from sales on the domestic regulated market and transport of
electricity on our distribution network was only partially offset by a Euro 121
million increase in revenues from trading of electricity on international
markets 107




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and a Euro 67 million increase in revenues from connection fees,
franchising, and public lighting activities. Our 2002 revenues from electricity
operations also included Euro 85 million attributable to transport fees for
electricity transported in the previous year that the Gestore della Rete
attributed to us in 2002. International. In 2002, operating revenues of our International segment,
prior to eliminations, increased to Euro 923 million from Euro 68 million in
2001. The increase (by Euro 855 million) reflected primarily the first time
consolidation of Viesgo, which had Euro 825 million in revenues in 2002. A Euro
30 million increase was due to sales made in the U.S. market. Transmission. In 2002, operating revenues of our Transmission segment,
prior to eliminations, increased by Euro 35 million, or 4.4%, as compared to
2001, due to a Euro 21 million increase in revenues attributable to higher
tariffs, and a Euro 14 million increase in revenues from fees for maintenance
services related to the high-voltage lines owned by Enel Distribuzione. Telecommunications. In 2002, operating revenues of our Telecommunications
segment, prior to eliminations, increased by Euro 745 million, or 23.5%, as
compared to 2001, of which Euro 464 million was due to increased traffic on our
network. Also, we estimate that approximately Euro 280 million of the increase
was attributable to the inclusion of a full years results of the former
Infostrada operations following their merger into WIND. In 2001, these
operations had only been consolidated for the last nine months of the year. Corporate. In 2002, operating revenues of our Corporate segment, prior to
eliminations, decreased by Euro 2,007 million, or 50.4%, as compared to 2001,
of which Euro 1,687 million was attributable to the transfer of agreements for
the purchase of fuel to Enel Trade and Euro 153 million was attributable to the
lower price at which imported electricity was sold to Enel Distribuzione. Services and Other Activities. In 2002, operating revenues in our Services
and Other Activities segment, prior to eliminations, increased by Euro 553
million, or 23.8%, as compared to 2001, primarily due to an increase of Euro
520 million in revenues from engineering and contracting that was attributable
to increased activities with third parties (Euro 450 million) and with
companies of our group (Euro 70 million). The increase was also due to a Euro
71 million increase in revenues from our information technology activities,
primarily in connection with the implementation of a SAP information management
system. The positive impact of these factors was partially offset by a Euro 68
million decrease in revenues from our real estate business attributable to
reduced activities. Of the segments total of Euro 2,874 million in operating
revenues, Euro 1,621 million was attributable to engineering and contracting,
Euro 523 million to information technology services, and Euro 491 million to
real estate and related services. Approximately 55% of such revenues were
generated by transactions carried out with companies of the Group. Eliminations.Eliminations in operating revenues primarily relate to
intersegment sales (primarily of fuel and electricity) and services (primarily
engineering and contracting). In 2002, these eliminations decreased by Euro
4,317 million, or 26.4%, as compared to 2001, mainly reflecting the transfer of
the agreements for the purchase of fuel from our Corporate segment to our
Generation and Energy Management segment and the decline in the tariff
component aimed at covering thermal fuel costs, which decline resulted in lower
revenues from sales from our Generation and Energy Management segment to our
Sales, Infrastructure and Networks segment. Operating expenses The following table shows a breakdown of our operating expenses for each
of the periods presented: 108




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Year ended December 31,2001
    
    2002(in millions of euro)Operating expensesPersonnel
    
    
    3,722
    
    
    
    3,589Fuel for thermal generation
    
    
    5,249
    
    
    
    4,255Purchased power
    
    
    3,649
    
    
    
    4,802Other operating expenses:Services and rentals
    
    
    5,633
    
    
    
    5,710Materials and supplies
    
    
    2,349
    
    
    
    4,212Provision
    
    
    599
    
    
    
    504Other
    
    
    577
    
    
    
    721Capitalized expense
    
    
    (934
    )
    
    
    (1,173
    )Total
    
    
    20,844
    
    
    
    22,620
 Our consolidated operating expenses for 2002 increased by Euro 1,776
million, or 8.5%, as compared to 2001. Expressed as a percentage of operating
revenues, operating expenses increased from 72.4% in 2001 to 75.5% in 2002. The
increase in our operating expenses was mostly due to a Euro 1,863 million
increase in expenses for material and supplies (of which Euro 1,232 million was
attributable to increased purchase costs for natural gas and fuels for
distribution and trading activities, and Euro 631 million to increased costs
for materials for our engineering and contracting activities and for other
construction performed by our Sales, Infrastructure and Networks segment), and
a Euro 1,153 million increase due to higher volumes of purchased power. The
negative effects of these factors were only partially offset by a Euro 994
million decrease in costs for fuel for thermal generation reflecting the
deconsolidation of Elettrogen and Eurogen, and by a Euro 239 million increase
in capitalized expenses. Personnel costs decreased by Euro 133 million, or 3.6%, as compared to
2001, primarily due to a 6.8% decline in the average number of employees. The
decline in headcount was mainly due to early retirements spurred by incentives
and, to a lesser extent, reflected the deconsolidation of Elettrogen and
Eurogen. These factors were partially offset by a 3.7% increase in the average
cost per employee mainly attributable to increased compensation introduced by
the new collective labor agreement for the electricity industry. Costs for fuel for thermal generation in 2002 decreased by Euro 994
million, or 18.9%, as compared to 2001, primarily due to a decrease of 13.7% in
the volume of electricity produced from thermal sources, reflecting the
deconsolidation of Elettrogen and Eurogen. The decrease in costs for fuel for
thermal generation was also attributable to the decline of market prices for
coal and natural gas and to the depreciation of the U.S. dollar (the currency
in which most of our fuel purchases are denominated) against the euro. These
factors were only partially offset by an additional Euro 184 million of costs
for fuel for thermal generation attributable to the first time consolidation of
Viesgo. Purchased power costs in 2002 increased by Euro 1,153 million, or 31.6%,
as compared to 2001, reflecting a 21.2% increase in volumes purchased,
primarily due to purchases made by our Sales, Infrastructure and Networks
segment from Elettrogen and Eurogen after their disposal and by Viesgo in the
Spanish electricity pool market. The increase in average purchase cost per unit
is attributable to a decline of the percentage of total power purchased
represented by the power purchased abroad (where prices are usually lower than
in Italy). Services and rentals costs in 2002 increased by Euro 77 million, or 1.4%
as compared to 2001, primarily due to a Euro 252 million increase in costs for
services with respect to our increased engineering and contracting activities,
and a Euro 243 million increase reflecting the inclusion of a full years
results of the former Infostrada operations following their merger into WIND.
The increase in services and rentals costs also reflected an aggregate Euro 62
million increase attributable to the first time consolidation of Viesgo and
Enel Rete Gas, a Euro 35 million increase in charges paid to the Gestore della
Retewith respect to increased fees to access the network, a Euro 16 million
increase in fees paid for the use of water to local authorities, and an
aggregate increase of Euro 16 million attributable to increased costs for
several other services. These factors were partially offset by a Euro 253
million 109




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decrease in the surcharge paid to the Gestore della Retewith respect to
the generation of hydroelectric or geothermal electricity as a result of a
21.8% decline in hydroelectric production and a 16.4% decline in the tariff
component aimed at covering thermal fuel costs on the basis of which the
surcharge is calculated, by a Euro 164 million decrease attributable to the
deconsolidation of Elettrogen, Eurogen and Valgen, and by an approximately Euro
130 million decrease reflecting lower costs for interconnection and roaming in
our telecommunications activities. Materials and supplies costs in 2002 increased by Euro 1,863 million, or
79.3%, as compared to 2001, primarily due to a Euro 804 million increase in
costs for supplies of fuel for trading activities mainly attributable to fuel
purchased for resale to Elettrogen and Eurogen after their disposal, a Euro 631
million increase in costs for materials for our engineering and contracting
activities, and a Euro 428 million increase in costs for supplies of natural
gas mainly attributable to the first time consolidation of Enel Rete Gas. Provisions in 2002 decreased by Euro 95 million, or 15.9%, as compared to
2001. The overall reduction reflected decreases of Euro 59 million in
write-downs of fixed-assets and receivables recorded by our Telecommunications
segment, and Euro 36 million in other provisions for risks and charges. Other costs in 2002 increased by Euro 144 million, or 25.0%, as compared
to 2001, primarily due to a Euro 195 million increase in costs for the purchase
of green certificates. Please refer to Item 4. Information on the
CompanyRegulatory MattersElectricity RegulationRegulatory
frameworkPromotion of renewable resources. Such increase was only partially
offset by a Euro 44 million decrease in contributions paid by WIND with respect
to telecommunications concessions. Capitalized expenses in 2002 increased by Euro 239 million, or 25.6%, as
compared to 2001, primarily reflecting capital improvements of our plants,
equipment and electricity distribution networks. The following table shows a breakdown of our operating expenses by
business segment for each of the periods presented. Year ended December 31,2001
    
    2002(in millions of euro)Generation and Energy Management
    
    
    8,661
    
    
    
    8,341Sales, Infrastructure and Networks
    
    
    19,100
    
    
    
    17,269International
    
    
    37
    
    
    
    680Transmission
    
    
    324
    
    
    
    310Telecommunications
    
    
    3,345
    
    
    
    3,444Corporate
    
    
    3,642
    
    
    
    1,805Services and Other Activities
    
    
    1,976
    
    
    
    2,726Eliminations
    
    
    (16,241
    )
    
    
    (11,955
    )Total
    
    
    20,844
    
    
    
    22,620
 Generation and Energy Management. In 2002, operating expenses for our
Generation and Energy Management segment (which primarily consist of fuel
costs, fees paid to the Gestore della Rete, and personnel and maintenance costs
for our power plants), prior to eliminations, decreased by Euro 320 million, or
3.7%, as compared to 2001. This decrease was primarily due to the
deconsolidation of Elettrogen, Valgen and Eurogen, which we estimate resulted
in a reduction in costs of approximately Euro 1,170 million, a Euro 293 million
decrease in costs for fuel for thermal generation, a Euro 253 million decrease
in costs for hydroelectric surcharge and a Euro 65 million decrease in costs
for personnel. These factors were partially offset by an aggregate increase of
Euro 1,200 million in costs for purchases of fuel for our trading activities
(including the resale of fuel to Elettrogen and Eurogen) and of natural gas for
resale to our Sales, Infrastructure and Networks segment, a Euro 164 million
increase in costs for this segments purchase of green certificates, a Euro 35
million increase in charges paid to the Gestore della Reteand a Euro 16
million increase in fees for the use of water. 110




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Sales, Infrastructure and Networks. In 2002, operating expenses for our
Sales, Infrastructure and Networks segment (which primarily consist of
purchases of power and natural gas and costs associated with running our
distribution network), prior to eliminations, decreased by Euro 1,831 million,
or 9.6%, as compared to 2001. This decrease was primarily due to a Euro 2,317
million decrease in costs for purchased power, reflecting a 8.4% decline in
volumes of electricity sold on the domestic regulated market and the reduction
in the fuel cost component of the tariff paid to purchase electricity. The
decrease was also due to a Euro 134 million decrease in costs for personnel
employed in the domestic electricity activities. These factors were partially
offset by the first time consolidation of Enel Rete Gas , which we estimate
accounted for an increase in costs of approximately Euro 554 million (of which
Euro 428 million related to costs for purchases of gas), an increase of Euro 50
million in expenses in our franchising and public lighting activities and an
increase of Euro 27 million in accruals for provisions for risks and charges. International. In 2002, operating expenses for our International segment,
prior to eliminations, increased to Euro 680 million from Euro 37 million in
2001. The increase of Euro 643 million reflected primarily the first time
consolidation of Viesgo which accounted for Euro 640 million. Transmission. In 2002, operating expenses for our Transmission segment,
prior to eliminations, decreased by Euro 14 million, or 4.3%, as compared to
2001, primarily due to lower costs for services. Telecommunications. In 2002, operating expenses for our Telecommunications
segment, prior to eliminations, increased by Euro 99 million, or 3.0%, as
compared to 2001. We estimate that an increase of approximately Euro 291
million (of which Euro 243 million relates to costs for services) was
attributable to the inclusion of a full years results of the former Infostrada
operations following their merger into WIND. The overall increase was also due
to a Euro 45 million increase in interconnection costs due to increased traffic
volumes. These factors were partially offset by a Euro 175 million decrease in
roaming costs due to the development of our mobile telecommunication network,
which reduced our need to access to other operators networks, and a Euro 59
million decrease reflecting lower write-downs of tangible assets and trade
receivables in 2002. Corporate. In 2002, operating expenses for our Corporate segment, prior to
eliminations, decreased by Euro 1,837 million, or 50.4%, as compared to 2001,
primarily due to a Euro 1,689 million decrease in costs for purchases of fuel
resulting from the transfer of the agreements for the purchase of fuel to Enel
Trade. The overall decrease also reflected a Euro 53 million decrease in
accruals for pension benefits to our retired managers, and a Euro 50 million
decrease in costs for services. Services and Other Activities. In 2002, operating expenses in our Services
and Other Activities segment, prior to eliminations, increased by Euro 750
million, or 38.0%, as compared to 2001, primarily due to a Euro 763 million
increase in costs in our engineering and contracting operations, reflecting an
increased level of activity and increased accruals (for Euro 68 million) with
respect primarily to losses incurred in certain international operations, and a
Euro 85 million increase in expenses in our information technology service
business in connection with the implementation of a SAP information management
system. These factors were only partially offset by an approximately Euro 100
million decrease in costs for our real estate business reflecting a reduced
level of activity Eliminations. Eliminations for operating expenses principally consist of
the elimination of intersegment electricity and fuel purchases and costs for
the provision of intersegment services. In 2002, the decrease of Euro 4,286
million, or 26.4%, was in line with the corresponding amount relating to
operating revenues. Depreciation and amortization The following table shows depreciation and amortization for each of our
business segments for each of the periods presented: Year ended December 31,2001
    
    2002(in millions of euro)Generation and Energy Management
    
    
    1,342
    
    
    
    1,167Sales, Infrastructure and Networks
    
    
    1,580
    
    
    
    1,217International
    
    
    21
    
    
    
    148
 111




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Year ended December 31,2001
    
    2002(in millions of euro)Transmission
    
    
    240
    
    
    
    247Telecommunications
    
    
    1,068
    
    
    
    1,496Corporate
    
    
    2
    
    
    
    4Services and Other Activities
    
    
    206
    
    
    
    198Total
    
    
    4,459
    
    
    
    4,477
 Depreciation and amortization for 2002 increased by Euro 18 million, or
0.4%, as compared to 2001, mainly as a result of a Euro 428 million increase in
our Telecommunications segment and a Euro 127 million increase in our
International segment, that were partially offset by a Euro 363 million
decrease in our Sales, Infrastructure and Networks segment and a Euro 175
million decrease in our Generation and Energy Management segment. Depreciation and amortization for our Generation and Energy Management
segment decreased by Euro 127 million, or 13%, primarily as a result of the
deconsolidation of Elettrogen, Valgen and Eurogen, which we estimate resulted
in a decrease of Euro 179 million. Depreciation and amortization for our Sales,
Infrastructure and Networks segment decreased by Euro 363 million, or 23.0%,
primarily due to a Euro 407 million decrease mainly attributable to the fact
that, until December 31, 2001, connection fees paid by Non-Eligible Customers
were recorded as revenues as well as being partially reflected in an increase
of the depreciation of capital investments on the distribution network. As a
result of the state of completion attained by our distribution network,
starting from 2002, connection fees are no longer deemed to be associated with
the development of such network and are no longer reflected in the depreciation
of capital investments, but rather are included in revenues as connections are
made. This factor was partially offset by a Euro 44 million increase in
depreciation and amortization for the gas activities as a result of the first
time consolidation of Enel Rete Gas. Depreciation and amortization for our
International segment increased by Euro 127 million (to Euro 148 million from
Euro 21 million) mainly attributable to the first time consolidation of Viesgo
(Euro 122 million). Depreciation and amortization for our Telecommunications
segment increased by Euro 428 million, or 40.1%, as compared to 2001,
reflecting a Euro 244 million decrease in depreciation related to capital
expenditures for the development of our telecommunications network. Also, we
estimate that the inclusion of a full years results of the former Infostrada
operations following their merger into WIND, was responsible for an increase in
depreciation and amortization of approximately Euro 184 million, of which Euro
127 million represented the amortization of the goodwill associated with the
acquisition of Infostrada. Operating income The following table shows operating income for each of our business
segments for the periods presented: Year ended December 31,2001
    
    2002(in millions of euro)Generation and Energy Management
    
    
    2,560
    
    
    
    1,373Sales, Infrastructure and Networks
    
    
    1,526
    
    
    
    2,100International
    
    
    10
    
    
    
    95Transmission
    
    
    229
    
    
    
    271Telecommunications
    
    
    (1,237
    )
    
    
    (1,019
    )Corporate
    
    
    336
    
    
    
    164Services and Other Activities
    
    
    128
    
    
    
    (50
    )Eliminations
    
    
    (74
    )
    
    
    (54
    )Total
    
    
    3,478
    
    
    
    2,880
 Operating income decreased by Euro 598 million, or 17.2%, as compared to
2001, primarily due to a Euro 1,197 million decrease in income in our
Generation and Energy Management segment. The overall decrease also 112




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reflected a Euro 178 million decrease in income in the Services and Other
Activities segment and a Euro 172 million decrease in income in the Corporate
segment. These factors were only partially offset by a Euro 574 million
increase in income in Sales, Infrastructure and Networks, a Euro 218 million
increase in income in our Telecommunications segment, a Euro 85 million
increase in income in our International segment and a Euro 42 million increase
in income in our Transmission segment. Generation and Energy Management. In 2002, operating income of our
Generation and Energy Management segment, prior to eliminations, decreased by
Euro 1,187 million, or 46.4%, as compared to 2001. This decrease was due to a
Euro 931 million decrease in operating income earned from the sale of
electricity that reflected lower tariffs, a 21.8% decline in hydroelectric
production, and increased costs for the purchase of green certificates. This
decrease also reflected the deconsolidation of Elettrogen, Eurogen and Valgen,
which we estimate resulted in a decrease of approximately Euro 256 million. Sales, Infrastructure and Networks. In 2002, operating income of our
Sales, Infrastructure and Networks segment, prior to eliminations, increased by
Euro 574 million, or 37.6%, as compared to 2001. This increase was mainly due
to lower depreciation and amortization of Euro 363 million, a Euro 178 million
increase in operating income earned from sales and distribution of electricity,
and a Euro 33 million increase due to the first time consolidation of Enel Rete
Gas. International. In 2002, operating income of our International segment,
prior to eliminations, increased to Euro 95 million from Euro 10 million in
2001. The increase of Euro 85 million was primarily due to the first-time
consolidation of Viesgo. Transmission. In 2002, operating income of our Transmission segment, prior
to eliminations, increased by Euro 42 million, or 18.3%, as compared to 2001,
primarily due to higher tariff and fee revenues. Telecommunications. In 2002, the operating loss of our Telecommunications
segment, prior to eliminations, decreased by Euro 218 million, or 17.6%, as
compared to 2001, reflecting a higher volume of activity. An increase in
revenues reduced the operating loss of the sectors core operations by Euro 424
million, though the effect of this on the total was partially offset by the
effect of the inclusion of a full years results of the former Infostrada
operations following their merger into WIND, which we estimate increased the
segments operating losses by approximately Euro 206 million. Corporate. In 2002, operating income of our Corporate segment, prior to
eliminations, decreased by Euro 172 million, or 51.2%, as compared to 2001,
mainly due to the decline in the price at which this segment sold imported
electricity to our Sales, Infrastructure and Networks segment. Services and Other Activities. In 2002, the operating loss of our Services
and Other Activities segment, prior to eliminations, was Euro 50 million, as
compared to operating income of Euro 128 million in 2001. This decrease was
primarily due to a Euro 243 million decrease in operating income from our
engineering and contracting business attributable to losses incurred with
respect to certain international operations. This factor was partially offset
by a Euro 73 million increase in operating income from our real estate and
related services business. Eliminations. Eliminations for operating income mainly related to income
from our engineering and contracting activities resulting from transactions
with companies in our Generation and Energy Management segment. In 2002, the
decrease of Euro 20 million, or 27.0%, was due to lower income from these
activities. Financial expense Net financial expense increased by Euro 68 million, or 6.1%, from Euro
1,110 million in 2001 to Euro 1,178 million in 2002, primarily due to an
increase in our average net financial debt from Euro 20,743 million in 2001 to
Euro 23,386 million in 2002. The total increase in our average net financial
debt reflected primarily our capital expenditures in 2002 and the financing of
our acquisition of Viesgo and Camuzzi Gazometri (now called Enel Rete Gas),
which increased our financial debt, and the use of some of the proceeds from
our divestiture of Eurogen for repayments, which reduced our financial debt. 113




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Equity losses The Euro 59 million charge recorded in 2002 consisted primarily of
write-downs in the value of investments in other companies, of which Euro 24
million related to our holdings in Echelon Corporation and Euro 31 million to
venture capital investments. The decrease of Euro 26 million in the total
charge as compared to 2001 reflected mainly a reduction in the amount of such
write-downs, as compared to 2001. Extraordinary income (expense) We recorded net extraordinary income of Euro 736 million in 2002, as
compared to Euro 2,318 million in 2001. Extraordinary income for 2002 principally consisted of:  
    
    A capital gain on the disposal of Eurogen of Euro 2,313 million;
    
    Capital gains on the disposal of the distribution networks in
the municipalities of Milan and Verona totaling Euro 459 million;
    
    Adjustments in income taxes with respect to previous years
for a total of Euro 64 million, resulting primarily from the
recalculation of the rates applicable to capital gains related to
the sale of certain assets of our real estate business;
    
    Adjustments in interconnection fees and other items relating
to our Telecommunications segment, totaling Euro 46 million;
    
    Adjustments and extraordinary gains attributable to the
reimbursement of certain regulatory charges paid in prior years,
which were recorded by Viesgo and totaled Euro 34 million. This extraordinary income was partially offset by extraordinary expenses
that principally consisted of:  
    
    A write-down of Euro 1,511 million in the value of goodwill
relating to our Telecommunications segment, reflecting a
reassessment of the value of our telecommunications business;
    
    Charges connected with early retirement incentives totaling Euro 291 million;
    
    A write-down of Euro 94 million in the value of a discontinued geothermal plant;
    
    Adjustments, write-downs and other items relating to our
Telecommunications segment, totaling Euro 92 million;
    
    A write-down of Euro 58 million in the value of generation
plants with respect to the decommissioning of such plants in view of
their conversion to combined-cycle gas turbine technology;
    
    A write-down of Euro 49 million in the value of parts of
plants in connection with engineering and contracting projects in
South America that are no longer expected to be realized due to the
adverse economic conditions in the region;
    
    An adjustment of Euro 41 million in the capitalized cost for
extraordinary contributions due following the suppression of the
Electricity Sector Employee Pension Fund, as a result of reductions
in personnel;
    
    Adjustments and accruals recorded by Viesgo totaling Euro 39
million. 114




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You should read note 23 to our consolidated financial statements for a
discussion of the different criteria used under Italian GAAP and U.S. GAAP for
determining what constitutes an extraordinary item. Income taxes The following table shows a breakdown of our income taxes for the periods
indicated. Year ended December 31,2001
    
    2002(in millions of euro)Income taxes:Current and deferred taxes
    
    
    1,338
    
    
    
    919Release of deferred tax provision following freeing-up of accelerated depreciation reserves
    
    
    (603
    )
    
    
    (60
    )Tax incentives on capital expenditure (Tremonti-bis Law)
    
    
    (86
    )
    
    
    (213
    )Total
    
    
    649
    
    
    
    608
 The total tax charge for 2002 was Euro 608 million, which was Euro 41
million, or 6.3%, lower than the charge for 2001. The decrease reflected
primarily a Euro 457 million decrease in current and deferred taxes due to the
decrease in income. The decrease was also attributable to the positive impact of the tax
incentive regime applicable to capital investments made in 2001 and 2002.
Pursuant to this regime, net capital investments made in excess of the amount
corresponding to the average amount of such investments made in prior years
were partially deductible from taxable income. In 2002, the benefit resulting
from this incentive increased by Euro 127 million as compared to 2001. The
decrease in total tax charges also reflected a Euro 60 million release, in
2002, of the provision for deferred taxes accrued at December 31, 2001. Italian
tax law enables companies to apply an asset depreciation regime different from
the one applicable for accounting purposes. Companies are entitled to
accelerate the tax depreciation of assets insofar as they create two special
reserves. Whereas one reserve must account for the accelerated depreciation,
the other reserve accounts for the deferred taxes (calculated by applying the
standard corporate tax rate) which will be due on the portion of depreciation
resulting from the financial statements, but already deducted for tax purposes
in prior periods, once the accelerated depreciation period is over. The Italian
Budget Law for 2003 reconfirmed a regime (already available in 2002 with
respect to the 2001 tax period) whereby companies had the option to release
reserves for accelerated depreciation by paying immediately a tax of 19% in
lieu of the tax accrued in the deferred taxes reserve at the standard corporate
tax rate. As a result of such release, the provisions for deferred taxes were
reduced for an amount corresponding to the difference between the standard
corporate tax and the 19% substitute tax levied on the portion of the
accelerated depreciation reserves released. In 2002, our tax rate applicable to ordinary income, net of the effects of
the extraordinary items, was equal to approximately 47%, relatively unchanged
as compared to 2001. Net income Net income decreased by Euro 2,218 million, or 52.5%, from Euro 4,226
million in 2001 to Euro 2,008 million in 2002. This decrease was primarily due
to a Euro 1,582 million decline in net extraordinary income reflecting a
write-down of Euro 1,511 million in the value of goodwill relating to our
Telecommunications segment, and a Euro 598 million decrease in operating
income. 
 Inflation The tariffs for sales of electricity in effect over the periods covered by
the financial statements included in this annual report were not adjusted for
inflation. Inflation in Italy was 2.7% in 2001, 2.5% in 2002, and 2.7% in
2003. As a result, the real value of tariffs decreased over time. 115




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U.S. GAAP Reconciliation We have prepared our consolidated financial statements in accordance with
accounting principles prescribed by Italian law and supplemented by the
accounting principles issued by the Consiglio Nazionale dei Dottori
Commercialisti e dei Ragionieri, or Italian GAAP, which differ in certain
respects from U.S. GAAP. The principal differences between Italian GAAP and
U.S. GAAP, as applied to our consolidated financial statements, relate to the
following:  
    
    Fixed assets and related depreciation;
    
    Capitalized interest and related depreciation;
    
    Customers connection fees;
    
    Unbilled revenues;
    
    Pension and employee termination accounting;
    
    Other post-retirement benefits accounting;
    
    Derivatives;
    
    Advertising and start-up costs;
    
    Software;
    
    Goodwill, write-down and related amortization;
    
    Restructuring reserve and conversion costs;
    
    Italian pension system obligations;
    
    Asset retirement obligations;
    
    Accounting for income taxes;
    
    Investment in equity securities; and
    
    Extraordinary income and expenses. You should read note 23 to our consolidated financial statements for a
more detailed discussion of the principal differences between Italian GAAP and
U.S. GAAP that affect our consolidated financial statements. Note 24 to our
consolidated financial statements for a reconciliation of net income and
shareholders equity between Italian GAAP and U.S. GAAP and note 25 to our
consolidated financial statements for additional U.S. GAAP disclosures. Our consolidated net income under U.S. GAAP was approximately Euro 3,688
million in 2001, Euro 1,399 million in 2002, and Euro 2,376 million in 2003, as
compared to consolidated net income under Italian GAAP of Euro 4,226 million in
2001, Euro 2,008 million in 2002 and Euro 2,509 million in 2003. Our
shareholders equity under U.S. GAAP was Euro 19,467 million at December 31,
2001, Euro 18,526 million at December 31, 2002 and Euro 18,651 million at
December 31, 2003, as compared with shareholders equity under Italian GAAP of
Euro 20,966 million at December 31, 2001, Euro 20,772 million at December 31,
2002 and Euro 21,124 million at December 31, 2003. The differences between U.S. GAAP and Italian GAAP also have an impact on
operating income at the segment level. The differences result primarily from
recognition of revenues related to customers connection fees, goodwill
impairment and amortization, property-related adjustments and different
classifications of extraordinary expenses. In addition, beginning in 2000, the
extraordinary contribution to the national pension system represents a negative
pre-tax reconciliation difference of Euro 523 million in 2001 and Euro 446
million in 2002 and a positive pre-tax reconciliation difference of Euro 124
million in 2003. You should read Item 6. Directors, Senior Management and
EmployeesEmployeesEmployee benefits for a discussion of these contributions. 116




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Critical accounting policies under U.S. GAAP In addition to the critical accounting policies discussed above under
OverviewCritical accounting policies, management considers that the
following critical accounting policies in the reconciliation of net income and
shareholders equity between Italian GAAP and U.S. GAAP require reliance upon
significant judgments, estimates and assumptions. Recoverability of goodwill. For U.S. GAAP, we adopted the provisions of
Statement of Financial Accounting Standard SFAS No. 142 (FASB 142), Goodwill
and Other Intangible Assets, as of January 1, 2002, which did not result in
any impairment as of that date. SFAS 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized and that goodwill be
tested for impairment at least annually (and between annual tests when certain
triggering events occur) using a two-step approach at the reporting unit level.
Reporting units may be tested at different times during the year. The first
step involves comparing the fair value of the reporting unit to its book value,
including goodwill and intangible assets. The determination of fair value of
each reporting unit is based on the present value of future cash flows and
requires significant judgment. If the fair value of the reporting unit is less
than its book value, a second step is required to be performed which compares
the implied fair values to the book values of the reporting units goodwill.
The implied fair value of the goodwill is the difference between the fair value
of the reporting unit and the net fair values of the recognized and
unrecognized intangible identifiable assets and liabilities of the reporting
unit. The fair value of intangible assets with indefinite lives is determined
based on expected discounted future cash flows. If the fair value of goodwill
and other intangible assets with indefinite lives are less than their book
values, the differences are recorded as impairment charges. With regard to our
telecommunications reporting unit, the annual impairment test which was
performed at June 30, 2002 resulted in us recording impairment charges of Euro
2,336 million relating to goodwill during the year ended December 31, 2002. No
such impairment resulted from the similar testing performed in 2003. 117




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Pension and other post-retirement benefits. Certain of our employees are
covered under pension plans, which allow for retirement benefits based upon
compensation and years of service, and certain employees are also covered under
other post-retirement benefit plans. Several statistical and judgmental
factors which attempt to anticipate future events are used in calculating the
expense and liability related to the plans. These factors include assumptions
about the discount rate, the rate of future compensation increases and health
care cost trends. In addition, our actuarial consultants also use subjective
factors such as withdrawal and mortality rates in making relevant estimates.
The actuarial assumptions used may differ materially from actual results due to
changing market and economic conditions, higher or lower withdrawal rates,
longer or shorter life spans of participants and changes in the actual costs of
health care. These differences may have a significant impact on the amount of
pension and other post-retirement benefit expenses recorded. Accounting for derivatives. In 1998, the Financial Accounting Standards
Board (FASB), issued SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS 133 was later amended by SFAS 137 and 138
(collectively referred to as SFAS 133). For U.S. GAAP purposes only, we use the
criteria in SFAS 133, as amended and interpreted, to determine if certain
contracts must be accounted for as derivative instruments. The rules for
determining whether a contract meets the criteria for derivative accounting are
numerous and complex. As a result, significant judgment is required to
determine whether a contract requires derivative accounting, and similar
contracts can sometimes be accounted for differently. The types of contracts
we currently account for as derivative instruments are interest rate swaps and
locks, foreign currency exchange contracts, call options and swaps. We do not
account for electric capacity, gas supply contracts, or purchase orders for
numerous supply items as derivatives. If a contract must be accounted for as a
derivative instrument, the contract is recorded as either an asset or a
liability in the financial statements at the fair value of the contract. Any
difference between the recorded book value and the fair value is reported
either in earnings or in other comprehensive income depending on certain
qualifying criteria. The recorded fair value of the contract is then adjusted
quarterly to reflect any change in the market value of the contract. In order
to value the contracts that are accounted for as derivative instruments, we use
a combination of market quoted prices and mathematical models. Option models
require various inputs, including forward prices, volatilities, interest rates
and exercise periods. Changes in forward prices or volatilities could
significantly change the calculated fair value of the call option contracts.
The models we used have been tested against market quotes to ensure consistency
between model outputs and market quotes. For derivative instruments to qualify
for hedge accounting under SFAS 133, the hedging relationship must be formally
documented at inception and be highly effective in achieving offsetting cash
flows or offsetting changes in fair value attributable to the risk being
hedged. If hedging a forecasted transaction, the forecasted transaction must be
probable. If a derivative instrument used as a cash flow hedge is terminated
early because it is probable that a forecasted transaction will not occur, any
gain or loss as of such date is immediately recognized in earnings. If a
derivative instrument used as a cash flow hedge is terminated early for other
economic reasons, any gain or loss as of the termination date is deferred and
recorded when then forecasted transaction affects earnings. Recoverability of intangible assets and other long-term assets. Under U.S.
GAAP, in order to test the recoverability of intangible assets and other long
term assets, we apply SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. We estimate the useful lives of intangible and other
long-term assets based on the nature of the asset, historical experience and
the terms of any related supply contracts. We test for impairment by comparing
the sum of the future undiscounted cash flows expected to be received or
derived from an asset or a group of assets to their carrying value. If the
carrying value exceeds the future undiscounted cash flows, the impairment is
measured using an estimation of the assets fair value, primarily using a
discounted cash flow method. The identification of indicators of impairment,
the estimation of future cash flow and the determination of fair values for
assets or groups of assets require management to make significant judgments
concerning the identification and validation of impairment indicators, expected
cash flows and appropriate discount rates. A significant change to these
assumptions could impact the estimated useful lives or valuation of intangible
and other long-term assets resulting in a change to amortization expense and
impairment charges. New U.S. GAAP accounting standards In addition to the critical accounting policies discussed above under
OverviewCritical Accounting Policies and  Critical Accounting Policies
under U.S. GAAP, our future U.S. GAAP results will be affected by a number of
new accounting standards that have been recently issued. 118




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Business combinations, goodwill and other intangible assets. In July 2001,
the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142,
Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. SFAS 141 also specifies the types of acquired intangible assets that
must be recognized and reported separately from goodwill and those acquired
intangible assets that must be included in goodwill. SFAS 142 requires that
goodwill no longer be amortized, but instead tested for impairment at least
annually. SFAS 142 also requires recognized intangible assets with a definite
useful life to be amortized over their respective estimated useful lives and
reviewed for impairment in accordance with SFAS 144 (see below). Any recognized
intangible asset determined to have an indefinite useful life will not be
amortized, but instead tested for impairment in accordance with SFAS 142 until
its life is determined to no longer be indefinite. We fully adopted the
provisions of SFAS 141 and SFAS 142 as of July 1, 2001, and January 1, 2002,
respectively. These statements require that goodwill acquired in a business
combination completed after June 30, 2001, and any intangible asset determined
to have an indefinite useful life acquired after June 30, 2001, should not be
amortized. We amortized goodwill acquired in business combinations completed
before July 1, 2001, and intangible assets with indefinite useful lives
acquired before July 1, 2001, until December 31, 2001. SFAS 142 required us to
evaluate our existing intangible assets and goodwill and to make any necessary
reclassifications in order to conform to the new separation requirements at the
date of adoption. We reassessed the estimated useful lives and residual values
of our intangible assets and determined that no adjustments regarding
amortization periods were necessary. In connection with the transitional
impairment evaluation, SFAS 142 required us to perform an assessment of whether
there is an indication that goodwill is impaired as of January 1, 2002. To
accomplish this, we (1) identified our reporting units, (2) determined the
carrying value of each reporting unit by assigning to those reporting units the
relevant assets and liabilities, including the existing goodwill and intangible assets,
and (3) determined the fair value of each reporting unit. We determined there
was no indication that goodwill had been impaired as of January 1, 2002.
Accordingly, no transitional goodwill impairment charge was necessary. As a
result of the annual impairment test performed as of June 30, 2002 on the
telecommunications reporting unit, an impairment charge was recorded against
goodwill of about Euro 2,336 million. Similar tests performed during 2003 on
all reporting units did not result in any further impairment charges. Accounting for asset retirement obligations. In June 2001, the FASB issued
SFAS 143, Accounting for Asset Retirement Obligations. The statement applies
to legal obligations associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development and/or the
normal operation of a long-lived asset, except for certain obligations of
lessees. SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset
and subsequently allocated to expense over the assets useful life. The
liability is changed at the end of each period to reflect the passage of time
(i.e., accretion expense) and changes in the estimated future cash flows
underlying the initial fair value measurement. We adopted SFAS 143, effective
January 1, 2003. You should read note 25 to our consolidated financial
statements for additional information relating to our adoption of SFAS 143. Accounting for the impairment or disposal of long-lived assets. FASB 144,
Accounting for Impairment or Disposal of Long-lived Assets, was issued by the
FASB in October 2001, and supersedes SFAS No. 121. The accounting model for
long-lived assets to be disposed of by sale applies to all long-lived assets,
including discontinued operations, and replaces the provisions of APB Opinion
No. 30 for the disposal of segments of a business. SFAS No. 144 requires that
those long-lived assets be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer be
measured at net realizable value nor include amounts for operating losses that
have not yet occurred. SFAS No. 144 also broadens the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity, and which components will be
eliminated from the ongoing operations of the entity in a disposal transaction.
The adoption of SFAS No. 144, effective January 1, 2002, did not have a
material impact on our consolidated financial statements. Extinguishment of debt. On April 22, 2002, the FASB issued SFAS No. 145
Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of SFAS No. 13 and
Technical Corrections. The principal change is that gains or losses from
extinguishments of debt will no longer be classified as extraordinary items as
they were under SFAS No. 4. The provisions of SFAS No. 145 are effective for
fiscal years beginning after May 15, 2002, except for the provisions relating
to the amendments of SFAS 13, which had been adopted for transactions occurring 119




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subsequent to May 15, 2002. The full adoption of SFAS No. 145, effective
January 1, 2003, did not have a material impact on our financial position,
results of operations or cash flows. Accounting for exit or disposal activities. In July 2002, the FASB issued
SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities.
The statement requires that a liability for costs associated with exit or
disposal activities be recognized in the period in which the costs are
incurred. Under previous ACCOUNTING guidance, a liability could be recognized when
management has committed to an exit plan. The provisions of SFAS 146 were
effective prospectively for exit or disposal activities initiated after
December 31, 2002. Our reconciliations from Italian GAAP to U.S. GAAP as of and for the year ended
December 31, 2003, include an adjustment for certain costs which were recognized in 2003 for Italian
GAAP purposes which do not qualify as a liability under SFAS 146. You should read
note 23 to our consolidated financial statements for additional information
relating to our adoption of SFAS 146. Certain aspects of revenue arrangements. In November 2002, the Emerging
Issues Task Force (EITF) reached consensus on EITF Issue 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables. This Issue addresses certain
aspects of the accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. In some arrangements, the
different revenue-generating activities (deliverables) are sufficiently
separable, and there exists sufficient evidence of their fair values to
separately account for some or all of the deliverables (that is, there are
separate units of accounting). In other arrangements, some or all of the
deliverables are not independently functional, or there is not sufficient
evidence of their fair values to account for them separately. This Issue
addresses when and, if so, how an arrangement involving multiple deliverables
should be divided into separate units of accounting. This Issue does not change
otherwise applicable revenue recognition criteria. The provisions of EITF 00-21
became effective for revenue arrangements entered into beginning January 1,
2004. We do not expect the adoption of EITF 00-21 to have a material impact on our
financial position, results of operations or cash flows. Guarantors accounting and disclosure. In November 2002, the FASB issued
FASB Interpretation (FIN) 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others  an interpretation of FASB statements 5, 57, and 107 and rescission of
FASB Interpretation 34. This Interpretation elaborates on the disclosure to be
made by a guarantor in its financial statements regarding obligations under
certain guarantees that it has issued. FIN 45 also clarifies that a guarantor
is required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation due to the issuance of the guarantee. Disclosure
requirements are effective for financial statements of periods ending after
December 15, 2002. The adoption of the provisions of FIN 45, effective on a
prospective basis for guarantees issued or modified after December 31, 2002,
did not have a material impact on our financial position, results of
operations, or cash flows. Stock-based compensation. In December 2002, the FASB issued SFAS 148,
Accounting for Stock-Based Compensation  Transition and Disclosure  an
amendment of FASB Statement No. 123. SFAS 148 amends SFAS 123, Accounting for
Stock-Based Compensation to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 requires more prominent
disclosures in annual financial statements about the method of accounting used
for stock-based employee compensation and the effect of the method used on
reported results. The disclosure provisions of FASB 148 are effective for
fiscal years ending after December 15, 2002 and have been incorporated into our
consolidated financial statements and accompanying footnotes. We have elected
to continue to follow APB 25, which uses an intrinsic value based approach to
measure compensation expense. Variable interest entities. In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities  an interpretation of ARB No.
51, which clarifies the application of the consolidation rules to certain
variable interest entities. In December 2003, the FASB issued a revised version
of FIN 46 (FIN 46R) to address certain technical corrections and implementation
issues. FIN 46 established a new multi-step model for the consolidation of
variable interest entities when a company has a controlling financial interest
based either on voting interests or variable interests. Consolidation based on
variable interests is required by the primary beneficiary if the equity
investors lack essential characteristics of a controlling financial interest or
if the equity investment at risk is not sufficient for the entity to finance
its activities without additional subordinated financial support from other
parties. The primary beneficiary of a variable interest entity is the party
that absorbs a majority of the entitys 120




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expected losses, receives a majority of its expected residual returns, or
both, as a result of holding variable interests. The requirements of FIN 46 are
effective January 1, 2004, and the requirements of FIN 46R apply to entities
other than special purpose entities for the period ended December 31, 2004 and
to special purpose entities no later than January 1, 2004. FIN 46 and FIN 46R
also provide disclosure requirements related to investments in variable
interest entities, whether or not those entities are consolidated. Certain of
these disclosure requirements apply to all financial statements issued after
December 31, 2003, regardless of when the variable interest entity was
established. In connection with our adoption of FIN 46R, we determined that an
entity created in connection with the securitization by WIND of its trade
receivables qualifies as a variable interest entity and therefore consolidated
this entity for U.S. GAAP purposes effective January 1, 2004. You should read
notes 4 and 23 of our consolidated financial statements for additional details on this
transaction and the related accounting treatment. We have not identified any
other entities which could be qualified as variable interest entities. Gains and losses on energy trading contracts. On October 25, 2002, the
EITF reached a consensus on Issue 02-3, Recognition and Reporting of Gains and
Losses on Energy Trading Contracts Under EITF Issues No. 98-10 and No. 00-17,
which changed the accounting for certain energy contracts:  
    
    EITF 02-3 prohibits the use of mark-to-market accounting for any
energy-related contracts unless they are derivatives. Any contracts
subject to EITF 02-3 must be accounted for on the accrual basis if
they are not derivatives. This change applies immediately to new
contracts executed after October 25, 2002 and was applied to all then
existing non-derivative energy-related contracts beginning January 1,
2003.
    
    We were required to report the impact of initially applying EITF 02-3
as the cumulative effect of a change in accounting principle effective
January 1, 2003.
    
    The EITF minutes on Issue 02-3 indicate that an entity should not
record unrealized gains or losses at the inception of derivative
contracts unless the fair value of the contracts is evidenced by
observable market data. EITF 02-3 required us to record a non-cash, cumulative effect adjustment
to convert non-derivative mark-to-market contracts to accrual accounting no
later than January 1, 2003. We did not mark-to-market any non-derivative
contracts, and therefore did not need to record any such adjustments. Amendment to derivative instruments and hedging activities. On April 30,
2003, the FASB issued FASB Statement No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends FASB Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, to address
(1) decisions reached by the Derivatives Implementation Group, (2) developments
in other Board projects that address financial instruments, and (3)
implementation issues related to the definition of a derivative. SFAS 149 had
multiple effective date provisions depending on the nature of the amendment to
SFAS 133. The adoption of SFAS 149 did not have a significant impact on our
consolidated financial statements. Financial instruments with characteristics of both liabilities and equity.
On May 15, 2003, the FASB issued FASB Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or as an asset in some circumstances). Many of
those instruments were previously classified as equity. This statement was
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatory redeemable financial
instruments of nonpublic entities. SFAS 150 is to be implemented by reporting
the cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the SFAS 150 and still existing
at the beginning of the interim period of adoption. Restatement is not
permitted. The adoption of SFAS 150 did not have a significant impact on our
consolidated financial statements, nor do we expect a significant impact on our
consolidated financial statements from provisions yet to be effective. Determining whether an arrangement contains a lease. In May 2003, the
EITF reached a consensus on EITF 01-8, Determining Whether an Arrangement
contains a Lease. EITF 01-8 clarifies certain provisions of SFAS 13,
Accounting for Leases, with respect to the identification of lease elements
in arrangements that do not 121




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explicitly include lease provisions. Any lease element identified under
EITF 01-8 should be accounted for under current lease accounting literature by
lessors and lessees. We will be required to apply the provisions of EITF 01-8
prospectively to arrangements newly agreed to, modified, or acquired in a
business combination beginning January 1, 2004. We do not expect the adoption
of EITF 01-8 to have a significant impact on our consolidated financial
statements. Other than temporary impairment of investments. In November 2003, the
EITF reached a partial consensus on EITF 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,
EITF 03-1 addresses the meaning of other than temporary impairment and its
application to investments classified as either available-for-sale or
held-to-maturity under SFAS 115, Accounting for Certain Investments in Debt
and Equity Securities, and investments accounted for under the cost method or
the equity method. Although no consensus was reached on how to evaluate when
an impairment of securities or investments is other than temporary, the EITF
agreed on certain quantitative and qualitative disclosures about unrealized
losses pertaining to debt and equity securities classified as
available-for-sale or held-to-maturity. The disclosures required by EITF 03-1
are effective for fiscal years ending after December 15, 2003
(see note 23 to
our consolidated financial statements). Loans or debt securities acquired in a transfer. In December 2003, the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants issued Statement of Position (SOP) 03-3, Accounting for
Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 is
applicable to loans and debt securities with characteristics of loans acquired
in a transfer (including business combinations) and limits recognition and
display of the accretable yield to the excess of cash flows expected to be
collected over the initial investment. The SOP prohibits carrying over or
creation of valuation allowances at initial recognition. Any subsequent
increases in cash flows expected to be collected will be recognized
prospectively. Any subsequent decreases will be recognized as impairment. The
provisions are effective for loans acquired in fiscal years beginning after
December 15, 2004. Impairment provisions apply prospectively for loans
existing at December 14, 2004, for fiscal subsequent years. Pension disclosure. In December 2003, the FASB issued SFAS 132 (revised
2003, SFAS 132R), Employers Disclosure about Pensions and Other Post-retirement Benefits
(revised 2003) and amendment of FASB 87, 88, and 106, which requires
additional disclosures about our defined benefit plans and other
post-retirement plan assets, obligations, net costs, and cash flows. We have
adopted the new disclosure requirements as of December 31, 2003 (see note 25 to
our consolidated financial statements). 
 Liquidity and Capital Resources Cash Flow Analysis Our primary source of liquidity is cash generated from operations. Net
cash provided by operating activities was Euro 7,173 million in 2003, as
compared to Euro 4,793 million in 2002. The increase of Euro 2,380 million, or
49.7%, was primarily attributable to the Euro 1,852 million increase in
operating income and a decrease of Euro 1,374 million in income taxes paid (net
of payments related to certain non-recurring income tax items which had an
impact on our cash used in financing activities, as explained below),
reflecting the fact that tax advances are determined on the basis of taxes due
in the previous year. The positive impact of these factors was partially offset
by a Euro 813 million decrease in the cash effect of changes in net current
assets, which had a negative cash effect of Euro 370 million in 2003, as
compared to a positive cash effect of Euro 443 million in 2002, primarily due
to payments to suppliers made in 2003 for services provided in 2002. Cash used in investing activities was Euro 5,579 million in 2003, as
compared to Euro 7,984 million in 2002. The decrease of Euro 2,405 million, or
30.1%, was primarily due to a Euro 1,748 million decrease in capital
expenditures related to our digital meter project, the development of our
telecommunications network and the conversion of some of our power plants to
combined-cycle technology. The decrease also reflected a Euro 740 million
decline in aggregate acquisition expenditures which totaled Euro 1,638 million
in 2003 and principally comprised our payment of Euro 1,389 million for the
acquisition of France Télécoms stake in WIND and Euro 168 million for the
acquisition of a controlling stake in Uniòn Fenosa Energias Especiales (now
Enel Union Fenosa Renovables), whereas in 2002 we spent a total of Euro 2,378
million, primarily for the acquisition of Viesgo and Camuzzi Gazometri. Cash
generated from disposals of businesses and fixed assets of Euro 884 million
consisted 122




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primarily of the Euro 477 million that we received in 2003 for the
disposal of Interpower (in addition to the Euro 55 million advance we had
received in 2002), and the Euro 240 million (Euro 550 million in 2002) we received for the sale of certain
municipal distribution networks. Cash used in financing activities was Euro 2,426 million in 2003, as
compared to Euro 774 million in 2002. The increase of Euro 1,652 million in
cash used in financing activities reflected primarily a Euro 2,056 million
negative cash effect from changes in short term debt (as compared to a positive
cash effect of Euro 924 million in 2002) as a result of the reallocation of our
debt portfolio from short-term to long-term debt in order to lengthen the
average residual life of our net indebtedness. The overall increase
also reflected a Euro 321 million increase in repayments of long-term debt. The negative
impact of these factors was partially offset by the fact that the increase in
our long-term debt was Euro 3,419 million in 2003 (Euro 1,008 million higher
than the Euro 2,411 million increase in 2002), the fact that in 2003 no
extraordinary contributions to the electricity industry pension fund were due
following the suppression of this fund (payments of these contributions were of
Euro 611 million in 2002), and a Euro 37 million decrease in payments related
to a 19% substitute tax on the release of reserves for deferred taxes (see
Results of Operations2002 compared with 2001 Income taxes for a discussion
of this substitute tax) and to the tax amnesty. Payment of dividends of Euro
2,183 million were in line with 2002 (when they were also Euro 2,183 million).
You should read note 23 to our financial statements for a discussion of the
cash-flow treatment of these non-recurring income tax payments under U.S. GAAP. We met our cash requirements for our investing activities and financing
activities primarily through cash generated from operations. Capital resources We manage our financing requirements through our centralized treasury
department. Most of the financing transactions of our divisions are centralized
and netted at the Group level in order to reduce our overall debt and interest
expense. As a general rule, external financing is incurred at the parent
company level (either directly by Enel S.p.A. or a treasury vehicle) in the
form of bonds and other debt securities, bank loans and lines of credit. Enel
S.p.A. then makes cash available to Group companies on an as needed basis
through intercompany loans or current-account arrangements. In limited
circumstances, financings are undertaken directly by our subsidiaries,
including financing provided to WIND before we became its sole shareholder, and
subsidized loans granted by the European Investment Bank to our operating
subsidiaries to finance a specific project. We also issue bonds and
commercial paper through Enel Investment Holding BV, a treasury vehicle. The
principal goals of our treasury operations are to maximize financing efficiency
and minimize structural subordination issues that would arise if significant
external debt was held at the operating subsidiary level, as well as optimizing
cash flows for all the companies of the Group on a daily basis. At December 31, 2003, our outstanding long-term debt, including current
maturities, was Euro 22,016 million, as compared to Euro 18,292 million at
December 31, 2002. The increase of Euro 3,724 million, or 20.4%, reflected the
reallocation of our debt portfolio from short-term to long-term debt, in order
to lengthen the average residual life of our net indebtedness and was primarily
attributable to new loans for a total principal amount of Euro 2,482 million
(including a total of Euro 1,430 million of new 36 month revolving credit
lines, a Euro 500 million loan extended by the European Investment Bank to Enel
Distribuzione, and a total of Euro 396 million draw down by WIND from two
syndicated credit facilities), the issue of two fixed rate bonds for a total
principal amount of Euro 1,500 million, and the issue of ten series of debt
securities through private placements by Enel Investment Holding BV for a total
principal amount of Euro 838 million. Also contributing to the increase was
Euro 165 million of long-term debt that Uniòn Fenosa had when we acquired our
stake in this company. Repayments during the year totaling Euro 1,350 million,
primarily comprised of payments at scheduled maturities, reduced the amount of
the overall increase in outstanding long-term debt. You should read note 10 to
our consolidated financial statements for a further discussion of our long-term
and short-term debt. At December 31, 2003, our outstanding short-term debt was Euro 4,632
million, as compared to Euro 7,251 million at December 31, 2002. The decrease
of Euro 2,619 million, or 36.1%, reflected a decrease of Euro 2,216 million in
funds drawn on our revolving credit lines and repayments of eighteen-month
financing for a total amount of Euro 700 million, partially offset by a Euro
280 million increase in the amount of other short-term financings. The
outstanding amount of commercial paper slightly increased by Euro 13 million. At December 31, 2003, our net financial indebtedness, which we calculate
on the basis of our long-term debt (including current maturities) and
short-term debt, less cash at banks and marketable securities, factoring
receivables and finance receivables, was Euro 24,174 million, comprising a net
long-term debt of Euro 20,488 million (including current maturities) and a net
short-term debt of Euro 3,686 million. The decrease in net financial
indebtedness of Euro 293 million, or 1.2%, as compared to Euro 24,467 million
at December 31, 2002, reflected a Euro 2,489 million decrease in our net
outstanding short-term debt, and a Euro 2,196 million increase in our net
outstanding long-term debt. Although net financial indebtedness is a non-GAAP measure, it is widely
used by Italian financial institutions and securities analysts to assess a
companys liquidity and the adequacy of its financial structure. We therefore
believe it is useful to provide this information to investors together with,
and not in lieu of, the analysis of our outstanding debt under Italian GAAP
provided above. The following table details our net financial indebtedness as
at December 31, 2002 and 2003, and provides a reconciliation of this non-GAAP
measure to cash at banks and marketable securities the most directly
comparable GAAP measure appearing in our consolidated statements of cash flows.
The parenthetical references to notes following particular line items in the
table are to the specific notes to our consolidated financial statements
included in Item 18 where these line items are presented in greater detail. 123




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2002
    
    2003(in millions of euro)At December 31,Cash at banks and marketable securities (note 2)
    
    
    (400
    )
    
    
    (452
    )Factoring receivables (note 4)
    
    
    (676
    )
    
    
    (487
    )Other finance receivables
    
    
    
    
    
    
    (7
    )(1,076
    )
    
    
    (946
    )Short-term debt (note 10):Bank loans18-month loans
    
    
    700
    
    
    
    Use of revolving credit lines
    
    
    3,388
    
    
    
    1,172Other short-term bank debt
    
    
    1,719
    
    
    
    1,999Total bank loans
    
    
    5,807
    
    
    
    3,171Commercial paper
    
    
    1,444
    
    
    
    1,457Other short-term financial loans
    
    
    
    
    
    
    4Total short-term debt
    
    
    7,251
    
    
    
    4,632Net short-term debt
    
    
    6,175
    
    
    
    3,686Long-term debt (including current maturities) (note 10):Bank loans
    
    
    10,401
    
    
    
    11,951Bonds
    
    
    7,543
    
    
    
    9,899Other loans
    
    
    348
    
    
    
    166Total Long-Term Debt (including current maturities)
    
    
    18,292
    
    
    
    22,016Medium- and long-term guarantee deposits
    
    
    
    
    
    
    (1,528
    )Net Long-Term Debt (including current maturities)
    
    
    18,292
    
    
    
    20,488Net Financial Indebtedness
    
    
    24,467
    
    
    
    24,174
 We maintain committed lines of credit for Euro 4,980 million (Euro 2,378
million of which were unused as of December 31, 2003) and uncommitted lines of
credit and other short-term borrowing agreements with banks in Italy with
maximum borrowing limits aggregating approximately Euro 3,064 million as of
December 31, 2003 (Euro 1,065 million of which were unused as of that date). In
2003, a Euro 5,000 million revolving credit line that had been extended in
November 2001 expired and, in December, 2003, we entered into a new revolving
credit line for Euro 3,000 million, of which Euro 1,000 million were used in
2003 and expire in one year and Euro 2,000 million were unused and expire in
five years. Under this Euro 3,000 million revolving credit facility the
availability of funds is conditioned upon the maintenance of certain ratios of
net financial indebtedness to capitalization. The weighted average interest
rate on our short-term borrowings was approximately 2.24% as of December 31,
2003. We believe that our bank facilities, together with our portfolio of cash
and cash equivalents, are sufficient to meet our present working capital needs. At December 31, 2003, only 3.0% of our long-term debt (including current
maturities) was denominated in currencies other than the euro, including the
equivalent of Euro 408 million of long-term debt which relates to our operating
subsidiaries in North America and Central and South America, that is primarily
denominated in Brazilian reals and U.S. dollars. At the same date, 7.1% of our
long-term debt was guaranteed as to principal and interest by 124




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the Italian government. At December 31, 2003, 64.0% of our long-term debt
bore interest at floating rates and 36.0% bore interest at fixed rates. To
improve our mix of floating and fixed-rate obligations, we have entered into
certain interest rate hedging transactions, particularly interest rate swaps,
swaptions and collars. Taking these hedging positions into account, we have
estimated that we are exposed to interest rate fluctuations with respect to
approximately 33.7% of our outstanding long-term debt. You should read Item
11. Quantitative and Qualitative Disclosure About Market RiskPrice Risk
Management and Market Risk Information for a more detailed discussion of our
hedging policies. Without giving effect to these arrangements, we estimate that
the weighted average interest rate on our outstanding long-term debt as of
December 31, 2003 was approximately 4.1%, as compared to approximately 4.6% as
of December 31, 2002. In 2001, WIND entered into two syndicated credit facilities for a total
amount of Euro 7,000 million. Under these facilities, the availability of funds
and changes in applicable interest rates are conditioned upon the maintenance
by WIND of its total net debt below certain levels and of certain ratios of
total net debt to EBITDA, and EBITDA to debt service. As of December 31, 2003,
Euro 6,261 million were outstanding under these facilities. In 2003, we
renegotiated one of these facilities, with an amount of Euro 1,500 million,
that had originally been extended to Infostrada before it was merged into WIND,
through the assignment of the facility from the original lenders to a primary
Italian bank that agreed to provide financing at a lower interest rate against
a guarantee deposit of the outstanding amount of the facility provided by
Enel S.p.A. Enel receives interest on such deposit at the same rate
applicable to the facility net of a fee paid to the bank. In 2003, we increased the maximum aggregate authorized amount of our Euro
medium-term note program that may be outstanding at one time to Euro 10,000
million from Euro 7,500 million. The terms of this program, allow
both Enel S.p.A. and our finance subsidiary Enel Investment Holding BV (with
the guarantee of Enel S.p.A.) to issue bonds to retail investors outside of the
United States and to institutional investors (including qualified institutional
buyers in the United States). In 2000, Enel S.p.A. issued Euro 750 million of
5.875% fixed rate five year bonds. In 2001 Enel Investment Holding BV issued
Euro 2,000 million of 5% fixed rate three-year bonds, and, in 2002, Enel S.p.A. issued 11 series of Euro-denominated bonds
with an aggregate principal amount of Euro 617 million and three Japanese
yen-denominated series of bonds with an aggregate principal amount equivalent
to Euro 118 million at the date of issue. In 2003, Enel Investment Holding BV
issued nine series of Euro-denominated bonds with an aggregate principal amount
of Euro 780 million, and one series of British pound-denominated bonds with a
principal amount of British pounds 40 million (equivalent to Euro 58 million at
the date of issue) Finally, in June 2003, Enel S.p.A. issued Euro 750 million
of 4.75% fixed rate fifteen-year bonds and Euro 750 million of 4.25% fixed rate
ten-year bonds. As of December 31, 2003, an aggregate of Euro 5,823 million in
notes was outstanding under our Euro medium-term note program. The currency
risk relating to the placement of the Japanese yen-denominated bonds and the
British pound-denominated bonds has been hedged through currency swaps entered
into at the date of the issue. You should read Item 11. Quantitative and
Qualitative Disclosure About Market RiskPrice Risk Management and Market Risk
Information for a more detailed discussion of our hedging policies. You
should see note 10 to our financial statements for additional
information about our debt securities including maturities. In May 2004, Enel S.p.A. issued an additional Euro 750 million of 4.125%
fixed rate seven-year bonds and Euro 750 million of 5.25 % fixed rate
twenty-year bonds under the program. In 2003, Enel Distribuzione entered into a 15-year floating-rate Euro 500
million loan with the European Investment Bank. The loan is secured by bank
guarantees and its proceeds are being used to finance capital expenditures
related to our digital meter project and to technological improvements in
services provided to customers. As of December 31, 2003, an aggregate of Euro
500 million was outstanding under this loan. At December 31, 2003, a total of Euro 1,457 million was outstanding on
commercial paper issued by our subsidiary Enel Investment Holding BV with the
guarantee of Enel S.p.A., as part of a multi-currency program with an aggregate
authorized amount that, in 2004, was increased from Euro 1,500 million to Euro
2,500 million. Of this outstanding amount, Euro 973 million was denominated in
Euro, Euro 309 million was denominated in U.S. dollars, Euro 69 million in
Japanese yen, Euro 62 million in Swiss francs, and Euro 44 million in British
pounds. We entered into currency swaps to hedge foreign exchange risk in
connection with the portion of this debt denominated in currency other than the
Euro. 125




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Our borrowing requirements are not seasonal. We use short-term borrowing facilities in order to finance our working
capital needs, aiming at ensuring flexible and cost-effective financing for all
companies of the Group. The following table shows the ratings of our short-term debt and long-term
debt according to Standard & Poors and Moodys Investors Service at June 22,
2004. Rating Agency
    
    Long-term debt
    
    Short-term debt
    
    OutlookStandard & Poors
    
    A +
    
    A-1
    
    StableMoodys Investors Service
    
    A1
    
    P-1
    
    Negative
 Future Liquidity and Capital Resources The Group has adopted formal policies and decision making processes aimed
at optimizing the Groups overall financial situation and its allocation of
financial resources, cash management processes and financial risk management,
as well as ensuring sustainable levels of indebtedness. We expect that cash flow from operations and cash received from
divestitures will continue to be the primary source of fund for our capital
expenditures and working capital requirements in 2004. We believe that our cash
flow and available liquid funds and credit lines will be sufficient to meet our
anticipated cash needs. We expect that the following transactions have had or are likely to have a
significant effect on our liquidity and capital resources in 2004:  
    
    our receipt of proceeds from the initial public offering of shares representing 50% of the share-capital of
Terna through a public offering in Italy and a private placement
abroad that generated net proceeds of Euro 1,700 million;
    
    an additional dividend of between Euro 0.30 and
Euro 0.36 per share that we intend to pay to our
shareholders based on the results of the
public offering of Terna shares; and
    
    the disposal of Newreal for a total consideration of approximately Euro 1,400 million. 
 Off-Balance Sheet Arrangements We do not engage in the use of special purpose entities for off-balance
sheet financing or any other purpose which results or may result in material
assets or liabilities not being reflected in our consolidated financial
statements. We do use certain off-balance sheet arrangements with
unconsolidated third parties in the ordinary course of business, including
indemnification agreements, financial guarantees, the sale of receivables and
other arrangements under which we have or may have continuing obligations. Our
arrangements in each of these categories are described in more detail below. Indemnities. A number of the agreements governing our divestiture of
former subsidiaries and operations include indemnification clauses and other
guarantees, with the maximum amount of potential liability under these
contracts generally capped at a percentage of the purchase price. These
indemnities primarily relate to potential liabilities, generally for a limited
period of time, arising from contingent liabilities in existence at the time of
the sale, as well as covering potential breaches of the representations and
warranties provided in the contracts and, in certain instances, environmental
or tax matters. As of December 31, 2003, our maximum potential obligations
with respect to these indemnities were approximately Euro
1 billion, essentially unchanged from those at
year-end 2002. However, we have not been informed of a claim under
any of these indemnities and believe that the possibility that any
such claim would be made and prove successful is remote. 126




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Other Guarantees. Our obligations under other guarantees primarily
include those arising from purchase agreements under which we are obligated to
pay additional consideration upon the occurrence of certain contingencies.
These warranty obligations primarily relate to our obligation to transfer to
France Télécom a portion of the difference between the cash price we paid to
purchase its 26.6% stake in WIND and the higher price, if any, we would receive
in the event we were to sell shares of WIND before December 2004. It is not
possible to reliably estimate the maximum amount of this obligation as it would
depend upon the price at which we could sell WIND shares. Variable Interest Entities. In 2004, in connection with our
implementation for U.S. GAAP purposes of FIN 46 (see U.S. GAAP
ReconciliationNew U.S. GAAP accounting standards), we determined that an
entity created in connection with the securitization by WIND of its trade
receivables qualifies as a variable interest entity and therefore consolidated
this entity for U.S. GAAP purposes effective January 1, 2004. Our
maximum exposure, as of December 31, 2003, amounts to the carrying value of the
notes issued by the securitiziation vehicle, equal to Euro 149 million. You
should read note 4 and note 23 to our consolidated financial statements for
additional details on this transaction and the related accounting treatment
under Italian and U.S. GAAP. Financial guarantees. Our off-balance sheet financial guarantees require
us to make contingent payments upon the occurrence of certain events or changes
in an underlying instrument that is related to an asset, a liability or the
equity of the guaranteed party. These guarantees include arrangements that are
direct obligations, giving the party receiving the guarantee a direct claim
against us, as well as indirect obligations, under which we have agreed to
provide the funds necessary for another party to satisfy an obligation. At
December 31, 2003, we had granted guarantees totaling Euro 17 million (Euro 14
million at December 31, 2002) comprising guarantees in favor of CESI
S.p.A. and Elcogas S.A., two unconsolidated companies in which we have an
equity interest. You should read note 23 to our consolidated financial
statements for additional details on these guarantees and the related
accounting treatment under U.S. GAAP. Derivative instruments. We do not hold or issue derivative financial
instruments for trading purposes. We enter into derivative contracts to hedge
our exposure to foreign exchange risk, interest rate risk and commodity price
risk. Please refer to Item 11. Quantitative and Qualitative Disclosure About
Market RiskPrice Risk Management and Market Risk
Information for information
on these derivative contracts. Nuclear liability. We remain liable for any damage caused by a nuclear
accident related to certain nuclear assets we owned occurred before the
transfer of these assets in November 2000. Please see Item 4. Information on
the CompanyRegulatory MattersEnvironmental MattersDiscontinued nuclear
operationsNuclear liability for a discussion of this potential liability and
its maximum amount. 
 Contractual Obligations and Commitments Contractual obligations The following table sets forth, as of December 31, 2003, the contractual
obligations of the Group with definitive payment terms which will require
significant cash outlays in the future: Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    More thanContractual obligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 years(in millions of euro)Long-term debt (including current maturities)
    
    
    22,036
    
    
    
    4,016
    
    
    
    3,884
    
    
    
    3,398
    
    
    
    10,738Capital (Finance) Lease Obligations*Operating leases
    
    
    1,550
    
    
    
    269
    
    
    
    631
    
    
    
    650Purchase obligations
    
    
    33,342
    
    
    
    4,292
    
    
    
    4,782
    
    
    
    4,487
    
    
    
    19,781Other long-term obligations
    
    
    317
    
    
    
    203
    
    
    
    114Total
    
    
    57,245
    
    
    
    8,780
    
    
    
    9,411
    
    
    
    8,535
    
    
    
    30,519
 127




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*We do not have capital (finance) lease obligations. In accordance with
Italian GAAP, if we had any capital (finance) lease obligations, we would not
account separately for them, but rather would report such obligations as part
of our operating leases. Long-term debt (including current maturities). The amounts reported above
under Long-term debt (including current maturities) relate to our repayment
obligations under outstanding long-term debt including the portion of our
long-term debt with maturities lower than twelve months. For a more detailed
discussion of our long-term debt, please see Liquidity and Capital
ResourcesCapital resources. We expect that our expenditures related to these
commitments will approximate an aggregate of Euro 11,298 million for the period
from January 1, 2004 through December 31, 2008. Operating leases. The amounts reported above under Operating leases
include the minimal rental and payment commitments due under such leases. We
expect that our expenditures related to these commitments will approximate an
aggregate of Euro 1,550 million for the period from January 1, 2004 through
December 31, 2008. Purchase obligations. The amounts reported above under Purchase
obligations include amounts related to the following purchase obligations:  
    
    Commitments to suppliers of fuel. We have entered into
various fuel supply contracts primarily for the purchase of fuel
oil and natural gas for a total amount of Euro 29,185 million.
Our aggregate expenditures related to these commitments are
expected to total Euro 10,467 million for the period from January
1, 2004 through December 31, 2008. Please see Item 4.
Information on the CompanyThe Enel GroupGeneration and Energy
ManagementFuel for information about our purchases of fuel.
    
    Commitments to suppliers of electricity. We also have
unconditional purchase obligations for electric power for a total
amount of Euro 3,644 million. Our aggregate expenditures related
to these commitments are expected to total Euro 2,747 million for
the period from January 1, 2004 through December 31, 2008.
Please see Item 4. Information on the CompanyThe Enel
GroupGeneration and Energy ManagementPurchased power for
information about our purchases of electricity.
    
    Payable to Ferrovie dello Stato for the lease of
Telecommunications Network rights of way. WIND is required to
make payments to Ferrovie dello Stato (the Italian state railway
company) of Euro 260 million under an agreement that was entered
into by Infostrada in 1998 (before it was merged in WIND), for
the use of the fiber optic network owned by Ferrovie dello Stato.
Our aggregate expenditures related to these commitments are
expected to total Euro 167 million for the period from January 1,
2004 through December 31, 2008.
    
    Payable to Treasury Ministry for UMTS license. WIND is
required to pay to the Treasury Ministry Euro an additional 253
million over the next eight years in connection with the purchase
of its UMTS license (for which Euro 2,174 million has already
been paid). Euro 180 million of this additional purchase
obligation relates to expenditures for the period from January 1,
2004 through December 31, 2008. The UMTS license became effective
January 1, 2002 and expires on December 31, 2022. For additional
information on our UMTS license, please refer to Item 4.
Information on the CompanyBusinessThe Enel
GroupTelecommunicationsNetwork infrastructure and licenses. Other long-term obligations. The amounts reported above under Other
long-term obligations include the following amounts:  
    
    Substitute tax due on restated value of assets. We are
required to pay 19% substitute tax due on the increase in value
of certain assets amortized on a tax acceleration basis. Please
refer to Results of Operations2003 compared with 2002Income
taxes for a discussion of this tax regime. Our aggregate
expenditures related to these commitments are expected to total
Euro 228 128




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million in the period covered by the table above (Euro 114 million
in 2005 and Euro 114 million in 2006).
    
    Substitute tax due upon the release of accelerated
depreciation reserves. We are also required to pay a 19%
substitute tax levied on the released portion of our accelerated
depreciation reserves. Please refer to Results of
Operations2002 compared with 2001Income taxes for a discussion
of this tax regime. Our aggregate expenditures related to these
commitments are expected to total Euro 89 million in the period
covered by the table above (of which 100% relates to 2004). Commitments Although the actual amount of our capital expenditures in future periods
will depend on various factors that cannot presently be foreseen, we expect to
make capital expenditures and financial investments of approximately Euro
18,940 million in the period from 2004 to 2008. Our planned capital expenditures include:  
    
    Approximately Euro 4,451 million in our generation
businesses, including those scheduled to be made by Enel Green
Power;
    
    Approximately Euro 1,134 million in our transmission business;
    
    Approximately Euro 3,503 million in our telecommunications business;
    
    Approximately Euro 6,775 million in our electricity
distribution business, including approximately Euro 1,200 million
for our remote metering project;
    
    Approximately Euro 410 million in our gas distribution
business;
    
    Approximately Euro 1,989 million in our international
operation businesses, including those scheduled to be made by
Viesgo; and
    
    Approximately Euro 678 million in our information technology,
real estate and research and development activities. We have made significant capital investments in developing our
telecommunications business. We have supported WIND with aggregate equity
contributions of approximately Euro 979 million, as well with providing credit
support for the refinancing of Euro 1,500 million in debt noted above. WIND
will be required to make substantial investments during the next several years
in order to build out its UMTS network and develop related services and
products, in addition to paying Euro 253 million in respect of its license by
the end of 2010. However, we expect that WIND will achieve its financial
independence by the end of 2004 and, accordingly, we do not expect to be
required to invest significant amounts in WIND or otherwise provide additional
support to WIND after such date. We incurred a substantial amount of debt and
made significant expenditures in connection with WINDs purchase of a third
generation UMTS mobile license and our acquisition of Infostrada. You should
read Item 4. Information on the
CompanyBusinessTelecommunicationsInfrastructure and
licenses. 
 Trend Information Please
refer to Overview and Outlook for information relating to
recent trends in our production, sales, costs and selling prices, as well as
events that are reasonably likely to have a material effect on our net sales,
operating income, profitability, liquidity or capital resources, or that would
cause reported financial information not 129




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necessarily to be indicative of future operating results or financial
condition. Please refer to Contractual Obligations and
Commitments for a
discussion of our future capital expenditures. 
 Process of Transition to International Financial Reporting Standards Following the coming into force of European Regulation No. 1606 dated July
2002, we and other EU companies whose securities are traded on regulated
markets in the EU are required to adopt international financial reporting
standards (IFRS) (known as international accounting standards, or IAS, until
May 2002) in the preparation of our 2005 consolidated financial statements.
Standards introduced prior to the renaming of IAS as IFRS are still referred to
as IAS; we refer to the combined body of IAS and IFRS standards as IFRS. In 2003, we established an IFRS implementation program with working groups
aimed at evaluating the main differences between IFRS and Italian GAAP and the
main impact of the adoption of IFRS on our processes and information systems.
Based on the results of the work performed, which in accordance with guidance
from the Commission of European Securities Regulators, focused on effects of
the change in accounting principles on consolidated stockholders equity, we
have determined that the following are the principal differences that will have
an effect on that measure as restated in accordance with IFRS as at January 1,
2004, and on our future financial results. General principles. The adoption of the new body of accounting standards
will involve a reassessment not only of the accounting valuation criteria we
use, but also of the format of our financial statements and the contents of the
related notes. As regards the principles of recognition and measurement of
financial statement components, the most significant changes relate to the
following:  
    
    replacement of the principle of the transfer of risks
and benefits in respect of the recording and reversal of certain
transactions at the time of transfer of ownership, IFRS giving
prevalence to the substance of the transaction over its legal
form; and
    
    the use under IFRS of alternative valuation criteria to
historical cost (where expressly required), such as fair value
(particularly for financial instruments) and present value (for
medium-long term reserves). Intangible fixed assets. In contrast to practice under Italian GAAP, IAS
38 requires that the majority of start-up and expansion costs and advertising
costs are recorded in the statement of operations when they are incurred.
Changes to IAS 38 have introduced the concept of intangible fixed assets with
an indefinite useful life which, accordingly, will no longer be subject to
amortization. This principle also extends to goodwill deriving from business
combinations. These intangible fixed assets are to be subjected to annual
impairment tests on the smallest group of assets that generates cash inflows
that are largely independent of other cash inflows (a cash generating unit),
comparing the carrying amount to the related market value or value in use. Financial instruments. IAS 32 and 39 require companies to classify
financial instruments, as a function of their destination, in different
categories than those used under Italian GAAP. The basis of recognition,
measurement and valuation of financial instruments will derive from these
classifications and, accordingly, in certain cases could differ substantially
from that under the current regime. In addition, under these standards,
derivative financial instruments are also treated as financial assets and
liabilities that must be recorded in the balance sheet, whereas Italian
accounting principles provide that they be recorded in the memorandum accounts,
with only certain specified circumstances in which they are to be recorded in
the balance sheet. The overall effect of the adoption of these standards could
vary depending on the way in which they are introduced into European law and
the likelihood the International Accounting Standards Board, or IASB, will make
additional changes to the standards. However, at present we expect that
different accounting treatment of receivables and bills discounting
transactions could have potentially significant effects on our calculation of
total financial liabilities. Employee benefits. IAS 19 sets out the method of accounting for employee
benefits. In particular, with regard to post-employment defined benefit
programs, IAS 19 requires that the obligation accrued to the balance sheet date
be projected into the future, in order to estimate the amount to be paid upon
termination of employment, 130




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and subsequent determination of the present value in accordance with a
specific actuarial method (called the Project Unit Credit Method). Provisions for risks and charges. In accordance with IAS 37, provisions
for risks and charges are recorded only when there is a present obligation, as
a result of a past event, which may be legal, contractual or derive from a
companys declarations or actions that result in valid expectations by the
parties involved (constructive obligations). Certain provisions that we
currently record in accordance with the Italian GAAP, may not be recognized

under the conditions set forth under IAS. Furthermore, in accordance with IAS
37, accruals are recorded at the value represented by the best estimate of the
amount that a company would pay to settle the obligation and, where the effect
of the time value of money is material, the estimated cost is to be discounted
to present value, a technique not contemplated by current Italian GAAP. Consolidated financial statements. In our first financial statements
prepared in accordance with IFRS, at the transition date, the principles of
consolidation set forth in IAS 27 will be applied. These principles differ
from those currently mandated by Italian law, particularly in respect of the
consolidation of subsidiaries that carry out dissimilar activities. 
 Item 6. Directors, Senior Management and Employees 
 Directors Enels board of directors is responsible for the management of the
Companys business and has the power to take all actions consistent with the
corporate purpose described in the Companys by-laws. Enels board is elected
for a term of up to three years. Members are eligible for re-election.
The board must consist of not less than three and not more than nine members,
to which it may be added a non-voting director, appointed by the Treasury
Ministry according to the special powers of the Italian government provided for
by Italian privatization law and Enels by-laws. The board was appointed on May
24, 2002 and currently consists of seven members whose three-fiscal year term
is scheduled to expire in 2005. No director has been appointed by the Treasury
Ministry according to its aforesaid special powers. The chairman and chief executive officer are Enels legal representatives.
The chief executive officer generally has the power to represent Enel within
the scope of the functions delegated to him. For specific actions or categories
of actions, the power to represent the Company can be delegated by the holder
of such power to one of Enels employees or to third parties. In December 2002,
Enels chairman was entrusted with the duties of overseeing the Companys audit
system and participating in the preparation of the Companys strategy, in both
cases in accordance with the chief executive officer. The quorum for board meetings is a majority of the members in place.
Resolutions are adopted by a majority of votes of those present. A board
meeting may be called by the chairman on his or her own initiative, must be
called upon a request of the board of statutory auditors (or at least two of
its members) or upon a request for a meeting for specific purposes of two
directors (or one director when the board is composed of three members). The board has the power to delegate certain of its powers to one of its
members, and determines the powers and the functions delegated to such person.
Under applicable law and the Companys by-laws, the board may not delegate
certain of its responsibilities, such as the approval of the financial
statements or proposals of increases or reductions of the Companys capital. In June 2002, Enels board of directors appointed the members of the
Companys compensation committee and internal control committee. Both
committees, which were originally established in January 2000, are composed of
three non-executive members. The current members of the compensation committee
are Francesco Taranto, Mauro Miccio and Fernando Napolitano. The current
members of the internal control committee are Piero Gnudi, Franco Morganti and
Gianfranco Tosi. The compensation committee submits to the board of directors
proposals for resolutions concerning the compensation of the chief executive
officer and the other directors holding specific offices, as well as the
resolutions concerning the determination of the compensation criteria for
senior executives, on the basis of the recommendations of the chief executive officer. The internal control committee has the authority 131




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to evaluate the activity and
periodic reports of both internal and external auditors, and is primarily
concerned with verifying the adequacy of Enels internal controls system and in
turn reporting to the full board of directors. We in the past have translated
the name of this committee, which we established in accordance with the
corporate governance code issued by Borsa Italiana
S.p.A., into English as internal audit committee, but no
longer do so to avoid confusion, as the internal control committee does not
fulfill the roles of the audit committee for purposes of U.S. securities laws
and NYSE listing standards in all respects. The Treasury Ministry has confirmed that as long as it remains the
Companys majority shareholder, it intends to continue to participate in the
nomination and election of the board of directors in order to protect its
investment as a shareholder. Under current law, as long as the Treasury
Ministry remains the Companys majority shareholder, the Court of Accounts,
which supervises the financial management of government-owned entities, will
exercise certain powers to protect the financial interests of the Italian
state. For example, the Court of Accounts has the right to inspect the
Companys financial statements and regularly reports its findings to the
President of the Senate and the President of the House of Representatives. In
addition, during this period, a non-voting representative of the Court of
Accounts may attend the meetings of the Companys board of directors and board
of statutory auditors. The names of the seven members of Enels current board of directors, their
current positions and the year when each was initially appointed as director
are set forth in the following table. Year initiallyName
    
    Position
    
    appointedPiero Gnudi
    
    Chairman
    
    
    2002Paolo Scaroni
    
    Director and Chief Executive Officer
    
    
    2002Mauro Miccio
    
    Director
    
    
    2002Franco Morganti
    
    Director
    
    
    1999Fernando Napolitano
    
    Director
    
    
    2002Francesco Taranto
    
    Director
    
    
    2000Gianfranco Tosi
    
    Director
    
    
    2002
 We have briefly summarized below the principal business activities,
experience and other principal directorships, if any, of each of the Companys
current directors. Piero Gnudi. Piero Gnudi gained professional experience holding numerous
positions on the board of directors and the board of statutory auditors of
several major Italian companies, including STET S.p.A. (now Telecom Italia
S.p.A.), Eni S.p.A. (the holding company of the Italian state-controlled energy
group), Enichem S.p.A. (a subsidiary of Eni S.p.A.), and Credito Italiano
S.p.A., a major Italian bank. He also served as economic advisor to the
Industry Ministry. In 1994, Mr. Gnudi was appointed to the board of directors
of IRI S.p.A., where he held a number of positions including that of supervisor
of privatizations in 1997, those of chairman of the board of directors and
chief executive officer in 1999, and that of chairman of the IRI Liquidation
Committee from 2000 to 2002. He is currently chairman of the board of directors
of RAI Holding S.p.A. (the holding company of the Italian state-owned
broadcasting group), vice-chairman of Unicredit Banca dImpresa S.p.A., and
director of Unicredito Italiano. He is also a member of the CNEL (National
Council of Economy and Labor), the steering committee of Assonime (an
association of Italian corporations) and the executive committee of the Aspen
Institute. He has been the chairman of the Companys board of directors since
May 2002 and he also sits on the board of directors of several of our group
companies. Paolo Scaroni.Paolo Scaroni gained executive experience in Italy and
abroad with the Saint Gobain Group, a major manufacturer of glass, ceramics and
other products. From 1985 to 1996, he was vice-chairman of the board of
directors and chief executive officer of Techint S.p.A., an engineering and
construction company. In 1996, he joined the Pilkington group, one of the
worlds largest manufacturers of glass and glazing products, holding the
position of chief executive officer of the parent company until May 2002. He is
also currently a member of the board of directors of Marzotto S.p.A. and
Alliance Unichem Plc., member of the supervisory board of ABN AMRO Bank N.V.,
member of the executive committee of Confindustria (the association of Italian
industrialists), president of
Unindustria Venezia and member of the board of the business school of
Columbia University in New York. Mr. Scaroni has been the chief executive
officer and direttore generaleof the Company since May 2002. 132




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Mauro Miccio. Mauro Miccio was a member of the board of directors of Ente
Cinema S.p.A. (now Cinecittà Holding S.p.A.), an Italian film production and
distribution company, from 1993 to 1996. Mr. Miccio was also a member of the
board of directors of RAI S.p.A. from 1994 to 1996, chairman of FERPI (the
Italian public relations federation) from 1994 to 2000, chairman of the board
of directors of Cinecittà Multiplex S.p.A. from 1997 to 2000, director of A.S.
Roma from 1997 to 2000, president of Rugby Roma from 1999 to 2000 (becoming in
2001 president of the National Rugby League), chief executive officer of
Agenzia della Modafrom 1998 to 2001 and a member of the board of directors of
ACEA S.p.A. (the municipal utility company of Rome) from 2000 to 2002. He is
currently chief executive officer of Eur S.p.A., a member of the steering and
executive committees of the Association of Industrialists in Rome and
vice-president of the Italian Small Industry Association. He is also president
of ICI (Corporate Communication Association). He has been a member of the
Companys board of directors since May 2002. Franco Morganti. Franco Morganti began his career at Olivetti S.p.A. and
SGS S.p.A. (now ST Microelectronics S.p.A.), and subsequently started his own
business. Since 1974, he has offered strategic consulting services in the field
of telecommunications, for both the public and private sectors. He was a member
of the board of directors of STET S.p.A. (now Telecom Italia S.p.A.) from 1981
to 1984, and in 1981-82 headed a task force on the reorganization of the
Italian telecommunications industry established by the Italian government. From
1991 to 1997, he served as a member of the advisory committee on technology and
market strategies of STET S.p.A. Mr. Morganti has also been vice-chairman of
the Databank Group since 1989. From 1998 to 2000, he served as an advisor to
the Italian Communications Authority. He is currently the vice president of the
International Institute of Communications in London, as well as president of
the ANFOV, an association of multimedia companies. He has been a member of
Enels board of directors since December 1999, and he is also a member of
WINDs board of directors. Fernando Napolitano. Fernando Napolitano began his career working in the
marketing department at Laben S.p.A. (an aerospace production company in the
Finmeccanica Group), and subsequently worked at Procter & Gamble Italia S.p.A.
In 1990, he joined the Italian office of Booz Allen Hamilton, a consulting
company in the management and technology sector, where he was appointed partner
and vice-president in 1998. He is currently responsible for Booz Allen
Hamiltons Italian operations and actively involved in international projects.
Mr. Napolitano has been a member of the committee for surface digital
television at the Ministry of Communications since 2001 and director of the
European Center for Aerospace Research since July 2002. He has been a member of
the Companys board of directors since May 2002. Francesco Taranto. Francesco Taranto began his career with a brokerage
firm in Milan, and subsequently worked (from 1965 to 1982) at Banco di Napoli
S.p.A. He then held numerous managerial positions in companies operating in the
mutual fund sector, becoming head of security management at Eurogest S.p.A.
(from 1982 to 1984), and subsequently becoming general manager of Interbancaria
Gestioni S.p.A. (from 1984 to 1987). Having moved to the Prime Group (where he
worked from 1987 to 2000), he was for a long time the managing director of the
groups holding company. He is currently a member of the board of directors of
Pioneer Global Asset Management S.p.A. (a company of the Unicredito Group) and
Kedrios S.p.A., a company providing services to financial companies. He has
also been a member of both the steering committee of Assogestioni and the
corporate governance committee for listed companies created by Borsa Italiana
S.p.A., the Italian stock exchange. He has been a member of the Companys board
of directors since October 2000, and he is also a member of WINDs board of
directors. Gianfranco Tosi. Gianfranco Tosi has been a professor of the Polytechnic
Institute of Milan since 1982 and also taught in the University of Lecco in
1992. He extensively published on metallurgy, technology of metals and other
related subjects. He has served as member of the board of directors of several
Italian companies. He has also held several positions in associations
instituted within Confindustria. He was mayor of the city of Busto Arsizio from
1993 to 2002. He has been a member of the Companys board of directors since
May 2002. 
 Senior Management The table below sets forth our executive officers, who are not also
directors, their positions, the year they were appointed to such positions and
their ages as of June 30, 2004: 133




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Year appointedYear joined
    
    to currentName
    
    Age
    
    Management position
    
    the Group
    
    positionAndrea Brentan
    
    
    55
    
    
    International Affairs
    
    
    2002
    
    
    
    2004Alessandro Bufacchi
    
    
    57
    
    
    Information and Communication Technology
    
    
    2000
    
    
    
    2000Vincenzo Cannatelli
    
    
    51
    
    
    Head of Sales, Infrastructure and Networks Division
    
    
    1999
    
    
    
    2002Antonio Cardani
    
    
    54
    
    
    Audit
    
    
    2000
    
    
    
    2000Salvatore Cardillo
    
    
    54
    
    
    Legal Affairs
    
    
    2000
    
    
    
    2000Gianluca Comin
    
    
    41
    
    
    Communication
    
    
    2002
    
    
    
    2002Fulvio Conti
    
    
    56
    
    
    Chief Financial Officer
    
    
    1999
    
    
    
    1999Sandro Fontecedro
    
    
    59
    
    
    Head of Generation and Energy Management Division
    
    
    1970
    
    
    
    2003Sergio Mobili
    
    
    63
    
    
    Head of Transmission Division
    
    
    1967
    
    
    
    2002Tommaso Pompei
    
    
    62
    
    
    Head of Telecommunications Division
    
    
    1996
    
    
    
    2002Massimo Romano
    
    
    45
    
    
    Regulatory and Institutional Affairs
    
    
    1997
    
    
    
    1999Paolo Ruzzini
    
    
    52
    
    
    Human Resources
    
    
    2003
    
    
    
    2003Salvatore Sardo
    
    
    51
    
    
    Purchasing
    
    
    2003
    
    
    
    2003Claudio Sartorelli
    
    
    59
    
    
    Corporate Affairs
    
    
    1970
    
    
    
    1996Luciana Tarozzi
    
    
    60
    
    
    Accounting
    
    
    1965
    
    
    
    1997
 We have briefly summarized below the principal business activities and
experience of our executive officers listed above. Andrea Brentan. Andrea Brentan was a research assistant at New York
University from 1975 to 1977 and then held various positions at GIE, an Italian
power plant contractor operating worldwide, until beginning of 1991. From 1991
to 1999 he successively held the positions of chief financial officer, general
manager and chief executive officer at Sae Sadelmi, a Milan-based company
belonging to Swedens ABB Group which engages in power plant engineering
procurement and construction and electrical generation equipment manufacturing
and service. From 2000 to 2002, he was the head of the worldwide steam power
plant business at Alstom, based in Paris. He joined Enel in November 2002 as
head of International Operations and Business Development of our Generation and
Energy Management division. He is currently head of the International
Department at Enel S.p.A. Alessandro Bufacchi. Alessandro Bufacchi held several positions in a
number of Italian computer companies, including Ing. Olivetti & C., where he
served as Vice-President Marketing of Enterprise Computer Division from 1993 to
1996, Wang Global Italia, where he served as head of the New Business
Development department from 1998 to 1999 and Getronics S.p.A., where he served
as head of the Enterprise Systems Division in 1999. He joined the Enel Group in
2000. He has been head of Enels e-business development department since May
2000, head of operations of Enel.it since April 2003 as well as of the Business
& Telecommunications development department since April 2004. He has also since
May 2004 been head of the Companys Information and Communication Technology
department. Vincenzo Cannatelli. Vincenzo Cannatelli in the 1980s worked at STET, an
Italian telecommunications holding company, in Planning and Control. In 1987,
he became General Manager of Elsag S.p.A, of the Finmeccanica Group. He
subsequently served as Managing Director of Elsag Bailey Process Automation. He
joined the Enel Group in 1999 as Managing Director of the Gencos. In 2001, he
became the Chief Executive Officer of Enel Distribuzione, and in July 2002, he
was appointed Chief Operating Officer of each of the two business units in the
Sales, Infrastructure and Network Division. He currently is the Chairman of
Enel Distribuzione, Enel Gas, Enel Distribuzione Gas, Enel Rete Gas, Enel Sole,
Enel.si and Enel Energia. Antonio Cardani. Antonio Cardani served as head of the administration
department of Olivetti S.p.A. from 1994 to 1995. He served as head of
administration and finance department of Telemedia S.p.A. from 1995 to 1997. He
joined Telecom Italia S.p.A. in 1997, where he was responsible for strategic
planning from 1997 to 1998 and for planning and organizational development from
1998 to 2000. He has been head of Enels audit department since 2000. Salvatore Cardillo. Salvatore Cardillo has served as the General Counsel
of a number of Italian companies, including Aeritalia-Finmeccanica (from 1983
to 1991), Alitalia S.p.A. (from 1991 to 1997), Edison S.p.A., a subsidiary of
Compart Group-Montedison (from 1997 to 1999) and De Agostini S.p.A., a major
Italian publishing company, from 1999 to 2000. He joined Enel in 2000 as
General Counsel, which is the position he still holds. 134




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Gianluca Comin. Gianluca Comin served as head of the public relations
department and communications department at Montedison S.p.A. from 1999 to
2001. He also served as head of the communications department at Telecom Italia
S.p.A. from September 2001 to June 2002. He worked as a journalist at Il
Gazzettino, an Italian newspaper, from 1987 to 1999. He is also a member of
the board of directors of Syremont S.p.A., a company in the Montedison Group.
In July 2002, he joined Enel as head of the
Communication department, which is the position he still holds. Fulvio Conti. Fulvio Conti held numerous positions in a number of Italian
companies during the 1990s. He served from 1993 to 1996 as head of the
Montedison-Compart Groups Finance department. He served from 1996 to 1998 as
Chief Financial Officer and General Manager of Ferrovie dello Stato S.p.A. He
held the position of General Manager and Chief Financial Officer of Telecom
Italia S.p.A., where he also held a number of position in the Group companies
in 1998 and 1999. He joined Enel in 1999 and he is currently Enels Chief
Financial Officer, Chairman of Terna and director of a number of our group
companies, including Enel Distribuzione, Enel Trade, Enelpower, Enel Produzione
and WIND. Sandro Fontecedro. Sandro Fontecedro joined Enel in 1970 in the
engineering department. In 1979, he became head of maintenance services for
thermal generation until 1985, when he became manager of the Torrevaldaliga
Nord thermal power plant. In 1991, he became manager of a group of power
plants, until 1997, when he assumed responsibility for a regional unit
comprising several plants. He served as head of thermal and renewables
generation from 2000 to 2003, when he was appointed Chief Operating Officer for
the Generation and Energy Management division. Sergio Mobili. Sergio Mobili began his career at Enel in 1967. He has held
a number of positions within our Distribution Division, including heading the
regional distribution departments in two Italian regions (Lombardy and the
Veneto). He was appointed director of Enels Transmission division in 1999,
becoming Managing Director of Terna since its incorporation in 1999. Tommaso Pompei. Tommaso Pompei has held positions at several Italian
companies. Until 1981, he was head of Alitalias Information Technology
Department. From 1982 to 1991, he was Managing Director of Sigma, a company
specializing in the development of value-added services for tourism and
transport. In 1991 and 1992, he served as a consultant to companies including
Olivetti, IBM, CAP Gemini, Finsiel, Pacific Telesis International and STET. In
1992, he became Chief Executive Officer of the Pronto Italia consortium, and in
1994 he became Chief Operating Officer of Italys second mobile telephone
operator (Omnitel Pronto Italia), during its start-up phase, and its Central
Director of Corporate Affairs in 1995. He subsequently moved to the Olivetti
Group, where he was Director of Telecommunications Policy and Strategy and
Chairman of Olivetti Telemedia Holding. He joined the Enel Group in November
1996. He currently is the Chief Executive Officer of our subsidiary WIND and
Head of the Telecommunications Division. Massimo Romano. Massimo Romano served as head of the Public Affairs
department of the Ilva Group from 1990 to 1994 and as head of the External
Relations department of the Lucchini Group from 1994 to 1997. He joined Enel in
1997, as head of the public affairs department. In 1999 he became head of
Enels Regulatory and Institutional affairs department, which is the position
he still holds. He is also member of the board of directors of Terna and
Enel.Hydro and of the board of the Energy and Environmental Political
and Economical Institute, at the Luigi Bocconi University. He is also
the senior advisor to the task force set by the Foreign Affairs Ministry
for the internationalization of the Italian production system. Paolo Ruzzini. From 1992 to 1995, he was head of human resources for the

Olivetti Group. In 1996, he became director of the Solutions division first at
Olivetti Sistemi e Servizi and then at Olivetti Solutions (Olsy). In 1998, with
the acquisition of Olsy by Wang Laboratories, he became director of the
Solutions Integration Olivetti Wang Global business line. Before joining Enel
in July 2003 as Director of Human Resources for the Group, he was managing
director of Getronics Italia S.p.A. He is also currently a member of the board
of directors of Terna. Salvatore Sardo. Salvatore Sardo served from 1992 to 1997 as head of
Planning and Control department of Stet S.p.A. After the merger of Stet into
Telecom Italia in 1997, he became head of the Accounting and Control of Telecom
Italia. He served as chairman of Seat Pagine Gialle S.p.A. from 1998 to 2001.
He served as head of Real Estate and General Services department and held
numerous positions in several companies of Telecom Italia Group from 1999 to
January 2003. He joined Enel in February 2003 and he currently serves as head
of Enels Purchasing department, as a member of the board of directors of Terna
and as chief executive officer of the real estate companies of the Enel Group. Claudio Sartorelli. Claudio Sartorelli joined Enel in 1970. Since then he
has held a number of positions. He was General Counsel from 1996 to 2000. He
has been head of Enels Corporate Affairs department since 1996 and he
currently serves as secretary of Enels board of directors. Luciana Tarozzi. Luciana Tarozzi joined Enel in 1965. Since then she has
held a number of positions. She was head of Enels Control and Reporting
department from 1996 to 1997, and became head of Enels Accounting 135




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department
in 1997, which is the position she still holds. She is currently also a
director of Enelpower, Enel Distribuzione and Enel Produzione. 
 Board of Statutory Auditors Pursuant to the Italian civil code, in addition to electing the board of
directors, Enels shareholders also elect a board of statutory auditors. Statutory auditors remain in office for a three-fiscal year term and may
be re-elected for consecutive terms or substituted automatically by an
alternate auditor if they resign or are unable to complete their term.
Statutory auditors may be removed only for cause and with the approval of an
Italian court. The board of statutory auditors is responsible for reviewing Enels
management and financial reporting and financial condition. In conducting this
review the board of statutory auditors has a duty to the shareholders, to whom
it reports, and to Enel. The role of the board of statutory auditors includes
reviewing the Companys management, and, in particular, ensuring compliance
with applicable law and the Companys by-laws. Furthermore, the statutory
auditors must ensure that Enel maintains adequate organizational structure,
internal controls and administrative and accounting systems. Enels former board of statutory auditors was appointed in May 2001. The
term of its members expired in May 2004. At that time, new members (whose
term will expire in 2007) were appointed by the shareholders. The names of the
former and current members, their positions and the year during which each was
initially appointed are set forth in the following table. Year initiallyName
    
    Position
    
    appointedFormer members of the board of statutory auditorsBruno De Leo
    
    Chairman
    
    
    1992Gustavo Minervini
    
    Auditor
    
    
    1992Franco Fontana
    
    Auditor
    
    
    2001Roberto Ulissi
    
    Alternate Auditor
    
    
    2001Francesco Bilotti
    
    Alternate Auditor
    
    
    1995Current members of the board of statutory auditorsAngelo Provasoli
    
    Chairman
    
    
    2004Carlo Conte
    
    Auditor
    
    
    2004Franco Fontana
    
    Auditor
    
    
    2001Giancarlo Giordano
    
    Alternate Auditor
    
    
    2004Paolo Sbordoni
    
    Alternate Auditor
    
    
    2004
 In addition, under Italian securities regulations, the Companys accounts
must be audited by external auditors appointed by the shareholders. The
appointment is communicated to the Commissione Nazionale per le
Società e la Borsa, or CONSOB. As of the fiscal year 2003, the Companys
external auditors for both consolidated and non-consolidated accounts are KPMG
S.p.A. Under Italian securities laws, listed companies may not appoint the same
auditors for more than three consecutive three-fiscal year terms. The external
auditors issue an opinion that the Companys financial statements are presented
fairly in all material respects. Their opinion is made available to the
Companys shareholders prior to the annual shareholders meeting. 136




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Executive Compensation Applicable Italian regulations (Article 78 of CONSOB Regulation No. 11971,
issued on May 14, 1999) require Enel to disclose in the Companys financial
statements the following information regarding the compensation for 2003 of
each of the directors and statutory auditors who served in such year. The
following amounts include compensation paid to such persons by Enels
subsidiaries. Bonuses and other
    
    Non- MonetaryName
    
    Positions(s) held
    
    Base compensation
    
    incentives
    
    Benefits
    
    Other compensationFees (in euro)Current DirectorsPiero Gnudi
    
    Chairman
    
    
    648,005
    
    
    
    
    (1)
    
    
    
    12,184
    (2)Paolo Scaroni
    
    Managing Director
and direttore generale
    
    
    705,165
    
    
    
    512,000
    (3)
    
    
    66,537
    (2)
    
    
    620,519
    (4)Mauro Miccio
    
    Director
    
    
    102,071Franco Morganti
    
    Director
    
    
    100,005
    
    
    
    
    
    
    
    
    
    
    
    73,761
    (5)Fernando Napolitano
    
    Director
    
    
    102,071Francesco Taranto
    
    Director
    
    
    107,071
    
    
    
    
    
    
    
    
    
    
    
    14,123
    (6)Gianfranco Tosi
    
    Director
    
    
    99,489Total compensation
of Directors
    
    
    
    
    1,863,877
    
    
    
    512,000
    
    
    
    78,721
    
    
    
    708,403Former Statutory
AuditorsBruno De Leo
    
    Chairman
    
    
    73,853Franco Fontana
    
    Statutory Auditor
    
    
    60,426Gustavo Minervini
    
    Statutory Auditor
    
    
    60,426Total compensation
of Statutory Auditors
    
    
    
    
    194,705Total compensation
paid
    
    
    
    
    2,058,582
    
    
    
    512,000
    
    
    
    78,721
    
    
    
    708,403
 For all positions held in group companies other than in Enel S.p.A., the
compensations of Piero Gnudi and Paolo Scaroni have either been renounced by
them or paid to Enel S.p.A. and included in their base compensation.  (1)
    
    On March 29, 2004, the board of directors granted to Mr. Gnudi, as Enels
chairman, a bonus of Euro 186,000 with respect to the achievement of
certain of the Groups results in 2003.(2)
    
    Insurance policies.(3)
    
    Compensation paid as bonus entry. In addition, on March 29, 2004 the
board of directors granted Mr. Scaroni, as Enels chief executive officer,
a bonus of Euro 490,000, with respect to the achievement of certain
Groups results in 2003.(4)
    
    Compensation paid as direttore generale. In addition, on March 29, 2004
the board of directors granted Mr. Scaroni, as Enels direttore generale,
a bonus of Euro 308,000, with respect to the achievement of certain
Groups results in 2003.(5)
    
    Compensation paid for the positions held in WIND, as director (for the
amount of Euro 20,274) and for a non-managerial task granted by the
board of directors in his capacity
as director (for the amount of Euro 53,487).(6)
    
    Compensation paid as a director of WIND. There are no service contracts entered into by Enels directors with the
Company or any of the Companys subsidiaries providing for benefits upon
termination of employment. We do not disclose to the Companys shareholders or otherwise make
available public information as to the compensation of the Companys executive
officers. The aggregate compensation Enel and its subsidiaries paid to all of the
Companys directors, senior managers and statutory auditors identified in this
annual report, excluding pension, retirement or similar benefits, for the year
ended December 31, 2003 was approximately Euro 11.6 million. The aggregate
amount paid or accrued 137




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for pension, retirement or similar benefits for the same
directors, statutory auditors and executive officers for the year ended
December 31, 2003 was approximately Euro 2.5 million. Paolo Scaroni, in his capacity as direttore generale, was granted:  
    
    In September 2002, 2,503,500 options to purchase the
same number of Enels ordinary shares. All these options vested
and, consequently, 30% of the options were exercisable starting
in 2003, an additional 30% starting in 2004 and the remaining 40%
starting in 2005. These options expire on December 31, 2007. The
exercise price for these options is Euro 6.480. During the period
between May 24, 2004 and June 11, 2004, Mr. Scaroni exercised
1,502,100 of these options and sold the resulting shares on the market;
    
    In April 2003, a further 4,200,000 options to purchase
the same number of Enels ordinary shares. All these options
vested and, consequently, 30% of the options are exercisable
starting from 2004, an additional 30% starting from 2005 and the
remaining 40% starting from 2006. These options expire on
December 31, 2008. The exercise price for these options is Euro
5.240. During the period between May 24, 2004 and June 11, 2004,
Mr. Scaroni exercised 1,260,000 of these options and sold the resulting shares on the market; and
    
    In March 2004, a further 2,500,000 options to purchase
the same number of Enels ordinary shares. Subject to the
satisfaction of the conditions precedent provided for in the 2004
stock option plan (see Item 10. Additional Information#Stock
Option Plan), 15% of the options may be exercised starting from
2005, another 15% starting from 2006, an additional 30% starting
from 2007 and the remaining 40% starting from 2008. These options
expire on December 31, 2009. The exercise price for these options
is Euro 6.242. Please refer to Item 10. Additional InformationStock Option Plan for a
complete description of the Companys stock option plan. 
 Share Ownership The following table sets forth the number of Enels ordinary shares held
by each of the Companys directors and statutory auditors as of June 10, 2004: Number of ordinaryshares held as of JuneName of director or statutory auditor
    
    10, 2004Piero Gnudi
    
    
    58,524
    (1)Paolo Scaroni
    
    
    21,437Franco Morganti
    
    
    787
    (2)Francesco Taranto
    
    
    10,000Angelo Provasoli
    
    
    10,000
    (3)All other directors and statutory auditors
    
    
    0Total
    
    
    100,748
  (1)
    
    40,000 are held by a company controlled by Mr. Gnudi and 18,262 by Mr.
Gnudis wife.(2)
    
    262 are held by Mr. Morgantis wife.(3)
    
    All shares are held by Mr. Provasolis wife. 
 Employees As of December 31, 2003, we had 64,770 employees, of whom 785 held
managerial positions. The following table shows the breakdown of employees in
each of our principal segments at December 31, 2003. 138




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Percentage of totalDivision
    
    Number of employees
    
    number of employeesGeneration and Energy Management
    
    
    10,318
    
    
    
    15.9Sales, Infrastructure and Networks
    
    
    36,424
    (*)
    
    
    56.2International Operations
    
    
    1,710
    
    
    
    2.6Transmission
    
    
    2,821
    
    
    
    4.4Telecommunications
    
    
    8,769
    
    
    
    13.5Other areas
    
    
    4,206
    
    
    
    6.5Holding Company
    
    
    522
    
    
    
    0.8Total Enel Group
    
    
    64,770
    
    
    
    100
   (*)
    
    Including employees of Enel Gas. In recent years, we have pursued a policy of workforce rationalization,
primarily through attrition, which has resulted in a steady reduction in
employment levels: the number of our employees declined by 27%, from 88,957 at
December 31, 1997 to 64,770 employees at December 31, 2003. Based on the current retirement system available to our employees, the
Companys management estimates that the following number of employees will
retire during each of the periods shown: Estimated number ofpotential retirees2004
    
    Not less than 1,4002005
    
    Not less than 2,0002006
    
    Not less than 1,4002007
    
    Not less than 1,8002008
    
    Not less than 1,600
 If Italys current system of governmental retirement benefits changes
significantly, we will consider adopting other voluntary measures to reduce
employment levels. These measures may involve increased costs. The increased
use of automated, remote-controlled plants and of advanced information
technology and other rationalization measures has improved our ability to
conduct operations with fewer employees. The table below shows our employment levels at the dates indicated. The
table does not take into account the employees of our telecommunications
segment during the period from 1996 to 2000, prior to our consolidation of
WIND. 1998
    
    1999
    
    2000
    
    2001
    
    2002
    
    2003Employees (other than managers)
    
    
    84,096
    
    
    
    77,768
    
    
    
    71,958
    
    
    
    71,802
    
    
    
    70,313
    
    
    
    63,985Managers
    
    
    842
    
    
    
    743
    
    
    
    689
    
    
    
    859
    
    
    
    891
    
    
    
    785Total l
    
    
    84,938
    
    
    
    78,511
    
    
    
    72,647
    
    
    
    72,661
    
    
    
    71,204
    
    
    
    64,770
 Most of our non-management employees in the electricity sector are members
of labor unions. The principal labor unions are the National Federation of
Energy Workers, to which approximately 33% of our employees belong, the Italian
Electrical Companies Federation, to which approximately 30% of our employees
belong, and the Italian Union of Chemical, Electrical and Manufacturing
Workers, to which approximately 9% of our employees belong. Other employees are
members of smaller labor unions, none of which includes more than 2.0% of our
employees. Typically, we and representatives of the three unions covering the largest
number of our employees negotiate and enter into a single collective bargaining
agreement every four years. Representatives of the smaller
unions typically sign the same agreement at a later date. Under the
collective bargaining agreement, wages and other compensation arrangements are
negotiated every two years. 139




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In July 2001, we signed a collective bargaining agreement for employees in
the electricity industry with the unions, Gestore della Reteand So.g.i.n. The
new collective bargaining agreement for all electric employees also applies to
independent producers and to municipally owned electric utilities. Under the terms of the collective bargaining agreements currently in
effect, employees covered by the agreement enjoy stability of employment and we
may terminate their employment only when they reach retirement age or for
cause. We believe that we can achieve our workforce rationalization objectives
principally through attrition. We believe that our relations with the unions are generally satisfactory.
Our employees have the right under Italian law to strike, although the unions
have guaranteed that in such event a minimum level of service will be provided
in each of the generation, transmission and distribution segments. We have
entered into an agreement with our principal labor unions which regulates the
exercise of our employees right to strike. As a consequence, strikes or other
work stoppages have not significantly affected our operations in recent years. Employee compensation in the past has been almost exclusively based on the
seniority and the position held by each employee. In 1999, we introduced
compensation based on performance for the our senior and junior management,
largely using a management by objective system with certain correction
mechanisms to ensure that compensation does not significantly depart from
market levels. This compensation method applied to approximately 80% of our
management in 2003. For top managers, the variable component of compensation
accounts for approximately 33% of total compensation. Salary incentives based
on sales have also been introduced for account managers of certain companies of
our group. 
 Employee benefits We sponsor retirement plans that pay pension benefits as required by
Italian law and our collective bargaining agreements. The costs related to
these plans are expensed as the benefits vest. In addition, our employees are
eligible, upon termination, for severance pay under Italian law. We accrue a
reserve for these employee termination liabilities, net of applicable advances,
over the employees service periods. Until the end of 1999, most of our employees were enrolled in the
Electricity Fund managed by INPS, the state funded social security system,
which covers pensions, disability pay and accidental death benefits. In 1999,
the Italian parliament enacted a law that required the government to terminate
industry specific retirement funds, such as the Electricity Fund, and to merge
them into the general retirement fund for Italian workers. The Electricity Fund
was terminated on January 1, 2000 and covered workers have been enrolled in the
general pension fund for Italian employees. We were required to make
extraordinary contributions to the general pension fund in each of 2000, 2001
and 2002 to eliminate the deficit in the Electricity Fund. We were not required
to make such contributions in 2003 and 2004. The net impact of this change on
our cash flow over the three-year period from 2000 to 2002 was Euro 1,940
million. This impact reflected the effect of lower payments we made to the
national pension system in respect of the family benefits program, following
the January 2000 reduction of 3.72 percentage points in the rate on which our
payments are based. For Italian GAAP purposes, we are expensing the amounts
paid in the years 2000-2002 proportionately over the twenty-year period between
2000 and 2019. However, for U.S. GAAP purposes, we expensed these amounts in
2000-2002, during the year that the contributions were due. The difference
between the treatment of these payments under Italian GAAP and U.S. GAAP
therefore had a significant negative effect on our U.S. GAAP results in each of
those three years. See Item 5. Operating and Financial Review and
ProspectsU.S. GAAP Reconciliation. 
 Item 7. Major Shareholders and Related Party Transactions 
 Major Shareholders Prior to Enels initial public offering in November 1999, the Treasury
Ministry was Enels sole shareholder, having become such when Enel became a
joint stock company in July 1992. Before that date, Enel had been a public
statutory body owned by the Italian government. Enels initial public offering
consisted of a total of 3,848,802,000 ordinary shares (corresponding to
1,924,401,000 ordinary shares after the one-for-two reverse stock 140




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split
effective July 9, 2001) in the form of ordinary shares and ADSs (each
representing ten ordinary shares, at the time of the offering, and five
ordinary shares after the aforesaid one-for-two reverse stock split). The
offering of the Companys shares was the second-largest in history at the time
and generated gross proceeds of approximately Euro 16,550 million. On November 4, 2003, the Treasury Ministry announced that it had completed
the settlement of the sale (announced on October 30, 2003) of 400,000,000 of
Enels ordinary shares (or approximately 6.6% of the Companys share capital)
to Morgan Stanley & Co. International Limited for Euro 2,172.8 million.
According to the announcement, the purchaser was selected by the Treasury
Ministry following a competitive bidding process in which primary financial
institutions had been invited to participate. The announcement also stated that
the Treasury Ministry had been informed by Morgan Stanley & Co. International
Limited that it had completed, on November 4, 2003, the placement of the entire
amount of shares purchased with Italian and international investors. On December 12, 2003, the Treasury Ministry sold 627,528,282 of Enels
ordinary shares (or approximately 10.35% of the Companys share capital) to
Cassa Depositi e Prestiti S.p.A. (a wholly-owned subsidiary of the Ministry at
the time of the sale) for total consideration of approximately Euro 3,156
million. On December 30, 2003, the Treasury Ministry announced the placement
of shares representing 30% of the share capital of Cassa Depositi e Prestiti to
sixty-five Italian bank-foundations. As of May 21, 2004, the Treasury Ministry owned 3,069,635,842 of Enels
ordinary shares, or 50.63% of the total number of outstanding ordinary shares and Cassa Depositi e Prestiti owned 627,528,282 of Enel's ordinary shares, or approximately 10.35% of the outstanding ordinary shares.
As of the same date, no other entity or individual held 2% or more of the
Companys outstanding ordinary shares. The Treasury Ministry may sell part of Enels shares at any time and has
announced that it intends to sell certain of Enels shares. There are no
minimum ownership or similar requirements under Italian law that would limit
sales of Enels shares by the Treasury Ministry. Sales of Enels ordinary
shares may have a material adverse effect on the price of the ordinary shares
and ADSs. Within the context of the privatization procedures and regulations under
Italian law, the Treasury Ministry may, as a significant shareholder, ask
Enels board of directors to examine the possibility of dispositions, in whole
or in part, of some entities we control. Enels board would implement any such
transaction solely to enhance value for all shareholders. The Treasury Ministry has indicated that it intends to continue to
participate in the nomination and election of Enels Board to protect its
investment as a shareholder. Under the 1994 privatization law, as recently
amended by article 4, paragraph 227, of Law 350 of December 24, 2003 (the 2004
Budget Law), the Treasury Ministry has special powers, regardless of the level
of its shareholding in Enel, related to:      The acquisition of Enels shares by third parties;      Shareholders agreements;      Major corporate changes; and      Appointment of one non-voting director. In addition, the privatization law provides that Enels by-laws may include:      
Special rules concerning appointments of directors and statutory
auditors in order to ensure that minority shareholders are represented; and      
Limitations on the maximum number of shares that a shareholder, or
group of shareholders, other than the Treasury Ministry (or other entities
controlled by the State), may hold. 141




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Certain provisions of Enels by-laws, as well as the special powers the
Treasury Ministry retains, are described in more detail in Item 10. Additional
InformationBy-Laws. As of June 14, 2004, 6,097,105,820 ordinary shares were outstanding. As of
the same date, there were 5,659,931 ADSs (equivalent to 28,299,655 ordinary
shares) held by 5 record holders (including the Depository Trust Company). Since certain of the shares and ADSs were held by brokers or other
nominees, the number of direct record holders in the United States may not be
fully indicative of the number of direct beneficial owners in the United States
or of where the direct beneficial owners of such shares are resident. 
 Related Party Transactions As the entity primarily responsible for electricity generation,
transmission and distribution in Italy, we provide services to many other
state-owned entities. The rates earned are comparable to the tariff rates
charged to similar commercial organizations. Under the current regulatory framework, we enter into certain
transactions with the Gestore della Rete(which is wholly owned by the
Treasury Ministry, the Companys majority shareholder). Prices and fees paid
to or received from the Gestore della Retein connection with these
transactions are determined by the Energy Authority. The revenues produced
from the sales of electricity to the Gestore della Reterepresented
approximately 3% of our revenues in 2003 and 2002. The generation companies
pay to the Gestore della Retethe additional access fee to the National
Transmission System. The amount of these transactions represents
approximately 2% of total operating expenses in 2003 and 1% in 2002.
Moreover, in 2002 the generation companies paid to the Gestore della Rete
the hydroelectric surcharge, due on the hydroelectric and geothermal
production from plants not falling under the CIP 6 regime. The amount of
this fee represented approximately 1% of our operating expenses for the year
ended December 31, 2002. The Transmission segment earns revenue from a fee
per kWh transported that distributors and suppliers pay to us through the
Gestore della Rete. The revenues relating to these fees represented
approximately 2% of our revenues in both 2003 and 2002. The Sales,
Infrastructure and Networks division purchases electricity from the Gestore
della Reteand pays to the same fees for the use of the national
transmission grid. The expenses relating to these prices and fees
represented approximately 7% of total operating expenses in 2003 (as
compared to 10% in 2002). We purchase fuel for our generation plants and gas for our sales and
distribution activities from Eni S.p.A., an Italian oil and gas company in
which the Treasury Ministry has a 20% direct interest and a 10% interest held through Cassa Depositi e Prestiti. Total purchases from Eni
were approximately 8% of total operating expenses in 2003, 7% in
2002, and 10% in 2001. Total purchases from state-owned companies accounted for approximately
8%, 10% and 12% of our total operating expenses for each of the three years
ended December 31, 2001, 2002, 2003. No member of the board of directors or board of statutory auditors and
no executive officer (including close members of any such persons families)
nor any enterprise over which any such person is able to exercise a
significant influence has had any interest in any transactions that are or
were unusual in their nature or conditions or are or were material to the
Company, and that were either effected since December 31, 2000 or that were
effected during an earlier period and remain in any respect outstanding or
unperformed. We have not provided any loans or
guarantees to or for the benefit of any such person since December 31, 2000
that remain outstanding or unperformed. We generally provide loans to our employees, excluding executive
officers, up to the amount of Euro 52,000 per employee. You should read note 22 to our consolidated financial statements for further details. 142




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Item 8. Financial Information 
 Consolidated Financial Statements Please refer to Item 18. Financial Statements of this annual report. 
 Other Financial Information 
 Legal Proceedings We are defendants in a number of legal proceedings incidental to the
generation, transmission and distribution of electricity. Because of the nature
of these proceedings, we are not able to predict their ultimate outcomes, some
of which may be unfavorable to us. However, we do not expect these proceedings,
either individually or in the aggregate, to have a material adverse effect on
our financial position or results of operations. Our pending legal proceedings include various civil and environmental
claims and disputes relating to the construction and operation of several power
stations, transmission and distribution lines, and other matters that arise in
the normal course of our business. We have established a reserve for litigation
and other contingent liabilities where we consider it probable that a claim
will be resolved unfavorably and where we can reasonably estimate the potential
loss involved. This reserve, which also includes provisions for other
contingencies and uncertainties related to our operations, is included in other
non-current liabilities in the consolidated balance sheets in our consolidated
financial statements, and amounted to Euro 1,483 million at December 31, 2003,
of which Euro 378 million related to legal proceedings. We have briefly summarized below the most significant proceedings. Notwithstanding the fact that the relevant infrastructure is, in our
opinion, in compliance with applicable laws, we are currently defendants in
numerous pending proceedings relating to the electromagnetic fields created by
our transmission and distribution lines and in some pending proceedings
relating to electromagnetic energy emanating from substations. In most of the
proceedings, the plaintiffs seek the relocation or removal of lines or
substations that are near to inhabited or occupied residential or office
buildings. In a limited number of proceedings, the plaintiffs also seek damages
based on our alleged non-compliance with regulations setting maximum exposure
levels or minimum distance requirements for lines and substations or on the
alleged health effects of exposure to electromagnetic fields. Alleged damage as a result of exposure to electromagnetic fields created
by our transmission and distribution lines has also been the subject of certain
criminal proceedings in which we are involved. In June 1999, the criminal court
of Rimini fined us symbolic damages of approximately Euro 1,000 in one
proceeding and transferred the case to the civil court for the quantification
of the physical damage to the individual plaintiff. We have appealed the
decision. In October 2000, the public prosecutor for the city of Turin initiated an
investigation against a manager and the chief executive officer of Terna, as
well as the former chairman of the Companys board, based on alleged harmful
effects in connection with certain instances of diseases that had occurred in
the province of Piedmont. In the cases described above, the transmission and distribution lines in
question are in compliance with all applicable laws. Moreover, we believe that
certain of such proceedings have become moot as a result of a law enacted in
March 2001, which replaced previous legislation on electromagnetic fields and
introduced measures for the restructuring of the Italian electricity grid. In
any event, if the outcome of the above civil cases is unfavorable to us, our
potential liability would be limited mainly to damages, to the extent
plaintiffs satisfied their burden of proof by demonstrating a causal connection
between electromagnetic fields and the alleged damage. You should read Item 3. Key
InformationRisk FactorsRisks Relating to Our Energy BusinessOur core energy business
and other activities are subject to numerous environmental regulations that could
significantly affect our results of operations and financial condition and Item 4.
Information on the CompanyRegulatory MattersEnvironmental
MattersElectromagnetic fields for a more detailed discussion of
electromagnetic fields. 143




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Since 1997, several suppliers of equipment to our distribution division
have brought civil actions against us claiming that we abused our market power
in the Italian electricity distribution sector by imposing contractual terms
and conditions on them. The plaintiffs have sought increases in the
compensation paid to them under supply contracts with us. We are contesting the
suppliers claims. The first three decisions rendered in these cases upheld our
contention that civil courts lack jurisdiction to hear these cases. In 1995,
the Antitrust Authority, prompted by similar claims filed by the same
suppliers, issued an opinion in which it held that our conduct did not
constitute an abuse of market power. Following the withdrawal of the petitions
filed by several suppliers, the aggregate value of the claims currently pending
against us is Euro 163 million. In January 2004, an expert appointed by the
Court of Bari, where one of the proceedings was pending, confirmed the opinion
issued by the Energy Authority. In February 2003, the public prosecutor of Milan initiated a criminal
investigation of the former chief executive officer of Enelpower, a former
senior executive of Enelpower, and 12 other persons for the alleged commission
of certain crimes, including embezzlement, fraud, corruption, and false
statements to shareholders, in connection with certain transactions carried out
by Enelpower in the Middle East and Italy, including transaction with the
Siemens and Alstom groups. On March 5, 2003, Enelpower was notified of the
pending investigation and the possible administrative liability it may incur in
relation to the alleged crimes. On June 6, 2003, the Tribunal of Milan, upon
request by the public prosecutor, ordered the arrest of the former chief
executive officer and the former senior executive of Enelpower on suspicion of
such charges. In response to this criminal proceeding, we and our subsidiary,
Enelpower, initiated legal actions against all Enelpower employees involved in
the alleged offenses, aimed at protecting the interests of the Enel Group and
those of our shareholders. In addition, Enelpower notified its suppliers
involved in the investigation that, in the event the alleged illegal conduct
should be proven, Enelpower would seek compensation for damages suffered as a
result. On July 11, 2003, the former Chairman of Enel Produzione resigned after
voluntarily disclosing to the public prosecutor of Milan the extent of his
involvement in the alleged illegal conduct that is the subject of the
prosecutors investigation. We and Enel Produzione intend to seek any damages
caused to us by the alleged illegal conduct, should such conduct be proved as a
result of the pending investigation. None of the individuals charged to date
are currently employed by us. We submitted to the Court of Milan a copy of a
settlement agreement between us and Siemens S.p.A. under which we will receive
Euro 20 million from Siemens S.p.A. for damages to our reputation, as well as
the right to renegotiate existing agreements between Siemens S.p.A. and Enel
Produzione. In April 2004, the Court of Milan, as a cautionary
measure, banned
Siemens AG from receiving contracts from public entities in Italy related to
the supply of gas turbines because of its alleged illicit relationship with
members of management of Enelpower and the former Chairman of Enel Produzione.
On February 19, 2004, we entered into a settlement with Alstom Holdings SA,
Alstom Power Inc. and Alstom Power Italia S.p.A. providing for damages to us
for injury to our reputation of Euro 4.5 million, in the form of credits
applicable to purchases by any Enel Group company from any Alstom Group
company, of which Euro 2 million relating to future purchases. In March 2003, the European Commission requested information from the
Italian government in order to assess whether the capital contributions we made
to WIND from 1998 through October 2002, the loans we granted to WIND or the
terms and conditions of our lease agreement for fiber optic cables with WIND
violated restrictions on state aid to companies. At this stage, we cannot
predict if the European Commission will open a formal investigation of any of
these matters, nor can we predict the eventual outcome of any such
investigation. On March 7, 2002, the Italian Antitrust Authority began an investigation
to assess whether we and one of our subsidiaries, Enel Energia, abused our
dominant position by, among other things, including in our standard contract
for the sale of electricity to Eligible Customers in 2002 certain exclusivity
and priority clauses aimed at discouraging them from changing their electricity
supplier. On November 27, 2003, the Authority determined that this conduct
constituted a serious violation of the European Community Treaty and imposed a
fine of Euro 2.5 million. We have appealed the Authoritys ruling to the Lazio
Regional Administrative Court, arguing that we did not hold a dominant position
in the market during the period at issue and therefore we could not have abused
a dominant position, as well as that the conduct of Enel Energia cannot be
attributed to us. While awaiting a ruling on the appeal, we paid the Euro 2.5
million fine within the provided 90-day period. In 2003, we amicably settled a contract dispute with Echelon, which
provides the network control technology for the Telemanagement system and in
which we hold a 7.5% interest, by effecting a payment of approximately $3
million. However, we are currently involved in another dispute with Echelon
concerning what we consider to be Echelons violation of its obligation to
supply us worldwide with the same type of Telemanagement 144




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system products that
it currently supplies to us in Italy and its obligation to support us in the
marketing of these products. On April 27, 2004, we filed a request for
arbitration of these disputes with the International Chamber of Commerce. In addition, following the blackout of electrical service that occurred on
September 28, 2003, approximately 140,000, mainly household, customers
requested a reimbursement for approximately Euro 25 for each customer, on the
grounds of the general agreement for the supply of electricity to such
customers, regardless of the fact that in October 2003 the Energy Authority had
issued a release in which it declared that customers should have not been
entitled to such reimbursement. We believe that we were not responsible for the
blackout and, accordingly, have not honored any of these requests. As of June
15, 2004, approximately 2,500 of our customers have brought legal actions
against Enel Distribuzione or Enel S.p.A. in the Italian courts seeking
aggregate damages for approximately 3.5 million dollars or Euro 2.9 million. So
far, the courts issued two decisions, one favorable to us and one unfavorable
to us. The unfavorable decision, which we appealed, requires us to
pay only Euro 25 to the plaintiff. Although the claims of each of the individual
plaintiffs are for relatively minor amounts, an increase in the decisions
holding us responsible for such damages could be expected to result in an
increase in the number of such claims and the magnitude of damages sought.
Italian law does not provide for the award of punitive damages in such cases,
and plaintiffs will be limited to compensatory damages. Please also
see Item 4. Information on the CompanyBusinessThe Enel
GroupGeneration and Energy Management for a description
of certain legal proceedings relating to disruptions of the Italian
electricity supply that occurred on June 26, 2003. 
 Dividend Policy Enels shareholders are entitled to receive interim or annual dividends
that the Companys board recommends and, in the case of annual dividends,
that the Companys shareholders approve. Dividends were declared and paid in Italian lire until July 8, 2001. On
July 9, 2001, the re-denomination of the Companys share capital into euro
and a one-for-two reverse stock split became effective, and since then
dividends have been declared and paid in euro. The following table shows the
amount in euro of the Companys dividends per share payable in respect of
each of the fiscal years indicated, based on the 12,126,150,379 ordinary
shares outstanding in 1999 and 2000, on the 6,063,075,189 ordinary shares
outstanding in 2001 and 2002 and, on the 6,097,105,820 ordinary shares
outstanding in June 2004. Prior to the Companys initial public offering in November 1999, the
Treasury Ministry was Enels sole shareholder. Year ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003Dividends per ordinary share (in euro)
    
    
    0.12
    
    
    
    0.13
    
    
    
    0.36
    
    
    
    0.36
    
    
    
    0.36Dividends
per ordinary share (in U.S. dollars) (1)
    
    
    0.11
    
    
    
    0.12
    
    
    
    0.32
    
    
    
    0.38
    
    
    
    0.45
  (1)
    
    We have translated the historical dividend amounts into U.S. dollars
using the noon buying rate for euro in effect on the respective payment
dates. The noon buying rate for euro may differ from the rate that may
be used by the Depositary for the ADSs in order to convert euro into
U.S. dollars for purposes of making payments to holders of ADSs. At the Companys shareholders meeting on September 3, 1999, the
Treasury Ministry, at that time the Companys sole shareholder, approved the
distribution of an extraordinary dividend of Lit. 4,422,000 million (Euro
2,284 million) that was paid to it in October 1999. At Enels annual shareholders meeting on May 26, 2000, the
shareholders approved the board of directors proposal to pay an aggregate
dividend of approximately Lit. 2,813,000 million (Euro 1,453 million), or
Lit. 232 (Euro 0.12) per ordinary share having a par value of Lit. 1,000
(Euro 0.52) each, in respect of the fiscal year ended December 31, 1999. The amount
of the aggregate dividend was equal to approximately 62% of our consolidated net income
for the year and was paid from June 22, 2000 to holders of record as of June 19, 2000. At Enels annual shareholders meeting on May 25, 2001, the
shareholders approved the board of directors proposal to pay an aggregate
dividend of approximately Lit. 3,056,000 million (Euro 1,578 million), or
Lit. 252 (Euro 0.13) per ordinary share having a par value of Lit. 1,000
(Euro 0.52) each, in respect of the fiscal year 145




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ended December 31, 2000. The
amount of the aggregate dividend was equal to approximately 72% of our
consolidated net income for the year and was paid from June 21, 2001 to
holders of record as of June 18, 2001. At Enels annual shareholders meeting on May 24, 2002, the
shareholders approved the board of directors proposal to pay an aggregate
dividend of approximately Euro 2,183 million, or Euro 0.36 per ordinary
share having a par value of Euro 1 each, in respect of the fiscal year ended
December 31, 2001. The amount of the aggregate dividend was equal to
approximately 52% of our consolidated net income for the year and was paid
from June 27, 2002 to holders of record as of June 24, 2002. At Enels annual shareholders meeting on May 23, 2003, the
shareholders approved the board of directors proposal to pay an aggregate
dividend of approximately Euro 2,183 million, or Euro 0.36 per ordinary
share having a par value of Euro 1 each, in respect of the fiscal year ended
December 31, 2002. The amount of the aggregate dividend was equal to
approximately 109% of our consolidated net income for the year and was paid
from June 26, 2003 to holders of record as of June 23, 2003. At Enels annual shareholders meeting on May 21, 2004, the
shareholders approved the board of directors proposal to pay an aggregate
dividend of approximately Euro 2,195 million, or Euro 0.36 per ordinary
share, in respect of the fiscal year ended December 31, 2003. This is in
line with our new policy of distributing 60-70% of our ordinary profits and
100% of the capital gains on disposals and nonrecurring extraordinary
regulatory items. The amount of the aggregate dividend was equal to
approximately 87% of our consolidated net income for the year and was paid
on June 24, 2004 to holders of record as of June 21, 2004. In addition to
this ordinary dividend paid with respect to fiscal year ended on December
31, 2003, following the completion of the offering of Terna shares
and before the end of 2004, we
expect to distribute an additional dividend to all shareholders, which is expected to be between
Euro 0.30 and 0.36 per share. Italian law allows Enel to pay dividends only out of the Companys
statutory retained earnings, plus the distributable reserves and statutory
net income for the current year, net of the amount to be allocated to the
legal reserve in the subsequent year. Italian law requires companies to
contribute 5% of their net income each year to the legal reserve until the
aggregate amount of this reserve is equal to 20% of the aggregate par value
of their issued and outstanding share capital. As the aggregate amount of
Enels legal reserve was exceeding to such aggregate par value, the Company
did not allocate any of its 2003 net income to such a reserve. Enels board
will recommend the payment of any future dividends in light of conditions
then existing, including:  
    
    Our financial performance;
    
    Cash and capital requirements;
    
    Any restrictions in financing agreements; and
    
    Prevailing business conditions. Enel pays dividends on ordinary shares represented by ADSs to the
Depositary. The Depositary converts the dividends into U.S. dollars at the
prevailing rate of exchange, net of conversion expenses of the Depositary
and any applicable Italian withholding tax. The amount of dividends received
by holders of ADSs in U.S. dollars may be affected by fluctuations in
exchange rates. You should read Item 3. Key InformationExchange Rates and
Item 3. Key InformationRisk FactorsRisks Relating to Enels Ordinary
Shares and ADSsThe dollar value of dividends Enel pays in respect of the
Companys ordinary shares and ADSs will be affected by the euro/dollar
exchange rate for a more detailed discussion of the risks of euro/dollar
exchange rate fluctuations for holders of ADSs. 
 Significant Changes On June 3, 2004, we signed an agreement for the transfer of the entire
share capital of Newreal to a consortium formed by an investment fund belonging
to the Deutsche Bank group and CDC-IXIS for approximately Euro 1,400 million.
The agreement provides for a price adjustment mechanism and requires that,
before the closing of this transaction, Newreal will transfer real estate
assets with a net book value of approximately Euro 380 million to our
subsidiary Dalmazia Trieste. We expect to close this transaction by the first
half of July 2004. 146




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In June 2004, we completed an initial public offering and listing in Italy
and a private placement with certain institutional investors (in
accordance with to Rule
144A and Regulation S under the Securities Act) of 1,000,000,000 Ternas shares,
representing 50% of Ternas issued share capital, receiving
gross proceeds of Euro 1,700 million. 
 Item 9. The Offer and Listing 
 Markets and Price Range of ADSs and Ordinary Shares The principal trading market for Enels ordinary shares is the Mercato
Telematico Azionario, or Telematico, the Italian automated screen-based trading
system managed by the Borsa Italiana S.p.A.Enels shares are traded on the
Telematico under the symbol ENEL. Enels American Depositary Shares, or ADSs
(each representing 5 ordinary shares), are listed on the New York Stock
Exchange, where they are traded under the symbol EN. Citibank, N.A. is Enels
depositary for purposes of issuing the American Depositary Receipts evidencing
the ADSs. Trading in Enels ordinary shares on the Telematico and in Enels
ADSs on the New York Stock Exchange commenced on November 2, 1999. The following table sets forth, for the periods indicated, the reported
high and low sales prices of the ADSs on the New York Stock Exchange, adjusted
to reflect the effect of a one-for-two reverse stock split effective as of
July 9, 2001, on the ADSs. ADSsHigh
    
    Low(in dollars)1999
    
    
    45.23
    
    
    
    41.132000
    
    
    46.00
    
    
    
    35.052001
    
    
    38.85
    
    
    
    25.002002First Quarter
    
    
    29.09
    
    
    
    27.41Second Quarter
    
    
    30.31
    
    
    
    27.03Third Quarter
    
    
    28.60
    
    
    
    22.60Fourth Quarter
    
    
    25.85
    
    
    
    23.702003First Quarter
    
    
    29.64
    
    
    
    26.58Second Quarter
    
    
    35.85
    
    
    
    28.58Third Quarter
    
    
    33.05
    
    
    
    29.99Fourth Quarter
    
    
    34.15
    
    
    
    30.50December 2003-May 2004December 2003
    
    
    34.15
    
    
    
    31.95January 2004
    
    
    36.94
    
    
    
    34.35February 2004
    
    
    39.30
    
    
    
    36.60March 2004
    
    
    40.89
    
    
    
    36.90April 2004
    
    
    41.35
    
    
    
    39.19May 2004
    
    
    41.40
    
    
    
    38.47
 The following table sets forth, for the periods indicated, the reported
high and low official sales prices for the ordinary shares on Telematico,
adjusted to reflect the one-for-two reverse stock split effective as of July
9, 2001. 147




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Ordinary sharesHigh
    
    Low(in euro)1999(NovemberDecember)
    
    
    8.593
    
    
    
    7.8392000
    
    
    9.357
    
    
    
    7.3482001
    
    
    8.051
    
    
    
    5.6502002First Quarter
    
    
    6.663
    
    
    
    6.137Second Quarter
    
    
    6.765
    
    
    
    5.607Third Quarter
    
    
    5.835
    
    
    
    4.490Fourth Quarter
    
    
    5.167
    
    
    
    4.7842003First Quarter
    
    
    5.471
    
    
    
    5.015Second Quarter
    
    
    6.022
    
    
    
    5.227Third Quarter
    
    
    5.740
    
    
    
    5.340Fourth Quarter
    
    
    5.479
    
    
    
    5.218December 2003May 2004December 2003
    
    
    5.460
    
    
    
    5.247January 2004
    
    
    5.829
    
    
    
    5.464February 2004
    
    
    6.220
    
    
    
    5.840March 2004
    
    
    6.581
    
    
    
    6.071April 2004
    
    
    6.875
    
    
    
    6.550May 2004
    
    
    6.788
    
    
    
    6.454
 Enels ordinary shares are among the constituents of the MIB 30 Index, the
primary Italian stock market index. As
of June 14, 2004, the Company had 6,097,105,820 ordinary shares
outstanding. On June 15, 2004, the closing price of our ordinary
shares on Telematico was
6.88 and the
closing price of the ADSs on the New York Stock Exchange was $41.98. 
 Item 10. Additional Information 
 Stock Option Plan 2000 Stock Option Plan In March 2000, Enels board of directors approved an executive stock
option incentive plan, which we refer to as the Plan, for the grant of options
to certain of the Groups executives (as identified by the board of directors
at the time of the grant). The Plan distinguishes between options that, once vested, may be exercised
after the first anniversary of the grant date, or One-Year Options, and those
that, once vested, may be exercised only after the third anniversary of the
grant date, or Three-Year Options. Of the options granted to each individual
participant in any single year, 20% are One-Year Options and the remaining 80%
are Three-Year Options. Options vest if the average reference price of Enels shares on Telematico
over the last three months of the year of the grant is higher than a target
price determined by the board of directors at the time of the grant. The board
sets the target price with reference to securities analysts estimates of
the future price of Enels shares. If the target price is not met in a given
year, all of the One-Year Options and 30% of the Three-Year Options granted in
that year do not vest and expire. However, the remaining 70% of the Three-Year
Options granted in the year (56% of the options) may still vest if (i) the
price of Enels shares on Telematico during the year of the grant outperforms a
specified reference index over the same period and (ii) the actual growth in
value of our business, or AGV, during the year of the grant (as determined
using a proprietary formula) exceeds the expected growth for that year, as 148




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determined by the board of directors at the time of the grant. If these
conditions are not met, the remaining 70% of Three-Year Options may also vest
if the average reference price of Enels shares on Telematico over the last
three months of the second year following the grant is higher than the target
price for the year of the grant, as adjusted for the expected variation of the
price of Enels shares in the following two years, as determined by the board
of directors each year. One-Year Options, if vested, may be exercised from the first to the fourth
year following the grant. Three-Year Options, if vested, may be exercised in
the third and fourth year following the grant. In all cases, the options may be
exercised only within the fifteen trading days following the shareholders
approval of the financial statements for the preceding fiscal year. The strike
price of the options is set by the board of directors on the date of the grant
and cannot be lower than the average reference price of Enels shares on
Telematico during the month preceding the grant. Options are transferable only
in certain limited cases. Under the Plan, in March 2000, Enels board of directors granted to 144 of
our executives, including the Companys former Chief Executive Officer in his
capacity as direttore generale, an aggregate of 19,690,000 options with
respect to an equal number of ordinary shares. The number of options and the
corresponding number of ordinary shares decreased to 9,845,000 as a result of
the one-for-two reverse stock split effective July 9, 2001. The number of
options granted to participating managers has been determined pursuant to a
formula based on the participants gross salary for the year in question and
the value of the Three-Year Options, calculated according to market value
indications supplied by primary financial institutions. The target price of
Enels stock in respect of the options granted in 2000 was set at Euro 4.70.
Since such target price was not met in 2000, all One-Year Options and 30% of
the Three-Year Options did not vest and thus expired. However, in the same
year, (i) the price of Enels shares on Telematico outperformed the specified
reference index and (ii) the AGV exceeded the expected rate of growth, as
determined by the board of directors at the time of the grant. As a result, 70%
of the Three-Year Options (equal to 11,026,400 options with respect to the same
number of ordinary shares, and corresponding to 5,513,200 ordinary shares after
the one-for-two reverse stock split) vested and have become exercisable in the
periods provided for by the Plan; however, as none of such Three-Year Options
has been exercised during the fifteen trading days following the shareholders
approval of the financial statements for fiscal years 2002 and 2003, 70% of the
Three-Year Options that had vested have now expired. The strike price of the
options granted in 2000, originally set at Euro 4.30, is now Euro 8.60 per
share as a result of the one-for-two reverse stock split. 2001 Stock Option Plan Under the Plan, in April 2001, Enels board of directors granted to 381 of
our executives, including the Companys former Chief Executive Officer in his
capacity as direttore generale, an aggregate of 68,548,100 options with respect
of an equal number of ordinary shares. The number of options and the
corresponding number of ordinary shares decreased to 34,274,050 as a result of
the one-for-two reverse stock split. The number of options granted to
participating managers has been determined pursuant to a formula based on the
participants gross salary for the year in question and the value of the
Three-Year Options, calculated according to market value indications supplied
by primary financial institutions. The target price of Enels stock with
respect to the options granted in 2001, originally fixed at Euro 4.40, was set
at Euro 8.80 as a result of the one-for-two reverse stock split. The strike
price of options granted in 2001 originally fixed at Euro 3.636 per share, was
set at Euro 7.272 as a result of the one-for-two reverse stock split. Since the
specified target price was not met in 2001, all One-Year Options and 30% of the
Three-Year Options did not vest and thus expired. However, in the same year,
(i) the price of Enels shares on Telematico outperformed the specified
reference index and (ii) the AGV exceeded the expected rate of growth as
determined by the board of directors at the time of the grant. As a result, 70%
of the Three-Year Options (equal to 38,386,936 options with respect to the same
number of ordinary shares, and corresponding to 19,193,468 ordinary shares
after the one-for-two reverse stock split) vested and have become exercisable
in the periods provided for by the Plan; but none of such Three-Year Options
has been exercised during the fifteen trading days following the shareholders
approval of the financial statements for fiscal year 2003. As authorized by Enels shareholders in December 1999, having already
taken into account the one-for-two reverse stock split effective July 9, 2001,
on April 9, 2001, Enels board of directors resolved: (i) to increase Enels
share capital by an amount not to exceed Euro 5,513,200 through the issuance of
a maximum of 5,513,200 new ordinary shares, at a price per share of Euro 8.60,
reserved for issuance upon the exercise of options granted under the terms of
the Plan in March 2000 and (ii) to increase Enels share capital by an amount
not to exceed Euro 149




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34,274,050 through the issuance of a maximum of 34,274,050
new ordinary shares, at a price per share of Euro 7.272, reserved for issuance
upon the exercise of options granted under the terms of the Plan in April 2001. In May 2001, Enels shareholders authorized the board of directors to
increase Enels outstanding share capital by an amount not to exceed Euro
60,630,750 in order to permit the issuance (in one or more tranchesover a
five-year period ending in May 2006) of a maximum of 60,630,750 new ordinary
shares to be reserved for issuance upon exercise of options granted to the
Groups executives by Enels board of directors under the terms of new
executive stock option incentive plans to be approved by the board itself. At
the same time, Enels shareholders revoked the authorization granted to Enels
board of directors in December 1999 with regard to capital increases not yet
resolved under such authorization. 2002 Stock Option Plan In March 2002, Enels board of directors approved an executive stock
option incentive plan for the year 2002, which we call the 2002 Plan, for the
grant of options to certain of the Groups executives (as identified by the
board of directors at the time of the grant). If vested, 30% of the options may be exercised starting in 2003, another
30% starting in 2004, and the remaining 40% starting in 2005. These options
expire on December 31, 2007. In each year, options may be exercised only within
the fifteen trading days following each of (i) the board of directors approval
of preliminary financial data for the preceding fiscal year on a consolidated
basis, (ii) the shareholders approval of the financial statements for the
preceding fiscal year, and (iii) the board of directors approval of the report
relating to the quarter ending September 30. Options vest if both the Earnings
Before Interest, Taxes, Depreciation and Amortization, or EBITDA, of the Group
for the fiscal year 2002 exceeds the estimated EBITDA as indicated in the
budget approved by the board of directors for the year and the price of Enels
shares on Telematico outperforms a specified reference index over the same
period. If any of these conditions is not met, all the options expire. The
strike price of the options is set by the board of directors on the date of the
grant and cannot be lower than the average reference price of Enels shares on
Telematico during the month preceding the grant. The number of options granted
to participating managers was determined pursuant to a formula based on the
participants gross salary for the year in question and the value of an option
exercisable in 2005, calculated according to market value indications supplied
by primary financial institutions. In March 2003, Enels Board of Directors
determined that the conditions for all of these options to vest had been
satisfied. Under the 2002 Plan, on March 28, 2002 and September 12, 2002, Enels
board of directors granted to a total of 383 of our executives, including
Enels former and current chief executive officers in their capacity as
direttori generali, an aggregate of 41,748,500 options with respect to an equal
number of ordinary shares. The strike price of the options was set at Euro
6.426. However, the strike price for the options granted to Enels current
Chief Executive Officer, Mr. Paolo Scaroni, was determined with regard to the
reference price of Enels shares on Telematico on the date of his appointment
as direttore generale, and was therefore set at Euro 6.480. Consequently, as authorized by Enels shareholders in May 2001, on April
10, 2003 Enels Board of Directors resolved to increase the Companys share
capital in order to permit issuance of a maximum of 41,748,500 shares in
connection with the 2002 Plan. During the period between May 24, 2004 and June
11, 2004 (i.e., during the fifteen trading days following the shareholders
approval of the financial statements for the year 2003), 18,946,680 of Enels
ordinary shares were issued in connection with the exercise of an equivalent
number of options granted under the 2002 Plan. 2003 Stock Option Plan In April 2003, Enels board of directors approved an executive stock
option incentive plan for the year 2003, which we call the 2003 Plan, with
terms similar to those of the 2002 Plan. Under the 2003 Plan, options vest
if both the EBITDA of the Group for the fiscal year 2003 exceeds the
estimated EBITDA as indicated in the budget approved by the board of directors
for the year and the price of Enels shares on Telematico outperforms a
specified reference index over the same period. The Board subsequently extended
the reference period for the share performance target to March 26, 2004, as a
result of the placement of a block of Enel shares with institutional investors
carried out by the Treasury Ministry in November 2003, an event outside
managements control that 150




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nonetheless had an adverse effect on the Companys
share price and normal trading activity in the Companys shares. See Item 7.
Major Shareholders and Related Party TransactionsMajor Shareholders for
additional information on this sale. If either of these conditions is not met,
all of the options expire. The strike price of the options is set by the board
of directors on the date of the grant and cannot be lower than the average
reference price of Enels shares on Telematico during the month preceding the
grant. The number of options granted to participating managers was determined
pursuant to a formula based on the participants gross salary for the year in
question and the value of an option exercisable in 2006 calculated according to
market value indications supplied by primary financial institutions. If vested,
30% of the options may be exercised starting in 2004, an additional 30%
starting in 2005, and the remaining 40% starting in 2006. The options expire on
December 31, 2008. In each year, options may be exercised only within the fifteen trading
days following each of (i) the board of directors approval of preliminary
financial data for the preceding fiscal year on a consolidated basis, (ii) the
shareholders approval of the financial statements for the preceding fiscal
year, and (iii) the board of directors approval of the report relating to the
quarter ending September 30. Under the 2003 Plan, on April 10, 2003, Enels board of directors granted
to a total of 549 of our executives, including the Companys current Chief
Executive Officer in his capacity as direttore generale, an aggregate of
47,624,005 options with respect to an equal number of ordinary shares. The
exercise price of the options was set at Euro 5.240. In May 2003, Enels shareholders authorized the board of directors to
increase the Companys share capital by an amount not exceeding Euro 47,624,005
in order to permit the issuance (in one or more tranchesover a five-year
period ending in May 2008) of a maximum of 47,624,005 new ordinary shares to be
reserved for issuance under the 2003 Plan. At the same time, Enels
shareholders revoked the authorization they had granted to Enels board of
directors in May 2001 with regard to capital increases not yet resolved under
such authorization. In March 2004, Enels board of directors determined that the conditions
for all of the options granted under the 2003 Plan to vest were satisfied
during the extended reference period. Consequently, as authorized by Enels shareholders in May 2003, on April
7, 2004, Enels board of directors resolved to increase the Companys share
capital in order to permit issuance of a maximum of 47,624,005 ordinary shares
in connection with the 2003 Plan. During the period between May 24, 2004 and
June 11, 2004 (i.e., during the fifteen trading days following the
shareholders approval of the financial statements for the year 2003),
15,083,951 of Enels ordinary shares were issued in connection with the
exercise of an equivalent number of options granted under the 2003 Plan. 2004 Stock Option Plan In March 2004, Enels board of directors approved an executive stock
option incentive plan for the year 2004, which we call the 2004 Plan, on terms
similar to those of the 2002 and 2003 plans. Under the 2004 Plan, options vest if both the Groups EBITDA for fiscal
year 2004 exceeds the estimated EBITDA as indicated in the budget for the same
year approved by the board of directors, and the price of Enels shares on
Telematico exceeds the performance of a specified reference index over the same
period. If any of these conditions is not met, all the options expire. The
strike price of the options is set by the board of directors on the date of the
grant and cannot be lower than the average reference price of Enels shares on
Telematico during the month preceding the grant. If vested, 15% of the options
will be exercisable starting in 2005, another 15% starting in 2006, an
additional 30% starting in 2007, and the remaining 40% starting in 2008. The
options will expire on December 31, 2009. The options are exercisable at any
time other than during the period (i) beginning on the date that is one month
prior to the day scheduled for the approval of Enel S.p.A.s draft annual
financial statements by its board of
directors and ending on the date of such approval and (ii) beginning on
the date that is one month prior to the day scheduled for the approval of Enel
S.p.A.s six-month report by its board of directors and ending on the date of
such approval. The options also may not be exercised following the declaration
of a dividend during the three trading days on the Italian Stock Exchange prior
to the ex-dividend date. 151




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Under the 2004 Plan, on March 29, 2004, Enels board of directors granted
to approximately 640 of our executives, including the Companys current Chief
Executive Officer in his capacity as direttore generale, an aggregate of
38,527,550 options with respect to an equal number of ordinary shares. The
strike price of the options was set at Euro 6.242. In May 2004, Enels shareholders authorized the board of directors to
increase the Companys share capital by an amount not exceeding Euro 38,527,550
in order to permit the issuance, in one or more tranches over a five-year
period ending in May 2009, of a maximum of 38,527,550 new ordinary shares to be
reserved for issuance in connection with the 2004 Plan. 
 By-Laws The following is a summary of certain information concerning Enels shares
and by-laws (Statuto) and of Italian law applicable to Italian companies whose
shares are listed in a regulated market in the European Union, as in effect at
the date of this annual report. The summary contains all the information that
we consider to be material regarding Enels shares but does not purport to be
complete, and is qualified in its entirety by reference to the by-laws or
Italian law, as the case may be. Italian companies whose shares are listed on a regulated market of the
European Union are principally governed by two sets of rules  the Italian
civil code (applicable to all Italian companies), and the Unified Financial Act
(Testo Unico dellIntermediazione Finanziaria, or TUF) of February 24, 1998 and
the related implementing regulations applicable to listed companies. In January
2003, the Italian government approved a wide-ranging reform of the corporate
law provisions of the Italian civil code, which took effect on January 1, 2004.
In February 2004 the Italian government amended the TUF to coordinate it with
the new corporate law provisions of the Italian civil code. The amendments to
the Italian civil code and to the TUF constitute the so-called 2004 corporate
law reform. On May 21, 2004 our shareholders approved a number of amendments
to our by-laws dictated or made possible by the 2004 corporate law reform. The
following summary takes into account the 2004 corporate law reform and the
consequent amendments to our by-laws. General In May 2001, the Companys shareholders approved the re-denomination of
the Companys share capital into euro from lire and a one-for-two reverse stock
split, effective July 9, 2001. As a result, at that date, the issued and
outstanding share capital of the Company consisted of 6,063,075,189 ordinary
shares, each with a par value of Euro 1. Before that date, the Companys share
capital consisted of 12,126,150,379 ordinary shares, each with a par value of
Lit. 1,000. In accordance with Italian law, in connection with the
re-denomination, Enels share capital was rounded down by approximately Lit.
386 million (Euro 199,352), which the Company allocated to a special statutory
reserve. Currently, all of the Companys 6,097,105,820 issued and outstanding
ordinary shares are fully paid, non-assessable and in registered form. Enels registered office is in Rome, Italy, at Viale Regina Margherita No.
137, and the Company is registered with the Italian Companies Register held by
the Chamber of Commerce of Rome at No. 00811720580. As set forth in Article 4
of Enels by-laws, its corporate purpose is to acquire and manage equity
holdings in Italian and foreign companies, and to provide such companies with
strategic guidelines regarding their industrial organization and business
activities. Through affiliates or subsidiaries, the Company operates
principally in (i) the electricity industry, including the activities of
production, importation and exportation, distribution and sale, as well as
transmission within the limits of existing legislation; (ii) the energy
industry in general, including the fuel sector, the field of environmental
protection and the water sector; (iii) the communications, telematics and
information-
technology industries and those of multimedia and interactive services;
and (iv) the network-based utility services sector (electricity, water, gas,
district heating, telecommunications) and local metropolitan utility services.
Enel is generally authorized to take any actions necessary or useful to achieve
the Companys corporate purpose. 152




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Authorization of Shares Enels board of directors is authorized, for a period of five years, by a
shareholders resolution of May 21, 2004, to increase Enels share capital by a
maximum total amount of Euro 38,527,550 in order to permit the issuance (in one
or more tranches over a five-year period ending in May 2009) of a maximum of
38,527,550 new ordinary shares under the terms of the 2004 Plan. Under the authorization granted to Enels board of directors in May 2003,
on April 7, 2004, Enels board of directors resolved to increase the Companys
share capital by a maximum total amount of Euro 47,624,005 in order to permit
the issuance of a maximum of 47,624,005 new ordinary shares in connection with
the 2003 Plan. See also Stock Option Plan. Form and Transfer of Shares Pursuant to the TUF, Legislative Decree No. 213 of June 24, 1998 (Decree
No. 213) and CONSOB Regulation No. 11768 of December 23, 1998 (Regulation No.
11768), as amended, since January 1, 1999, shareholders can no longer obtain
the physical delivery of share certificates representing shares of Italian
listed companies. Shares of Italian listed companies are no longer represented
by paper certificates and the transfer and exchange of shares takes place
exclusively through an electronic book-entry system. All shares must,
accordingly, be deposited by their owners with an intermediary (each an
Intermediary), which is defined by Regulation No. 11768 as:  
    
    an Italian or EU bank;
    
    a non-EU bank authorized by the Bank of Italy to operate in the Italian market;
    
    Società di Intermediazione Mobiliare, or SIM;
    
    an EU investment company;
    
    a non-EU investment company authorized by CONSOB to provide investment services in Italy;
    
    an Italian asset management company;
    
    a stock broker;
    
    the company which has issued the shares;
    
    the controlling shareholder of the company which has issued the shares;
    
    the Bank of Italy;
    
    an EU or non-EU entity operating a centralized clearing system;
    
    a financial intermediary operating a clearing system governed by art. 69 (2) and 70 of the TUF;
    
    a financial intermediary registered on the list kept by the
Bank of Italy under art. 107 of Legislative Decree No. 385 of
September 1, 1993;
    
    Poste Italiane S.p.A. (the Italian Post Office company);
    
    Cassa Depositi e Prestiti S.p.A. (a state-owned company
mainly responsible for extending loans to public administration
bodies); 153




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
    
    the Treasury Ministry; and
    
    the managers of foreign clearing, settlement and guarantee
systems for financial instruments, provided that they are subject to
supervision equivalent to that provided by Italian law. The Intermediary in turn deposits the shares with Monte Titoli or with
another company authorized by CONSOB to operate a centralized clearing system. To transfer shares under the system introduced by Decree No. 213, owners
of shares are required to give instructions to their Intermediaries. If the
transferee is a client of the transferors Intermediary, the Intermediary
simply transfers the shares from the transferors account to the account of the
transferee. If, however, the transferee is a client of another Intermediary,
the transferors Intermediary instructs the company operating a centralized
clearing system to transfer the shares to the account of the transferees
Intermediary, which will then record the shares in the transferees account. Each Intermediary maintains a custody account for each of its clients
setting out the financial instruments of such client and keeps a record of all
transfers, payment of dividends, exercise of rights attributable to such
instruments, charges or other encumbrances on the instruments. The account
holder or any other eligible party (for example, in the case of a pledge over
the financial instrument, the pledge holder) may submit a request to the
Intermediary for the issue of a certified statement of account. The request
must indicate the quantity of the financial instruments in respect of which the
statement is requested, the rights which the applicant intends to exercise and
the duration in respect of which the certificates validity is required. Within
three business days from the receipt of such request, the Intermediary shall
issue a certified statement of account that constitutes evidence of the account
holders ownership of the financial instruments indicated. Once a certificate
has been issued, the Intermediary may not effect any transfer of the
corresponding securities until the certificate expires or is returned. As a result of the foregoing, shareholders can no longer obtain physical
delivery of share certificates representing Enels ordinary shares. Instead,
transfers of shares are possible only using the procedures described above. The shares have been accepted for clearance through Euroclear and
Clearstream. Purchasers of shares may elect to hold such shares through
Euroclear or Clearstream. Persons owning a beneficial interest in shares held
through Monte Titoli, Euroclear and Clearstream must rely on the procedures of
Monte Titoli, Euroclear and Clearstream, respectively, and of the
Intermediaries that have accounts with Monte Titoli, Euroclear and Clearstream,
to exercise their rights as holders of shares. Limitations on shareholdings According to Italian privatization law, Enels by-laws provide that no
shareholder other than the Italian government, public statutory bodies and the
relevant subsidiaries may own ordinary shares representing more than 3% of the
Companys voting share capital. This limit does not apply in the event that it
is exceeded as a result of certain types of tender offers as provided under
Italian law. The limitation on shareholding is calculated taking into account, among other things, shares owned by:  
    
    Controlling entities and directly or indirectly controlled entities of the holder as well as entities controlled by the
same controlling entity; and
    
    Affiliated personal entities of the holder including spouses and other closely related personal relatives. Italian privatization law and Enels by-laws restrict the ability of any
entity to exercise any voting rights attributable to ordinary shares held or
controlled by that entity representing more than 3% of Enels voting share
capital. This restriction does not apply to any shareholdings held by the
Italian state, other state-owned entities, or
other entities controlled by the state or other state-owned entities. The
voting rights of each entity to whom this limit on shareholding applies are
reduced correspondingly. In the event that ordinary shares held or controlled
in excess of the 3% threshold are voted, any shareholders resolution adopted
pursuant to this vote may be challenged if the 154




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majority required to approve
this resolution would not have been reached without the vote of ordinary shares
held exceeding this threshold. Ordinary shares not entitled to be voted are
nevertheless counted for purposes of determining the quorum at a shareholders
meeting. Further limitations on shareholding result from the special powers of
the Treasury Ministry. Special powers of the Treasury Ministry The Italian privatization law and the Companys by-laws confer upon the
Italian government, acting through the Treasury Ministry, certain special
powers with respect to our business and actions by Enels shareholders. These
powers may apply regardless of the Treasury Ministrys shareholding in Enel.
The government may review the scope and duration of the Treasury Ministrys
special powers starting from September 2004. In this review, the government
will take into account, among other factors, the liberalization level achieved
by that time in the European energy sector. The Treasury Ministry exercises
these special powers after consultation with, and with the agreement of, the
Industry Ministry. The Italian budget law for 2004 (Law No. 350 of December 24,
2003) amended the regulations concerning the special powers held by the
government. Enels by-laws now reflect the following special powers of the
Treasury Ministry: Opposition to material acquisitions of shares The Treasury Ministry has the authority to oppose the acquisition by
persons or entities of an
interest in the Company equal to or in excess of 3% of the share capital
(including ordinary shares held in the form of American Depositary Shares) with
voting rights at ordinary shareholders meetings in the event the Minister
considers the transaction to be detrimental to vital national interests. The
Ministry must express any opposition to an acquisition by such a person or
entity within ten days of receiving notice from the board of directors that a
request to register such an interest in the shareholders register has been
made. During this ten-day period, all non-economic rights, including the right
to vote, pertaining to the shares to be acquired are suspended. Should the
Ministry oppose a purchase for due cause in an order setting out the concrete
detriment the transaction would cause to vital national interests, the
purchaser may not exercise the right to vote nor any other non-economic right
pertaining to the shares held, and must dispose of such shares within one year.
In case of failure to comply, upon request by the Treasury Ministry, a court
will order the sale of the subject shares. The purchaser has 60 days to
challenge an order opposing its purchase before the Regional Administrative
Court of Lazio. Opposition
to material shareholders agreements The Treasury Ministry has the authority to oppose certain types of
shareholders agreements (see Notification of the Acquisition of Shares and
Voting Rights) entered into by holders of at least one-twentieth of the voting
capital stock at ordinary shareholders# meetings, or such lower percentage as
may be established by a decree of the Treasury Ministry, if it believes such an
agreement would be detrimental to vital national interests. Parties to these
types of agreement are required to notify CONSOB upon entry into the agreement,
and CONSOB in turn notifies the Ministry. The Ministry must oppose the
agreement within 10 days of receiving this notice from CONSOB. During this
ten-day period, all non-economic rights pertaining to the shares held by the
parties to the agreement, including the right to vote, are suspended. Should
the Ministry oppose an agreement, for due cause in an order setting out the
concrete detriment the agreement would cause to vital national interests, the
agreement is not effective, and if it appears from their conduct at a
shareholders meeting that the parties to the agreement are continuing to
observe the arrangement contemplated by the agreement, any resolution adopted
with the decisive vote of these shareholders may be challenged in court. Any
party to an agreement that the Ministry opposes has 60 days to challenge the
Ministrys order before the Regional Administrative Court of Lazio. Members of Enels Board of Directors The Treasury Ministry has the power to appoint one non-voting member of
Enels board of directors in addition to the voting members
elected by the shareholders. 155




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Veto power over material changes The Treasury Ministry, for due cause when it believes concrete detriment
to vital national interests would result, may veto any resolution to dissolve,
merge or demerge Enel, to transfer a significant part of its business or its
registered headquarters outside of Italy, to change its corporate purpose or to
eliminate or modify any of the Ministrys special powers. Any such veto may be
challenged within sixty days by any dissenting shareholder before the Regional
Administrative Court of Lazio. The special powers of the Treasury Ministry reflected in Enels by-laws
are also reflected in the by-laws of Enel Produzione, Terna and Enel
Distribuzione. Dividend Rights The payment by us of any annual dividend is proposed by the board of
directors and is subject to the approval of the shareholders at the annual
shareholders meeting. Before dividends may be paid out of our unconsolidated
net income in any year, an amount equal to 5% of such net income must be
allocated to our legal reserve until such reserve is at least equal to
one-fifth of the par value of our issued share capital. As of December 31,
2003, the amount of Enels legal reserve exceeded one-fifth of the par value of
our issued share capital. If our capital is reduced as a result of accumulated
losses, dividends may not be paid until the capital is reconstituted or reduced
by the amount of such losses. The board of directors may authorize the
distribution of interim dividends, subject to certain statutory limitations. Dividends are payable to those persons who hold shares through an
Intermediary on the day preceding the ex-dividend payment date declared by the
shareholders meeting. Dividends not collected within five years from the
dividend payment date are forfeited to the benefit of the Company. Payments in
respect of dividends are distributed through Monte Titoli on behalf of each
shareholder by the Intermediary with which the shareholder has deposited its
shares. Holders of ADSs will be entitled to receive payments in respect of
dividends on the underlying shares through Citibank N.A., as ADR depositary, in
accordance with the deposit agreement relating to the ADRs. See Item 8.
Financial InformationOther Financial InformationDividend Policy. Voting Rights Shareholders are entitled to one vote per share, although a slate voting
system applies in case of appointment of members of the board of directors and
of the board of statutory auditors. See Minority
Shareholders Rights. Proxy solicitation is possible. Solicitation can be engaged in by certain
professional investment and financial intermediaries, as well as certain
companies whose sole purpose is to carry out proxy solicitation, on behalf of a
qualified soliciting shareholder (generally, one or more shareholders who own
and have owned at least 0.5% of our shares for more than six months and who
have been registered with us as having been shareholders of at least 0.5%, for
the same period of time). Proxies may be collected by a shareholders association provided that such
association has been formed by notarized private agreement, does not carry out
business activities and is made up of at least 50 individuals, each of whom
owns not more than 0.1% of our voting capital. Members of the shareholders
association may, but are not obliged to, grant proxies to the legal
representative of the association, and proxies may also be granted in respect
of only certain of the matters to be discussed at the relevant shareholders
meeting. The association may vote in different manners in compliance with the
instructions expressed by each member who has granted a proxy to the
association. As a registered shareholder and ADR depositary, Citibank N.A. or its
nominee is entitled to vote the shares underlying the ADSs. The Deposit
Agreement requires Citibank (or its nominee) to accept voting instructions from
owners of ADSs and to execute such instructions to the extent permitted by law. 156




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Board of Directors Pursuant to Enels by-laws, Enels board of directors must consist of no
fewer than three and no more than nine members. In addition, a non-voting director
may be appointed by the Treasury Ministry according to its special powers. The board
of directors is elected at a shareholders meeting for a term of up to three
fiscal years. Directors are eligible for re-election. For additional
information on the election of directors, see Minority Shareholders Rights. In accordance with Enels by-laws, management of the Company is the
exclusive responsibility of the directors, who carry out all actions necessary
to achieve the corporate purpose. In addition to exercising the powers entrusted to it by law, our by-laws
provide the board of directors with the power to adopt resolutions concerning:  
    
    mergers and demergers as permitted by law;
    
    the establishment or elimination of secondary headquarters;
    
    which directors shall have power to represent the Company;
    
    the reduction of share capital in the event of the withdrawal of one or more shareholder;
    
    the harmonization of the by-laws with provisions of the law; and
    
    the transfer of the Companys registered office within Italy. The chairman and chief executive officer are Enels legal representatives.
The chief executive officer generally has the power to represent the Company
within the scope of the functions delegated to him. For specific actions or
categories of actions, the power to represent Enel can be delegated by the
holder of such power to one of Enels employees or to third parties. The quorum for board meetings is a majority of the members in place.
Resolutions are adopted by a majority of votes of those present. A board
meeting may be called by the chairman on his or her own initiative and must be
called upon request of the board of statutory auditors (or at least two of its
members) or upon a request for a meeting for specific purposes of two directors
(or one director when the board is composed of three members). The board has the power to delegate certain of its powers to one of its
members, and determines the powers and the functions delegated to such person.
In accordance with Italian law and our by-laws, the board of directors may not
delegate certain of its responsibilities, including those relating to the
approval of the draft financial statements, the approval of merger and
de-merger plans to be presented to shareholders meetings, increases in the
amount of our share capital or the issuance of convertible debentures (if any
such power has been delegated to the board of directors by vote of the
extraordinary shareholders meeting) and the calling of an ordinary or an
extraordinary shareholders meeting to resolve upon the actions to be taken by
us in case of decrease of our shareholders equity to less than two-thirds of
our paid-in capital as a result of accumulated losses. See also Meetings of
Shareholders. Directors having any interest in a proposed transaction must disclose
their interest to the board, even if such interest is not in conflict with the
interest of the company in the same transaction. The interested director is
not required to abstain from voting on the resolution approving the
transaction, but the resolution must state explicitly the reasons for, and the
benefit to the company of, the approved transaction. In the event that these
provisions are not complied with, or that the transaction would not have been
approved without the vote of the interested director, the resolution may be
challenged by a director or by the board of statutory auditors if the approved
transaction may be prejudicial to the company. A managing director having any
such interest in a proposed transaction within the scope of his powers must
solicit prior board approval of such transaction. The interested director may
be held liable for damages to his company resulting from a resolution adopted
in breach of the above rules. Finally, directors may 157




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be held liable for damages to their company if they illicitly profit from
insider information or corporate opportunities. Under Italian law, directors may be removed from office at any time by the
vote of shareholders at an ordinary shareholders meeting, although if
directors are removed in circumstances where there was no just cause, such
directors may have a claim for indemnification against the company. Directors
may resign at any time by written notice to the board of directors and to the
chairman of the board of statutory auditors. The board of directors must
appoint substitute directors to fill vacancies arising from removals or
resignations, subject to the approval of the board of statutory auditors, to
serve until the next shareholders meeting, except for the non-voting director
appointed by the Treasury Ministry, whose vacancy must be filled in by a
substitute non-voting director also appointed by the Treasury Ministry (see
Special powers of the Treasury MinistryMembers of
Enels Board of Directors). If at any time more than half of the members
of the board of directors appointed at a shareholders meeting resigns or
otherwise ceases to be directors, the entire board of directors will be
considered to have lapsed and the remaining members of the board of directors
(or the board of statutory auditors if all the members of the board of
directors have resigned or ceased to be directors) must promptly call an
ordinary shareholders meeting to appoint a new board of directors. The compensation of directors is determined by shareholders at ordinary
shareholders meetings. The board of directors determines, upon the proposal of
the board compensation committee and after having consulted the board of
statutory auditors, the compensation of the chief executive officer and the
other directors holding specific offices. Directors are entitled to
reimbursement for expenses reasonably incurred in connection with their
functions. Statutory Auditors In addition to electing the board of directors, the companys shareholders
elect a board of statutory auditors (Collegio Sindacale) at ordinary
shareholders meetings. The statutory auditors are elected for a term of three
fiscal years, may be re-elected for successive terms and may be removed only
for cause and with the approval of a competent court. Pursuant to certain provisions of the TUF, the by-laws of listed companies must:  
    
    specify the number of statutory auditors (not fewer than three) and alternate members (not fewer than two);
    
    regulate the appointment of the chairman of the board of statutory auditors;
    
    limit the number of mandates that the statutory auditors may have in other companies; and
    
    include clauses ensuring that minority shareholders may elect one statutory auditor (or at least two if the board is
composed of more than three members). Enels by-laws currently provide that the board of statutory auditors
shall consist of three statutory auditors and two alternate members (who are
automatically substituted for a statutory auditor who resigns or is otherwise
unable to serve). Enels by-laws also provide that the statutory auditors may
not hold the position of statutory auditor in five or more other listed
companies (not counting our subsidiaries). As to the election of statutory
auditors please refer to Minority Shareholders
Rights. The TUF provides further that the board of statutory auditors will be
required to verify that the company (i) complies with applicable law and its
by-laws, (ii) respects the principles of correct administration, (iii)
maintains adequate organizational structure, internal controls and
administrative and accounting systems and (iv) adequately instructs its
subsidiaries to transmit to the company information relevant to the disclosure
obligations of the company. Each member of the board of statutory auditors must provide certain
evidence that he is in good standing and meets certain professional standards. 158




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The companys board of statutory auditors is required to meet at least
once every 90 days. In addition, the statutory auditors of the company must be
present at meetings of the companys board of directors and shareholders
meetings and at meetings of the companys executive committee, if any. The
statutory auditors may decide to call a meeting of the shareholders, the board
of directors or the executive committee, ask the directors for information on
the management of the company, carry out inspections and verifications at the
company and exchange information with the companys external auditors. The
board of directors must report to the statutory auditors at least quarterly on
its activities and on the main transactions carried out by the company and its
subsidiaries. The companys board of statutory auditors may convene the companys
shareholders meeting if it detects serious irregularities during its review
activities and there is an urgent need to take action. Any shareholder may
submit a complaint to the board of statutory auditors regarding facts that such
shareholder believes should be subject to scrutiny by the board of statutory
auditors, which must take any complaint into account in its report to the
shareholders meeting. If shareholders collectively representing 2% of the
companys share capital submit such a complaint, the board of statutory
auditors must promptly undertake an investigation and present its findings and
any recommendations to a shareholders meeting (which it shall convene if the
complaint concerns serious irregularities and there is an urgent need to take
action). The board of statutory auditors may report to the competent court
serious breaches of the duties of the directors which may be prejudicial to the
company or to its subsidiaries. The companys board of statutory auditors is
also required to notify CONSOB without delay of any irregularities found during
its review activities. CONSOB may report to the competent court serious
breaches of the duties of the statutory auditors of a listed company. External Auditors The TUF requires Italian companies whose shares are listed on regulated
markets of EU member states to appoint a firm of external auditors that shall
verify (i) during the fiscal year, that the companys accounting records are
correctly kept and accurately reflect the companys activities, and (ii) that
the financial statements correspond to the accounting records and the
verifications conducted by the external auditors and comply with applicable
rules. The external auditors express their opinion on the financial statements
in a report that may be consulted by the shareholders prior to the annual
shareholders meeting. The external auditors are appointed by a resolution taken at the annual
shareholders meeting for a three-fiscal year term (which may not be renewed
more than twice). Such appointment must be notified to CONSOB. In May 2002, KPMG S.p.A., with registered offices at Via Vittor Pisani 25,
Milan, was appointed as Enels external auditor for a three-fiscal year period. Meetings of Shareholders Shareholders are entitled to attend and vote at ordinary and extraordinary
shareholders meetings. Votes may be cast personally or by proxy.
Shareholders meetings may be called by our board of directors (or the board of
statutory auditors) and must be called if requested by holders of at least 10%
of the issued shares. Shareholders are not entitled to request that a meeting
of shareholders be convened to resolve upon matters which as a matter of law
shall be resolved upon on the basis of a proposal, plan or report by our board
of directors. If the shareholders meeting is not called despite the request by
shareholders and such refusal is unjustified, the competent court may call the
meeting. Shareholders are informed of all shareholders meetings to be held by
publication of a notice in the Official Journal of the Italian Republic
(Gazzetta Ufficiale) at least 30 days before the date fixed for the meeting (20
days if the meeting is called at the request of holders of at least 10% of the
issued shares). The above formalities and terms regarding the call notice may
be reduced in other very limited circumstances. As a matter of practice, we
publish the notice in at least two national daily newspapers, as recommended by
CONSOB. Shareholders meetings must be convened at least once a year. Our annual
stand-alone financial statements are prepared by our board of directors and
submitted for approval to the ordinary shareholders meeting which must be
convened within 120 days after the end of the fiscal year to which such
financial statements relate. This term may 159




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be extended to up to 180 days after the end of the fiscal year, as we are
bound by law to draw up consolidated financial statements or if particular
circumstances concerning our structure or our purposes so require. At ordinary
shareholders meetings, shareholders also appoint the external auditors,
approve the distribution of dividends, appoint the board of directors and
statutory auditors, determine their remuneration and vote on any business
matter the resolution or authorization of which is entrusted to them by law. Extraordinary shareholders meetings may be called to pass upon
dissolutions, appointment of receivers and similar extraordinary actions.
Extraordinary shareholders meetings may also be called to resolve upon
proposed amendments to the by-laws, issuance of convertible debentures, mergers
and de-mergers, capital increases and reductions, where such resolutions may
not be taken by our board of directors. In particular, the board of directors
may resolve upon the issuance of shares or convertible debentures if such
powers have been previously delegated to the board of directors by vote of the
extraordinary shareholders meeting. See also Board of Directors. The notice of a shareholders meeting may specify up to two meeting dates
for an ordinary or extraordinary shareholders meeting; such meeting dates are
generally referred to as calls. The ordinary and extraordinary meetings may
be convened on third call through a new notice if the quorum required for
shareholder action on second call is not reached. The quorum required for shareholder action at an ordinary shareholders
meeting on first call is at least 50% of the total number of issued shares,
while on second or third call there is no quorum requirement. In all cases,
resolutions may be approved by holders of the majority of the shares present or
represented at the meeting. The quorum required at an extraordinary
shareholders meeting on first, second and third call is at least 50%, more
than one-third and at least one-fifth, respectively, of our issued shares.
Resolutions of any extraordinary shareholders meeting require the approval of
at least two-thirds of the holders of shares present or represented at such
meeting. Shareholders meetings may be attended only by shareholders with voting
rights, whose financial intermediary shall have delivered to us, at least two
days prior to the date set for the relevant meeting, a notice entitling
the shareholder to attend the meeting. Once the above notice is communicated
to us by the relevant intermediary, if the shareholder disposes of the shares,
he loses the right to attend the meeting. Shareholders may attend the shareholders meeting by proxy. A proxy may
be given only for a single shareholders meeting (including, however, the
first, second and third calls of such meeting), except as part of a general
power of attorney or a power of attorney granted by a corporation, association,
foundation or any other legal entity to one of its employees. A proxy may be
exercised only by the person expressly named in the applicable form. The person
exercising the proxy cannot be our subsidiary, a director, statutory auditor or
employee of ours or of any of our subsidiaries. Proxies may be solicited by an
Intermediary (banks or investment companies, asset management companies and
companies having proxy solicitation as their sole purpose) on behalf of a
qualified soliciting shareholder (a shareholder who owns and has owned at least
0.5%  or such lesser percentage determined by CONSOB  of our voting capital
for at least six months and who has been registered with us as holder of such
shares for the same period of time). Proxies may also be collected by a
shareholders association from among its members provided that such association
has been formed by notarized private agreement, does not carry out business
activities other than those relevant to the purpose of the association and is
made up of at least 50 individuals each of whom owns not more than 0.1% of our
voting capital. Members of the shareholders association may, but are not
obliged to, grant proxies to the legal representative of the association and
proxies may also be granted in respect of only certain of the matters to be
discussed at the relevant shareholders meeting. The association may vote in
different manners in compliance with the instructions given by each member who
has granted a proxy to the association. CONSOB has established provisions
which govern the transparency and proper performance of the solicitation and
collection of proxies. Preemptive Rights Pursuant to Italian law, holders of shares are entitled to subscribe for
new issuances of shares, debentures convertible into shares and any other
warrants, rights or options entitling the holders to subscribe for shares in
proportion to their holdings, unless such issues are for non-cash consideration
or preemptive rights are waived or limited by a resolution adopted at an
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shares. There can be no assurance that the owners of ADSs will be able to
exercise fully any preemptive rights to which the holders of shares are
entitled. Reports to Shareholders The Company is required to publish audited annual stand-alone financial
statements and audited annual consolidated financial statements, all prepared
in conformity with Italian GAAP and in the Italian language. The Company also
produces an annual report to shareholders in the Italian language which
contains a directors report together with audited financial statements
(consolidated and stand-alone) of the Company. The Company is required to produce semi-annual and quarterly reports to
shareholders in the Italian language which contain a directors report as well
as unaudited semi-annual and quarterly condensed financial statements of the
Company (consolidated and, in the case of semi-annual statements only,
stand-alone). The Company is also required to prepare annual reports on Form
20-F to be filed with the U.S. Securities and Exchange Commission containing,
among other matters, audited consolidated financial statements of the Company. Liquidation Rights Pursuant to Italian law and subject to the satisfaction of the claims of
all creditors, shareholders are entitled to a distribution in liquidation that
is equal to the value of their shares (to the extent available out of the net
assets of the company). Holders of savings shares and preferred shares, if Enel
should issue any such shares in the future, would have priority rights in any
such distribution from liquidation. Thereafter, all shareholders would rank
equally in their claims to the distribution of surplus assets, if any. Purchase by the Company of its Own Shares The Company is permitted to purchase its own shares, subject to certain
conditions and limitations provided by Italian law. Shares may be purchased
only out of profits available for dividends or out of distributable reserves,
in each case as appearing on the latest shareholder-approved stand-alone
financial statements. In addition, Enel may only repurchase fully paid-in
shares. Such purchases must be authorized by an ordinary shareholders meeting.
The number of shares to be acquired, together with any shares previously
acquired by Enel or any of its subsidiaries may not (except in limited
circumstances) exceed in the aggregate 10% of the total number of Enels shares
then issued and the aggregate purchase price of such shares may not exceed the
amount specifically approved by Enels shareholders. Shares held in excess of
such 10% limit must be sold within one year of the date of purchase. Similar
limitations apply with respect to purchases of Enels shares carried out by
Group subsidiaries. A corresponding reserve equal to the purchase price of such shares must be
created in the balance sheet, and such reserve is not available for
distribution unless such shares are sold or canceled. Shares purchased and held
by Enel may be resold only pursuant to a resolution of Enels shareholders
adopted at an ordinary shareholders meeting. The voting rights attaching to
the shares held by Enel or its subsidiaries cannot be exercised, but the shares
can be counted for quorum purposes at shareholders meetings. Dividends and
other rights, including pre-emptive rights, attaching to such shares will
accrue to the benefit of other shareholders. The TUF provides that the purchase by a listed company of its own shares
and the purchase of shares of a listed company by its subsidiaries must take
place by way of a public tender offer or on the market, in a manner agreed with
Borsa Italiana, ensuring the equality of treatment among shareholders. Subject
to certain limitations, the foregoing does not apply to shares being purchased
by a company from its employees or from the employees of its controlling
company or subsidiaries. At the date hereof, Enel does not own, directly or indirectly, any of its
shares. Notification of the Acquisition of Shares and Voting Rights Pursuant to Italian securities laws, including the TUF and implementing
CONSOB regulations, any acquisition of any interest in excess of 2% in the
voting shares of a listed company must be notified to CONSOB 161




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and the company whose shares are acquired. The voting rights attributable
to the shares in respect of which such notification has not been made may not
be exercised. Any resolution taken in violation of the foregoing may be
annulled if the resolution would not have been adopted in the absence of such
votes. In addition, any person whose aggregate interest in the voting shares of a
listed company exceeds or falls below 2%, 5%, 7.5%, 10% and successive
percentages being multiples of five, respectively, of the listed companys
voting share capital, is obliged to notify CONSOB and the issuer. For the
purpose of calculating these ownership thresholds, shares owned by any person,
irrespective of whether the voting rights attributable thereto are exercisable
by such person or by a third party, are taken into consideration and, except in
certain circumstances, account must also be taken of shares held through, or
shares the voting rights of which are exercisable by, subsidiaries, fiduciaries
or intermediaries. For the purpose of calculating the ownership thresholds of
5%, 10%, 25%, 50% and 75%, shares which: (i) a person has an option to,
directly or indirectly, acquire or sell; and (ii) a person may acquire further
to the exercise of a warrant or conversion right which is exercisable within 60
days, must also be taken into account. The notification must be repeated when
such person, upon the exercise of the right referred to in (i) or (ii) above,
acquires or sells shares which cause his aggregate ownership in the listed
company to exceed or fall below the relevant thresholds. Notification must be
made (except in certain circumstances) within five trading days of the event
which gives rise to the notification obligation. Cross-ownership of listed companies may not exceed 2% of their respective
voting shares and cross-ownership between a listed company and an unlisted
company may not exceed 2% of the voting shares of the listed company and 10% of
the voting shares of the unlisted company. If the relative threshold is
exceeded, the company which is the latter to exceed such threshold may not
exercise the voting rights attributable to the shares in excess of the
threshold and must sell the excess shares within a period of 12 months. If the
company does not sell the excess shares, it may not exercise the voting rights
in respect of its entire shareholding. If it is not possible to ascertain which
is the latter company to exceed the threshold, the limitation on voting rights
and the obligation to sell the excess shares applies to both of the companies
concerned, subject to an agreement to the contrary between the two companies.
The 2% limit for cross-ownership in listed companies is increased to 5% on the
condition that such limit is only exceeded by the two companies concerned
following an agreement authorized in advance by an ordinary shareholders
meeting of each of the two companies. Furthermore, if a party holds an interest
in excess of 2% of a listed companys share capital, such listed company or the
party which controls the listed company may not purchase an interest above 2%
in a listed company controlled by the first party. In case of non-compliance,
voting rights attributable to the shares held in excess may not be exercised.
If it is not possible to ascertain which is the latter party to exceed the
limit, the limitation on voting rights applies to both, subject to any
different agreement between the two parties. Any shareholders resolution
approved in violation of the limitation on voting rights may be annulled if the
resolution would not have been adopted in the absence of such votes. The
foregoing provisions in relation to cross ownership do not apply when the
thresholds are exceeded following a public tender offer aimed at acquiring at
least 60% of a companys ordinary shares or when a controlled company purchases
shares of a controlling company within the limits set forth in Article 2359 bis
of the Italian civil code and following the procedures described under
Purchase by the Company of its Own Shares; however, certain restrictions on
the manner of purchase apply. Pursuant to the TUF, agreements among shareholders of a listed company or
of its parent company regarding the exercise of voting rights must be notified
to CONSOB (within five days), published in summary form in the press (within 10
days) and filed with the Chamber of Commerce (within 15 days). Failure to
comply with the above rules renders the agreements null and void and the shares
cannot be voted. These rules apply also to shareholders agreements which: (i) concern (including prior consultation for) the exercise of
voting rights in a listed company or its controlling company; (ii) contain limitations on the transfer of shares or securities
which grant the right to purchase or subscribe shares of the companies
mentioned in (i) above; (iii) provide for the purchase of shares or securities mentioned in
(ii) above; or 162




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(iv) have as their object or effect the exercise (including joint
exercise) of a dominant influence over a listed company or its
controlling company. Any shareholders agreement of the nature described above may have a
maximum term of three years or, if executed for an unlimited term, can be
terminated by a party upon six months prior notice. In case of a public tender
offer, shareholders who intend to participate in the tender offer may withdraw
from the agreement without notice, such withdrawal being effective only in the
event that the relevant shares are actually sold. CONSOB regulations specify the method and content of the notification and
publication of the agreements as well as of subsequent amendments thereto. The
regulation also provides that any party to an agreement regarding the exercise
of voting rights or referred to in (i) and (iv) above concerning more than 5%
of the listed companys share capital is obliged to notify CONSOB and the
listed company in question of its overall shareholding in the listed company,
unless such information has already been notified in compliance with other
provisions of the TUF. In accordance with Italian antitrust laws, the Antitrust Authority is
required to prohibit any acquisition of control in a company which would create
or strengthen a dominant position in the domestic market or a significant part
thereof and result in the elimination or substantial reduction, on a lasting
basis, of competition, provided that certain turnover thresholds are exceeded.
However, if the turnover of the acquiring party and the company to be acquired
exceed certain higher turnover thresholds, the antitrust review of the
acquisition falls within the exclusive jurisdiction of the European Commission. Minority Shareholders Rights Shareholders resolutions which are not adopted in conformity with
applicable law or our by-laws may be challenged (with certain limitations and
exceptions) within 90 days by absent, dissenting or abstaining shareholders
representing individually or in the aggregate at least 0.1% of our share
capital (as well as by our board of directors or our board of statutory
auditors). Shareholders not reaching this threshold or shareholders not
entitled to vote at our meetings may only claim damages deriving from the
resolution, unless otherwise provided by our by-laws. Enels
by-laws currently do not contain any such provision. Dissenting or absent shareholders may require us to buy back their shares
for the average closing price of the previous six months as a result of
shareholders resolutions approving, among other things, material modifications
of the companys corporate purpose or of the voting rights of our shares, the
transformation of the Company from a stock corporation into a different legal
entity, the transfer of our registered seat outside Italy or the de-listing of
our shares from the Telematico. Any shareholder may bring to the attention of the board of statutory
auditors facts or acts which are deemed wrongful. If such shareholders
represent more than 2% of Enels share capital, the board of statutory auditors
must investigate without delay and report its findings and recommendations to
the shareholders meeting. Shareholders representing more than 5% of our share capital have the right
to report to the competent court serious breaches of the duties of the
directors which may be prejudicial to us or to our subsidiaries. In addition,
shareholders representing at least 5% of our share capital may commence
derivative suits before the competent court against our directors, statutory
auditors and direttori generali(general managers). We may waive or settle the
suit unless shareholders holding at least 5% of the shares vote against such
waiver or settlement. We will reimburse the legal costs of such action in the
event that the claim of such shareholders is successful and the court does not
award such costs against the relevant directors, statutory auditors or
direttori generali. Under Italian law, the by-laws of privatized companies that impose a
maximum limit on the number of shares that may be held by any shareholder must
provide for the election of directors and statutory auditors through the voting
list system provided under the privatization law to ensure that minority
shareholders of a company are represented on its board of directors and board
of statutory auditors. Accordingly, Enels by-laws require that members of the
board of directors and board of statutory auditors, except for the non-voting
director, if any, appointed by the Italian government pursuant to its special
powers (see Special Powers of the Treasury Ministry), be elected on the
basis of candidate lists presented either by the board of directors or by one
or more shareholders, including the Treasury Ministry, representing in the
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having the right to vote at ordinary shareholders meetings. Such
candidate lists must be deposited at Enels registered office and published in
at least three Italian newspapers having general circulation in Italy, two of
which must be daily business newspapers. Publication of the candidate list
presented by the board of directors must occur at least 20 days before the
first call of the shareholders meeting or 10 days in the case of candidate
lists proposed by shareholders. Each shareholder may present or join in the
presentation of only one candidate list and each candidate may appear on only
one list. Under Enels by-laws, the election of the members of the board of
directors, other than the non-voting director, if any, appointed by the Italian
government through the exercise of its special powers, will proceed as follows:  
    
    Four-fifths of the members to be elected will be drawn out from the
candidate list that receives the majority of votes expressed by the
shareholders in the numerical order in which they appear on the list,
rounded off in the event of a fractional number to the next lower
number; and
    
    The remaining board members will be drawn out from the other candidate
lists; for this purpose, the votes obtained by each such list will be
divided by one, two, three and so forth up to the number of directors
to be elected. The numbers obtained through this process are
attributed to the candidates of each list in the order in which such
candidates rank in the list. The candidates of the various lists are
ranked in a single ranking and in decreasing order on the basis of the
numbers attributed to each of them. The candidates with the highest
numbers are elected. The election of members of the board of statutory auditors is governed by
the same rules, except that the board of directors may not present a candidate
list for the board of statutory auditors, and that, under Italian law, if
Enels by-laws provide that Enels board of statutory auditors consists of four
or more members, at least two of them must be appointed by minority
shareholders. Enels current by-laws provide that the board of statutory
auditors consists of three auditors, of which minority shareholders have the
right to appoint one, and two alternate auditors, of which minority
shareholders have the right to appoint one. The first candidate of the list who
receives the most votes becomes chairman of our board of statutory auditors. Tender Offer Rules Pursuant to the TUF, a public tender offer must be made by any person
that, by reason of its purchases of shares, holds more than 30% of the shares
of an Italian company listed on an Italian regulated market entitling their
holders to vote on the appointment or revocation of the directors or the
commencement of derivative suits against them (for purposes of this section,
and as applicable to our shares, the Ordinary Shares). The tender offer must
cover all the Ordinary Shares of the listed company. Similarly, a tender offer
for all the Ordinary Shares of a listed company must be made by any person who,
having more than 30% of the Ordinary Shares without exercising majority voting
rights at ordinary shareholders meetings, acquires  by way of acquisition or
exercise of subscription or conversion rights  during a 12-month period more
than an additional 3% of the Ordinary Shares. Moreover, according to a release
issued by CONSOB if, as a result of a share buy-back effected by a listed
company, the controlling shareholder of that company holds more than 30% of the
outstanding Ordinary Shares (i.e., exclusive of treasury stock), the obligation
to launch a tender offer is triggered. Likewise, the obligation to launch a
tender offer is triggered when a share buy-back results in an increase of more
than 3% of the outstanding Ordinary Shares owned by the controlling shareholder
originally holding more than 30% but less than 50% of the companys outstanding
Ordinary Shares. The offer must be launched within thirty days from the date
on which the relevant threshold was exceeded, at a price not lower than the
average of the weighted average of the market price for the shares in the
previous twelve months, and the highest price paid for the Ordinary Shares by
the offeror in the same period. Under Regulation No. 11971, a purchaser is exempted from the tender offer
obligation when: (i) the purchasers equity interest, as a result of an
acquisition, does not exceed the 30% threshold by more than 3% (provided that
the purchaser commits (a) not to exercise the voting rights pertaining to any
Ordinary Shares exceeding the 30% threshold and (b) to sell any shares
exceeding the 30% threshold within 12 months from the date of purchase), (ii)
another person (or several persons acting jointly) already owns more than 50%
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Ordinary Shares, (iii) the 30% threshold is exceeded as a result of a
capital increase in connection with a debt restructuring plan approved by
CONSOB, (iv) the 30% threshold is exceeded as a result of transfers of Ordinary
Shares among related persons, (v) the 30% threshold is exceeded as a result of
the exercise of pre-emptive rights, (vi) the 30% threshold is exceeded through
mergers or demergers having an industrial purpose, approved by the shareholders
of the company whose shares would otherwise be the target of the tender offer.
The TUF provides further that the acquisition of an interest above 30% of the
Ordinary Shares of a company does not trigger the obligation to launch a 100%
tender offer if the person concerned has exceeded the threshold as a result of
a public tender offer launched on 60% or more of the Ordinary Shares of the
company. This provision, however, is available only (i) if the tender offer
has been approved by shareholders of the company holding a majority of the
Ordinary Shares (excluding the offeror and the current majority shareholder),
and (ii) if the offeror (its subsidiaries, controlling person, related
companies and other person connected to it by virtue, inter alia, of
shareholders agreements) has not acquired more than 1% of the Ordinary Shares
of the company in the preceding 12 months; CONSOB shall ensure compliance with
these conditions before allowing the offer to be launched. After such an offer
has been completed, the offeror nevertheless becomes subject to the duty to
launch an offer for 100% of the Ordinary Shares if, in the course of the
subsequent 12 months, (i) it (or its affiliates) purchases more than an
additional 1% of the Ordinary Shares of the company, or (ii) if the company
approves a merger or split-up. Finally, the TUF provides that anyone holding
90% or more of the voting shares of a company must launch an offer for the
remaining voting shares unless an adequate distribution is restored so as to
ensure proper trading within a period of 120 days. Any shareholder holding
more than 98% of the voting shares of a listed company following a tender offer
for all such shares issued by the company, has the right to obtain title to the
remaining shares within four months after the end of the tender offer if it has
stated in the offer document its intention to make such an acquisition at a
price set by a court-appointed expert. Liability for Mismanagement of Subsidiaries Companies and other entities that, acting in their own interest or the
interest of third parties, mismanage a company subject to their direction and
coordination powers are liable to such companys shareholders and creditors for
ensuing damages. Said liability is excluded if (i) the ensuing damage is fully
eliminated, including through subsequent transactions, or (ii) the damage is
effectively offset by the global benefits deriving in general to the company
from the continuing exercise of such direction and coordination powers.
Direction and coordination powers are presumed to exist, among other things,
with respect to consolidated subsidiaries. Significant Differences in Corporate Governance Practices for Purposes of
Section 303A.11 of the New York Stock Exchange Listed Company Manual (the
NYSE Manual) Overview Corporate governance rules for Italian stock corporations (società per
azioni) like us whose shares are listed on the Italian stock exchange are set
forth in the Italian civil code, the Unified Financial Act (Testo Unico
dellIntermediazione Finanziaria, the TUF) of February 24, 1998 and in the
corporate governance rules set forth by the voluntary code of corporate
governance issued by Borsa Italiana (the Corporate Governance Code). As
described in more detail below, the Italian corporate governance rules set
forth in the Italian civil code, the TUF and the Corporate Governance Code
differ in a number of ways from those applicable to U.S. domestic companies
under NYSE listing standards, as set forth in the NYSE Manual. As a general rule, our main corporate bodies are governed by the Italian
civil code and the TUF and are assigned specific powers and duties that are
legally binding and cannot be derogated from. The Corporate Governance Code
builds on the general framework provided for by the Italian civil code and the
TUF and sets forth recommendations for responsible corporate governance
intended to reflect generally accepted best practice. While these
recommendations are not legally binding, the regulations issued by Borsa
Italiana require that listed companies issue an annual compliance report
disclosing which recommendations, if any, are not being followed and why such
recommendations are not being followed. The annual compliance report must also
contain a general description of our corporate governance system. As stated in
our annual compliance report, which we issued in March 2004, we are
substantially in compliance with the recommendations set forth in the Corporate
Governance Code. 165




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Effective January 2004, pursuant to the 2004 corporate law reform, we may
choose to adopt one of the following three corporate governance systems: (i)
the traditional Italian corporate governance system with a board of directors
(consiglio di amministrazione) and a separate board of statutory auditors
(collegio sindacale), with supervisory functions; (ii) a two-tier governance
system with a management board and a supervisory board; or (iii) a one-tier
governance system with a single board, which includes an audit committee. As of the date of this annual report, we have decided to maintain the
traditional system, which was the only system provided for by Italian law prior
to the 2004 corporate law reform. See Board of Directors and Statutory
Auditors, above, for a description of the powers and duties of our board of
directors and of our board of statutory auditors, respectively. The two boards
are separate and no individual may be a member of both boards. Both the
members of the board of directors and the members of the board of statutory
auditors owe duties of loyalty and care to us. As required by Italian law, a firm of outside auditors is in charge of
auditing our financial statements. The members of our board of directors and
board of statutory auditors, as well as the firm of outside auditors, are
directly and separately appointed by votes of our shareholders at a general
meeting. As recommended by the Corporate Governance Code, moreover, our board of
directors also established an internal control committee which is mainly
responsible for assessing the adequacy of our internal control system and
accounting standards and for relations with outside auditors and essentially
advises, assists and makes proposals to our board of directors with respect to
all such matters. The three members of our internal control committee are
non-executive directors and qualify as independent under the rules of the
Corporate Governance Code described below. However, as explained in more detail
below, this committee does not serve as our audit committee for purposes of
Rule 10A-3 under the Exchange Act or NYSE listing standards. The traditional Italian corporate governance system, based on two main
corporate bodies, contrasts with the unitary system based on a single main
corporate body, the board of directors, as envisaged for U.S. companies by the
NYSE listing standards. We have set out in the following summary the significant differences
between Italian corporate governance rules and practices, as we have
implemented them, and those applicable to U.S. issuers under NYSE listing
standards, as set forth in the NYSE Manual. Independent Directors NYSE domestic company standards.The NYSE listing standards applicable to
U.S. companies provide that independent directors must comprise a majority of
the board. In order for a director to be considered independent, the board
of directors must affirmatively determine that the director has no material
direct or indirect relationship with the company. These relationships can
include commercial, industrial, banking, consulting, legal, accounting,
charitable and familial relationship (among others). More specifically, a
director is not independent if such director or his/her immediate family
members, has certain specified relationships with the company, its parent, its
consolidated subsidiaries, their internal or external auditors, or companies
that have significant business relationships with the company, its parent or
its consolidated subsidiaries. Ownership of a significant amount of stock is
not a per sebar to independence. In addition, a three-year cooling off
period following the termination of any relationship that compromised a
directors independence must lapse before that director can again be considered
independent. Our practice.In Italy, directors independence is the subject of a
recommendation of the Corporate Governance Code, rather than mandated by law,
and is periodically assessed by the board of directors. The Corporate
Governance Code recommends that the board of directors include a number of
non-executive directors (i.e., not members of our senior management) such that
their views carry significant weight in the adoption of the boards
resolutions. It also recommends that an adequate number of non-executive
directors be independent. Directors independence is assessed on the basis of a few general
principles, rather than detailed rules. Under the Corporate Governance Code, a
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relationships of an economic nature, directly, indirectly or on behalf of
third parties, with the issuer or its affiliates (that is, its subsidiaries,
executive directors or controlling shareholder(s)) which may unduly influence
the directors autonomous judgment; (ii) holds, directly, indirectly or on
behalf of third parties, an equity interest affording control or a significant
influence over the issuer; (iii) is a party to a
shareholders agreement for the
control of the issuer; or (iv) has close family relations with an executive
director or other persons who do not themselves qualify as independent. The
Corporate Governance Code recommends a three-year cooling off period for
individuals who were employees and/or directors of a relevant company and a
one-year cooling off period with respect to other relationships of an economic
nature. As of March 10, 2004, our board consisted of seven directors, six of
whom were non-executive directors and qualified as independent directors under
the standards of the Corporate Governance Code. In addition, the members of our board of statutory auditors must meet the
independence requirements mandated by Italian law. As with directors,
statutory auditors independence is assessed on the basis of a few general
principles, rather than detailed rules. In particular, a person who (i) is a
director, or the spouse or a close relative of a director, of our company or
any of our affiliates; (ii) has an employment or consulting or similar
relationship with our company or any of our affiliates; or (iii) has an
economic relationship with us or any of our affiliates which might compromise
his/her independence, cannot be appointed to our board of statutory auditors.
Although there is no formal cooling off requirement, if a statutory auditor who
is a registered chartered accountant (i) during his term entertains, or
entertained in the two years prior to the appointment, a regular or material
consulting relationship with the company that appointed him as statutory
auditor or with any of its subsidiaries, or (ii) during his term is employed
by, or serves as a director of  or was employed or served as a director in the
three years prior to the appointment  the company that appointed him as
statutory auditor or any of its controlling entities, such auditors licence
may be suspended or withdrawn. Finally, our by-laws are required to provide a
system whereby our shareholders can propose alternative lists of candidates for
the board of statutory auditors, with two regular and one alternate statutory
auditors being elected from the list that receives the highest number of votes
at a general shareholders meeting and the third regular and the second
alternate being chosen from the list that receives the second-highest number of
votes. The first candidate of the list who receives the most votes becomes the
chairman of the board of statutory auditors. (See Item 6. Directors, Senior
Management and Employees#Board of Statutory Auditors and also Minority
Shareholders Rights). Executive Sessions NYSE domestic company standards. Non-executive directors of U.S.
companies listed on the NYSE must meet regularly in executive sessions, and
independent directors should meet alone in an executive session at least once a
year. Our practice.In Italy, neither non-executive directors nor independent
directors are required to meet in executive sessions. The members of our board
of statutory auditors are required to meet at least once every 90 days. Audit Committee and Internal Audit Function NYSE domestic company standards. U.S. companies listed on the NYSE are
required to establish an audit committee that satisfies the requirements of
Rule 10A-3 under the Exchange Act and certain additional requirements set by
the NYSE. In particular, all members of this committee must be independent and
the committee must adopt a written charter. The committees prescribed
responsibilities include (i) the appointment, compensation, retention and
oversight of the external auditors; (ii) establishing procedures for the
handling of whistle blower complaints; (iii) discussion of financial
reporting and internal control issues and critical accounting policies
(including through executive sessions with the external auditors); (iv) the
approval of audit and non-audit services performed by the external auditors;
and (v) the adoption of an annual performance evaluation. A company must also
have an internal audit function, which may be out-sourced, except to the
independent auditor. Our practice.Rule 10A-3 under the Exchange Act provides that foreign
private issuers with a board of statutory auditors established in accordance
with local law or listing requirements and meeting specified requirements with
regard to independence and responsibilities (including the performance of most
of the specific tasks assigned to audit committees by the rule, to the extent
permitted by local law), are exempt from the audit committee requirements
established by the rule. As a foreign private issuer, we must comply with
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requirements or qualify for a valid exemption by July 31, 2005. We are in the
process of evaluating the impact of these rules on our corporate governance
system and have not yet determined whether we will (i) seek to take advantage,
to the extent possible, of the exemption afforded to foreign private issuers having a board of
statutory auditors that meets the requirements described above, including, if
necessary, by expanding the scope of duties of our board of statutory auditors,
to the extent permitted by law; or, alternatively, (ii) comply with the audit
committee requirements by expanding, to the extent possible under Italian law,
the current mandate of our internal control committee or otherwise. We have an
internal audit function, which we have not out-sourced. Compensation Committee NYSE domestic company standards.Under NYSE standards, the compensation
of the CEO of U.S. domestic companies must be approved by a compensation
committee (or equivalent) comprised solely of independent directors. The
compensation committee must also make recommendations to the board of directors
with regard to the compensation of other officers, incentive compensation plans
and equity-based plans. Disclosure of individual management compensation
information for these companies is mandated by the Exchange Acts proxy rules,
from which foreign private issuers are generally exempt. Our practice.Compensation of the chairman of our board of directors, our
CEO and other members of our board of directors vested with particular offices
is proposed by our compensation committee and approved by our board of
directors, after consultation with the board of statutory auditors. Senior
management compensation policies are proposed by our CEO, evaluated by our
compensation committee and approved by our board of directors. Our equity-based
compensation plans are adopted by our board of directors upon proposal of our
compensation committee. Please see Stock Option Plan. The Corporate
Governance Code recommends that a majority of the members of the compensation
committee be non-executive directors. The three members of our compensation
committee are non-executive directors and qualify as independent under the
criteria described above. We disclose the compensation of each of the members
of our board of directors (including our CEO) and our board of statutory
auditors in our annual financial statements prepared in accordance with
Italian GAAP, and in Item 6 of this annual report on
Form 20-F. Nominating Committee NYSE domestic company standards.Under NYSE standards, a U.S. domestic
company must have a nominating committee (or equivalent) comprised solely of
independent directors, which is responsible for nominating directors. Our practice.We do not have a nominating committee and our compensation
committee is not responsible for nominating our directors. Directors may be
nominated by any of our shareholders or our board of directors. Corporate Governance/Code of Ethics NYSE domestic company standards.Under NYSE standards, a company must
adopt governance guidelines and a code of business conduct and ethics for
directors, officers and employees. A company must also publish these items on
its website and provide printed copies on request. Section 406 of the
Sarbanes-Oxley Act requires a company to disclose whether it has adopted a code
of ethics for its principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, and if not, the reasons why it has not done so. The NYSE listing
standards applicable to U.S. companies provide that codes of conduct and ethics
should address, at a minimum, conflicts of interest; corporate opportunities;
confidentiality; fair dealing; protection and use of company assets; legal
compliance; and reporting of illegal and unethical behavior. Corporate
governance guidelines must address, at a minimum, directors qualifications,
responsibilities and compensation; access to management and independent
advisers; management succession; director orientation and continuing education;
and annual performance evaluation of the board. Our practice.We have adopted certain corporate governance guidelines
(including with respect to our internal control system, significant
transactions, management and handling of confidential information and internal
dealing), a compliance program to prevent certain criminal offenses and a code
of conduct for our directors, 168




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employees and others acting on our behalf. As noted in Item 16B of this annual
report, we have also adopted a code of ethics meeting the requirements of
Section 406 of the Sarbanes-Oxley Act. We believe that our codes of conduct and ethics address the relevant
issues contemplated by the NYSE standards applicable to U.S. companies noted
above. Our corporate governance guidelines, on the other hand, do not address
all of the issues contemplated by the NYSE domestic company standards. As noted above, we must issue an annual report describing our corporate
governance system and disclosing the level of our compliance with the
recommendations of the Corporate Governance Code. This report and all our
guidelines, programs and codes are available, both in English and in Italian,
on our website at www.enel.it in the Investor relations#Corporate Governance
section. Information appearing on the website is not incorporated by reference
into this annual report. Certifications as to Violations of NYSE Standards NYSE domestic company standards.Under NYSE listing standards, the CEO of
a U.S. company must certify annually that he or she is unaware of any violation
by the company of the NYSE corporate governance standards. This certification
must be included in the companys annual report to shareholders (or, if no
annual report is prepared, its Form 10-K). The CEO must also notify the NYSE
in writing if any executive officer becomes aware of any material
non-compliance with the NYSE corporate governance standards. Our practice.The NYSE does not apply the first of the two domestic
certification standards to foreign private issuers. Accordingly, our CEO must
only notify the NYSE in writing if any executive officer becomes aware of any
material non-compliance with NYSE corporate governance standards. Shareholder Approval of Adoption and Modification of Equity Compensation
Plans NYSE domestic company standards.Shareholders of a U.S. company listed on
the NYSE must approve the adoption of and any material revision to the
companys equity compensation plans, with certain exceptions. Our practice.Although our shareholders must authorize (i) the issuance
of shares in connection with capital increases, and (ii) the buy-back and
resale of our own shares, the adoption of equity compensation plans does not
per serequire prior shareholders approval. 
 Material Contracts Neither we nor any member of our group entered into any material contract,
other than contracts entered into in the ordinary course of our businesses,
during the two years immediately preceding the publication of this document. 
 Exchange Controls No exchange control consent is required in Italy for the transfer to
persons outside of Italy of dividends or other distribution with respect to, or
of the proceeds form the sale of, shares of an Italian company. However, Italian resident and non-resident investors who transfer,
directly or indirectly (through banks or other intermediaries) into or out of
Italy, cash, investments or other securities in excess of Euro 12,500 must
report all such transfers to the Italian Exchange Office (Ufficio Italiano
Cambi or UIC). In the case of indirect transfers, banks or other
intermediaries are required to maintain records of all such transfers for five
years for inspection by Italian tax and judicial authorities. Non-compliance
with these reporting and record-keeping requirements may result in
administrative fines or, in the case of false reporting or in certain cases of
incomplete reporting, criminal penalties. The UIC is required to maintain
reports for a period of ten years and may use such reports, directly or through
other government offices, to police money laundering, tax evasion and any other
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Individuals, non-profit entities and partnerships that are residents of
Italy must disclose on their annual tax returns all investments and financial
assets held outside Italy, as well as the total amount of transfers to, from,
within and between countries other than Italy relating to such foreign
investments or financial assets, even if at the end of the taxable period
foreign investments or financial assets are no longer owned. No such tax
disclosure is required if (i) the foreign investments or financial assets are
exempt from income tax; or (ii) the total value of the foreign investments or
financial assets at the end of the taxable period or the total amount of the
transfers effected during the fiscal year does not exceed Euro 12,500.
Corporate residents of Italy are exempt from these tax disclosure requirements
with respect to their annual tax returns because this information is required
to be discussed in their financial statements. We cannot assure you that the present regulatory environment in or outside
Italy will continue or that particular policies presently in effect will be
maintained, although Italy is required to maintain certain regulations and
policies by virtue of its membership of the European Union and other
international organizations and its adherence to various bilateral and
multilateral international agreements. 
 Taxation The following is a summary of certain United States federal and Italian
tax matters. The summary contains a description of the principal United States
federal and Italian tax consequences of the purchase, ownership and disposition
of ADSs by a holder who is a citizen or resident of the United States or a U.S.
corporation or who otherwise will be subject to United States federal income
tax on a net income basis in respect of the ADSs (a U.S. holder). This
summary does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to a decision to purchase ADSs. In
particular, the summary deals only with beneficial owners who will hold
ordinary shares or ADSs as capital assets and does not address the tax
treatment of a beneficial owner who owns 10% or more of Enels voting shares or
who may be subject to special tax rules, such as banks, tax-exempt entities,
insurance companies or dealers in securities or currencies, or persons that
will hold ADSs as a position in a straddle for tax purposes or as part of a
constructive sale or a conversion transaction or other integrated
investment comprised of ADSs and one or more other investments. Nor does this
summary discuss the treatment of ADSs that are held in connection with a
permanent establishment or fixed base through which a non-resident beneficial
owner carries on or performs personal services in Italy. The summary is based upon tax laws and practice of the United States and
Italy as in effect on the date of this annual report. Prospective purchasers
and current holders of ordinary shares or ADSs are advised to consult their own
tax advisors as to the U.S., Italian or other tax consequences of the purchase,
beneficial ownership and disposition of ordinary shares or ADSs, including, in
particular, the effect of any state, local or national tax laws. For purposes of the summary, beneficial owners of ADSs who are considered
residents of the United States for purposes of the current income tax
convention between the United States and Italy (the Income Tax Convention),
and are not subject to an anti-treaty shopping provision that applies in
limited circumstances, are referred to as U.S. holders. Beneficial owners who
are citizens or residents of the United States, corporations organized under
U.S. law, and U.S. partnerships, estates or trusts (to the extent their income
is subject to U.S. tax either directly or in the hands of partners or
beneficiaries) generally will be considered to be residents of the United
States under the Income Tax Convention. Special rules apply to U.S. holders
that are also residents of Italy. A new tax treaty to replace the current
Income Tax Convention was signed on August 25, 1999, but has not yet been
ratified by Italy. The new treaty would not change significantly the provisions
of the current Income Tax Convention that are discussed below (except that it
would clarify the availability of benefits to certain tax-exempt
organizations). These laws are subject to change, possibly on a retroactive
basis. Unless otherwise stated, this summary assumes that a U.S. holder is
eligible for the benefits of the Income Tax Convention. For purposes of the Income Tax Convention and the United States Internal
Revenue Code of 1986, or the Code, holders of American Depositary Receipts
evidencing ADSs will be treated as the beneficial owners of the underlying
ordinary shares represented by those ADSs. 170




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Withholding Tax on Dividends Italian law provides for the withholding of income tax at a 27% rate on
dividends paid by Italian companies to shareholders who are not residents of
Italy for tax purposes. Accordingly, the amount initially made available to the
Depositary for payment to U.S. holders will reflect withholding at the 27%
rate. Under domestic Italian law, a non-resident holder of shares of common
stock may recover up to four-ninths of the tax withheld on dividends by
presenting evidence to the Italian tax authorities that income tax has been
fully paid on the dividends in the non-resident holders country of residence
in an amount at least equal to the total refund claimed. Non-resident holders
seeking such payments from the Italian tax authorities have experienced
extensive delays and incurred expenses. Alternatively, the 27% withholding tax may be reduced pursuant to an
income tax convention between Italy and the non-resident holders country of
residence. Generally, a reduced 15% withholding tax would be levied under the
Income Tax Convention. Under current Italian law, all shares of Italian listed companies
(including the ordinary shares) must be held in a centralized clearing system
authorized by CONSOB. Under applicable tax provisions, if the ordinary shares
are held through the centralized clearing system managed by Monte Titoli S.p.A.
(Monte Titoli) (the only such system currently authorized in Italy), no
withholding tax on dividends is applied by the Company. Instead of the
withholding tax a substitute tax (imposta sostitutiva) is applied on dividend
distributions to non-resident holders of ordinary shares (or ADSs relating to
such ordinary shares) at a rate equal to the withholding tax that would
otherwise be due. The substitute tax is applied by the resident or non-resident
intermediary with which the ordinary shares are deposited and which
participates in the Monte Titoli system (directly or through a foreign
centralized clearing system participating in the Monte Titoli system). The
procedures to be followed by a non-resident holder in order for the
intermediary with which the ordinary shares are deposited to apply a reduced
rate of tax pursuant to an applicable income tax convention are as follows. The
intermediary must receive (i) a declaration of the non-resident holder that
contains certain data identifying the non-resident holder and indicating the
existence of all the conditions necessary for the application of the relevant
income tax convention and the determination of the applicable treaty rate of
withholding and (ii) a certification by the tax authorities of the non-resident
holders country of residence that the holder is a resident of that country for
purposes of the income tax convention and, as far as it is known to such
authorities, the holder has no permanent establishment in Italy (which
certificate will be effective until March 31 of the year following submission).
If the ordinary shares are deposited with a non-resident intermediary, such
intermediary must appoint as its fiscal representative in Italy a bank or an
investment services company that is resident in Italy, the permanent
establishment in Italy of a non-resident bank or investment services company,
or a company licensed to manage a centralized depository and clearing system,
to carry out all duties and obligations relating to the application and
administration of the substitute tax. Since the ordinary shares underlying the ADSs will be held by the
custodian in the centralized clearing system managed by Monte Titoli, the
substitute tax regime described above will apply to the ADSs. In order to
enable eligible U.S. holders to obtain a reduction at source or a refund of
withholding tax under the Income Tax Convention, the Company and the Depositary
have agreed to certain procedures. According to such procedures, the Depositary
will send holders of the ADSs certain instructions before the dividend payment
date specifying the documentation required and the deadlines for submission.
The documentation generally will include the holders declaration and the tax
certification specified under points (i) and (ii) in the preceding paragraph.
In order to comply with the documentation described under point (ii) above,
eligible U.S. holders must obtain a certificate of residence from the U.S.
Internal Revenue Service (Form 6166) with respect to each dividend payment,
unless a previously filed certification will be effective on the dividend
payment date, and produce it together with a statement whereby such holder
represents to be a U.S. resident individual or corporation and not to maintain
a permanent establishment or a fixed base in Italy. The time for processing
requests for certification by the Internal Revenue Service normally is six to
eight weeks. Accordingly, holders requiring this certification must submit
their requests to the Internal Revenue Service as soon as possible after
receiving instructions from the Depositary. In the case of ADSs held through a
broker or other financial intermediary, the required documentation must be
delivered to such financial intermediary for transmission to the Depositary. In
all other cases, eligible U.S. holders must deliver the required documentation
directly to the Depositary at least five business days prior to the date set
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If the documentation is not provided in the time allotted, or if the
intermediary (i.e., the custodian in the case of the ADSs) determines that the
produced documentation does not satisfy the prescribed requirements or that
applicable law does not permit it to apply directly the reduced Income Tax
Convention rate, the intermediary will withhold tax at the 27% rate on the
dividends paid with respect to ADSs, and eligible U.S. holders will be required
to claim an Income Tax Convention refund of 12% of the dividend (representing
the difference between 27% and the 15% Income Tax Convention rate) directly
from the Italian tax authorities. U.S. residents seeking refunds from the
Italian tax authorities have encountered expenses and extensive delays. Distributions of profits in kind will be subject to withholding tax. In
that case, prior to receiving the distribution, the holder will be required to
provide the Company with the funds to pay the relevant withholding tax.
Distributions of additional ordinary shares issued upon capitalization of
reserves to beneficial owners with respect to their ADSs that are made as part
of a pro rata distribution to all shareholders of the Company generally will
not be subject to Italian tax. However, such additional shares will reduce the
tax basis of each single share for the calculation of the capital gains tax. The gross amount of dividends (that is, the amount before reduction for
Italian withholding tax) paid to U.S. holders will be subject to U.S. federal
income taxation as dividend income and will not be eligible for the
dividends-received deduction allowed to domestic corporations. Dividends paid
in lire or euro will be includible in the income of U.S. holders in a U.S.
dollar amount calculated by reference to the exchange rate in effect on the day
the dividends are received by the Depositary. Subject to certain exceptions for
short-term and hedged positions, the U.S. dollar amount of dividends received
by an individual prior to January 1, 2009 with respect to our ADSs will be
subject to taxation at a maximum rate of 15% if the dividends are qualified
dividends. Dividends paid on our ADSs will be treated as qualified dividends
if we were not, in the year prior to the year in which the dividend was paid,
and are not, in the year in which the dividend is paid, a passive foreign
investment company (PFIC), foreign personal holding company (FPHC) or
foreign investment company (FIC). Based on our audited financial statements
and relevant market and shareholder data, we believe that we were not treated
as a PFIC, FPHC or FIC for U.S. federal income tax purposes with respect to our
2003 taxable year. In addition, based on our audited financial statements and
our current expectations regarding the value and nature of our assets, the
sources and nature of our income, and relevant market and shareholder data, we
do not anticipate becoming a PFIC, FPHC or FIC for our 2004 taxable year. If the Depositary converts the euro into dollars on the day it receives
them, U.S. holders generally must not realize foreign currency gain or loss in
respect of dividend income. A U.S. holder who receives a treaty refund may be
required to recognize foreign currency gain or loss, which will be treated as
ordinary gain or loss, to the extent the amount of the treaty refund (in
dollars) received by the holder differs from the dollar equivalent of the
foreign currency amount of the treaty refund on the date the dividends were
received by the Depositary. The Italian withholding tax (less any refund to
which such holder is entitled under the Income Tax Convention) will be treated
as a foreign income tax which such holders may elect to deduct in computing
their taxable income or, subject to the limitations on foreign tax credits
generally, credit against their United States federal income tax liability. Distributions of additional shares to U.S. holders with respect to their
ADSs that are made as part of a pro rata distribution to all of Enels
shareholders generally will not be subject to U.S. federal income tax. Tax on capital gains As of January 1, 2004, capital gains realized by non-resident shareholders
on the disposal of a qualified shareholding held as a capital asset and not
in connection with a permanent establishment or fixed base through which such
shareholders carry on or perform business services in Italy are no longer
subject to Italian capital gain tax (CGT) but to personal or corporate income
tax, for an amount equal to 40% of the overall gain. Losses can be offset
against taxable gains for a corresponding amount and, if in excess, can be
carried forward up to four years. A qualified shareholding is constituted by
ordinary shares or ADSs and/or rights representing more than 5% of a listed
companys total share capital or more than 2% of its share capital voting in
the ordinary shareholders meeting. A disposal of a qualified shareholding
occurs if in any 12-month period immediately following the date when a
shareholding meets one of the thresholds illustrated above, the shareholder
engages in disposals of shares or ADSs that, individually or in aggregate,
constitute a qualified shareholding. The taxable gain realized by a
non-resident shareholder who is an individual would be subject to progressive
personal income tax rates (currently, the marginal 172




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tax rate is equal to 45%, plus a surcharge of up to 1.4%, depending on the
municipality in which the shareholder resides). The taxable gain realized by a
non-resident corporate shareholder would be subject to corporate income tax,
currently levied at a rate of 33%. Generally, CGT, levied at a rate of 12.5%, is imposed on gains realized
upon the transfer or sale of non-qualified shareholdings, whether held within
or outside Italy. A non-qualified shareholding is constituted by an interest
in Enel which does not reach the thresholds described above. However, under
domestic law, an exemption applies to gains realized on the disposal of
non-qualified shareholdings in an Italian company the shares of which are
listed on a regulated market, such as the Enel shares, even when such
shareholdings are held in Italy. Furthermore, pursuant to the Income Tax Convention, a U.S. holder will not
be subject to Italian CGT unless such U.S. holder has a permanent establishment
or fixed base in Italy to which the ordinary shares or ADSs are effectively
connected. To this end, U.S. residents selling ordinary shares or ADSs and
claiming benefits under the Income Tax Convention may be required to produce
appropriate documentation establishing that the above mentioned conditions have
been met. Other countries have executed income tax conventions with Italy
providing for a similar treatment of Italian CGT. No CGT will be imposed on the
deposit or withdrawal of shares in return for ADSs. U.S. holders of ADSs will be subject to U.S. federal income tax on any
capital gains to the same extent as on other gains from the disposition of
stock. The net amount of long-term capital gain recognized by an individual
holder after May 5, 2003 and before January 1, 2009 generally is subject to
taxation at a maximum rate of 15%. The net long-term capital gain recognized by
an individual holder before May 6, 2003 generally is subject to taxation at a
maximum rate of 20%. A non-U.S. holder will not be subject to U.S. federal income tax on gain
realized on the sale of ADSs unless (i) such gain is effectively connected with
the conduct by the non-U.S. holder of a trade or business in the United States
or (ii) in the case of gain realized by an individual non-U.S. holder, the
non-U.S. holder is present in the United States for 183 days or more in the
taxable year of the sale and certain other conditions are met. Transfer tax An Italian transfer tax is normally payable on the transfer of shares in
an Italian company. The transfer tax will not be payable with respect to any
transfers of ordinary shares or ADSs involving non-Italian residents concluded
either on a regulated market or with the intervention of a bank or an
investment services company. Estate and gift tax As of October 25, 2001, the Italian estate and gift tax has been abolished
and consequently any transfer of ordinary shares or ADSs occurring by reason of
death or gift as of that date is no longer subject to any Italian estate and
gift tax. However, should a gift of shares or ADSs for a value exceeding Euro
180,759.91 (the Threshold) occur and the relationship between the donor and
the beneficiary not qualify for the exemption regime applicable to gifts made
in favor of certain family members (e.g., spouse, parents, children,
grandchildren), a registration tax of Euro 129.11 would be due insofar as the
gift agreement is either executed or registered in Italy. The materiality
threshold is increased to Euro 516,456.91 in cases where the beneficiary is
either underage (i.e., younger than 18) or a person with a handicap recognized
pursuant to applicable law. Information reporting and backup withholding Dividends paid on, and proceeds from the sale or other disposition of,
ADSs paid to a U.S. holder generally may be subject to information reporting
requirements and may be subject to backup withholding unless the holder (i)
establishes that it is a corporation or other exempt holder or (ii) provides an
accurate taxpayer identification number on a properly completed Internal
Revenue Service Form W-9 and certifies that no loss of exemption from backup
withholding has occurred. The amount of any backup withholding from a payment
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as a credit against the holders U.S. federal income tax liability and may
entitle such holder to a refund, provided that certain required information is
furnished to the Internal Revenue Service. A non-U.S. holder may be required to comply with certification and
identification procedures in order to establish its exemption from information
reporting and backup withholding. 
 Documents On Display Enel is subject to the information reporting requirements of the Exchange
Act applicable to foreign private issuers. In accordance therewith, Enel is
required to file reports and other information with the U.S. Securities and
Exchange Commission. In particular, the Company is required to file annual
reports on Form 20-F by electronic means. These materials, including this
annual report on Form 20-F, are available for inspection and copying at the
U.S. Securities and Exchange Commissions public reference facilities in
Washington D.C., New York, New York and Chicago, Illinois. Please call the
Commission at 1-800-SEC-0330 for further information on the public reference
rooms. 
 Item 11. Quantitative and Qualitative Disclosure About Market Risk 
 Price Risk Management and Market Risk Information We purchase electricity from countries that use currencies other than the
euro and also purchase fuel in the international oil and natural gas markets,
where prices are generally denominated in U.S. dollars. As a consequence, we
are subject to market risks from changes in foreign exchange rates and
commodity prices. We are also directly subject to interest rate risks related
to our financial indebtedness. The system for the reimbursement of fuel costs through tariffs that was in
place through March 31, 2004 reduced our commodity price and exchange rate
risks from fuel purchases and imports of electricity. This structure included a
reimbursement component for fuel costs and imports that was based on, among
other things, an index to the price of a basket of fuels on international
markets (which are generally priced in U.S. dollars). This index was adjusted
so that changes in fuel costs and exchange rate fluctuations were reflected in
the levels of reimbursements and, as a consequence, in tariffs. As a result,
our commodity price and exchange rate exposures for fuel purchases related
mainly to the time lag between our incurrence of fuel costs and the calculation
period used to determine the level of reimbursements. In 2003, we
systematically hedged our foreign exchange and commodity exposure for fuel
purchases arising from this time lag through Enel Trade using the instruments
described below. On March 31, 2004, the pool market became operational. As a result, we
are now facing the market risk arising from the fact that prices on the market
are determined by competitive bidding among participants. However, under the
current regulatory framework, generation companies may also sell electricity
through over-the-counter bilateral contracts with buyers, and enter into
contracts for differences, which are swap or similar arrangements relating to
the supply of electricity, with the Single Buyer (as well as with other
producers, retail suppliers or Eligible Customers). Our use of both
over-the-counter bilateral contracts and contracts for differences with the
Single Buyer is contributing to reduce our pool market price risk exposure. In
addition, we believe that the potential impact of this market risk vis-à-vis
our competitors is mitigated by the homogeneity of the cost structure of
Italian generation companies and by the limited import capacity of the
transmission lines that connect the Italian network with those of other
countries. Finally, for the amount of energy we sell in the pool market and
for which we do not enter in contracts for differences with the Single Buyer,
we are putting in place a hedging strategy based on our assessment of our
exposure to changes in pool market prices as compared to our generation costs
in Italy, using swaps and other hedging instruments. Our exchange rate exposure for electricity imports is principally limited
to imports denominated in Swiss francs. In 2003, approximately 48% of our
electricity imports by value were denominated in Swiss francs. The balance of
our electricity imports are denominated in euro, and we do not have an exchange
rate risk on these imports as a result. We actively manage the exchange rate
exposure on our accounts payable in Swiss francs. 174




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Almost all of our long-term debt is denominated in euro and as a result is
not subject to exchange rate risk. At December 31, 2003, we were fully exposed
to exchange rate risk on only Euro 668 million (including approximately Euro
408 million of long-term debt which relates to our operating subsidiaries in
North America and Central South America and which is denominated in the
currency of the territories in which such subsidiaries operate) out of a total
Euro 22,016 million in outstanding long-term debt. Our financial risk manager is responsible for analyzing, monitoring and
controlling our interest rate and foreign exchange risk management activities,
while our treasurer is responsible for executing related financial operations.
Senior management provides these two members of our finance department with
guidance as to the strategic aspects of the management of our debt portfolio. Our calculation and measurement techniques are generally consistent with
international banking standards established by the Basle Committee. Moreover,
we believe that our policies regarding risk levels are generally significantly
more conservative than those established by the Basle Committee. Our financial risk manager is responsible for measuring actual risk levels
on the portfolio of financial instruments and monitoring compliance with our
policies. With respect to commodity risk management, Enel Trade (previously Enel
F.T.L.) is the company of our Group in charge of the commercial relations with
operators in the energy and fuel procurement markets, including purchases of
financial derivatives based on energy indexes for hedging purposes. Under a
strict Group risk management policy, each company of the Group is assigned a
maximum amount of risk that it is allowed to maintain, and enters into
derivatives with Enel Trade in order to reduce its risk below the assigned
maximum allowed amount. Enel Trade aggregates the risk positions on
commodities from our companies through these intercompany derivatives and nets
opposing positions related to these intercompany derivatives and purchases
of commodities made by it. To reduce the residual risk following these netting
operations below the maximum limit set annually by the Groups policy, Enel
Trade uses cash-settled derivatives of the types described below under
Commodity Price Risk. Enel Trades use of such derivative instruments is
limited to hedging the Groups risks arising from changes in the prices of
physical commodities used in our operations, since we do not buy and sell
derivative instruments for trading or speculative purposes. We have estimated our market risk exposure using sensitivity analysis.
Market risk exposure represents the change in the fair value of financial
instruments, including financial and commodity derivatives, resulting from an
assumed 10% adverse change in market prices or rates. We determined fair value
using pricing models that measure the effect of changes in market prices
according to market practice for each category of financial instrument. We have used sensitivity analysis to determine the market risk exposure
associated with our debt and with our foreign exchange, interest rate and
commodity derivatives. We have summarized the results of this sensitivity
analysis in the following paragraphs. Actual changes in market prices or rates
may differ from hypothetical changes. The notional value of a derivative is the contractual amount on the basis
of which the differentials are exchanged. This amount can be expressed either
on a value basis or on a physical quantities basis such as tons. Amounts
expressed in a foreign currency are converted into euro by applying the
exchange rate at end of the relevant period. Foreign exchange risk As explained above, our principal foreign exchange risk relates to fuel
costs and electricity imports. At December 31, 2003, we also had foreign
exchange risk exposure on Euro 668 million in debt denominated in non-euro
currencies, which represented 3.0% of our total long-term debt. Our exposure to
foreign currency exchange rates is primarily in respect of U.S. dollars for
fuel purchases and in respect of Swiss francs for electricity imports. We use forward exchange contracts and currency options in managing our
foreign exchange risk. As of December 31, 2003, we had outstanding forward
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risks with an aggregate
notional amount of Euro 2,384 million (Euro 4,095
million as of December 31, 2002). In particular we had:  
    
    contracts with a notional amount of Euro 1,681 million used
to hedge the foreign exchange risk related to fuel purchases,
electricity imports and expected cash flows in currencies other than
the euro (Euro 2,445 as of December 31, 2002); and
    
    contracts with a notional amount of Euro 440 million used to
hedge the foreign exchange risk related to the repayment of the
commercial paper we issued in foreign currency (Euro 725 as of
December 31, 2002). We generally enter into these contracts with respect to the same amount
and date of a repayment obligation or the cash flow that we expect to generate,
thus any change in fair value of these contracts deriving from a possible
appreciation or depreciation of the euro against other currencies would be
fully offset by a corresponding change in the fair value of the underlying
position. At the end of 2003, we also had in place Euro 153 million of foreign
exchange forward contracts (Euro 671 million at December 31, 2002) and Euro 110
million of options (Euro 254 million at December 31, 2002) used to hedge any
residual foreign exchange risk on an aggregate basis. The fair value of these derivatives was negative by Euro 51 million at
December 31, 2003 (negative by Euro 54 million in 2002). Assuming a 10%
depreciation of the euro against all the other currencies to which we have
exchange rate exposure, the fair market value of these financial instruments,
including long-term debt exposed to foreign exchange risk, would have increased
by Euro 17 million in 2003 (as compared to an increase of Euro 68 million in
2002). Interest rate risk Our outstanding total medium-term and long-term debt at December 31, 2003
amounted to Euro 22,016 million, of which Euro 14,095 million, or 64% of the
total, bore interest at floating rates, principally based on Euribor, and Euro
7,921 million, or 36%, bore interest at fixed rates. To improve the mix of our fixed and floating rate exposures, we have
entered into interest rate hedging contracts, particularly interest rate swaps,
collars and swaptions. In interest rate swaps, we agree with other parties to
exchange, at specified intervals, the difference between interest amounts
calculated by reference to the notional principal amount and the fixed or
floating interest rates that we have agreed with the other parties. An interest
rate collar is a combination of options that enables us to lock our debt cost
into a predetermined interest rate range. We primarily use zero-cost collars
that do not require payment of an option premium. Through a swaption, we
acquire or sell the option to enter into an interest rate swap at a certain
date in the future. At December 31, 2003, we had arranged interest rate derivatives with a
notional amount of Euro 9,479 million (Euro 8,704 million at December 31,
2002), of which Euro 8,580 million were interest rate swaps (Euro 7,697 million
at December 31, 2002), Euro 873 million were interest rate collars (Euro 857
million at December 31, 2002), and Euro 26 million were swaptions (Euro 50
million at December 31, 2002). The fair value of these derivatives was negative
by Euro 365 million at such date (negative by Euro 358 million in 2002). You
should read note 21 to our financial statements for a further discussion of the
fair value of these derivatives. See also Item 5. Operating and Financial
Review and ProspectsU.S. GAAP ReconciliationCritical Accounting Policies
under U.S. GAAP. With these contracts in place, we estimate that the portion of our
long-term debt still exposed to interest rate fluctuations, appropriately
weighting the notional value of interest rate collars, is approximately 34%. Based on the results of our sensitivity analysis, at December 31, 2003, a
10% decrease in interest rates would have increased the net negative fair value
of our portfolio of financial instruments, including long term debt and
interest rate derivatives, by Euro 307 million (Euro 147 million in 2002).
However, we do not consider such an 176




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increase in the net negative fair value to be a significant risk, because
it would affect earnings and cash flow only if we were to reacquire all or a
portion of these instruments on the open market prior to their maturity. We believe that our effective interest rate risk depends on the likelihood
that interest rates will increase. Because our revenues are not directly linked
to interest rates, our principal interest rate risk is that a general rise in
interest rates will result in a higher interest expense on the unhedged portion
of our floating-rate debt. If interest rates were to increase by 10% over
December 31, 2003 levels, our consolidated interest expense, including with
respect to long term debt and interest rate derivatives, would increase by a
total of approximately Euro 23 million per year (Euro 18 million in 2002). Such
amount is the net result of the impact of the increase in interest charges on
the floating rate portion of our outstanding long term debt, partially offset
by positive flows deriving from our hedging contracts. Commodity price risk Since 2000, we have adopted a systematic approach to cover commodity
pricing and currency risk linked to the reimbursement mechanism. Enel Trade
entered into derivatives contracts on commodities in order to fix part of the
difference between our costs and the related contribution we received through
tariffs, as well as to manage other risks related to the purchase of
commodities for our trading and gas sale activities. Because of the
uncertainty at the end of 2003 as to the actual starting date of the operations
of the pool market, as of December 31, 2003 we had no positions open for the
purpose of hedging of electricity prices and prices of fuel used in generation
activities. As a result, our overall volume of contracts to hedge commodity
price risks at December 31, 2003 decreased significantly as compared to volumes
at December 31, 2002, as our only such contracts open at that date were those
related to purchases of fuel. At December 31, 2002, the notional value of our open contracts was as follows:  
    
    Futures: Euro 354 million or 12,752 contracts;
    
    Swaps on petroleum indexes: Euro 268 million or 2,062,518 tones; and
    
    Swaps on gas transmission fee: 1 billion cubic meters per year.
At December 31, 2003, the notional value of our open contracts was as follows: At December 31, 2003, the notional value of our open contracts was as follows: 
    
    Futures: Euro 36.6 million or 1,437 contracts;
    
    Swaps on petroleum indexes: Euro 36.7 million or 335,852 tones; and
    
    Swaps on gas transmission fee: 1 billion cubic meters per year. The following table shows the fair value of these contracts at December
31, 2002 and at December 31, 2003. 177




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As of December, 312003
    
    2002Fair Value (in millions of euro)Futures
    
    
    0.5
    
    
    
    23.2- assets
    
    
    0.6
    
    
    
    25.0- liabilities
    
    
    (0.1
    )
    
    
    (1.8
    )Swaps on Petroleum indexes
    
    
    1.6
    
    
    
    7.1- assets
    
    
    2.3
    
    
    
    13.1- liabilities
    
    
    (0.7
    )
    
    
    (6.0
    )Gas Transmission fee
    
    
    (9.6
    )
    
    
    (9.4
    )- assets
    
    
    0.0
    
    
    
    0.0- liabilities
    
    
    (9.6
    )
    
    
    (9.4
    )Total
    
    
    (7.5
    )
    
    
    20.9- assets
    
    
    2.9
    
    
    
    38.1- liabilities
    
    
    (10.4
    )
    
    
    (17.2
    )
 Positive or negative changes in the fair value of our derivative
commodities contracts result from an increase or decrease in the price of the
underlying commodities. Changes in the fair value of our derivative
commodities contracts related to commodities we purchase and resell
are generally offset
by opposite negative or positive changes in the fair value of our revenues-cost
margin. Based on the results of our sensitivity analysis, at December 31, 2003, a
10% increase in commodity price levels would have caused an increase in the
value of our derivative contracts of Euro 5.4 million (Euro 50 million in
2002), while a 10% decrease would have caused a concomitant decrease of Euro
5.4 million (Euro 50 million in 2002). In
2004, we are also entering into derivatives contracts on commodities in
order to hedge our exposure to electricity prices and the price of fuel we use in
generation activities, with respect to the amount of energy we sell in the pool
market and for which we do not enter in contracts for differences with the
Single Buyer. We believe that changes in the fair value of these derivative
commodities contracts are generally offset by opposite negative or positive changes in
the fair value of our revenues-cost margin. This will occur primarily to the
extent prices in the pool market rise or decline in close relation to rises or
declines in prices of fuels, which we expect will continue until significant
volumes of electricity generated at generation costs lower than current average
generation costs in Italy shall be available as a result of increased imports
and/or the construction of new plants in Italy. In accordance with our accounting policies, we do not account for
commodity contracts at fair value for Italian GAAP purposes. For additional
detail on the volume of such contracts, see Item 5. Operating and Financial
Review and ProspectsContractual Obligations and Commitments. We believe that we are not exposed to significant counterparty risk, or
the risk of potential losses that may arise from the non-fulfillment of
contractual obligations by individual counterparties of our hedging
instruments, given the high credit ratings of our counterparties. 
 Item 12. Description of Securities Other Than Equity Securities Not applicable. 
 PART II 
 Item 13. Defaults, Dividends Averages and Delinquencies None. 178




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Item 14. Material Modifications to the Rights of Security Holders and
Proceeds Not applicable. 
 Item 15. Controls and Procedures We carried out an evaluation under the supervision and with the
participation of our management, including our chief executive officer and
chief financial officer, of the effectiveness of the design and operation of
our disclosure controls and procedures, as of December 31, 2003. There are
inherent limitations to the effectiveness of any system of disclosure controls
and procedures, including the possibility of human error and the circumvention
or overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their control objectives. Based upon our evaluation, our chief
executive officer and chief financial officer concluded that the disclosure
controls and procedures as of December 31, 2003, were effective to provide
reasonable assurance that information required to be disclosed in the reports
we file and submit under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported as and when required. There was no
change in our internal control over financial reporting during 2003 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting. 
 Item 16. [Reserved] 
 Item 16A. Audit Committee Financial Expert Our board of directors has determined that Piero Gnudi, the Chairman of
our board of directors, qualifies as an audit committee financial expert
within the meaning of this Item 16A. 
 Item 16B. Code of Ethics The Company has adopted a broad code of ethical conduct applicable to all
of its directors, employees and others acting on its behalf. In addition to
this code of ethical conduct, the Company adopted a specific code of ethics, as
defined in Item 16B of Form 20-F under the Securities Exchange Act of 1934, as
amended, that is applicable to the Companys chief executive officer, chief
financial officer, chief accounting officer, controller and persons performing
similar functions to any of the foregoing. This code of ethics is attached
hereto as Exhibit 4.1. If the Company amends the provisions of this code of
ethics that apply to its chief executive officer, chief financial officer,
chief accounting officer, controller and persons performing similar functions,
or if the Company grants any waiver of such provisions, it will timely disclose
such amendment or waiver through a special Form 6-K. 
 Item 16C. Principal Accountant Fees and Services Audit and Non-Audit Fees The following table sets forth the fees billed to the Company by its
independent auditors, KPMG S.p.A., with respect to the fiscal years ended December 31,
2002 and 2003, which do not include VAT and expenses: Year ended December 31,2003
    
    2002(in millions of euro)Audit fees
    
    
    1.9
    
    
    
    1.6Audit-related fees
    
    
    0.2
    
    
    
    0.4Tax fees
    
    
    0.0
    
    
    
    0.0Other fees
    
    
    0.0
    
    
    
    0.0Total fees
    
    
    2.1
    
    
    
    2.0
 Audit fees in the above table are the aggregate fees billed by KPMG
S.p.A. in connection with the audit of the Companys annual and interim
financial statements and the Companys annual sustainability financial statements. 179




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Audit-related fees in the above table are the aggregate fees billed by
KPMG S.p.A. for procedures performed in connection with the issuance
of debt securities and due
diligence relating to acquisitions, dispositions
and other contemplated transactions. Audit Committee Pre-Approval Policies and Procedures Our shareholders are responsible for the appointment of the independent
auditor for the performance of the annual statutory audit, as required by
Italian law, on the proposal of the board of directors. In accordance with
Italian law, our board of statutory auditors is required to make a
recommendation to the shareholders with respect to the board of directors
proposal prior to the shareholder vote. In June 2003, our board of directors approved a corporate compliance code
requiring among other things that management not engage the independent auditor
to perform any audit-related service without first obtaining the express
approval of the internal control committee. Proposals to engage the
independent auditor to perform non-audit services, if any, must be approved by our board
of directors on a case-by-case basis. In 2003, the board of directors did not
approve any such engagement. 
 PART III 
 Item 17. FINANCIAL STATEMENTS Not applicable. 
 Item 18. FINANCIAL STATEMENTS Notice on the audit report for 2001. The audit firm Arthur Andersen S.p.A.
has been the auditor of Enel S.p.A. and, consequently, principal auditor to the
Group for the fiscal year 2001. In May 2002, KPMG S.p.A. was appointed as our
auditor for the three-year period 2002-2004. During 2002, Arthur Andersen
S.p.A. terminated its affiliation with the Andersen Worldwide network and
entered into an agreement to associate with the Deloitte Touche Tohmatsu
international practice, through an agreement with that networks Italian member
firm, Deloitte & Touche S.p.A., and changed its business name to Deloitte &
Touche Italia S.p.A. Deloitte & Touche LLP has confirmed to the Securities and
Exchange Commission that Deloitte & Touche Italia S.p.A. is qualified to
practice before the Commission, having provided written representation that
policies and practices consistent with the objectives set forth in Appendix K,
SECPS §1000.45 have been established. Deloitte & Touche Italia S.p.A. (as the
successor entity to Arthur Andersen S.p.A.) did not participate in the
preparation of this report, did not reissue the Arthur Andersen S.p.A. audit
report with respect to the financial statements for the years ended December
31, 2001 included in this report and did not consent to the inclusion in this
report of that audit report. We include in this Annual Report the report of
independent auditors issued by Arthur Andersen S.p.A. with respect to the
financial statements for the year 2001. INDEX TO FINANCIAL STATEMENTS Reports
of Independent Public Accounting Firm
    
    F-1Report
of Independent Auditors
    
    F-2Consolidated Balance Sheet as of December 31, 2002 and 2003
    
    F-3Consolidated Statements of Income for the years ended December 31, 2001, 2002 and 2003
    
    F-5Consolidated Statements of Changes in Shareholders Equity for the years ended
December 31, 2001, 2002 and 2003
    
    F-6Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002 and
2003
    
    F-7Notes to Consolidated Financial Statements
    
    F-8Reports
of Independent Registered Public Accounting Firm
    
    F-84
 180




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##### Table of Contents



INDEX TO EXHIBITS FILED WITH THIS REPORT 
 Item 19. EXHIBITS 1.1 By-laws of the Company. 2.1 Deposit Agreement, as amended, among Enel S.p.A. and Citibank N.A., as
Depositary, and the owners of American Depositary Receipts (incorporated by
reference to the Registrants Registration Statement (File No. 333-6868) on
Form F-6 effective as of October 29, 1999 and the Post-effective Amendment No.
1 to Form F-6 effective as of July 9, 2001). 3.1 List of Subsidiaries. 4.1 Code of Ethics. 12.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. 12.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. 13.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. 181




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##### Table of Contents



REPORT OF INDEPENDENT PUBLIC ACCOUNTING FIRM To the Shareholders of ENEL S.p.A. We have audited the accompanying consolidated balance sheets of ENEL S.p.A. (an
Italian corporation) and subsidiaries (the Company) as of December 31, 2003
and 2002, and the related consolidated statements of income, changes in
shareholders equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of the subsidiary Wind Telecomunicazioni S.p.A. and its consolidated
subsidiaries (Wind), which statements reflect total consolidated assets
constituting 14% and 15% of the related consolidated totals at December 31,
2003 and 2002 respectively, and total consolidated revenues constituting 14%
and 12% of the related consolidated totals for those respective years. Those
statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for Wind,
before conversion to generally accepted accounting principles in the United
States of America, is based solely on the report of the other auditors. The
consolidated financial statements of the Company for the year ended December
31, 2001 were audited by other auditors who were a member firm of a worldwide
organisation that has ceased operations. Those auditors expressed an
unqualified opinion on those consolidated financial statements, before the
restatements described in Notes 24 and 25 (h) to the accompanying consolidated
financial statements, in their report dated April 19, 2002. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits, which include procedures relating to the adjustments to convert
information with respect to Wind as reported under generally accepted
accounting principles in Italy to amounts reported under generally accepted
accounting principles in the United States of America, and the report of the
other auditors, provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of ENEL S.p.A. and subsidiaries as of
December 31, 2003 and 2002, and the results of their operations and their cash
flows for the years then ended, in conformity with generally accepted
accounting principles in Italy. Accounting principles generally accepted in Italy vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences is
presented in Notes 23, 24 and 25 to the consolidated financial statements. As discussed above, the 2001 consolidated financial statements of the Company
were audited by other auditors who have ceased operations. As described in Note
24, the Company changed in 2003 and 2002 the classification of the gain on
disposal of the generation business in the consolidated statements of income,
and the amounts disclosed in the 2001 consolidated statement of income relating
to the gain on disposal of the generation business have been restated to
conform to the 2003 presentation of the consolidated statement of income. As
described in Notes 25 (h), the Company changed the composition of its
reportable segments in 2003 and 2002, and the amounts disclosed in the 2001
consolidated financial statements relating to reportable segments have been
restated to conform to the 2003 composition of reportable segments. We audited
the adjustments described in Notes 24 and 25 (h) that were applied to restate
the classification of the gain on disposal of the generation business and to
restate the disclosures for reportable segments reflected in the 2001
consolidated financial statements. In our opinion, such adjustments are
appropriate and have been properly applied. However we were not engaged to
audit, review, or apply any procedures to the 2001 consolidated financial
statements of the Company other than with respect to such adjustments and,
accordingly, we do not express an opinion or any other form of assurance on the
2001 consolidated financial statements taken as a whole. /S/ KPMG S.p.A. _____________________________ KPMG S.p.A. Rome, Italy May 3, 2004, except with reference to notes 26 (a), 26 (c), 26 (f), 26 (g) and
26 (h) to the consolidated financial statements, for which this report is dated
June 30, 2004. F-1




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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS To the Shareholders of ENEL S.p.A.: We have audited the accompanying consolidated balance sheets of ENEL
S.p.A. (an Italian corporation) and subsidiaries (the Company) as of December
31, 2000 and 2001, and the related consolidated statements of income, changes
in shareholders equity and cash flows for each of the three years in the
period ended December 31, 2001. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of certain subsidiaries, which statements reflect assets
representing approximately 14% of total assets at December 31, 2001 and
revenues representing approximately 10% of consolidated revenues for the period
ended December 31, 2001. Those statements were audited by other auditors whose
reports have been furnished to us and our opinion, insofar as it relates to the
amounts included for those entities, is based solely on the reports of the
other auditors. We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of ENEL S.p.A. and subsidiaries as of December
31, 2000 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in Italy. The accounting practices used by the Company in preparing the accompanying
consolidated financial statements conform with accounting principles generally
accepted in Italy, but do not conform with accounting principles generally
accepted in the United States (U.S. GAAP). A description of these differences
and a reconciliation of net income and shareholders equity to U.S. GAAP are
set forth in Notes 25 and 26 of the Notes to the Consolidated Financial
Statements. /s/ ARTHUR ANDERSEN S.p.A. Rome, Italy, April 19, 2002 F-2




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##### Table of Contents



ENEL S.P.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2003 2002
    
    2003
    
    2003(millions of U.S.(millions of euro)
    
    dollars)ASSETSCurrent assets:Cash and cash equivalents (Note 2)
    
    
    400
    
    
    
    452
    
    
    
    569Receivables: (Note 4)Customers
    
    
    6,924
    
    
    
    6,884
    
    
    
    8,672Other
    
    
    3,497
    
    
    
    2,559
    
    
    
    3,224Inventories (Notes 2 and 5)
    
    
    3,266
    
    
    
    4,211
    
    
    
    5,305Accrued income and prepayments
    
    
    377
    
    
    
    414
    
    
    
    52114,464
    
    
    
    14,520
    
    
    
    18,291Utility plant (Notes 2 and 6)
    
    
    81,832
    
    
    
    83,591
    
    
    
    105,300Accumulated depreciation (Notes 2 and 6)
    
    
    (46,741
    )
    
    
    (48,576
    )
    
    
    (61,192
    )35,091
    
    
    
    35,015
    
    
    
    44,108Construction work in progress and advance payments
    
    
    2,442
    
    
    
    2,140
    
    
    
    2,69637,533
    
    
    
    37,155
    
    
    
    46,804Other non-current assets:Intangible assets (Notes 2 and 7)
    
    
    13,029
    
    
    
    13,576
    
    
    
    17,102Investments (Notes 2 and 8)
    
    
    385
    
    
    
    335
    
    
    
    422Other (Note 9)
    
    
    1,608
    
    
    
    3,344
    
    
    
    4,21215,022
    
    
    
    17,255
    
    
    
    21,736Total Assets
    
    
    67,019
    
    
    
    68,930
    
    
    
    86,831
 The accompanying notes are an integral part of these consolidated financial statements. F-3




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ENEL S.P.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2003 2002
    
    2003
    
    2003(millions of U.S.(millions of euro)
    
    dollars)LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt (Note 10)
    
    
    1,120
    
    
    
    4,011
    
    
    
    5,053Short term debt (Note 10)
    
    
    7,251
    
    
    
    4,632
    
    
    
    5,835Trade accounts payable
    
    
    6,664
    
    
    
    5,602
    
    
    
    7,057Taxes
payable
    
    
    889
    
    
    
    1,511
    
    
    
    1,903Advances from customers
    
    
    1,988
    
    
    
    3,075
    
    
    
    3,873Accrued expenses and other current liabilities
    
    
    4,004
    
    
    
    4,077
    
    
    
    5,13621,916
    
    
    
    22,908
    
    
    
    28,857Long-term debt (Note 10)
    
    
    17,172
    
    
    
    18,005
    
    
    
    22,681Other non-current liabilities:Reserves for pensions and similar obligations (Note 11)
    
    
    472
    
    
    
    462
    
    
    
    582Reserves for employee termination indemnities
    
    
    1,415
    
    
    
    1,298
    
    
    
    1,635Deferred income taxes (Note 20)
    
    
    3,104
    
    
    
    2,515
    
    
    
    3,168Other (Notes 12 and 21)
    
    
    2,168
    
    
    
    2,618
    
    
    
    3,2987,159
    
    
    
    6,893
    
    
    
    8,683Shareholders equity (Note 13):Share capital, euro 1 par value per share (6,063,075,189 shares
authorized, issued and outstanding)
    
    
    6,063
    
    
    
    6,063
    
    
    
    7,638Legal
reserve
    
    
    1,453
    
    
    
    1,453
    
    
    
    1,830Law 292/93 reserve
    
    
    2,215
    
    
    
    2,215
    
    
    
    2,790Retained earnings
    
    
    9,033
    
    
    
    8,884
    
    
    
    11,191Net
income
    
    
    2,008
    
    
    
    2,509
    
    
    
    3,16120,772
    
    
    
    21,124
    
    
    
    26,610Total Liabilities and Shareholders Equity
    
    
    67,019
    
    
    
    68,930
    
    
    
    86,831
 The accompanying notes are an integral part of these consolidated financial statements. F-4




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ENEL S.P.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003 2001
    
    2002
    
    2003
    
    2003(millions of U.S.(millions of euro)
    
    dollars)Operating revenues (Notes 2 and 14):Sales and services:Energy sales and transport
    
    
    21,323
    
    
    
    20,208
    
    
    
    19,834
    
    
    
    24,985Electricity equalization fund contribution
    
    
    783
    
    
    
    187
    
    
    
    179
    
    
    
    225Telecommunications services
    
    
    2,817
    
    
    
    3,642
    
    
    
    3,959
    
    
    
    4,987Gas sales to end users
    
    
    423
    
    
    
    780
    
    
    
    1,254
    
    
    
    1,580Other revenues
    
    
    3,435
    
    
    
    5,160
    
    
    
    6,091
    
    
    
    7,67328,781
    
    
    
    29,977
    
    
    
    31,317
    
    
    
    39,450Operating expenses:Personnel (Note 15)
    
    
    3,722
    
    
    
    3,589
    
    
    
    3,440
    
    
    
    4,333Fuel for thermal generation (Note 16)
    
    
    5,249
    
    
    
    4,255
    
    
    
    4,101
    
    
    
    5,166Purchased power (Note 16)
    
    
    3,649
    
    
    
    4,802
    
    
    
    4,620
    
    
    
    5,820Depreciation and amortization (Notes 2 and 6)
    
    
    4,459
    
    
    
    4,477
    
    
    
    4,516
    
    
    
    5,689Services and rentals (Note 17)
    
    
    5,633
    
    
    
    5,710
    
    
    
    5,224
    
    
    
    6,581Materials and supplies (Note 16)
    
    
    2,349
    
    
    
    4,212
    
    
    
    4,111
    
    
    
    5,179Provision
    
    
    599
    
    
    
    504
    
    
    
    593
    
    
    
    747Other
    
    
    577
    
    
    
    721
    
    
    
    924
    
    
    
    1,163Capitalized expense (Note 2)
    
    
    (934
    )
    
    
    (1,173
    )
    
    
    (944
    )
    
    
    (1,189
    )25,303
    
    
    
    27,097
    
    
    
    26,585
    
    
    
    33,489Operating income
    
    
    3,478
    
    
    
    2,880
    
    
    
    4,732
    
    
    
    5,961Financial income (expense) (Note 18):Financial income
    
    
    207
    
    
    
    286
    
    
    
    425
    
    
    
    536Financial expense
    
    
    (1,317
    )
    
    
    (1,464
    )
    
    
    (1,555
    )
    
    
    (1,959
    )(1,110
    )
    
    
    (1,178
    )
    
    
    (1,130
    )
    
    
    (1,423
    )Equity losses (Note 8)
    
    
    (85
    )
    
    
    (59
    )
    
    
    (73
    )
    
    
    (92
    )Extraordinary income (expense) (Notes 2 and 19)
    
    
    2,318
    
    
    
    736
    
    
    
    (136
    )
    
    
    (171
    )Income before income taxes
    
    
    4,601
    
    
    
    2,379
    
    
    
    3,393
    
    
    
    4,275Income taxes (Notes 2 and 20)
    
    
    649
    
    
    
    608
    
    
    
    966
    
    
    
    1,217Income before minority interests
    
    
    3,952
    
    
    
    1,771
    
    
    
    2,427
    
    
    
    3,058Minority interests
    
    
    274
    
    
    
    237
    
    
    
    82
    
    
    
    103Net income
    
    
    4,226
    
    
    
    2,008
    
    
    
    2,509
    
    
    
    3,161
   The accompanying notes are an integral part of these consolidated financial statements. F-5




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##### Table of Contents



ENEL S.P.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003 Share Capital
    
    Legal Reserve
    
    Law 292/93 Reserve
    
    Retained Earnings
    
    Net Income
    
    Total(millions of euro)Balance at January 1, 2001
    
    
    6,263
    
    
    
    1,253
    
    
    
    3,117
    
    
    
    5,491
    
    
    
    2,188
    
    
    
    18,312Allocation of 2000 net income to reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,963
    
    
    
    (1,963
    )
    
    
    Dividends paid
    
    
    
    
    
    
    
    
    
    
    (902
    )
    
    
    (451
    )
    
    
    (225
    )
    
    
    (1,578
    )Translation of foreign companies financial statements
and other changes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    6Restatement of the capital stock in euro and reverse
stock split
    
    
    (200
    )
    
    
    200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income for 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,226
    
    
    
    4,226Balance at December 31, 2001
    
    
    6,063
    
    
    
    1,453
    
    
    
    2,215
    
    
    
    7,009
    
    
    
    4,226
    
    
    
    20,966Allocation of 2001 net income to reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,043
    
    
    
    (2,043
    )
    
    
    Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,183
    )
    
    
    (2,183
    )Translation of foreign companies financial statements
and other changes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    (19
    )Net income for 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,008
    
    
    
    2,008Balance at December 31, 2002
    
    
    6,063
    
    
    
    1,453
    
    
    
    2,215
    
    
    
    9,033
    
    
    
    2,008
    
    
    
    20,772Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (175
    )
    
    
    (2,008
    )
    
    
    (2,183
    )Asset revaluation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    33Translation of foreign companies financial statements
and other changes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )Net income for 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,509
    
    
    
    2,509Balance at December 31, 2003
    
    
    6,063
    
    
    
    1,453
    
    
    
    2,215
    
    
    
    8,884
    
    
    
    2,509
    
    
    
    21,124(millions of U.S. dollars)Balance at December 31, 2003
    
    
    7,638
    
    
    
    1,830
    
    
    
    2,790
    
    
    
    11,191
    
    
    
    3,161
    
    
    
    26,610
   The accompanying notes are an integral part of these consolidated financial statements. F-6




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##### Table of Contents



ENEL S.P.A. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003 2001
    
    2002
    
    2003
    
    2003(millions of U.S.(millions of euro)
    
    dollars)CASH FLOWS FROM OPERATING ACTIVITIES:Income before minority interests
    
    
    3,952
    
    
    
    1,771
    
    
    
    2,427
    
    
    
    3,058Depreciation and amortization
    
    
    4,459
    
    
    
    4,477
    
    
    
    4,516
    
    
    
    5,689Writedowns (revaluations), net
    
    
    774
    
    
    
    1,832
    
    
    
    308
    
    
    
    388Net changes in reserves for employee termination indemnities
    
    
    (76
    )
    
    
    117
    
    
    
    (69
    )
    
    
    (87
    )Net changes in other reserves
    
    
    (92
    )
    
    
    19
    
    
    
    236
    
    
    
    297Gain on disposal of assets, net
    
    
    (3,017
    )
    
    
    (2,772
    )
    
    
    (528
    )
    
    
    (665
    )Interest income
    
    
    (207
    )
    
    
    (286
    )
    
    
    (425
    )
    
    
    (536
    )Interest expense
    
    
    1,317
    
    
    
    1,465
    
    
    
    1,555
    
    
    
    1,959Income taxes
    
    
    649
    
    
    
    608
    
    
    
    966
    
    
    
    1,217(Increase) Decrease:Inventories
    
    
    (295
    )
    
    
    (1,320
    )
    
    
    (1,028
    )
    
    
    (1,295
    )Accounts receivable
    
    
    (1,684
    )
    
    
    134
    
    
    
    378
    
    
    
    476Accrued income, prepayments and other
    
    
    (13
    )
    
    
    (53
    )
    
    
    (34
    )
    
    
    (43
    )Equalization fund receivables
    
    
    1,679
    
    
    
    44
    
    
    
    24
    
    
    
    30Trade accounts payable
    
    
    356
    
    
    
    1,434
    
    
    
    275
    
    
    
    346Accrued expenses and other current liabilities
    
    
    80
    
    
    
    204
    
    
    
    15
    
    
    
    19Interest received
    
    
    207
    
    
    
    286
    
    
    
    425
    
    
    
    536Interest paid
    
    
    (1,269
    )
    
    
    (1,436
    )
    
    
    (1,511
    )
    
    
    (1,903
    )Income taxes paid
    
    
    (656
    )
    
    
    (1,731
    )
    
    
    (357
    )
    
    
    (450
    )Net cash provided by operating activities
    
    
    6,164
    
    
    
    4,793
    
    
    
    7,173
    
    
    
    9,036CASH FLOWS FROM INVESTING ACTIVITIES:Investment:Capital expenditure (tangibles and intangibles)
    
    
    (4,718
    )
    
    
    (5,717
    )
    
    
    (3,969
    )
    
    
    (5,000
    )Unconsolidated subsidiaries
    
    
    (547
    )
    
    
    (39
    )
    
    
    (37
    )
    
    
    (47
    )Investments in consolidated subsidiaries, net of cash acquired
    
    
    (8,301
    )
    
    
    (2,339
    )
    
    
    (1,601
    )
    
    
    (2,017
    )Other changes in fixed assets
    
    
    7
    
    
    
    111
    
    
    
    28
    
    
    
    36(13,559
    )
    
    
    (7,984
    )
    
    
    (5,579
    )
    
    
    (7,028
    )Disposals:Disposal of businesses
    
    
    4,670
    
    
    
    3,665
    
    
    
    654
    
    
    
    824Fixed assets
    
    
    223
    
    
    
    113
    
    
    
    230
    
    
    
    2904,893
    
    
    
    3,778
    
    
    
    884
    
    
    
    1,114Net cash used in investing activities
    
    
    (8,666
    )
    
    
    (4,206
    )
    
    
    (4,695
    )
    
    
    (5,914
    )CASH FLOWS FROM FINANCING ACTIVITIES:Increase in long-term debt
    
    
    8,384
    
    
    
    2,411
    
    
    
    3,419
    
    
    
    4,307Repayment of long-term debt
    
    
    (4,318
    )
    
    
    (1,029
    )
    
    
    (1,350
    )
    
    
    (1,701
    )Change in short-term debt
    
    
    570
    
    
    
    924
    
    
    
    (2,056
    )
    
    
    (2,590
    )4,636
    
    
    
    2,306
    
    
    
    13
    
    
    
    16Dividends paid
    
    
    (1,578
    )
    
    
    (2,183
    )
    
    
    (2,183
    )
    
    
    (2,750
    )
 F-7




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##### Table of Contents



2001
    
    2002
    
    2003
    
    2003(millions of U.S.(millions of euro)
    
    dollars)Electricity
industry pension fund contribution and other pension obligations
    
    
    (651
    )
    
    
    (611
    )
    
    
    
    
    
    
    Payment of substitute tax on freeing-up of reserves and tax amnesty charges
    
    
    
    
    
    
    (402
    )
    
    
    (365
    )
    
    
    (460
    )Minority capital contribution and other minor items
    
    
    191
    
    
    
    116
    
    
    
    109
    
    
    
    137Net cash (used in) provided by financing activities
    
    
    2,598
    
    
    
    (774
    )
    
    
    (2,426
    )
    
    
    (3,057
    )NET CASH FLOW FOR THE YEAR
    
    
    96
    
    
    
    (187
    )
    
    
    52
    
    
    
    65CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR
    
    
    491
    
    
    
    587
    
    
    
    400
    
    
    
    504CASH AND CASH EQUIVALENTS AT END OF THE YEAR
    
    
    587
    
    
    
    400
    
    
    
    452
    
    
    
    569
   The accompanying notes are an integral part of these consolidated
financial statements. ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) GENERAL ENEL S.p.A. (the Parent) and its subsidiaries (the Subsidiaries or the
Subsidiary Companies), (collectively the Company or ENEL) are
involved in the generation, transmission, distribution and sale of
electricity, providing the majority of the electric service in Italy. ENEL,
through Wind Telecomunicazioni S.p.A. (WIND), also provides mobile and
fixed telecommunications services. Gas distribution and sale, fuel trading,
engineering and contracting represent the other principal activities of
ENEL. International operations are mainly represented by the generation and
distribution of electricity in Spain, through Viesgo. The Parent is the successor entity to Ente Nazionale per lEnergia
Elettrica, which was established as a public statutory body by the Italian
Parliament in 1962 when the Treasury Ministry nationalized approximately
1,250 private electric companies. In July 1992, the public statutory body
was converted into a joint stock company in accordance with Law No. 359 of
August 8, 1992, which provided for the privatization of ENEL. ENELs privatization was launched in 1999 when a total of 3,848,802,000
ENELs ordinary shares (1,924,401,000 taking into account the reverse stock
split made in 2001) representing 31.74% of its capital stock, were placed
on the market, with the net proceeds going to the Ministry of Treasury (the
Treasury Ministry) of the Republic of Italy. At December 31, 2002,
67.576% of the share capital of the Parent Company was owned by the
Treasury Ministry. At December 31, 2003, 50.63% of the share capital of the
Parent Company is owned by the Treasury Ministry and 10.35% is owned by
Cassa Depositi e Prestiti SpA, a company controlled by the Treasury
Ministry. In July 2000, the Company, which owned a 51% interest in WIND, acquired an
additional interest, thus raising ENELs interest to 56.63%. On March 29, 2001, ENEL, through its wholly owned subsidiary Enel
Investment Holding BV, purchased 100% of the share capital of Infostrada
S.p.A. (fixed line telecommunications operator in Italy). The acquisition
was treated as a purchase, with resulting goodwill, considering also the
ancillary costs, of euro 7,632 million, which is being amortized over 15
years (see Note 7). F-8




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##### Table of Contents



On July 31, 2001, Enel Investment Holding BV contributed its 100% interest
in Infostrada S.p.A. to WIND against receipt of shares of WIND
corresponding to 38.7% of the share capital of WIND, after the stock
issuance, increasing ENELs share to 73.42%. For consolidation purposes,
this transaction was treated as a reorganization under common control, and
accordingly the assets and liabilities transferred were accounted for at
their historical carrying values. On March 20, 2003, ENEL reached an agreement for the acquisition of the
26.6% share in WINDs capital stock held by the France Telecom Group, thus
achieving full ownership of WIND. The price for the acquisition
amounts to euro 1,330 million. In addition to the purchase price, the seller
was reimbursed euro 59 million of capital contributions
made to WIND. The agreement provides for payments of additional
consideration to France Telecom in case ENEL should sell WIND shares
before December 31, 2004, receiving a cash price per share
higher than that ENEL paid to France Telecom. The
transfer of the shares and the payment of the price agreed, in addition to
the assumption by ENEL of the euro 175 million subordinated loan, took place
on July 1, 2003. The acquisition was accounted for as a purchase, with resulting
goodwill, of euro 1,411 million which is being amortized over 15 years which
is the residual duration of the concession. In May 2001, ENEL, through its wholly owned subsidiaries Valgen and Valdis,
sold 100% and 49% of the shares of Geval and Deval, respectively, to
Finaosta (a finance company owned by the Valle dAosta Regional Authority)
for euro 802 million in cash. Geval owned the business unit relating to the
generation of electricity in the Valle dAosta and Deval owned the
activities related to the sales and distribution of electricity in the same
Italian region. The gain from the sales of euro 444 million
was recorded as
extraordinary income in the consolidated financial statements in the year
ended December 31, 2001. On September 20, 2001, the Company sold 100% of the share capital of
Elettrogen to a consortium led by the Spanish Group Endesa. ENEL received
euro 2,687 million in cash. The gain from the disposal of
euro 1,900 million was recorded as extraordinary income in the consolidated
financial statements in the year ended December 31, 2001. Effective
September 20, 2001, Elettrogen has been deconsolidated. In January 2002, the Company purchased 100% of the share capital of Electra
de Viesgo SL, the holding company of the Viesgo Group, the fourth largest
electricity operator in Spain, for euro 1,920 million. Following the
restructuring of Electra de Viesgo SL and its subsidiaries, at the end of
2002, activities in power generation and distribution of electricity were
contributed to Viesgo Generacion SL and Electra de Viesgo Distribucion SL,
respectively. The former is controlled by Enel Produzione SpA while the
latter is controlled by Enel Distribuzione SpA. The acquisition was accounted for
as a purchase, with resulting goodwill of euro 757 million, which is being
amortized over 20 years . On May 31, 2002, the Company sold 100% of the share capital of Eurogen to
Edipower, a consortium led by Edison SpA, for euro 2,980 million. The gain
from the disposal of euro 2,313 million was recorded as extraordinary
income in the consolidated financial statements for the year ended
December 31, 2002. Effective May 31, 2002, Eurogen has been deconsolidated. On January 29, 2003, the Company sold 100% of the share capital of
Interpower to the Energia Italiana-ACEA-Electrabel consortium for
euro 532 million. The gain from the disposal was euro 356 million and was recorded
as extraordinary income in the consolidated financial statements for
the year ended
December 31, 2003. Effective January 1, 2003 Interpower has been
deconsolidated. On March 5, 2003, Enel Produzione acquired for euro 75.7 million a 60% share
in the capital stock of Dutch company Entergy Power Holding Maritza BV
(Maritza), which in turn controls 73% of the Bulgarian company Maritza East
III Power Company AD. The latter will carry out the refurbishment and
environmental upgrade of a lignite-fired generation plant (with a nominal
generation capacity of 840 MW) located in Bulgaria on the border with Greece
(in the Stara Zagora Region), and will subsequently manage the plant. ENEL holds a
call option on 40% of the capital stock of Maritza. Effective April 1, 2003
these companies have been consolidated. F-9




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##### Table of Contents



On June 16, 2003, ENEL and Uniòn Fenosa signed an agreement for the
acquisition by ENEL of 80% of Uniòn Fenosa Energìas Especiales (UFEE), a
company that groups the activities of the Spanish operator in the field of
renewable resources. The price agreed for the purchase of UFEE is euro 178
million, while Uniòn Fenosa holds a call option, expiring at the end of
2007, on 30% of the shares. The transaction was concluded in December 2003
and was effective December 31, 2003. UFEE has been consolidated as of December 31, 2003 (balance-sheet only). The Bersani Decree requires that a local distribution company owned or
jointly owned by a municipality that serves at least 20% of the electricity
customers of a municipality may request the Company to sell to them its
distribution assets in that municipality at a price to be determined by
agreement between the ENEL and that relevant local distribution company.
Under this requirement, in March 2001 and in December 2001, the Company,
through its wholly owned subsidiary Enel Distribuzione, signed agreements
for the sale of its local distribution network in the relevant
municipalities to A.C.E.A., the utility company serving Rome and Formello
for euro 568 million and A.E.M. Torino S.p.A., the utility company serving
Turin, for euro 248 million. In October 2002 and November 2002,
distribution networks based in the municipalities of Milan and Verona were
sold for euro 424 million and euro 108 million, respectively. In November
2003, the distribution network based in the municipality of Brescia was
sold for euro 168 million. The aggregate gains from the sales of local
distribution networks related to the compliance with the Bersani Decree
of euro 120 million for the year ended December 31, 2003, euro 459
million for the year ended December 31, 2002 and euro 391 million for the
year ended December 31, 2001 were recorded as extraordinary income in
the respective consolidated statements of income. During 2001, the Company began to consolidate several companies active in
the distribution and sale of gas to the regulated market. The companies
acquired until June 2001 were merged into Enel Distribuzione Gas. In May
2002, the Company purchased 98.81% of the share capital of Camuzzi
Gazometri SpA, the second largest distributor of natural gas in Italy, for
euro 1,045 million. The acquisition was accounted for as a purchase, with
resulting goodwill of euro 597 million, which is being amortized over 15
years (see Note 7). Camuzzi Gazometri SpA (now renamed Enel Rete Gas
S.p.A.) and its subsidiaries have been consolidated effective July 1, 2002. In
2002, the Company purchased a number of minor gas distributors, which at
the end of the year were merged into GE.AD SpA, a fully owned subsidiary of
Enel Distribuzione Gas. Finally, in order to comply with current
regulation, the sales activity was spun off from the ownership and
management of the networks and attributed to a separate legal entity, Enel
Gas SpA. (2) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES Basis of Presentation  The Companys consolidated financial statements are prepared from the
accounts of the Parent and those of the Companys subsidiaries (whether
directly or indirectly controlled), in accordance with accounting
principles prescribed by Italian law and supplemented by the accounting
principles issued by the Consiglio Nazionale dei Dottori Commercialisti e
dei Ragionieri (Italian GAAP). The financial statements have been
reformatted from the original Italian consolidated financial statement
presentation and include certain financial statement reclassifications and
additional disclosures in order to conform more closely with the form and
content of financial statements required by the United States Securities
and Exchange Commission. Differences between the Companys accounting principles and accounting
principles generally accepted in the United States (U.S. GAAP) and their
effects on consolidated shareholders equity as of December 31, 2003 and
2002 and on consolidated net income for each of the three years in the
three year period ended December 31, 2003, are described in Notes 23, 24 and 25. F-10




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##### Table of Contents



The Companys consolidated financial statements are presented in euro. The
translations of the euro amounts into U.S. Dollars (USD) at the rate of
USD 1.2597 to 1 euro are included solely for the convenience of the reader,
using the noon buying rate in New York City for cable transfers in euro, as
certified for customs purposes by the Federal Reserve Bank of New York on
December 31, 2003. The convenience translations should not be construed as
representations that the euro amounts have been, could have been, or could
in the future be, converted into USD at this or any other rate of exchange. Certain amounts reported in previous years have been reclassified to
conform to the 2003 presentation. Amounts previously classified as other
reserves are included as retained earnings and amounts reported as gas
sales to end users were previously reported as other operating revenues. Consolidation Principles  The Companys consolidated financial statements include the Parents
statutory accounts and the accounts of companies controlled by ENEL S.p.A.,
directly or indirectly, either by holding the majority of the voting rights
or sufficient votes to enable it to exercise control at ordinary
shareholders meetings. Control is defined as the ability to govern the
financial and operating policies of the enterprise so as to obtain benefits
from the activities. The statutory financial statements reflect certain
tax-basis amounts. Adjustments are made on consolidation to eliminate the
effect of the tax-basis reporting and to eliminate all significant
intercompany balances and transactions, including any unrealized gains and
losses on such transactions, net of applicable tax effect, if any. Investments in entities that are not consolidated, when the Company has a
20% to 50% investment, if material, are accounted for under the equity
method. Joint ventures in which the Group has a stake are consolidated
using the proportional method. Other investments are recorded at cost and
adjusted if a permanent impairment in value is present. As further explained in Note 1, in 2003, the entities included in the consolidated financial statements
changed as compared to the prior year, mainly due to the disposal of
Interpower in January 2003 and the acquisition of Maritza and UFEE in March
2003 and December 2003, respectively. Other significant transactions, which
affect the comparability of the consolidated financial statements, as
compared with the previous year, include the acquisition of the remaining
26.6% share of WINDs capital stock and the disposal of the electricity
distribution network in the municipality of Brescia in March 2003 and November 2003, respectively. Additionally, as of
and for the year ended December 31, 2003, CESI was accounted for under the
equity method as, due to the disposal of Interpower in January 2003,
the share held by ENEL in CESI declined to 40.92%. Cash and Cash Equivalents  Cash equivalents consist of highly liquid temporary investments with
original maturities within three months. Inventories  Inventories are stated at the lower of cost or market; cost is determined
on the basis of the weighted average cost, and primarily includes fuel
stock and other materials. Obsolete or slow moving inventories are written down to their estimated
realizable value. Contract work in progress is stated on the basis of the contracted amounts
due, if those amounts can be calculated with reasonable certainty, on a
percentage-of-completion method. F-11




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##### Table of Contents



Utility Plant  Utility plant is stated at cost, as adjusted by revaluations in accordance
with various Italian laws. Revaluations prior to 1993 increased the consolidated and statutory net
book value of utility plant. Increases in utility plant of the Parent were
credited to retained earnings in the statutory and consolidated financial
statements. Revaluations that increased the net assets of Subsidiary
Companies were reflected as an increase in Retained Earnings in the
accompanying consolidated balance sheets. The application of Law No. 292 of August 9, 1993 resulted in a restatement
of the net book value of the Parents utility plant in its statutory books
to a valuation based upon a projected economic return. Such revaluation
increased the gross book value of utility plant and created a distributable
reserve in the statutory accounts that is reflected in the Law 292/93
Reserve in the accompanying consolidated financial statements. The
application of Law No. 292 did not result in a restatement of the net
assets of Subsidiary Companies. The Italian 2004 Budget Law (Law no. 350 dated December 24, 2003) has
enabled the revaluation of assets carried out in the statutory accounts of
the main ENEL companies resulting in a euro 41 million increase in the
gross book value of assets recorded in the consolidated financial
statements as of December 31, 2003, of which euro 14 million relates to land and buildings and euro
27 million to plant and equipment. The corresponding increase in ENELs
Shareholders equity amounts to euro 33 million, equal to the mentioned
revaluation, net of substitute tax payables, of euro 8 million. Costs directly associated with improvements are capitalized while routine
maintenance and repairs are expensed. Interest prior to 1989 was
capitalized. No interest amounts have been capitalized since. If management has evidence that there has been a permanent impairment in
the net value of any specific asset, a write-down is recorded accordingly.
The Company assesses potential impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In making this assessment, the Company groups its assets at
the lowest level of identifiable cash flows that are largely independent of
the cash flows of other utility plant assets. If it is determined that the
fair value of the assets is lower than the corresponding book value, an
impairment change is recorded for the difference. Such fair value is
determined based on the estimated future cash flows, on a discounted
basis, to be generated from the use of the asset. The original value of the
asset, net of depreciation, may be reinstated if the reasons for such a
write-down subsequently cease to exist. Replaced or retired property is removed from the utility plant accounts,
together with the related accumulated depreciation. Grants received to finance specific construction projects are recognized
once the legal right to such grants has been acquired and their amount is
reasonably determinable. These amounts are amortized over the estimated
economic useful life of the related asset. Depreciation  The consolidated financial statements reflect the depreciation of utility
plant on a straight-line basis, using rates reflecting the estimated
economic useful life (economic depreciation) of the related assets. In
the statutory financial statements of the Parent and Subsidiary Companies,
as permitted by Italian law, utility plant is depreciated over prescribed
tax lives (fiscal depreciation) which are shorter than the economic
useful lives. The excess amount of depreciation in the statutory accounts
is eliminated in the consolidated financial statements. As a result of a governmental law passed in 1986, which was aimed at
providing funds for ENEL to offset the cost of building the Italian
electricity infrastructure and other costs of connecting new buildings to
the electricity distribution network, customers requiring a new connection
are obliged to pay a connection fee to the Company. F-12




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##### Table of Contents



Prior to January 1, 2002, connection fees were initially recognized in
revenues as assessed, with an offsetting charge to depreciation expense.
Since that date, depreciation expense has been credited such that the
connection fees were effectively recognized in income on a straight-line
basis over the twenty year estimated useful life of the related
infrastructure assets. Deferred connection fees are included in the
consolidated balance sheets in accumulated depreciation. As a result of the
state of capital completion attained by the electricity distribution
network and of the different nature of the Companys capital expenditures
which are increasingly oriented towards improvements in the quality of
service and the safeguard of the environment, starting from January 1,
2002, connection fees paid by Non-Eligible Customers are no longer
attributed by the Company to the development of such network and are no
longer reflected in the depreciation of capital investments for Italian
GAAP purposes. The effect of this change to the attributable life of the
fees is an increase in consolidated net income of euro 302 million and euro
287 million for the years ending December 31, 2003 and 2002, respectively,
and an increase in earnings per share of euro 0.05 for the years ended
December 31, 2003 and 2002. Depreciation expense is based on the following estimated economic useful
lives: Average yearsof estimatedeconomicPlant categories
    
    useful lifeBuildings and associated land
    
    
    40Generating plant:Hydroelectric
    
    
    40Thermal
    
    
    20Geothermal
    
    
    12Other renewable sources
    
    
    20Transmission lines
    
    
    40
    (1)Transformer stations
    
    
    32-42
    (2)Medium and low voltage distribution lines
    
    
    18-20Telecommunications:Mobile equipments
    
    
    5-6Fixed lines appliances
    
    
    8Cables
    
    
    20
 (1) Average years estimated from January 1, 2003; previously equal to 35
(Note 6). (2) Average years estimated from January 1, 2003; previously equal to 20
(Note 6). Intangible Assets  Intangible assets are recorded following the same criteria adopted for
tangible assets. They include the non-amortized balance of investments
which have an economic life of several years. For acquired intangible
assets, including goodwill, amortization is calculated on a straight-line
basis over five years or a different period if deemed to be more
representative of the expected economic useful life of the assets. The
extraordinary contribution due upon the suppression of the electricity
industry pension fund, pursuant to Law 488, December 23, 1999 (the 2000
Budget Law), has also been recorded under intangible assets. This balance
is amortized over a period of 20 years, as also permitted under Italian Law
(see Note 7). Reserve for Employee Termination Indemnities and Other Employee Benefits  The Companys Italian employees are eligible for severance pay pursuant to
Italian law. The Company accrues a reserve for such employee termination
liabilities, net of applicable advances, over the employees service
periods. The Company also contributes to a management retirement plan that pays
pension benefits, in F-13




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##### Table of Contents



accordance with Italian law and by agreements with the trade unions, to
managers who retired prior to April 1, 1998. With the establishment of the
FONDENEL Fund, the liabilities related to managers employed as of April 1,
1998 were transferred to the FONDENEL Fund. The FONDENEL Fund is managed
externally and is subject to the regulations governed by Decree No. 14 on
April 21, 1993. In the last quarter of 2000, the Company reached an
agreement with the majority of the participants in the management
retirement plan for an early payment of the provision. Accordingly, the pension benefits liability as of December 31, 2003 relates
solely to those individuals who had retired prior to April 1, 1998 and did
not agree to the early payment in the last quarter of 2000. The reserve
also includes amounts to be paid to existing employees who have worked 35
years with the Company, in accordance with the collective labor contract
and current union agreements. In addition, ENEL makes contributions to certain employee associations that
provide medical and various other employee benefits to both current and
retired employees. These plans are not administered by ENEL and
contributions are determined in accordance with the provisions of
negotiated contracts with the trade unions. ENEL expenses its contributions
to these plans as incurred. Such amounts totaled euro 90 million,
euro 79 million and euro 82 million for the years ended December 31, 2003,
2002 and 2001, respectively. The Company grants, under existing contractual obligations, to its
employees hired prior to July 1, 1996 (working, retired or to their
surviving spouses), an 80% reduction on electricity tariffs (excluding
taxes and duties) within certain consumption limits per year. These
discounts are presented as a reduction in operating revenues in the
accompanying consolidated financial statements. Employees
of Viesgo are also entitled to certain benefits, including a
reduction of electricity tariffs and medical care. In March 1999, the Company and the managers union signed an agreement
which replaced the managers benefit of discounted electricity tariff rates
with a monthly bonus paid during their working life and a one-time bonus
paid at their retirement date. In November 1999, the investors in ENELs initial public offering included
70,303 ENEL employees (approximately 87% of those eligible), who purchased
an aggregate of 1.5% of ENELs capital stock. No discount was reserved for
employees, with the exception of bonus shares in the ratio of 11 shares for
every 200 shares held for a period of at least one year (for the general
public, the allocation was 10 shares for every 200 shares held for at least
one year). ENEL employees were permitted to obtain advances from the
provision for termination indemnities for the purchase of these shares. The
total amount of the advances at the time of the initial public offering was
euro 745 million. Operating Revenues  Revenues from the sale and transport of electricity and gas to end users
relate to volume supplied in the period. These revenues are recorded when
the customer is billed or the meter is read and are integrated with
appropriate consumption estimates of revenues from the supply of
electricity provided after the last meter reading prior to year end.
Calculations are based, where applicable, on law provisions and tariffs
established by the Italian Authority for Electricity and Gas or other
similar foreign institutions, applicable for the year. Pricing is based on the tariff structure, applicable for the year, as
established by law and the Energy Authority. Revenues for the telecommunications sector from traffic, interconnections
and roaming are recorded according to the usage by customers and telephone
operators calculated on an accrual basis. Such revenues include the amount
relating to the access to and use of the Companys network by customers and
other domestic and international telephone operators. Revenues from F-14




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##### Table of Contents



the sale of rechargeable telephone cards and recharging are recorded solely
for the amount corresponding to prepaid traffic effectively used by
customers during the year. Revenues from the sale of mobile and fixed
telephones and related accessories are recorded at the time of the transfer
of ownership. Revenues from other services and the sale of goods are
recognized when the service is provided or the title of ownership of the
goods is transferred. Statements of Cash Flows  The consolidated statements of cash flows are prepared using the indirect
method and are in accordance with International Accounting Standard No. 7,
issued by the International Accounting Standards Board, as well as Italian
GAAP. The payment in 2001 and 2002 of the extraordinary contribution for the
elimination of the electricity industry pension fund are included in the
consolidated statements of cash flows as financing activities. Vacation Pay  Vacation pay for Italian employees is provided in accordance with Italian
law. The related liabilities were euro 89 million and euro 85 million as of
December 31, 2003 and 2002, respectively, and are included in Accrued
expenses and other current liabilities in the accompanying consolidated
balance sheets. Income Taxes  The following two income taxes are payable by Italian companies:  IRPEG (corporate income tax), payable at 34%, 36% and 36% for the
years ended December 31, 2003, 2002 and 2001, respectively. From January 1,
2004, IRES replaces IRPEG, and the statutory rate for the year ending
December 31, 2004 is 33%.  IRAP (regional income tax), payable at a tax rate of 4.25% for the
years ended December 31, 2003, 2002 and 2001 as well as for 2004. From
January 1, 2003, each Italian region may determine its own tax rate leading
to an aggregate rate which must fall between 3.259% and 5.259%. The tax base for IRAP differs significantly from that for IRPEG. In
particular, employee related costs and net interest expense are not
deductible for IRAP purposes. Deferred tax assets and liabilities are recognized for differences between
the financial reporting and tax bases of assets and liabilities at each
reporting period end. Certain reserves within shareholders equity,
totaling euro 2,657 million as of December 31, 2003, are subject to
taxation upon utilization. Deferred tax liabilities on such reserves are
provided to the extent that such taxation will result from expected future
distributions or other taxable events. Deferred tax assets, including tax
loss carry-forwards, are recognized when management believes there is
reasonable certainty of their realization. Research and Development  Research and Development costs are charged to operating expenses as
incurred. In 2001 and 2002, research and development activities primarily
related to various studies involving technological innovation, improvements
to plant efficiency, reliability and safety, environmental protection,
service quality, and use of energy resources. In 2003, research and
development costs include only expenses related to improvements to plant
efficiency, reliability and safety, environmental protection, service
quality, and use of energy resources. Studies involving technological
innovation are carried out by the associate company CESI, which is no
longer consolidated as of January, 1 2003, but accounted for by the equity
method. F-15




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##### Table of Contents



Amounts charged to operating expenses were euro 16 million, euro 100
million and euro 100 million for the years ended December 31, 2003, 2002
and 2001, respectively. Foreign Currency  Transactions
denominated in currencies other than the functional currency are translated to
the functional currency at the exchange rate in effect on the date of the transaction. At the
balance sheet date, assets and liabilities denominated in currencies
different from the functional currency are translated into the functional
currency at the exchange rate at that date. Foreign currency exchange gains
and losses, both realized and unrealized, are included in income in the
period they arise. The balance sheet of companies operating in countries not participating in
the euro are translated into euro at the exchange rate applicable at the
balance sheet date. Statement of income items are translated into euro at
average exchange rates for the year. Differences arising from the
translation into euro of these statements are netted against retained
earnings without any effect on net income. With regards to the Brazilian subsidiary TSN, until December 31, 2002, it
was deemed appropriate to translate the financial statements of such
subsidiary using the standards and procedures applicable if the
transactions of the foreign operations had been those of the Parent
itself. Property, plant and equipment of this subsidiary, and shareholders
equity were translated at historical exchange rate, monetary items were
translated at the year-end exchange rate, while the annual average exchange
rate is applied to the income statement items. Starting from 2003, due to
the entity changing from a branch to an autonomous entity, it has been
deemed appropriate to convert such amounts at the current exchange rate.
Such change did not have a significant impact on the consolidated
financial statements. Financial Derivatives  With respect to interest rate, foreign exchange and price risks, the
Company enters into derivative transactions to hedge specific transactions
as well as general risks (see Note 21). The interest differentials to be received or paid on interest rate swaps,
as well as interest differentials on interest rate collars, are accrued
over the life of the contract. The interest differentials on forward rate
agreements are recognized at the date of settlement of the contract and are
accrued over the period hedged. Such interest rate differentials are
recorded in accrued income and prepayments or accrued expenses and other
current liabilities as applicable in the consolidated balance sheets. When
recognized in the consolidated statements of income, the amounts are
classified as financial income (expense). Foreign exchange forward contracts are valued at the spot rate at year-end
and the related gains and losses are recorded as financial income
(expense). Costs for options are recognized at the expiration date of the
option. Premiums or discounts are accrued over the life of the contract,
and are also classified as financial income (expense) in the consolidated
statements of income. With reference to options, the premiums paid are
recorded in accrued income and prepayments until the maturity of the
contract. The economic effects of currency and commodity risk hedging contracts aimed
at hedging risks deriving from the current tariff system are recorded in
the consolidated statements of income in line with those of transactions
for which risks are being hedged. If the economic effect of the hedged
transaction has not yet occurred, the corresponding economic effect
relating to the hedging instruments is deferred. Derivative contracts
originally entered into as hedging contracts for which the underlying asset
or liability is extinguished prior to expiration or is not specifically
identifiable, are valued at the lower of cost or market value as of the
balance sheet date (interest rate derivatives) or are marked to market
(foreign exchange derivatives). The corresponding effect of the valuation
is recorded as financial income (expense) in the consolidated statements of
income. F-16




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##### Table of Contents



Extraordinary Income and Expenses  The Company records items as extraordinary income and expenses if they
relate to gains or losses on activities which impact the corporate
structure of the Company (such as business re-organization costs, mergers
and acquisitions, write-downs due to reconversions and replacement of plant
and equipment due to new technologies); extraordinary write-downs of fixed
assets and related restatement to original value when the reasons for asset
write-downs subsequently cease to exist; contingent assets or liabilities
from events or transactions that would not reasonably be expected to recur
in the foreseeable future, such as theft or shortage, natural events or
litigation related to non-operating areas (e.g., mergers and acquisitions)
and items regarding previous fiscal years. Environmental Costs  Environmental costs refer to the avoidance, reduction and monitoring of the
environmental impact of production activities. Recurring environmental
costs are recorded in the consolidated statements of income in the year in
which they occur, while costs relating to the extension of the useful life,
increase in capacity and improvement in the safety of tangible assets are
capitalized as part of the cost of the assets and depreciated over the
residual useful lives of the related assets. Provisions for risks and
charges are accrued when it is probable or certain that the cost will be
incurred and its amount can be reasonably estimated. (3) REGULATION AND RATES On April 1, 1999, Legislative Decree No. 79/1999 (the Bersani Decree),
implementing the principles contained in the Electricity Directive issued
in 1996 by the European Union, became effective. The Bersani Decree has
commenced the transformation of the electricity sector from a highly
regulated industry to one where energy prices charged by generators will be
eventually determined by competitive bidding. The Bersani Decree also
mandates the consolidation of electricity distribution activities in urban
areas. It further provides for a gradual liberalization of the electricity
market so that customers whose annual consumption of electricity exceeds
specified amounts, together with distributors and wholesalers (all defined
as Eligible Customers) will be able to contract freely with power
generation companies to buy electric power. The Energy Authority has also replaced the cost-plus system for tariffs
with a new price cap tariff methodology. Under the price-cap methodology,
tariffs will be reduced by a fixed percentage each year. This system
creates incentives for operators to improve efficiency and gradually passes
on savings to final customers. The Bersani Decree establishes a general regulatory framework for the
Italian electricity industry that gradually introduces free competition in
power generation and sales to Eligible Customers while maintaining a
regulated monopoly structure for power transmission, distribution and sales
to Non-Eligible Customers. In particular, the Bersani Decree and subsequent
implementing regulations:  
    
    Liberalized, as of April 1, 1999, the generation, import and export of
electricity, as well as the sale of electricity to Eligible Customers;
    
    Provided that, after January 1, 2003, no electricity company will be
allowed to produce or import more than 50% of the total of imported
and domestically-produced electricity in Italy and, in connection with
this limit, mandated that the Company sell not less than 15,000 MW of
its generating capacity by January 1, 2003;
    
    Distinguished between Eligible Customers, which may negotiate supply
agreements directly with any domestic or foreign producer, wholesaler
or distributor of electricity, and Non-Eligible Customers, which must
purchase electricity from the distributor that serves the area in
which they are located and pay tariffs determined by the Energy
Authority;
    
    Provided for the establishment of the Single Buyer, a central
purchaser of electricity from producers on behalf of all Non-eligible
Customers; F-17




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##### Table of Contents




    
    Provided for the creation of the Borsa dellEnergia Elettrica, (Pool
Market) for electricity, in which producers, importers, wholesalers,
distributors, the Gestore della Rete, other Eligible Customers and the
Single Buyer will participate, with prices being determined through a
competitive bidding process;
    
    Provided for the creation of the Gestore del Mercato, (Market
Operator), charged with managing the pool market;
    
    Provided that the transmission and distribution of electricity are
reserved to the Italian government and performed by licensed
operators, and in this respect:
    
    Provided that management and operation of the national transmission
network is licensed to an independent system operator, the Gestore
della Rete, (System Operator) while owners of the transmission
network (including the ENEL) retain ownership of the network assets;
and
    
    Established a new licensing regime for electricity distribution and
provided incentives for the consolidation of electricity distribution
networks within each municipality. The Bersani Decree has been amended, following the enactment of a law in
October 2003, that provides, among other things, that management and operation
of the national transmission grid be entrusted to a single entity, which will
also own the grid assets and that will be privatized. A governmental decree
enacted in May 2004 requires ENEL to merge Terna S.p.A. (Terna), its subsidiary
that owns the majority of the national transmission grid assets, with the
Gestore della Rete in a new entity and to transfer the responsibility for the
management of the national transmission grid and related assets by October 31,
2005 to this new entity. Upon this transfer, the Company will no longer control
Terna as no electricity operator, including ENEL, shall be entitled to voting
rights in excess of 5% with respect to the appointment of Ternas directors. In
any event, ENEL is required to reduce its holding in Terna to no more than 20%
by July 1, 2007. (4) RECEIVABLES Receivables are stated at their net realizable value and primarily relate
to amounts due for the supply of electricity, gas and services, and also
include amounts to be billed for services rendered prior to year-end. The
following table shows a breakdown of receivables as of December 31, 2002
and 2003. 2002
    
    2003(millions of euro)Electricity, gas and services
    
    
    6,076
    
    
    
    5,995Telecommunication services
    
    
    1,174
    
    
    
    1,335Allowance for doubtful accounts
    
    
    (326
    )
    
    
    (446
    )6,924
    
    
    
    6,884Tax receivables
    
    
    1,385
    
    
    
    948Deferred tax assets
    
    
    729
    
    
    
    506Other
    
    
    1,383
    
    
    
    1,1053,497
    
    
    
    2,55910,421
    
    
    
    9,443
 F-18




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##### Table of Contents



The decrease in receivables for electricity, gas and services is mainly due
to the collection of receivables from the Gestore della Retefor
electricity withdrawn by free market operators in 2002, in addition to
lower electricity sales on the domestic free market. The increase in trade receivables for the telecommunications sector is due
to increased activity. In 2003, WIND continued the program for the securitization of its trade
receivables which started in 2002 with a primary third-party bank involving
an entity created to manage such receivables. The face value of receivables
securitized in 2003 amounts to euro 1,213 million, of which euro 105 million
not yet fell due as of December 31, 2003. The amount received against the
securitization of receivables is equal to their face value net of a discount
and is paid partly in cash and partly in financial notes issued by the
entity created to manage such receivables. The risk of default borne by the
seller, connected with the credit standing of debtors, is limited to the
value of the said financial notes and amounts, at the end of 2003, to euro
149 million, recorded among other receivables. The above amount is net of
the related provision for doubtful accounts which equals euro 45 million as of
December 31, 2003. The decrease in tax receivables is mainly due to lower estimated payments
made by the Company, lower taxes payable and lower VAT receivables. The
decrease in deferred tax assets is mainly related to write-downs on assets
calculated by Enel Distribuzione and Enel Produzione in previous years and
to the change in the scope of operations, due almost entirely to the
deconsolidation of Interpower and CESI. Other receivables mainly include advances to suppliers, factoring
receivables, receivables from social security institutions and net
Equalization Fund receivables. (5) INVENTORIES Inventories as of December 31, 2002 and 2003 were as follows: 2002
    
    2003(millions of euro)Fuel
    
    
    682
    
    
    
    534Materials, supplies and other inventories
    
    
    444
    
    
    
    527Residential buildings available for sale
    
    
    340
    
    
    
    263Contract work in progress
    
    
    1,731
    
    
    
    2,880Advances
    
    
    69
    
    
    
    73,266
    
    
    
    4,211
 The decline in fuel inventories is primarily due to the change in the scope
of consolidation due to the disposal of Interpower and to lower stocks of
natural gas. The increase in materials, supplies and other inventories is mainly due to
material of the Networks and Infrastructure Division used in investing
activities. Residential buildings available for sale decreased due to disposals in the
year. The increase in contract work in progress is primarily due to the
development of activities in the engineering and contracting sector for
contract work acquired internationally. The increase is consistent with
advances from customers, recorded under current liabilities. (6) UTILITY PLANT F-19




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##### Table of Contents



Net utility plant as of December 31, 2002 and 2003 consisted of the
following: 2002
    
    2003(millions of euro)Utility plant, gross:Generating Plant:Hydroelectric
    
    
    8,201
    
    
    
    8,178Thermal
    
    
    17,587
    
    
    
    17,432Geothermal and renewable sources
    
    
    1,914
    
    
    
    2,068Transmission Line
    
    
    6,590
    
    
    
    7,160Distribution Electricity Network
    
    
    34,727
    
    
    
    34,961Distribution Gas Network
    
    
    2,564
    
    
    
    2,573Telecommunication networks
    
    
    4,484
    
    
    
    5,124Land and Buildings
    
    
    3,380
    
    
    
    3,767Other
    
    
    2,385
    
    
    
    2,328Construction in progress
    
    
    2,442
    
    
    
    2,140Total
    
    
    84,274
    
    
    
    85,731Accumulated Depreciation:Generating Plant:Hydroelectric
    
    
    3,392
    
    
    
    3,599Thermal
    
    
    9,848
    
    
    
    10,025Geothermal and renewable sources
    
    
    1,014
    
    
    
    1,036Transmission Line
    
    
    3,264
    
    
    
    3,389Distribution Electricity Network
    
    
    24,694
    
    
    
    24,886Distribution Gas Network
    
    
    877
    
    
    
    944Telecommunication networks
    
    
    1,236
    
    
    
    1,868Land and Buildings
    
    
    935
    
    
    
    1,319Other
    
    
    1,481
    
    
    
    1,510Total
    
    
    46,741
    
    
    
    48,576Utility plant, net:Generating Plant:Hydroelectric
    
    
    4,809
    
    
    
    4,579Thermal
    
    
    7,739
    
    
    
    7,407Geothermal and renewable sources
    
    
    900
    
    
    
    1,032Transmission Line
    
    
    3,326
    
    
    
    3,771Distribution Electricity Network
    
    
    10,033
    
    
    
    10,075Distribution Gas Network
    
    
    1,687
    
    
    
    1,629Telecommunication networks
    
    
    3,248
    
    
    
    3,256Land and Buildings
    
    
    2,445
    
    
    
    2,448Other
    
    
    904
    
    
    
    818Construction in progress
    
    
    2,442
    
    
    
    2,140Total
    
    
    37,533
    
    
    
    37,155
 As of December 31, 2003, utility plant includes assets to be relinquished,
primarily hydroelectric, with a net book value of approximately euro 2,800
million. Italian law (Decree 79/99 applying European Commission Directive
92/62 regarding the electricity market) established the expiration date for
concessions relating to large reservoirs managed and operated by the
Company. The concessions will expire thirty years after the decree became
effective, thus in 2029. Moreover, Law no. 340 dated November 24, 2000,
extended to 2020 concessions regarding State property used for thermal
generation activities. At such dates, all water catchment plant,
control equipment, high pressure pipes and drainage pipes must be
transferred to the State in F-20




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##### Table of Contents



good working order if the concession is not
renewed. This is achieved through annual maintenance activities. Therefore,
the depreciation of the assets to be relinquished has been calculated on
the basis of the lesser of the duration of the concession or the residual
useful life of the assets. The same decree also provides the possibility for the autonomous provinces
of Trento and Bolzano to choose a different expiration date for
hydroelectric concessions, currently in 2010. The expiration of concessions for hydroelectric plants of the Viesgo Group
varies between 2032 and 2065. The following reflects changes in utility plant (millions of euro): December
    
    
    
    
    
    
    
    
    
    
    
    
    
    December
    
    
    
    
    
    
    
    
    
    
    
    
    
    December31, 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    31, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    31, 2003Reclass.
    
    
    
    
    
    
    
    
    
    
    
    Reclass.retirem.
    
    Net book
    

    
    
    
    


    
    
    
    
    retirem.
    
    Net bookNet book value
    
    Addition
    
    Depreciation
    
    and other mov.
    
    value
    
    Addition
    
    Depreciation
    
    and other mov.
    
    valueGenerating Plant:Hydroelectric
    
    
    4,958
    
    
    
    45
    
    
    
    (258
    )
    
    
    64
    
    
    
    4,809
    
    
    
    35
    
    
    
    (249
    )
    
    
    (16
    )
    
    
    4,579Thermal
    
    
    8,718
    
    
    
    425
    
    
    
    (816
    )
    
    
    (588
    )
    
    
    7,739
    
    
    
    293
    
    
    
    (741
    )
    
    
    116
    
    
    
    7,407Geothermal and
other renewables
    
    
    787
    
    
    
    103
    
    
    
    (107
    )
    
    
    117
    
    
    
    900
    
    
    
    35
    
    
    
    (116
    )
    
    
    213
    
    
    
    1,032Transmission
line
    
    
    3,258
    
    
    
    161
    
    
    
    (229
    )
    
    
    136
    
    
    
    3,326
    
    
    
    54
    
    
    
    (139
    )
    
    
    530
    
    
    
    3,771Distribution
electricity
network
    
    
    8,876
    
    
    
    1,500
    
    
    
    (1,043
    )
    
    
    700
    
    
    
    10,033
    
    
    
    1,053
    
    
    
    (948
    )
    
    
    (63
    )
    
    
    10,075Distribution gas
network
    
    
    518
    
    
    
    48
    
    
    
    (46
    )
    
    
    1,167
    
    
    
    1,687
    
    
    
    66
    
    
    
    (70
    )
    
    
    (54
    )
    
    
    1,629Telecommunication
networks
    
    
    2,335
    
    
    
    1,239
    
    
    
    (552
    )
    
    
    226
    
    
    
    3,248
    
    
    
    515
    
    
    
    (690
    )
    
    
    183
    
    
    
    3,256Land and
buildings
    
    
    2,220
    
    
    
    124
    
    
    
    (64
    )
    
    
    165
    
    
    
    2,445
    
    
    
    9
    
    
    
    (95
    )
    
    
    89
    
    
    
    2,448Other
    
    
    1,078
    
    
    
    208
    
    
    
    (218
    )
    
    
    (164
    )
    
    
    904
    
    
    
    116
    
    
    
    (209
    )
    
    
    7
    
    
    
    818Construction in
progress
    
    
    2,256
    
    
    
    1,256
    
    
    
    
    
    
    
    (1,070
    )
    
    
    2,442
    
    
    
    1,447
    
    
    
    
    
    
    
    (1,749
    )
    
    
    2,140Total
    
    
    35,004
    
    
    
    5,109
    
    
    
    (3,333
    )
    
    
    753
    
    
    
    37,533
    
    
    
    3,623
    
    
    
    (3,257
    )
    
    
    (744
    )
    
    
    37,155
 The economic depreciation rates used until 2002 for Ternas high voltage
and very high voltage plants were determined in 1994 by a special ENEL
working group. Recent diagnostic methods, used in conjunction with
sophisticated calculation tools, made possible a more accurate
determination of the plants technical condition. Therefore, effective
January 1, 2003, the economic depreciation rates were revised in order to
better reflect the estimated economic useful life of the facilities. The
analysis performed, based on specific factors such as preventive
maintenance and improved reliability of the components, resulted in the
extension of the assets economic useful lives, specifically with regards
to the plants forming the Terna Grid (lines and stations) and the linked
facilities (remote management and control). The application of lower
depreciation rates for such assets resulted in a euro 104 million reduction
in the ordinary depreciation as compared to 2002 which was
calculated on higher depreciation rates. Reclassifications, retirements and other movements include the effect on
utility plant net book value of the change in ENELs structure in 2003 due
to the following reasons:  
    
    the disposal of Interpower, which resulted in the
deconsolidation of fixed assets amounting to euro 450 million; F-21




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##### Table of Contents




    
    the deconsolidation of CESI resulting in a decrease in net book
value of euro 55 million;  
    
    the acquisition of the UFEE resulting in an increase in net
book value of euro 169 million;  
    
    the acquisition of Maritza resulting in an increase in net book
value of euro 55 million. The amount of
reclassifications, retirements and other movements in the above table also
includes current divestments of euro 252 million, write-downs totaling euro
211 million and adjustments relating capital grants recorded in previous
years of euro 60 million. The Company is in the process of converting the Torre Valdaliga Nord
generation plant from fuel oil to coal. The financial effects reflected in
the consolidated financial statements as of and for the year ended December
31, 2003 are as follows:  
    
    write-downs in the net book value of assets of euro 133 million;  
    
    accruals for expected dismantling and restoration costs of euro 58 million;  
    
    capitalized costs of euro 28 million. Additionally, as discussed in Note (2), revaluations made pursuant to the 2004
Budget Law (Law no. 350 dated December 24, 2003) resulted in a euro 41
million increase in the gross book value of assets during the year ended
December 31, 2003. (7) INTANGIBLE ASSETS Intangible assets as of December 31, 2002 and 2003 were as follows: 2002
    
    2003(millions of euro)Goodwill
    
    
    7,391
    
    
    
    8,313Concessions, licenses, trademarks and similar
rights
    
    
    2,839
    
    
    
    2,707Extraordinary contribution for Electricity
Industry Pension Fund
    
    
    1,546
    
    
    
    1,422Patents and intellectual property rights.
    
    
    465
    
    
    
    489Other
    
    
    788
    
    
    
    64513,029
    
    
    
    13,576
 The amortization of intangible assets for the years ended December 31,
2003, 2002 and 2001 amounts to euro 1,253 million, euro 1,142 million and
euro 815 million, respectively. Goodwill is detailed as follows: F-22




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##### Table of Contents



December 31, 2002
    
    
    
    
    
    
    
    
    
    December 31, 2003Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedHistorical
    
    amortization
    
    Net book
    
    Historical
    
    amortization
    
    Net book
    
    Amortization(millions of euro)
    
    cost
    
    and write-downs
    
    value
    
    cost
    
    and write-downs
    
    value
    
    periodTelecommunications
    
    
    8,360
    
    
    
    2,511
    
    
    
    5,849
    
    
    
    9,771
    
    
    
    3,011
    
    
    
    6,760
    
    
    15 yearsViesgo
    
    
    757
    
    
    
    38
    
    
    
    719
    
    
    
    757
    
    
    
    76
    
    
    
    681
    
    
    20 yearsGas
sector
    
    
    695
    
    
    
    35
    
    
    
    660
    
    
    
    701
    
    
    
    111
    
    
    
    590
    
    
    15 yearsENA and ELA
    
    
    163
    
    
    
    14
    
    
    
    149
    
    
    
    168
    
    
    
    24
    
    
    
    144
    
    
    20 yearsMaritza
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    1
    
    
    
    15
    
    
    20 yearsEnel Union Fenosa
Ren
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    123
    
    
    
    
    
    
    
    123
    
    
    20 yearsOther
    
    
    15
    
    
    
    1
    
    
    
    14
    
    
    
    15
    
    
    
    15
    
    
    
    9,990
    
    
    
    2,599
    
    
    
    7,391
    
    
    
    11,551
    
    
    
    3,238
    
    
    
    8,313
 At December 31, 2003, goodwill for the telecommunications segment includes
primarily the residual amount of the goodwill paid in March 2001 for the
acquisition of Infostrada (euro 4,836 million), the residual amount of
goodwill paid in July 2000 for the acquisition of a 5.63% share in WIND
(euro 441 million) and the residual amount of goodwill paid in July 2003
for the acquisition of a 26.6% share in WIND (euro 1,355 million).
Additionally, in 2002, following the break-up of the Italian mobile
communications operator named BLU, WIND acquired certain of BLUs assets,
paying euro 130 million in goodwill which is being amortized over 15 years. In view of the outlook of the telecommunications sector and the downwards
revision of growth expectations inevitably affecting WIND, the carrying value of the goodwill related to such
segment as of December 31, 2002 was tested for impairment. A valuation of ENELs telecommunications
business was performed on the basis of estimated future cash flows, which involved the comparison of the estimated future
discounted cash flows, to the book value of the telecommunications segment. This resulted in the determination of
an impairment in value of euro 1,511 million that was deemed to be
other than temporary and was recognized as an extraordinary charge in
the 2002 consolidated statement of income. Goodwill for the gas sector mainly relates to the acquisitions in 2002 of
gas distributors (Camuzzi and other minor companies) of euro 597 million.
Such goodwill, mainly related to the customer base acquired, is amortized
over 15 years, deemed appropriate in view of current and expected
performances of the business and in view of the fact that sales activities
are not directly connected to the expiration terms of licenses for the
distribution of gas. Goodwill relating to electricity generation activities (Viesgo, Enel North
America, Enel Latin America, Maritza and UFEE) is amortized over 20 years,
deemed in line with the activity and business plan. Concessions, licenses, trademarks and similar rights include costs incurred
by WIND to participate in the auction for the awarding of a license for the
installation and operation of third generation mobile telecommunications
systems (UMTS  IMT 2000) as well as license registration costs. The
original cost amounts to euro 2,447 million, amortized over the residual
life of the license. The initial 15-year license issued by the Authority
for Telecommunications on January 10, 2001 was extended in 2002 to a
20-year period, effective January 1, 2002. Amortization started on January
1, 2003 following the testing of the service in some areas. The
amortization expense for the year ended December 31, 2003 amounted to euro
129 million. Concessions, licenses, trademarks and similar rights also
include approximately euro 318 million relating to costs incurred by
Infostrada (now part of WIND) to acquire concessions for the use of
international circuits and for the usage and passage rights provided for in
the contract signed in 1998 with Ferrovie dello Stato (State Railways),
regulating the use of the related fiber optic network. The right of access
to the network is amortized on the basis of the duration of the same (29
years). The right to use the existing optical fiber network is amortized
over 20 years. F-23




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##### Table of Contents



The extraordinary contribution due following the suppression of the
electricity industry pension fund, was established through Law no. 488,
dated December 23, 1999 (2000 Budget Law). Based on the three installments
paid, the Companys final total contribution of euro 1,940 million (the
original estimate was euro 2,036 million) is expensed on a straight-line
basis over a period of 20 years, as also permitted by the above-mentioned
Budget Law. Patents and intellectual property rights primarily relate to costs incurred
by WIND, Enel Distribuzione, and Enel.it for the acquisition of proprietary
and licensed software. Other intangible assets mainly relate to leasehold improvements made by
telecommunications companies on technical sites; costs incurred in projects
of various nature, such as the development of a cartography system for the
electricity distribution networks, the implementation of new operating
systems and leasehold improvements on technical sites in the
Telecommunications sector, in addition to costs incurred in the acquisition
of rights deriving from two contracts for the construction of
waste-to-energy plants; costs of advertising campaigns carried out to
support new telecommunications services and trademarks and software
development costs. Accumulated amortization and write-downs of goodwill, concessions,
licenses, trademarks and similar rights and the extraordinary contribution
related to the suppression of the electricity industry pension fund, amount
to euro 3,238 million, euro 215 million and euro 422 million, respectively,
as of December 31, 2003, and euro 2,599 million, euro 71 million and euro
340 million, respectively, as of December 31, 2002. The amortization of
goodwill, concessions, licenses, trademarks and similar rights and the
extraordinary contribution related to the suppression of the electricity
industry pension fund, amounts to euro 593 million, euro 149 million and
euro 89 million, respectively, for the year ended December 31, 2003, and
euro 629 million, euro 25 million and euro 92 million, respectively, for
the year ended December 31, 2002. In 2002, extraordinary charges included
the mentioned write-down of the goodwill related to WIND for euro 1,511
million. (8) INVESTMENTS Investments as of December 31, 2002 and 2003 are as follows: 2002
    
    2003(millions of euro)Investments in unconsolidated subsidiaries
    
    
    7
    
    
    
    Investments in affiliates
    
    
    293
    
    
    
    244Investments in other companies
    
    
    85
    
    
    
    91385
    
    
    
    335
 Investments in affiliates as of December 31, 2003 primarily include a 49%
ownership in Immobiliare Foro Bonaparte (euro 103 million) following a
contribution by ENEL in 2001 of real estate property and a 49% ownership in
Leasys (euro 37 million) following a contribution by ENEL in 2001 of
vehicles leasing and company fleet management activities. The decrease with
respect to December 31, 2002 is primarily due to the combination of the
following factors: ENELs share of losses of Leasys (euro 72 million);
adjustment of the equity investment in Immobiliare Foro Bonaparte due to
dividends received and the distribution of part of the share premium
reserve (euro 11 million); the acquisition for euro 15 million of a 25.5%
share in Hydroitalia, subsequently renamed En.Hydro; a change in accounting
for the investment in CESI (euro 10 million as of December 31, 2003) which
was consolidated in the previous year and now F-24




---



##### Table of Contents



is accounted for using the equity method as a result of a reduction in the
interest held. Investments in other companies as of December 31, 2003 mainly include a
7.42% share (euro 32 million and euro 36 million as of December 31, 2003
and 2002, respectively) of Echelon Company, acquired in the context of the
digital meterproject and listed in the United States, a 12.5% share of
LaGeo SA (euro 26 million as of December 31, 2003 and 2002), an electricity
generation company from renewable resources in El Salvador, and a 1% share
of Red Eléctrica Española (euro 15 million as of December 31, 2003). (9) OTHER NON-CURRENT ASSETS At December 31, 2003, other non-current assets include euro 1,500 million
relating to the amount receivable by the Parent from a primary Italian bank
in the context of the renegotiation of a euro 1,500 million facility
extended in 2001 to Infostrada (now part of WIND). The facility has been
assigned from the original lenders to a primary Italian bank that agreed to
provide financing at a lower interest rate against a guarantee deposit of
the same outstanding amount of the facility provided by Enel S.p.A. On
such deposit, ENEL receives interest at the same rate applicable to the
facility net of a fee paid to the bank. In addition, the item includes the long-term portion of deferred tax assets
of euro 1,532 million, tax receivables due beyond twelve months of euro 19
million, loans to employees of euro 111 million, and other long-term
receivables of euro 154 million. Deferred tax assets include amounts recorded in WIND for tax loss
carry-forwards of euro 859 million as of December 31, 2003 (652 million as
of December 31, 2002). In this context, euro 174 million relates to losses
that may be carried forward indefinitely, while the remainder expires in
years 2005 to 2008. In 2003, WIND recorded euro 207 million of deferred tax
assets (265 million in 2002) arising from the tax loss reported for the
year ended December 31, 2003. At December 31, 2002, other non-current assets mainly include the long-term
portion of deferred tax assets of euro 939 million, tax receivables due
beyond twelve months of euro 294 million, and other long-term receivables
of euro 375 million. The increase of euro 208 million as December 31, 2003 is primarily due to
the deferred tax assets arising from tax loss carry-forwards. (10) DEBT Long-Term Debt  The Companys consolidated long-term debt balances, including current
maturities, as of December 31, 2002 and 2003, and the related maturity
schedules are as follows: F-25




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##### Table of Contents



Long-term MaturityCurrentSummary by Type
    
    Maturity
    
    Balance at
    
    Balance at
    
    Maturityof Debt Instrument
    
    Range
    
    12/31/2002
    
    12/31/2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    After
    
    Total(millions of euro)Fixed - rate listed
bonds
    
    
    2004 - 2033
    
    
    
    5,075
    
    
    
    7,178
    
    
    
    2,995
    
    
    
    745
    
    
    
    225
    
    
    
    0
    
    
    
    1,000
    
    
    
    2,213
    
    
    
    4,183Floating - rate listed
bonds
    
    
    2006 - 2010
    
    
    
    452
    
    
    
    602
    
    
    
    200
    
    
    
    0
    
    
    
    166
    
    
    
    0
    
    
    
    50
    
    
    
    186
    
    
    
    402Fixed - rate bonds not
listed
    
    
    2005 - 2008
    
    
    
    176
    
    
    
    181
    
    
    
    0
    
    
    
    63
    
    
    
    45
    
    
    
    0
    
    
    
    73
    
    
    
    0
    
    
    
    181Floating - rate bonds not
listed
    
    
    2004 - 2032
    
    
    
    1,614
    
    
    
    1,774
    
    
    
    20
    
    
    
    21
    
    
    
    21
    
    
    
    22
    
    
    
    21
    
    
    
    1,669
    
    
    
    1,754Fixed - rate bond EU
    
    
    2004 - 2010
    
    
    
    210
    
    
    
    153
    
    
    
    37
    
    
    
    38
    
    
    
    36
    
    
    
    31
    
    
    
    10
    
    
    
    1
    
    
    
    116Floating - rate bonds
EU
    
    
    2006 - 2009
    
    
    
    16
    
    
    
    11
    
    
    
    3
    
    
    
    3
    
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    8Fixed - rate bank loans.
    
    
    2004 - 2012
    
    
    
    75
    
    
    
    103
    
    
    
    13
    
    
    
    17
    
    
    
    10
    
    
    
    7
    
    
    
    6
    
    
    
    50
    
    
    
    90Floating - rate bank
loans
    
    
    2004 - 2018
    
    
    
    7,241
    
    
    
    8,319
    
    
    
    622
    
    
    
    280
    
    
    
    1,742
    
    
    
    560
    
    
    
    863
    
    
    
    4,252
    
    
    
    7,697Fixed - rate EU Loans
    
    
    2004 - 2009
    
    
    
    247
    
    
    
    166
    
    
    
    45
    
    
    
    36
    
    
    
    30
    
    
    
    30
    
    
    
    12
    
    
    
    13
    
    
    
    121Floating - rate EU Loans
    
    
    2004 - 2018
    
    
    
    2,838
    
    
    
    3,363
    
    
    
    56
    
    
    
    106
    
    
    
    267
    
    
    
    295
    
    
    
    394
    
    
    
    2,245
    
    
    
    3,307Other financings
    
    
    2004 - 2026
    
    
    
    348
    
    
    
    166
    
    
    
    20
    
    
    
    13
    
    
    
    13
    
    
    
    12
    
    
    
    10
    
    
    
    98
    
    
    
    146Total
    
    
    
    
    
    
    18,292
    
    
    
    22,016
    
    
    
    4,011
    
    
    
    1,322
    
    
    
    2,557
    
    
    
    958
    
    
    
    2,440
    
    
    
    10,728
    
    
    
    18,005
 Medium and long-term debt as of December 31, 2003 includes bond issues
guaranteed by the Italian State of euro 1,375 million (euro 1,358 million
as of December 31, 2002) and bank loans guaranteed by the Italian State of
euro 185 million (euro 271 million as of December 31, 2002). The increase in long-term debt of euro 3,724 million is a result of new
borrowings of euro 4,947 million and the euro 165 million of long-term debt
that Uniòn Fenosa had at the time of its acquisition by the Company, which
are offset by principal repayments of euro 1,350 million and effects from
foreign currency translation of euro 38 million. Funding operations during 2003 include the renewal of the Euro Medium Term
Notes program originally stipulated in November 2000 and already renewed in
2001 and 2002, bringing the maximum aggregate authorized amount of bond
issues from euro 7.5 billion to euro 10 billion. In the context of the Medium Term Notes program, on June 4, 2003, two
series of bonds of euro 750 million each and having 10 and 15-year
maturities were issued in private placements. The terms of the issues are
summarized in the table below. 10-year bonds
    
    15-year bondsAmount
    
    euro 750 million
    
    euro 750 millionRepayment
    
    In full on June 12, 2013
    
    In full on June 12, 2018Coupon
    

    4.25%

    

    4.75%Issuance price
    
    99.90

    

    99.369Early repayment
    
    Not permitted
    
    Not permittedListed in
    
    Luxembourg
    
    Luxembourg
 As part of the same program, in 2003, Enel Investment Holding BV issued
through private F-26




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##### Table of Contents



placements, ten bond issues, of which nine are denominated in euro
(totaling euro 780 million) and one in British pounds (£40 million,
equivalent at the time of the issue to euro 58 million). The currency risk
related to the debt denominated in British pounds was fully hedged through
a currency swap entered into at the time of the issuance. A total of euro 1,430 million of new 36-month revolving credit lines was
renewed to refinance a portion of expiring short-term credit lines and
loans. The remaining new debt consists primarily of euro 396 million of funds
drawn by WIND on two Facility Agreements underwritten with a pool of banks
on September 28, 2001 and December 4, 2001 to finance capital expenditure
on its telecommunications network. These credit facilities were utilized
for euro 6,261 million as of December 31, 2003 and for euro 5,865 million
as of December 31, 2002. Such credit lines expire at the end of 2010 and
are subject, for the full duration of their term, to equity, debt and
financial ratio covenants according to which the availability of funds and
the applicable spread on Euribor are determined. The Company satisfied all
such covenants as of December 31, 2003 and 2002. In 2003, the European Investment Bank (EIB) extended a euro 500 million
floating rate loan to Enel Distribuzione secured by a guarantee provided
by primary banks. The loan from EIB has a term of 15 years and will be used
to finance a long-term capital expenditure plan aimed at technological
improvements provided to customers and in particular the installation of
digital meters to replace analog ones. Long-term debt, including current maturities, by currency, is as follows: Average Interest
    
    At December 31, 2002
    
    Average Interest
    
    At December 31, 2003Currency
    
    Maturity
    
    rate
    
    (millions of euro)
    
    rate
    
    (millions of euro)Euro
    
    
    2004-2033
    
    
    
    4.58
    %
    
    
    17,702
    
    
    
    4.03
    %
    
    
    21,348U.S.
Dollar
    
    
    2004-2014
    
    
    
    7.48
    %
    
    
    187
    
    
    
    7.59
    %
    
    
    188British Pound
    
    
    2004-2033
    
    
    
    9.73
    %
    
    
    12
    
    
    
    6.16
    %
    
    
    67Swiss
Franc
    
    
    2004-2009
    
    
    
    6.92
    %
    
    
    55
    
    
    
    6.87
    %
    
    
    40Japanese Yen
    
    
    2004-2010
    
    
    
    2.24
    %
    
    
    163
    
    
    
    1.80
    %
    
    
    149Brasilian
Real
    
    
    2016
    
    
    
    13.91
    %
    
    
    111
    
    
    
    14.50
    %
    
    
    163Other currencies
    
    
    2012
    
    
    
    8.29
    %
    
    
    62
    
    
    
    8.12
    %
    
    
    61Non - EMU Currency
    
    
    
    
    
    
    
    
    
    
    590
    
    
    
    
    
    
    
    668Total Long - Term Debt
    
    
    
    
    
    
    
    
    
    
    18,292
    
    
    
    
    
    
    
    22,016
 As of December 31, 2003, approximately 64% of the Companys long-term debt
was linked to floating-rates (68% as of December 31, 2002). To reduce
exposure to interest rate mix, the Company entered into interest rate
derivatives transactions for a total nominal value of euro 9,479 million
(euro 8,704 million as of December 31, 2002), of which euro 8,580 million
is in the form of interest rate swaps (euro 7,697 million as of December
31, 2002), euro 873 million is in the form of interest rate collars (euro
857 million as of December 31, 2002) and euro 26 million is in the form of
swaptions (euro 150 million related to forward rate agreements and
swaptions as of December 31, 2002). Considering the above-mentioned hedging
contracts, appropriately weighting the notional amount of the interest rate
collars, the residual amount of debt still exposed to the risk of
floating-rates was approximately 34% of total long-term debt as of December
31, 2003 (41% as of December 31, 2002). Short-Term Debt  The Company maintains committed revolving lines of credit with maximum
borrowing limits F-27




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##### Table of Contents



aggregating euro 4,980 million and uncommitted lines of credit and other
short-term borrowing agreements with banks with maximum borrowing limits
aggregating approximately euro 3,064 million as of December 31, 2003. These
agreements provide for interest charges based on prevailing market
conditions. As of December 31, 2003 and 2002, the average interest rate on
short-term borrowings was 2.24% and 3.2%, respectively. As of December 31, 2003 and 2002, euro 3,171 million and euro 5,807
million, respectively, in borrowings from banks were outstanding.
Short-term bank debt includes the use of revolving credit lines of euro
1,172 million as of December 31, 2003. In 2003, a revolving credit line of euro 5 billion extended in November
2001 expired. A new euro 3 billion credit line was extended on December,
2003, of which euro 1 billion expires in one year and euro 2 billion
expires in five years. As of December 31, 2003, the five-year portion had
not yet been utilized. In the context of a financial policy aimed at
diversifying sources of financing and at reducing the cost of funding, in
2001, Enel Investment Holding BV established a Commercial Paper Program,
guaranteed by the Parent, for euro 1,500 million. As of December 31, 2003,
euro 1,457 million of commercial paper was outstanding under such program
(euro 1,444 million as of December 31, 2002). In May 2004, the Commercial
Paper Program was increased to euro 2,500 million. (11) RESERVE FOR PENSIONS AND SIMILAR OBLIGATIONS As of December 31, 2003 and 2002, euro 399 million and euro 406 million,
respectively, are accrued related to the present value of future
liabilities connected with trade union agreements regarding a supplemental
pension fund for managers participating in this supplemental pension fund
program. From April 1, 1998, the reserve relates only to retired managers.
The managers currently employed are covered by the FONDENEL Fund. The agreement between ENEL and FNDAI (National Federation of Industrial
Managers), signed on January 23, 1998, led to the establishment of a
Company sponsored pension fund known as FONDENEL, which is managed
externally. It differs from the previous pension plan, which was based on
defined benefits, in that it is now a defined contribution plan. Viesgo employees are entitled to retirement and post-retirement benefits
similar to Italian employees, of which euro 44 million and euro 45 million
are accrued as of December 31, 2003 and 2002, respectively. The reserve also includes euro 19 million and euro 21 million,
respectively, as of December 31, 2003 and 2002, which covers payments in
lieu of notice at the date of retirement, to existing employees who have,
among other conditions, worked at least 35 years, in accordance with
collective labor contracts and current union agreements. (12) OTHER NON - CURRENT LIABILITIES Amounts included in the caption Other non-current liabilities in the
accompanying consolidated balance sheets were as follows as of December 31,
2002 and 2003: 2002
    
    2003(millions of euro)Litigation and contingent liabilities
reserves
    
    
    1,181
    
    
    
    1,443Reserve for early
retirement
    
    
    110
    
    
    
    40Substitute tax due upon the release of
accelerated depreciation reserves to
income
    
    
    119
    
    
    
    Substitute tax on revaluations (Law 350/2003)
    
    
    
    
    
    
    228Payable to Treasury for UMTS
license
    
    
    253
    
    
    
    217Payable to Ferrovie dello Statofor
telecommunication
network
    
    
    260
    
    
    
    233Other
    
    
    245
    
    
    
    4572,168
    
    
    
    2,618
 F-28




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##### Table of Contents



Litigation and contingent liabilities reserves include euro 378 million to
cover uncertainties, contingencies and potential liabilities from current
legal proceedings (primarily relating to supply contracts, labor disputes
and plant operations) of a determinate nature that, according to ENELs
internal and external legal advisors, are reasonably estimable and for
which the Company believes an unfavorable outcome to be probable. An
additional amount of euro 44 million has been accrued in the year ended
December 31, 2003. The reserve does not take into account the effects of
proceedings in which a favorable outcome is expected or those in which an
adverse outcome cannot be reasonably estimated. Further information
regarding litigation and contingent liabilities is provided in Note 21. The reserve also covers additional estimated liabilities and charges of
various nature, connected mainly to the operation and conversion of plants,
penalties and other charges on engineering contracts, litigation with local
administrations for taxes and fees of various nature, the estimated future
cost arising from the restructuring plans launched in 2003 in the
telecommunications and real estate sectors (euro 89 million as
of December 31, 2003), in addition
to contributions due on revenues from telecommunications services  for
which the related resolution imposing them was appealed. With regards to
the latter category, the provision at the end of 2003 amounted to euro 194
million, of which euro 51 million was accrued during the year ending
December 31, 2003. In 2003, in the context of the appeals submitted by
Albacom and Infostrada (now part of WIND), the European Court of Justice
issued an opinion on the interpretation of the EU Directive no. 97/13
(relating to common rules regarding general authorizations and individual
licenses in the telecommunication sectors), stating that the provision of
the same prohibit member states from imposing on holders of
telecommunication licenses charges similar to those under examination. A
final pronouncement by the competent Italian Authority is still pending. In
the absence of a final resolution of the Supreme Administrative Court
holding said contribution to be illegal, it has been deemed appropriate to
maintain such provision, as deemed necessary by current Italian
legislation, as of December 31, 2003. Other accruals for the year relate mainly to penalties and risks on
engineering contracts of euro 8 million, charges relating to the operation
of generation plants of euro 179 million, and an estimate of damages in
excess of insurance coverage of euro 26 million. The Italian 2002 and 2003 Budget Laws enabled the release from corporate
income tax (IRPEG) of the reserves accumulated in the statutory accounts
arising from accelerated depreciation charged for tax purposes, through the
payment of a 19% substitute tax. This amount is due after December 31,
2004. The amount included in Substitute tax on revaluations (Law 350/2003)
relates to the revaluation of assets carried out in the statutory accounts
of the main Italian ENEL companies. The amount accrued represents two
installments to be paid in 2005 and 2006. In 2001, WIND bought a 20-year license for the installation and operation
of third generation mobile telecommunications system (UMTS  IMT 2000) for
a total consideration of euro 2,447 million, of which euro 217 million is
due in the years from 2005 to 2010 (euro 36 million is due in 2004). The payable to Ferrovie dello Stato relates to the usage and transmission
rights of the fiber optic network. Other includes minority interests, long-term trade and other payables.
Minority interests were euro 191 million and euro 70 million for the years
ended December 31, 2003 and 2002, F-29




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##### Table of Contents



respectively. Long-term trade and other payables were euro 266 million and
euro 175 million for the years ended December 31, 2003 and 2002,
respectively. (13) SHAREHOLDERS EQUITY Share Capital  In accordance with the resolution of the Shareholders Meeting held on May
25, 2001, the capital stock of the Parent was restated in euro (bringing
the nominal value of each share from lire 1,000 to euro 0,50). At the same
date, the shares were subject to a reverse split in a ratio of one share
with nominal value euro 1 for every two shares of nominal value euro 0.50,
effective July 9, 2001. Following such operations, the capital stock is now
composed of 6,063,075,189 ordinary shares with a nominal value of euro 1
each. As a result of rounding, the capital stock was decreased from euro
6,263 million to euro 6,063 million, with the balance of euro 200 million
transferred to the Legal reserve. At December 31, 2003 and 2002, on the basis of the Shareholders Register
and information available, there are no shareholders with an ownership
interest in the Company greater than 2% of the capital stock of the Company
other than the Treasury Ministry. At December 31, 2003, the Treasury
Ministry holds 50.63% of the capital stock and Cassa Depositi e Prestiti
SpA (a company controlled by the Treasury Ministry) holds 10.35% of the
capital stock. At December 31, 2002, the Treasury Ministry held 67.576% of
the capital stock. Shareholders Equity Reserves  The Legal reserve represents the residual amount of undistributable
earnings restricted from the payment of dividends pursuant to the Italian
Civil Code (the Civil Code). Under the Civil Code, with respect to income
of any year, an amount equal to 5% of the Companys and Italian
subsidiaries statutory income must be allocated to a legal reserve until
such reserve is equal to one-fifth of the par value of the Companys issued
and outstanding share capital. The legal reserve of the Parent represents
24% of its share capital, consequently a current allocation is not required. The Law 292/93 reserve reflects the residual amount of write-up of assets
of the Parent pursuant to Law No. 292. As discussed in Note 2, revaluation
reserves of the Parent prior to 1993 have been credited to retained
earnings in the accompanying consolidated financial statements. Retained Earnings  As provided by Italian law, dividends may only be paid out of the statutory
retained earnings, plus its distributable reserves and statutory net income
for the current year, net of the amount to be allocated to the legal
reserve in the subsequent year. The legal reserve may not be distributed.
Approximately euro 4,481 million was available for dividends as of December
31, 2003. Reconciliation of Parents Statutory Net Income and Shareholders Equity to
Consolidated Net Income and Shareholders Equity  In the Parents statutory financial statements, investments in subsidiaries
are accounted for under the cost method, consequently they do not reflect
the consolidation of the Subsidiary Companies. Adjustments are made in consolidating the accounts of the Parent and the
Subsidiary Companies to reflect the consolidation principles described in
Note 2. In addition, adjustments are made to eliminate the effect of
certain tax-basis reporting applied by the Parent and the Subsidiary
Companies in their respective statutory accounts. The reconciliation of shareholders equity and net income as reported in
the statutory financial statements to those reported in the consolidated
financial statements is as follows: F-30




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##### Table of Contents



Net Income
    
    Shareholders Equity2001
    
    2002
    
    2003
    
    2001
    
    2002
    
    2003(millions of euro)Per Parents statutory financial statements
    
    
    3,578
    
    
    
    2,405
    
    
    
    607
    
    
    
    13,350
    
    
    
    13,573
    
    
    
    11,997Effects of consolidating the financial
statements of the Subsidiary Companies
    
    
    709
    
    
    
    (370
    )
    
    
    2,192
    
    
    
    7,737
    
    
    
    7,358
    
    
    
    9,576Elimination of intra-group gains and other
    
    
    (61
    )
    
    
    (27
    )
    
    
    (290
    )
    
    
    (121
    )
    
    
    (159
    )
    
    
    (449
    )Per consolidated financial statements
    
    
    4,226
    
    
    
    2,008
    
    
    
    2,509
    
    
    
    20,966
    
    
    
    20,772
    
    
    
    21,124
 In 2003, 2002, and 2001 the elimination of intra-group gains relates mainly
to the elimination of margins earned on captive generation plant
construction activities. (14) OPERATING REVENUES Operating revenues for the years ended December 31, 2001, 2002 and 2003
were as follows: 2001
    
    2002
    
    2003(millions of euro)Energy sales and transport
    
    
    21,323
    
    
    
    20,208
    
    
    
    19,834Electricity Equalization Fund
contributions
    
    
    783
    
    
    
    187
    
    
    
    179Telecommunications
services
    
    
    2,817
    
    
    
    3,642
    
    
    
    3,959Gas sales to end
users
    
    
    423
    
    
    
    780
    
    
    
    1,254Other:Connections, inspections and
repositioning
services
    
    
    591
    
    
    
    645
    
    
    
    684Other operating
revenues
    
    
    2,844
    
    
    
    4,515
    
    
    
    5,407Total
other
    
    
    3,435
    
    
    
    5,160
    
    
    
    6,09128,781
    
    
    
    29,977
    
    
    
    31,317
 Revenues from the sale and transport of electricity declined from 2002 to
2003 by euro 374 million mainly due to the reduction of revenues from sales
on the free market due to the change in ENELs strategy on the free market.
Starting from 2003, ENEL selectively reduced its electricity sales to large
business clients (yearly consumption between 1 million and 100 million of
kWh) in favor of the selective penetration of the medium business segment
(yearly consumption between 0.1 million and 1 million of kWh). This
decrease was partially offset by higher revenues from sales on the domestic
regulated market primarily due to higher volumes transported for the free
market and the rise in the tariff component aimed at covering the cost of
fuel. The electricity equalization fund contributions are in line with 2002
despite the different components. Electricity Equalization Fund
contributions for the year ended December 31, 2003 include euro 102 million
relating to costs incurred for green certificatesin 2002 which were
reimbursed to ENEL in 2003. Electricity Equalization Fund contributions for
the year ended December 31, 2002 include contributions recognized on
previous years generation of plants falling under the incentives of CIP
Resolution no. 6/92. For the year ended December 31, 2001, Equalization Fund
contributions include only euro 452 million relating to the contribution of
euro 0.003 for each kWh produced for Non-Eligible Customers and euro 331
million mainly related to F-31




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##### Table of Contents



contributions on electricity generated by plants under the provisions of
CIP Regulation 6/92 in previous years, but recognized in 2001. In
compliance with the tariff regulations, effective January 1, 2002,
Equalization Fund contributions for power generated for Non-Eligible
Customers were eliminated. Revenues from telecommunication services increased by euro 317 million from
2002 to 2003 due to higher traffic reported by WIND in the mobile telephone
segment, partly offset by a slight decline in revenues from fixed line
telephone service. Revenues from the sale of natural gas to end users increased by euro 474
million from 2002 to 2003 primarily due to the change in the scope of
activity. The year ended December 31, 2002 only included six months of the
Camuzzi Group, whose results are consolidated from July 1, 2002. Other operating revenues increased by euro 931 million primarily due to
reasons including: the reimbursement in 2003 of euro 410 million of charges
recorded in 2002 related to the hydroelectric surcharge as a result of the
issue by the Ministry of Productive Activities of a Decree dated September
10, 2003 establishing the terms for the reimbursement of the hydroelectric
surcharge; the awarding in 2003 by the Authority of euro 147 million in
prizes for the improvement in service quality achieved by Enel
Distribuzione in 2001 and 2002 (in 2002, euro 4 million was recorded for
similar prizes for previous years); euro 55 million resulting from the
termination of a contract for the construction of a power plant in Libya;
higher fees from the use of the national transmission network of euro 52
million due to a tariff increase and a higher volume of electricity
transported; revenues generated by the initiation of service in 2003 of
very-high voltage transmission lines in Brazil of euro 52 million and
stronger Engineering and Contracting activities of Enelpower for third
parties of euro 164 million. In 2003, sales in countries other than Italy amounted to euro 2,036 million
(euro 1,596 million and euro 433 million in 2002 and 2001, respectively),
of which euro 1,482 million were in Europe (euro 1,085 million and euro 12
million in 2002 and 2001, respectively), euro 246 million in the Middle
East (euro 363 million and euro 328 million in 2002 and 2001, respectively)
and euro 233 million in the Americas (euro 91 million and euro 75 million
in 2002 and 2001, respectively). (15) PERSONNEL EXPENSES Personnel expenses for the years ended December 31, 2001, 2002 and 2003
were as follows: 2001
    
    2002
    
    2003(millions of euro)Wages and salaries
    
    
    2,645
    
    
    
    2,554
    
    
    
    2,440Social security contributions
    
    
    726
    
    
    
    700
    
    
    
    675Employee termination indemnities
    
    
    218
    
    
    
    208
    
    
    
    197Employee pension and similar obligations
    
    
    26
    
    
    
    22
    
    
    
    26Other costs
    
    
    107
    
    
    
    105
    
    
    
    1023,722
    
    
    
    3,589
    
    
    
    3,440
 Personnel expenses decreased by euro 149 million from 2002 to 2003 due to
the effect of changes in the scope of consolidation and the reduction in
headcount in the Sales, Infrastructure and Networks (in the electricity
area) and Generation Divisions, partly offset by the impact of F-32




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##### Table of Contents



acquisitions in the Gas area.  (16)
    PURCHASED POWER, FUEL FOR THERMAL GENERATION AND MATERIALS AND
SUPPLIES Purchased power, fuel for thermal generation and materials and supplies for
the years ended December 31, 2001, 2002 and 2003 were as follows: 2001
    
    2002
    
    2003(millions of euro)Purchased power
    
    
    3,649
    
    
    
    4,802
    
    
    
    4,620Fuel for thermal generation
    
    
    5,249
    
    
    
    4,255
    
    
    
    4,101Total fuel and power
    
    
    8,898
    
    
    
    9,057
    
    
    
    8,721Materials consumption
    
    
    1,344
    
    
    
    1,975
    
    
    
    1,733Gas for distribution and fuel for trading.
    
    
    1,005
    
    
    
    2,237
    
    
    
    2,378Total materials and supplies
    
    
    2,349
    
    
    
    4,212
    
    
    
    4,11111,247
    
    
    
    13,269
    
    
    
    12,832
 The decrease in the cost of fuel for thermal generation reflects mainly the
change in the scope of activity following the disposal of Eurogen in 2002
and Interpower in 2003. The decrease in cost of materials is due to a decrease in the amount of
construction of electricity distribution networks in 2003. The increase in the purchases of gas for distribution due to the growth in
the scope of activity is partially offset by a decline of fuel purchased
for trading. (17) SERVICES AND RENTALS EXPENSES Services and rentals expenses for the years ended December 31, 2001, 2002
and 2003 were as follows: 2001
    
    2002
    
    2003(millions of euro)Electricity transmission fees
    
    
    1,751
    
    
    
    1,399
    
    
    
    912Interconnections and roaming
    
    
    1,424
    
    
    
    1,426
    
    
    
    1,381Other services
    
    
    1,843
    
    
    
    2,164
    
    
    
    2,197Total services
    
    
    5,018
    
    
    
    4,989
    
    
    
    4,490Rentals and leases
    
    
    615
    
    
    
    721
    
    
    
    7345,633
    
    
    
    5,710
    
    
    
    5,224
 F-33




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##### Table of Contents



The decrease in the cost of services from 2002 to 2003 is substantially due
to the suppression of the hydroelectric surcharge, which in 2002 was euro
424 million (including Eurogen and Interpower charges of euro 14 million).
On September 10, 2003, a legislative decree defining the parameters for the
reimbursement of the hydroelectric surchargewas issued. According to its
provisions, Enel Produzione and Enel Green Power recorded an overall
benefit in 2003 of euro 410 million, equal to the charge recorded for the
hydroelectric surchargein the 2002 statement of income. Interconnections and roaming costs in 2003 declined by euro 45 million as a
result of the development of proprietary networks, allowing the reduction
of traffic which was diverted to other operators. Roaming costs declined by
euro 32 million, while interconnection costs decreased by euro 13 million. The Company has entered into various operating leases, primarily related to
offices, vehicles and office equipment, used in the normal course of
business. The original lease terms generally do not exceed six years in
accordance with Italian law, but may be renewed upon expiration. Rental
expense for significant leases totaled approximately euro 194 million, euro
216 million and euro 211 million for the years ended December 31, 2003,
2002 and 2001, respectively. Future rental payments for the years 2004
through 2008 are estimated to be euro 250 million, euro 307 million, euro
313 million, euro 319 million and euro 326, respectively. (18) FINANCIAL INCOME AND EXPENSES Financial income for the years ended December 31, 2001, 2002 and 2003 was
as follows: 2001
    
    2002
    
    2003(millions of euro)Interest
income
    
    
    104
    
    
    
    100
    
    
    
    98Foreign exchange differences
    
    
    68
    
    
    
    152
    
    
    
    270Other
    
    
    35
    
    
    
    34
    
    
    
    57207
    
    
    
    286
    
    
    
    425
 Financial expense for the years ended December 31, 2001, 2002 and 2003 was
as follows: 2001
    
    2002
    
    2003(millions of euro)Interest and other charges on bonds
    
    
    390
    
    
    
    418
    
    
    
    464Interest and other charges on loans from banks and
other financial institutions
    
    
    413
    
    
    
    510
    
    
    
    547Interest on short-term debt from banks and other
financial institutions
    
    
    376
    
    
    
    200
    
    
    
    148Foreign exchange differences
    
    
    57
    
    
    
    159
    
    
    
    268Other
    
    
    81
    
    
    
    177
    
    
    
    1281,317
    
    
    
    1,464
    
    
    
    1,555
 Net financial expense decreased by euro 48 million over the previous year
mainly due to a reduction in the average cost of debt. F-34




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##### Table of Contents



(19) EXTRAORDINARY INCOME AND EXPENSES Extraordinary income in 2003 included:  
    
    euro 356 million capital gain on the disposal of Interpower (Note 1);  
    
    euro 165 million capital gain on the disposal of local
electricity distribution networks, of which euro 120 million
related to the disposal of the Brescia distribution network (Note
1);  
    
    adjustments of euro 58 million on income taxes for the previous
year, resulting from the definition of the tax treatment of a
number of items for which there existed uncertainty when the 2002
consolidated financial statements were prepared;  
    
    indemnities recognized by third parties of euro 44 million;  
    
    write-backs of euro 37 million as a result of adjustments made in previous years;  
    
    adjustments and other items relating to WIND of euro 31 million;  
    
    capital gains and non-recurring income of various nature of euro 69 million. These extraordinary income items were offset in part by:  
    
    early retirement incentives of euro 256 million;  
    
    write-downs of euro 133 million and other expenses of euro 58
million related to the conversion of the Torrevaldaliga Nord power
plant;  
    
    restructuring and reorganization charges of euro 92 million, of
which euro 69 million relates to WIND;  
    
    charges relating to the tax amnesty of euro 83 million;  
    
    adjustments relating to capital grants recorded in previous years of euro 60 million;  
    
    write-downs, settlements of transactions due to extraordinary
events, extraordinary reimbursements made to customers and taxes
relating to previous years of euro 48 million;  
    
    adjustments and other items of various nature relating to WIND of euro 44 million;  
    
    write-downs relating primarily to foreign coal trading activities of euro 23 million;  
    
    adjustments of euro 20 million on previous year fuel stocks;  
    
    expenses of various types of euro 79 million. The net extraordinary
income net of tax effect amounts to euro 8 million,
reflecting different tax rates applicable to the single components of net
extraordinary income. Extraordinary income in 2002 included:  
    
    gains on the disposal of Eurogen of euro 2,313 million (see Note 1);  
    
    gains on the disposal of the distribution networks in the
municipalities of Milan and Verona of euro 459 million (see Note
1);  
    
    euro 64 million adjustment on previous years income taxes
resulting primarily from the definition of the appropriate tax
rules applicable to certain capital gains;  
    
    interconnection fee adjustments and other items relating to
WIND of euro 46 million;  
    
    adjustments and extraordinary gains of euro 34 million recorded
by the Viesgo Group; and  
    
    other extraordinary gains of euro 88 million. These extraordinary income items were offset in part by:  
    
    a write-down of euro 1,511 million to reflect the impairment in
the value of the goodwill relating to WIND, based on the outlook
for the telecommunications sector and the downwards revision of
growth expectations (see Note 7);  
    
    early retirement incentives to personnel of euro 291 million;  
    
    a write-down of euro 94 million in the value of a discontinued geothermal plant; F-35




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##### Table of Contents




    
    adjustments, write-downs and items of various nature relating
to WIND of euro 92 million;  
    
    a write-down of euro 58 million in the value of generation
plants to be decommissioned in view of their conversion to
combined-cycle technology;  
    
    a write-down of euro 49 million in the value of parts of plants
destined to international projects in the engineering and
contracting sector which, in view of the adverse economic situation
in the area in which such projects were based (South America), are
no longer expected to be carried on;  
    
    adjustments and accruals recorded by Viesgo of euro 39 million;  
    
    an adjustment of euro 41 million in the unamortized cost paid
upon the suppression of the electricity industry pension fund
following a reduction in personnel; and  
    
    other extraordinary losses of euro 93 million. The net extraordinary income net of tax effect of euro 1,067 million,
reflects different tax rates applicable to the single components of net
extraordinary income. Extraordinary income in 2001 included:  
    
    gains on the sale of Elettrogen of euro 1,900 million;  
    
    gains on the sales of generation plants located in the Valle
dAosta (Geval) and 49% of distribution activities in the Region
(Deval) of euro 444 million;  
    
    gains on the disposal of assets primarily represented by the
distribution networks in the municipalities of Rome and Turin of
euro 391 million;  
    
    other gains on the disposal of assets of euro 87 million;  
    
    the recording of euro 501 million relating to electricity
supplied at the end of 2000; such recognition was not possible
according to the accounting and billing method previously used;  
    
    settlement of contributions from the Electricity Equalization
Fund relating to previous years of euro 40 million; and  
    
    other extraordinary gains of euro 81 million. These extraordinary income items were offset in part by:  
    
    a write-down of euro 443 million to reflect the early disposal
of analog meters currently in use due to their replacement with
electronic meters in the context of the digital meter project;  
    
    a write-down of euro 224 million in the value of plant and
accrual of expected costs for the disposal of fixed assets as a
result of the conversion of part of generating plants to combined
cycle gas turbine technology;  
    
    early retirement incentives to personnel of euro 190 million;  
    
    charges connected with the business integration between WIND
and Infostrada of euro 125 million;  
    
    capital losses on disposal of assets and other extraordinary
write-downs of euro 76 million; and  
    
    other extraordinary losses of euro 68 million. Net extraordinary income net of the tax effect amounts to euro 2,078
million. (20) INCOME TAXES F-36




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##### Table of Contents



The provisions for income taxes for the years ended December 31, 2001, 2002
and 2003, were as follows: 2001
    
    2002
    
    2003(millions of euro)Current
    
    
    1,655
    
    
    
    562
    
    
    
    1,396Deferred
    
    
    (317
    )
    
    
    357
    
    
    
    (8
    )Resizing of
deferred taxes and deferred tax assets to changes in tax rates
    
    
    
    
    
    
    (38
    )
    
    
    (47
    )Tax incentives on capital expenditure
    
    
    (86
    )
    
    
    (213
    )
    
    
    Release of deferred tax provision following release of
accelerated depreciation reserves and reversal of deferred
provision as a result of revaluation of assets carried out
in the statutory accounts by ENEL companies
    
    
    (603
    )
    
    
    (60
    )
    
    
    (375
    )649
    
    
    
    608
    
    
    
    966
 The difference between the normal tax rate on income before taxes and the
effective tax rate for the years ended December 31, 2001, 2002 and 2003 is
due to the following factors: 2001
    
    2002
    
    2003Normal tax rate on income before taxes
(a)
    
    
    47.0
    %
    
    
    47.0
    %
    
    
    45.0
    %Resizing of
deferred taxes and deferred tax assets to changes in
tax rates
    
    
    
    
    
    
    (1.6
    )
    
    
    (1.4
    )Release of deferred tax provision following release of accelerated
depreciation reserves and reversal of deferred provision as a result
of revaluation of assets carried out in the statutory accounts by
ENEL companies
    
    
    (13.1
    )
    
    
    (2.5
    )
    
    
    (11.1
    )Capital gains subject to 19% substitute tax and release of excess
deferred taxes of companies sold
    
    
    (19.8
    )
    
    
    (37.1
    )
    
    
    (4.8
    )Adjustments of deferred tax assets and other impacts relating to
WIND
    
    
    
    
    
    
    23.2
    
    
    
    Tax incentives on capital expenditure
    
    
    (1.8
    )
    
    
    (9.0
    )
    
    
    Impact due to corporate operations in the gas sector
    
    
    
    
    
    
    5.0
    
    
    
    Permanent differences and other
    
    
    1.8
    
    
    
    0.6
    
    
    
    0.8Effective tax rate
    
    
    14.1
    %
    
    
    25.6
    %
    
    
    28.5
    %
    (a)
    
    Normal tax rate is estimated considering Italian Corporate income tax
rate (IRPEG, which will be replaced by IRES starting from 2004) of
34%, 36% and 36% for the years ended December 31,2003, 2002 and 2001,
respectively, and regional income tax rate (IRAP) of 4.25% for all
years presented. In order to estimate the impact of IRAP (for which
employee related costs, interest expense and certain other costs are not deductible) an
estimate of the different tax base has been made based on historical
trends. The impact of different tax rates used in foreign countries is
reflected among other differences. Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting and income tax purposes. Deferred tax F-37




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assets have also been calculated on loss carry-forwards for tax purposes to
the extent that their recovery is reasonably certain. Income taxes for 2003 benefited from the reversal of euro 375 million
(contributing for 11.1 percentage points of the difference between the normal tax rate and the effective tax rate), resulting from the revaluation of assets carried out by main ENEL
companies on certain classes of assets, limited to the spread between
fiscal and ordinary accumulated depreciation. The carrying value of these
assets in the statutory accounts as of December 31, 2003 is therefore now
in line with that reported in the Consolidated Financial Statements. The
amount of the revaluation is subject to a 19% substitute tax rate, while
deferred taxes accrued on the difference between the carrying value in the
statutory accounts (equivalent to the tax base) and that reported for
consolidation purposes were calculated at the ordinary corporate tax rate.
As a consequence, the portion of the deferred tax provision exceeding the
amount of the substitute tax was reversed and accounted for as an offset
item under 2003 income taxes. A further benefit equal to euro 164 million (contributing for 4.8 percentage points of the difference between the normal tax rate and the effective tax rate)
arises from the taxation
of the capital gain on the disposal of Interpower and local electricity
distribution networks at the 19% substitute tax rate instead of the
ordinary corporate tax rate. Finally, the adjustments made to deferred taxes to take into consideration
the amended tax rate resulted in a euro 47 million net positive component. Income taxes for 2002 and 2001 (contributing for 1.4 percentage points of the difference between the normal tax rate and the effective tax rate) benefited from the taxation of large
capital gains (euro 2,772 million) at a 19% substitute tax rate instead of
the ordinary corporate tax rate, in addition to the further benefit from
the reversal of the surplus in deferred tax provisions accrued at the
ordinary corporate tax rate on the temporary differences related to the
assets and businesses sold during the year. Benefits deriving from tax
incentives on capital expenditure (Tremonti-bis Law) for 2002 amounted to
euro 213 million. This tax incentive was no longer applicable in 2003. Deferred tax assets recognized by WIND in 2003, 2002 and 2001, on the tax
loss carry-forward for each of these years were euro 207 million, euro 265
million and euro 350 million, respectively. In 2002, following the
definition of a new business plan, deferred tax assets of euro 269 million
were deemed no longer recoverable and were consequently written down. Significant components of deferred taxation at December 31, 2002 and 2003
are as follows: 2002
    
    2003(millions of euro)Deferred income tax liabilities:Accelerated depreciation
    
    
    (2,077
    )
    
    
    (1,663
    )Other
    
    
    (1,027
    )
    
    
    (852
    )Deferred income tax assets:Loss carry-forward
    
    
    696
    
    
    
    941Accruals and reserves
    
    
    973
    
    
    
    1,097Net deferred income tax liabilities
    
    
    (1,435
    )
    
    
    (477
    )
 At December 31, 2003, income taxes for all fiscal years prior to 1999 have
been settled by the Company with the Italian tax authorities. (21) COMMITMENTS AND CONTINGENCIES F-38




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Financial Derivatives  The Company purchases electricity from countries that use currencies other than
the euro and also purchases fuel in the international oil and natural gas
markets, where prices are generally denominated in U.S. dollars. As a
consequence, the Company is subject to market risks from changes in foreign
exchange rates and commodity prices. The Company is also directly subject to
interest rate risks related to its financial indebtedness. Derivative instruments are utilized by the Company to reduce these risks. Notional Amounts and Credit Exposures of Derivatives The notional value of a derivative is the contractual amount on the basis
of which the differentials are exchanged; this amount can be expressed
either on a value basis or on a physical quantities basis (such as tons,
converted into euro by multiplying the notional quantity by the fixed
price). Amounts expressed in currencies different from euro are converted
into euro by applying the exchange rate at the balance sheet date. The notional amounts of derivatives summarized below do not represent
amounts exchanged by the parties and, thus, are not a measure of the credit
exposure of the Company. Although the Company is exposed to credit-related losses in the event of
non-performance by counterparties to derivative financial instruments,
given the high credit standing of the counterparties, the Company does not
expect there to be any defaults by these parties in meeting their
obligations. Interest Rate Risk Management The Company enters into various types of interest rate contracts in
managing its interest rate risk. The financial instruments utilized as of
December 31, 2002 and 2003 were as follows: Notional amount2002
    
    2003(millions of euro)Interest rate swaps
    
    
    7,697
    
    
    
    8,580Interest rate collars
    
    
    857
    
    
    
    873Swaptions
    
    
    50
    
    
    
    26Forward Rate Agreements
    
    
    100
    
    
    
    Total
    
    
    8,704
    
    
    
    9,479
 The Company enters into interest rate derivatives, particularly interest
rate swaps, with the purpose of decreasing the amount of debt subject to
interest rate fluctuations and to lower funding costs. Under interest rate
swaps, the Company agrees with other parties to exchange, at specified
intervals, the difference between interest amounts calculated by reference
to an agreed notional principal amount and agreed fixed or floating
interest rates. Forward rate agreements are generally used by the Company to offset changes
in the rates of short-term debt and the current maturity of long-term
floating-rate debt. Forward rate agreements F-39




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##### Table of Contents



settle in cash at a specified future date based on the differential between
agreed interest rates applied to a notional amount. The Company also enters into interest rate collar contracts to reduce the
potential impact of increases in interest rates on floating-rate long-term
debt. These agreements are normally entered into when the fixed rate
available under interest rate swaps are considered too high with respect to
the Companys view about the level of future interest rates. Moreover, the
use of interest rate collars is deemed appropriate under uncertainty
periods, in order to benefit from a possible decline in interest rates. The
Company normally uses zero-cost collars that do not require payment of an
option premium. Swaptions provide the holder with the right to enter into an interest rate
swap in the future. The Company generally buys the right to pay a fixed
rate or sells the right to receive a fixed rate should the option be
exercised, in order to eventually lock in a fixed rate hedging transaction
at a rate lower than the actual level. Foreign Exchange Rate Risk Management The Company enters into various types of foreign exchange contracts in
managing its foreign exchange risk. The foreign exchange contracts utilized
as of December 31, 2002 and 2003, were as follows: Notional amount2002
    
    2003(millions of euro)Forward exchange contracts relating to Commodity hedging
    
    
    1,618
    
    
    
    294Forward exchange contracts relating to hedges of commercial paper
    
    
    725
    
    
    
    440Forward exchange contracts relating to hedges of future cash flows
    
    
    827
    
    
    
    1,387Other forward exchange contracts
    
    
    671
    
    
    
    153Options
    
    
    254
    
    
    
    110Total
    
    
    4,095
    
    
    
    2,384
 At December 31, 2003,
the Company had outstanding euro/dollar forward exchange
contracts and options with an aggregate notional amount of euro 2,384
million (euro 4,095 million as of December 31, 2002). In particular the
Company had:  
    
    contracts with a notional amount of euro 1,681 million used
to hedge the foreign exchange risk related to fuel purchases,
electricity imports and expected cash flows in currencies other than
the euro (euro 2,445 million as of December 31, 2002); and  
    
    contracts with a notional amount of euro 440 million used to
hedge the foreign exchange risk related to the repayment of the
commercial paper the Company issued in foreign currency (euro 725
million as of December 31, 2002). The Company generally enters into these contracts with respect to the
same amount and date of the repayment obligation or the cash flow that the
Company expects to generate, thus any change in fair value of these
contracts deriving from a possible appreciation or depreciation of the euro
against the other currencies is fully offset by a corresponding change in
the fair value of the underlying position. At the end of 2003, the Company also had in place euro 153 million of
foreign exchange forward contracts (euro 671 million as of December 31,
2002) and euro 110 million of options (euro 254 million as of December 31,
2002) used to hedge any residual foreign exchange risk on an aggregated
basis. F-40




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The Company uses forward exchange contracts and currency options primarily
to hedge expenses denominated in foreign currencies. The accounts payable
in currencies other than euro are denominated mainly in U.S. dollars and
Swiss francs. Both buy and sell amounts of such contracts are indicated at
the notional value. Currency options, traded in the over-the-counter
market, provide the Company with the right or the obligation to buy or sell
agreed amounts of currency at a specified exchange rate at the end of a
specified period, generally not exceeding one year. Generally, the maturity
of the Companys forward exchange contracts also does not exceed one year. Commodity Risk Management At the end of 1999, the Company established a new company, Enel Trade
(formerly Enel F.T.L.Fuel Trading and Logistics) with the purpose of
providing fuel to the individual generation companies and gas to the sale
and distribution companies within ENEL, to manage the Companys risk in the
oil market and to develop fuel trading activities on the international
markets. Enel Trade started operations on June 1, 2000. In 2000, due to the significant volatility in the currency and commodity
market, and taking into consideration the next phase of the Energy Market
that could discontinue the Equalization Fund mechanism (under Decree
70/1997), the Company adopted a systematic approach to cover commodity
pricing and currency risk linked to the time lag present in the
reimbursement mechanism. Since 2000, Enel Trade has entered into derivative contracts on commodities
to fix part of the margin between the costs and contribution received from
the Authority under the Equalization Fund mechanism. The Company does not enter into commodity derivatives for speculative
trading purposes. The Company has entered into different transactions with the intent to
align revenues and costs through the management of oil price risk in the
international market. The derivative instruments are based on benchmark
indexes (for example, IPE Brent, NYMEX, WTI) that are considered the most
appropriate instruments to hedge the oil index used and to fix the price
for fuel supplies. Any variation in the portfolio value of the derivative
contracts is offset by a corresponding variation of the market value in the
portfolio of the physical contracts, except for a minor risk arising from
the misalignment between the price index of the oil supplies and the
benchmark. Under the commodity swap contracts, the Company establishes with a
counterparty the exchange, on a specific pricing period basis, of the
difference between the average of an index and the predetermined fixed
quantity value. For futures contracts, the Company purchases (sells) standardized contracts
on the IPEInternational Petroleum Exchange and the NYMEXNew York
Mercantile Exchange. These contracts are subject to the daily payment of
the margins and, therefore, no credit default risk exists. Because of the uncertainties at the end of 2003, as to the effective
starting date of the Italian Power Exchange (IPEX), as of December 31,
2003, no positions for the purpose of hedging of the electricity price were
in place. Consequently, the sole positions in place were for the purpose of the
hedging activity of physical contracts related to the fuel purchasing
activity (natural gas, fuel oil, etc.). At December 31, 2003, the notional value of the Companys open contracts was as follows:  
    
    Futures: euro 36.6 million or 1,437 contracts;  
    
    Swaps on petroleum indexes: euro 36.7 million or 335,852 tons; and  
    
    Swaps on gas transmission fee: 1 billion cubic meters per year. F-41




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##### Table of Contents



At December 31, 2002, the notional value of the Companys open contracts was as follows:  
    
    Futures: euro 354 million or 12,752 contracts;  
    
    Swaps on petroleum indexes: euro 268 million or 2,062,518 tones; and  
    
    Swaps on gas transmission fee: 1 billion cubic meters per year. The fair value of these contracts as of December 31, 2002 and 2003
was as follows: As of December, 312002
    
    2003Fair Value (millions of euro)Futures
    
    
    0.5
    
    
    
    23.2assets
    
    
    0.6
    
    
    
    25.0liabilities
    
    
    (0.1
    )
    
    
    (1.8
    )Swaps on Petroleum indexes
    
    
    1.6
    
    
    
    7.1assets
    
    
    2.3
    
    
    
    13.1liabilities
    
    
    (0.7
    )
    
    
    (6.0
    )Gas Transmission fee
    
    
    (9.6
    )
    
    
    (9.4
    )assets
    
    
    0.0
    
    
    
    0.0liabilities
    
    
    (9.6
    )
    
    
    (9.4
    )Total
    
    
    (7.5
    )
    
    
    20.9assets
    
    
    2.9
    
    
    
    38.1liabilities
    
    
    (10.4
    )
    
    
    (17.2
    )
 Fair value of financial instruments are disclosed in Note 25. Purchase Commitments  The Company has entered into various fuel supply contracts primarily for
the purchase of fuel oil and natural gas. The Company expects that
expenditures related to these commitments will approximate an aggregate of
euro 10,467 million for the period from January 1, 2004 through December
31, 2008. The Company also has unconditional purchase obligations for
electric power. The Company expects that its expenditures related to these
commitments will approximate euro 2,747 million for the period from January
1, 2004 through December 31, 2008. Insurance  The Company maintains third-party insurance to cover property liabilities,
and other risks in the normal course of business in amounts that the
Companys management believes are adequate to cover the risks involved,
considering minor additional accruals included in other non current
liabilities. In addition, the Company maintains casualty and liability
insurance against risks of its business to the extent management considers
appropriate. The level of this insurance is generally in line with that
maintained by other companies in the same industry. F-42




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Litigation  The Company is a defendant in a number of legal proceedings incidental to
the generation, transmission and distribution of electricity. Because of
the nature of these proceedings, the Company is not in the position to
predict the ultimate outcome of certain of these matters, some of which may
be unfavorable to the Company. However, the Company does not expect the
outcome of such proceedings, either individually or in the aggregate, to
have a material adverse effect upon its financial position or results of
operations, therefore, no provisions are included in the Litigation and
contingent liabilities reserve. The most significant litigations are
listed below. The European Commission requested information from the Italian Government in
order to assess whether the capital contributions made by ENEL to WIND from
1998 through October 2002, loans ENEL granted to WIND or the terms and
conditions of its lease agreement for fiber optic cables with WIND violated
restrictions on State aid to companies. At this stage, the Company cannot
predict if the European Commission will open a formal investigation of any
of these matters, nor can ENEL predict the eventual outcome of any such
investigation. The Italian Antitrust Authority began an investigation in 2002 to assess
whether ENEL and one of its subsidiaries, Enel Energia (formerly Enel Trade),
abused their dominant position by, among other things, including in their
standard contract for the sale of electricity to Eligible Customers in 2002
certain exclusivity and priority clauses aimed at discouraging them from
changing their electricity supplier. On November 27, 2003, the Authority
determined that this conduct constituted a serious violation of the European
Community Treaty and imposed a fine of euro 2.5 million, that was accrued as of
December 31, 2003. The Company has appealed the Authoritys ruling to the Lazio Regional
Administrative Court, arguing that it did not hold a dominant position in the
market during the period at issue and therefore it could not have abused a
dominant position, as well as that the conduct of Enel Energia cannot be
attributed to ENEL. While awaiting a ruling on the appeal, the Company paid the
euro 2.5 million fine within the provided 90-day period. Following the blackout of electrical service that occurred on September 28,
2003, approximately 140,000 customers, mainly household, requested a
reimbursement for approximately euro 25 for each customer, on the grounds of
the general agreement for the supply of electricity to such customers,
regardless of the fact that in October 2003, the Energy Authority had issued a
release in which it declared that customers should have not been entitled to
such reimbursement. The Company believes that it was not responsible for the
blackout and, accordingly, has not honored any of these requests. As of June
15, 2004, approximately 2,500 of the Companys customers have brought legal
actions against Enel Distribuzione or Enel S.p.A. in the Italian courts seeking
aggregate damages for approximately 3.5 million dollars or euro 2.9 million. So
far, the courts issued two decisions, one favorable and one unfavorable to the
Company which imposed an obligation to pay euro 25 to the plaintiff
which has been appealed. Although the claims of each of the individual plaintiffs are for
relatively minor amounts, an increase in the decisions holding the Company
responsible for such damages could be expected to result in an increase in the
number of such claims and the magnitude of damages sought. A number of urban planning and environmental cases for the construction and
operation of some generation plants and of a number of transmission and
distribution lines are pending. Based on indications given by legal advisors,
the Company believes the possibility of negative outcomes to be remote. For a
limited number of cases, an unfavorable outcome may not however be ruled out
completely. In case of negative pronouncements, consequences could consist of
the possible payment of damages and costs related to work required on
electrical equipment and the temporary unavailability of the same. At present,
such charges may not be quantified and are therefore not included in the
Litigation and contingent liabilities reserve. F-43




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The public prosecutor of Milan initiated in February 2003, a criminal
investigation of the former chief executive officer of Enelpower, a former
senior executive of Enelpower, and 12 other persons for the alleged commission
of certain crimes, including embezzlement, fraud, corruption, and false
statements to shareholders, in connection with certain transactions carried out
by Enelpower in the Middle East and in Italy. On March 5, 2003, Enelpower was
notified of the pending investigation and the possible administrative liability
it may incur in relation to the alleged crimes. On June 6, 2003, the Tribunal
in Milan, upon request by the public prosecutor, ordered the arrest of the
former chief executive officer and the former senior executive of Enelpower on
suspicion of such charges. In response to this criminal proceeding, ENEL and
its subsidiary, Enelpower, initiated legal actions against all Enelpower
employees involved in the alleged offenses, aimed at protecting the interests
of ENEL and those of its shareholders. In addition, Enelpower notified its
suppliers involved in the investigation that, in the event the alleged illegal
conduct should be demonstrated, it would seek compensation for damages suffered
as a result. On July 11, 2003, the former Chairman of Enel Produzione resigned
after voluntarily disclosing to the public prosecutor of Milan the extent of
his involvement in the illegal conduct that is the subject of the prosecutors
investigation. The Company intends to seek any damages caused by the alleged
illegal conduct, should such conduct be proved as a result of the pending
investigation. None of the individuals charged to date are currently employed
by ENEL. On December 3, 2003, the public prosecutor of Milan requested to bar Siemens AG
from receiving contracts from public entities in Italy because of its alleged
illicit relationship with members of management of Enelpower and the former
Chairman of Enel Produzione. At the same hearing, the Company submitted to the
Court a copy of a settlement agreement with Siemens S.p.A. under which ENEL
will receive euro 20 million from Siemens S.p.A. for damages to its reputation,
as well as the right to renegotiate existing agreements between Siemens S.p.A.
and Enel Produzione. On February 19, 2004, the Company entered into a
settlement with Alstom Holdings SA, Alstom Power Inc. and Alstom Power Italia
S.p.A. providing for damages for injury to its reputation of euro 4.5 million,
in the form of a credit applicable to future purchases by ENEL from any Alstom
Group company. Environmental litigation and contingencies The Company has exposure for environmental contingencies as a result of the
installation and operation of electrical equipment. The Company does not
expect the outcome of these matters, either individually or in aggregate,
to have a material adverse effect upon its position or results of
operations, therefore, no provisions are included in the Litigation and
contingent liability reserve. The most important environmental issues are
those relating to the effect of exposure to electric and magnetic fields
generated by the equipment installed. The more significant environmental
litigation are as follows. Notwithstanding the fact that the relevant infrastructure is, in the
opinion of Company management, in compliance with applicable laws, Enel
Distribuzione and Terna are currently defendants in numerous pending
proceedings relating to the electromagnetic fields created by transmission
and distribution lines and in some pending proceedings relating to
electromagnetic energy emanating from substations. In most of the
proceedings, the plaintiffs seek the relocation or removal of lines or
substations that are near to inhabited or occupied residential or office
buildings. In a limited number of proceedings, the plaintiffs also seek
damages based on alleged non-compliance with regulations setting maximum
exposure levels or minimum distance requirements for lines and substations
or on the alleged health effects of exposure to electromagnetic fields. ENEL management believes that certain litigation concerning the effect of
electric and magnetic fields could evolve in favor of ENEL following the
coming into effect of a law on electromagnetic emissions (Law 36/2001) on
March 22, 2001, and the related implementation regulations (Decree of the
President of the Council of Ministers (DPCM) dated July 8, 2003). The new
Law regulates the field and establishes the fundamental principles to be
followed by F-44




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Regional regulating bodies, setting rules that apply to the whole national
territory, defining exposure limits, attention thresholds and quality
objectives introduced by DPCM. New regulations apply to low frequency equipment such as transmission
lines, distribution lines and distribution cabins, in addition to high
frequency equipment used for the telephone service, including mobile
telephone services. The new regulations will introduce a ten-year program
for the environmental upgrade of the whole national network to new exposure
limits, in addition to the possibility to recover, either in part or in
full, costs incurred by the owners of power lines and distribution cabins
through electricity tariffs, according to criteria to be set by the
Authority for Electricity and Gas, pursuant to Law 481/95, as they
represent costs incurred in the general interest. Following new regulations contained in Section V of the Italian
Constitution, introduced through Constitutional Law no. 3/2001 that
redefines normative, State and Regional responsibilities, a ruling of the
Constitutional Court regarding relationships between the State and Regions
in this context was issued. The issue arose following the introduction of a
law by the Campania Region (Law no.3 dated November 24, 2001) setting
stricter limits on emissions than those set by the former related DPCM of
1992 and by the recent DPCM dated July 8, 2003, also with regards to
environmental work on power lines (requiring extensive work on a
considerable part of the network, without providing specifically for the
reimbursement of costs incurred) which was upheld by the Italian Government
before the Constitutional Court on the grounds that it exceeds the
jurisdiction of the regions and is in contrast with current legislation. On
October 7, 2003, the Constitutional Court ruled as constitutionally
illegitimate the said law promulgated by the Campania Region, establishing
the principle that limits established by the laws of the State may not be
derogated, also in the case of regional legislation, as the protection of
health must be insured uniformly on the whole national territory. A number of urban planning and environmental cases for the construction and
operation of some generation plants and of a number of transmission and
distribution lines are pending. Based on indications given by legal
advisors, the Company believes the possibility of negative outcomes to be
remote. For a limited number of cases, an unfavorable outcome may not
however be ruled out completely. In case of negative pronouncements,
consequences could consist of the possible payment of damages and costs
related to work required on electrical equipment and the temporary
unavailability of the same. At present, such charges may not be quantified
and are therefore not included in the Litigation and contingent
liabilities reserve. (22) RELATED PARTY TRANSACTIONS As the entity primarily responsible for electricity generation,
transmission and distribution in Italy, the Company provides services to
many other state-owned entities. The rates earned are comparable to the
tariff rates charged to similar commercial organizations. Under the current regulatory framework, the Company enters into certain
transactions with the Gestore della Rete(which is wholly owned by the
Treasury Ministry, the Companys majority shareholder). Prices and fees
paid to or received from the Gestore della Retein connection with these
transactions are determined by the Energy Authority. The revenues produced
from the sales of electricity to the Gestore della Reterepresented
approximately 3% of total ENEL revenues for the years ended December 31,
2003 and 2002 and 2% for the year ended December 31, 2001. The generation
companies pay to the Gestore della Retethe additional access fee to the
National Transmission System. The amount of these transactions represents
approximately 2% of total operating expenses for the year ended December
31, 2003 and 1% for the year ended December 31, 2002. No amounts related
to these transactions were present for the year ended December 31, 2001.
Moreover, in 2002 and 2001 the generation companies paid to the Gestore
della Retethe hydroelectric surcharge, due on the hydroelectric and
geothermal production from plants not falling under the CIP 6 regime, that
was discontinued in 2003. The amount of this fee represented approximately
1% of total operating expenses for the years ended December 31, 2002 and
2001. The Transmission segment earns revenue from a fee per kWh transported
that distributors and F-45




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##### Table of Contents



suppliers pay to the Company through the Gestore della Rete. The revenues
relating to these fees represented approximately 2% of total ENEL revenues
for the years ended December 31, 2003 and 2002 and 3% for the year ended
December 31, 2001. The Sales, Infrastructure and Networks segment purchases
electricity from the Gestore della Reteand pays to the same fees for the
use of the national transmission network. The expenses relating to these
prices and fees represented approximately 7% of total operating expenses
for the year ended December 31 2003, 10% for the year ended December 31
2002 and 19% for the year ended December 31 2001. The Company purchases fuel for generation and gas for distribution from
Eni, an Italian oil and gas company in which the Treasury Ministry has an
ownership interest. Total purchases from Eni were approximately 8% of total
operating expenses in 2003, 7% in 2002, and 10% in 2001. Total purchases from state-owned companies were approximately 8%, 20% and
12%% of total operating expenses for each of the three years ended December
31, 2003, 2002, and 2001, respectively. Until December 31, 2001, certain tariff components were remitted to and
managed by the Cassa Conguaglio peril Settore Elettrico, or Equalization
Fund, a public entity charged with redistributing such revenues to the
electricity companies entitled to receive them. Effective January 1, 2002,
these components, mainly related to the recovery of the fuel cost and to
incentives on generation from renewable sources, are included in the sale
price of electricity applicable for the generation companies. Equalization
Fund contributions recognized in 2003 and 2002 primarily represent the
recovery of incentives arising from past years production from renewable
sources. As the activity of the Equalization Fund is limited to the
redistribution of certain tariff components among the operators of the
electricity market, the Company does not believe such transactions fall
under the definition of transactions with Related Parties. In 2003, the Equalization Fund paid to the generation companies the
retrieval relating to green certificate charges incurred in 2002. (23) DIFFERENCES BETWEEN ITALIAN GAAP AND U.S. GAAP The consolidated financial statements are prepared in accordance with
Italian GAAP, as described in Note 2, which differs in certain respects
from U.S. GAAP. The significant differences are described and discussed below and in Notes 24 and 25. Fixed Assets and Related Depreciation  In accordance with various Italian laws, certain utility plant balances
have been restated. Under U.S. GAAP, such restatements are not permitted.
In 2000, the Company initiated a plan to replace the existing meters with
others based on digital technology. As a consequence, a one time write down
was made in 2001 for Italian GAAP but not for U.S. GAAP purposes, and the
estimate regarding their remaining useful lives was revised. Additionally,
due to the above, differences in gains or losses on disposal of fixed
assets arise between Italian and U.S. GAAP. The reconciliations below include adjustments to eliminate the
restatements, and related accumulated depreciation, to reflect the effect
of the recomputation of depreciation expense on a historical U.S. GAAP cost
basis, to adjust for the one time write-down made under Italian GAAP and to
recognize gains or losses on asset disposals in accordance with U.S. GAAP.
The effect on net income of the change in
estimates of the useful life of certain assets amounts to euro 48 million, euro 51 million and  euro 74
million for the years ended December 31, 2003, 2002
and 2001, respectively. Capitalized Interest and Related Depreciation  F-46




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Under U.S. GAAP, interest is capitalized as part of the cost of
constructing an asset in accordance with Statement of Financial Accounting
Standards (SFAS) No. 34, Capitalization of Interest Cost. Under Italian
GAAP, interest capitalization is permitted, but not required. For Italian
purposes, the Company has not capitalized any interest since December 31,
1988. The reconciliation below includes adjustments to reflect the
capitalization of interest on assets, to the extent those assets qualify
for interest capitalization in accordance with SFAS No. 34, and the related
effect on depreciation. Customers Connection Fees  As described in Note 2, the Company changed, as of January 1, 2002, the
period of recognition of fees charged to Non-Eligible Customers for
connection to the electricity network, from deferring and amortizing the
effect of the fees over 20 years, to recording the effect of the fees in
income in the year of assessment. For U.S. GAAP purposes, these fees
continue to be deferred over a 20 year period. Unbilled Revenues  Until December 31, 2000, the Company recorded revenues for electric
services rendered when the electric meter was read or when a customer was
billed based on estimated consumption. Revenues for the supply of
electricity provided after the last meter reading prior to year-end, as
well as differences between estimated and actual consumption, were
recognized in the subsequent period when billed. Under U.S. GAAP, revenues
are recorded for all services provided through the end of the accounting
period. Following the new tariff rules, effective January 1, 2001, revenues
under Italian GAAP reflect the estimated amounts of electricity supplied
after the last meter reading prior to year end. At December 31, 2001, the
difference between Italian GAAP and U.S. GAAP no longer existed. Previous
years adjustments were reversed in 2001 in the reconciliation presented
below. Pension and Employee Termination Accounting  As discussed in Note 2, the Company grants certain pension and other
benefits to its employees, as required by Italian law and under labor
contracts. In particular, the Companys Italian employees are covered by a
plan required under Italian law and labor contracts which grants a
termination indemnity based on compensation and years of service. For
Italian GAAP purposes, the Company accrues the amount due to each employee
as of the respective year-end, based on such factors and dates. In
addition, the Company is required, by agreements with Italian trade unions,
to provide certain additional employee termination benefits. The reserve
for these termination benefits is accrued as a liability at the end of each
year and accordingly is not actuarially computed. SFAS No. 87, Employers Accounting for Pensions, requires the provision
for pension and other benefits to be recognized over the employees
employment period based on actuarially determined calculations.
In determining the employee termination liability for U.S.
GAAP purposes, the Company has applied Approach 2 of Emerging Issues Task
Force (EITF) No. 88-1. Under this approach, the actuarial present value
of the vested benefit obligation the employee is entitled to at separation
is based on the employees expected date of separation or retirement. The
reconciliations below include adjustments to recognize the pension and
other benefits in accordance with SFAS No. 87 and EITF No. 88-1. Additionally, SFAS 87 requires the recognition of an additional minimum
liability if the unfunded accumulated benefit obligation exceeds the
accrued pension liability. If an additional minimum pension liability is
recognized, an equal amount is recognized as an intangible asset to the
extent of unrecognized prior service cost. Any remaining excess is reported
as other comprehensive income, under Shareholders equity. F-47




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Other Post-retirement Benefits Accounting  As discussed in Note 2, the Company grants certain post-retirement benefits
to its employees, mainly relating to a reduction in electricity tariffs and
contributions to certain employee programs that provide medical benefits.
The related costs are expensed as incurred under Italian GAAP. SFAS No. 106, Accounting for Post-retirement Benefits Other then
Pensions, requires the provision for various employee benefit arrangements
to be recognized over the employees employment period based on actuarially
determined calculations. The reconciliation presented below includes
adjustments to recognize the other post-retirement benefits in accordance
with SFAS No. 106. Derivatives  The Company enters into derivatives for general and specific hedging
purposes. The general hedges are not designated against specific
transactions. Under U.S. GAAP, derivatives that are not designated to hedge
specific transactions are accounted for at fair value with gains and losses
being recognized currently in the consolidated statements of income.
Specific hedges are accounted for as hedges if they meet the qualifying
criteria for hedge accounting. The ineffective portion of effective hedge
relationships is recorded in earnings when required by U.S. GAAP. The total
ineffectiveness recorded in earnings during the years ended December 31,
2003 and 2002 amounts to euro 0.1 million and 0.7 million, respectively. In connection with the preliminary agreement signed by the Company in
October 2000 to acquire Infostrada, the Company also entered into
derivative instruments to manage its exposure to the variable price
adjustment mechanism in the preliminary agreement. For Italian GAAP
purposes, the settlement of the derivative instruments was considered a
component of the purchase price of Infostrada, while U.S. GAAP does not
allow hedge accounting for instruments intended to hedge the purchase price
of a business combination. Therefore, the loss of euro 250 million from
these instruments was recorded in 2001 as a loss in the statement of income
under U.S. GAAP rather than as a part of the purchase price. The reconciliation below includes adjustments to reflect the derivatives
described above at their estimated fair value in the consolidated
statements of income, or in other comprehensive income, as appropriate. Advertising Costs  Under Italian GAAP, certain advertising costs may be capitalized if certain
conditions are met, and are then amortized over five years. Under U.S. GAAP
advertising costs are expensed as incurred. Start-up Costs  Under Italian GAAP, the Company capitalizes and amortizes start-up costs
over five years. Under U.S. GAAP, start-up costs are expensed as incurred. Internal Use Software  For Italian GAAP, software development costs may be capitalized if certain
conditions are met. For U.S. GAAP purposes, software development costs are
divided into three categories: costs incurred in a preliminary phase
(strategic decisions, systems and performance requirements, vendors
selection, general conceptual framework, preliminary studies and planning),
development and implementation costs, and training and on-going maintenance
costs. Under U.S. F-48




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GAAP, costs related to the preliminary phase and costs related to training
and on-going maintenance are expensed as incurred. Additionally, under
Italian GAAP, the Company accrues for costs expected to be incurred
regarding the adaptation of software applications. Under U.S. GAAP these
costs are expensed as incurred. Reorganizations of
Companies Under Common Control  Under U.S. GAAP, acquisitions within a group of commonly controlled
companies are accounted for as a reorganization of entities under common
control. Accordingly, assets and liabilities acquired are recorded at
historical cost with no goodwill or other adjustments to the historical
carrying value of the assets acquired or liabilities assumed arising. U.S.
GAAP requires the elimination of goodwill and other purchase price
allocation adjustments arising on consolidation of companies acquired under
common control together with the related amortization. FS (Italian State Railways) Right of Way  In the consolidated financial statements of the Company, under Italian
GAAP, the total consideration payable to the Italian State Railways for the
rights of way over the FS rail network is recorded as an intangible asset
and residual payments (13 installments over the period 1999 to 2011) are
recorded at face value as liabilities. The intangible asset is amortized
over its estimated useful life. For U.S. GAAP purposes, the intangible
asset is adjusted to the present value of amounts to be paid for
liabilities incurred. Amortization is charged on the adjusted cost of the
intangible asset and the discount to present value of the gross amounts to
be paid is charged to interest expense using the effective interest rate
method over the repayment period. Sundry Differences Regarding Telecommunications Activities  In 2002 and 2001, the item included several differences regarding
telecommunications activities between Italian GAAP and U.S. GAAP, mainly
related to customer acquisition costs and activation fees of which the
effect of the adjustments reversed in 2003. Goodwill and Intangible Assets  Under Italian GAAP, intangible assets, including goodwill, are amortized
over a period deemed to be representative of the expected useful life of
the assets. Under U.S. GAAP, the Company has adopted Statement of Financial Accounting
Standards No. 141, Business Combinations (SFAS 141) which requires that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS 141 also includes guidance on the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination completed after June 30, 2001. Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS
142). SFAS 142 prohibits the amortization of all goodwill and intangible
assets with indefinite useful lives, and also requires that goodwill
included in the carrying value of equity method investments no longer be
amortized. Intangible assets, excluding goodwill, that have finite useful lives continue to be
amortized over their useful lives. SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives be tested for impairment annually, or more frequently if
events or changes in circumstances indicate that the asset might be
impaired. Goodwill is tested for impairment using the prescribed two-step
process. The first step screens for potential impairment by comparing the
fair value of the reporting units to their carrying values. If the fair
value of a reporting unit is less than its carrying value, the second step
measures the amount of impairment by comparing the fair value of the
reporting unit F-49




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to the fair value of the recognized and unrecognized assets and
liabilities of the reporting unit. In accordance with the requirements of SFAS 142, the Company
performed the initial impairment test of goodwill as of January 1, 2002.
Based on that test, no impairment was recorded at January 1,
2002 with respect to any of the Companys reporting units, and
accordingly there was no cumulative effect of this change in accounting
principle. Under SFAS 142, the Company estimates fair value for its reporting units
using a present value technique, incorporating estimated discounted future cash flow assumptions that
marketplace participants would use in their estimates of fair value. The
annual impairment test of the telecommunications reporting unit was
performed as of June 30, 2003 and 2002. The telecommunications reporting
unit was evaluated on a stand alone basis, without considering the weighted
average cost of capital benefits resulting from being part of the ENEL. As
a result of its annual impairment test performed on the telecommunications
reporting unit as of June 30, 2002, the Company recognized a goodwill
impairment charge of euro 2,336 million. Based on the impairment tests
performed during 2002 on the other reporting units, no additional goodwill
impairment charges were recognized during 2002. Based on similar tests
performed in 2003, no goodwill impairment charges were recognized during
2003. There are also differences between Italian GAAP and U.S. GAAP in the
application of the purchase method of accounting which results in different
allocations of the purchase price, in particular the allocation of fair
values to intangible assets and the resulting goodwill. The differences in accounting for goodwill between U.S. and Italian GAAP
described above results in differences between net income and shareholders
equity presented under U.S. GAAP and Italian GAAP. In 2002, under Italian
GAAP, and as described in Note 7, the Company recorded a goodwill
impairment charge of euro 1,511 million relating to the telecommunications
business in addition to goodwill amortization of euro 629 million. Under
U.S. GAAP, there was a further impairment charge relating to the
telecommunications reporting unit goodwill of euro 825 million, and
goodwill is no longer amortized under U.S. GAAP. The carrying values of goodwill under U.S. GAAP for the segments are as
follows: GenerationTelecommu-
    
    and energy
    
    Internationalnications
    
    management
    
    operations
    
    Total(millions of euro)Balance as of January 1, 2003, as previously reported
    
    
    5,358
    
    
    
    920
    
    
    
    
    
    
    
    6,278Reclassifications due to change in reorganized segments
    
    
    
    
    
    
    (920
    )
    
    
    920
    
    
    
    Goodwill acquired during year
    
    
    855
    
    
    
    
    
    
    
    144
    
    
    
    999Balance as of December 31, 2003
    
    
    6,213
    
    
    
    
    
    
    
    1,064
    
    
    
    7,277
 No goodwill has been allocated to any other segment. On March 29, 2001, the Company acquired from Vodafone Airtouch Plc 100% of
the voting stock of Infostrada, a fixed-line telecommunications and Italian
internet operator, for euro 7.6 billion, including certain ancillary costs.
Infostrada was merged into WIND effective January 1, 2002. Under
both Italian and U.S. GAAP, the acquisition was accounted for as a
purchase; however, there are certain differences in the purchase price
allocation and in the determination of the amount of resulting
goodwill between Italian and U.S. GAAP. The Company allocated the purchase price to the assets acquired and
liabilities assumed based on their fair values and calculated the goodwill
under U.S. GAAP. The table below shows a reconciliation of goodwill at the
acquisition date between Italian GAAP and U.S. GAAP. (millions of euro)Goodwill under Italian GAAP
    
    
    7,631Hedge cost (see footnote on derivatives)
    
    
    (250
    )Infostrada U.S. GAAP adjustments
    
    
    165
 F-50




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(millions of euro)Goodwill under U.S. GAAP
    
    
    7,546
 Until December 31, 2001, the goodwill was amortized over its expected
useful life of 15 years under both U.S.
GAAP and Italian GAAP. Upon the adoption of SFAS 142, goodwill is no
longer amortized under U.S. GAAP. The difference in goodwill resulting from the purchase price allocation has
been considered in the SFAS 142 goodwill impairment test, and is reflected in the
reconciliation lines related to goodwill amortization and impairment. The following table
presents net income and earnings per share under U.S. GAAP for the
years
ended December 31, 2001, 2002 and 2003 adjusted to exclude the amortization
of goodwill in accordance with SFAS 142: Year ended
    
    Year ended
    
    Year endedDecember 31, 2001
    
    December 31, 2002
    
    December 31, 2003(millions of euro, except per share data)Reported net
income, as adjusted for U.S. GAAP
    
    
    3,688
    
    
    
    1,399
    
    
    
    2,376Add back goodwill amortization, net of tax
    
    
    284
    
    
    
    
    
    
    
    Pro-forma
net income, as adjusted for U.S. GAAP, after amortization add-back
    
    
    3,972
    
    
    
    1,399
    
    
    
    2,376Basic earnings per share:Reported net income, adjusted for U.S. GAAP
    
    
    0.61
    
    
    
    0.23
    
    
    
    0.39Goodwill (net of minority interest)
    
    
    0.05
    
    
    
    
    
    
    
    Pro-forma basic earnings per share as adjusted for U.S. GAAP, after
amortization add-back
    
    
    0.66
    
    
    
    0.23
    
    
    
    0.39
 Camuzzi Purchase Price Allocation  In connection with the Camuzzi acquisition in 2002, under Italian GAAP
goodwill of euro 597 million was recorded. Of this goodwill, an amount of
euro 566 million is being amortized over 15 years and euro 31 million is
being amortized over 9 years. Under U.S. GAAP, the Company recorded a
customer relationship intangible of euro 566 million which is being
amortized over 15 years and a license valued at euro 66 million which is
being amortized over 9 years. The different allocation under Italian and
U.S. GAAP results in additional amortization under U.S. GAAP of euro 4
million for the years ended December 31, 2002 and 2003. Restructuring Reserve
and Conversion Costs  The Italian GAAP
consolidated financial statements reflect accruals for future
anticipated restructuring charges. U.S. GAAP requires that certain
conditions must be met before a restructuring accrual can be recorded.
Since these conditions have not been met, the reconciliations below reflect
adjustments for the difference in the timing of the recording of costs
related to personell and other costs not yet meeting the definition of a
liability under U.S. GAAP. The Italian GAAP consolidated financial statements reflect accruals for certain
conversion costs. U.S. GAAP requires these costs to be expensed as incurred.
The reconciliations below reflect an adjustment for the difference in timing of
the recording of these conversion costs. Italian Pension System Obligation  As discussed in Note 7, the Company was required to pay extraordinary
contributions to the Italian national pension system in the three year
period 2000-2002. U.S. GAAP requires the recognition of the required
contribution as net pension cost for the period and recognition as a
liability of any contributions due and unpaid, while Italian GAAP allows
these amounts to be expensed over a 20-year period. The reconciliations
presented below include an adjustment to recognize the expense in
accordance with U.S. GAAP. Investments in Equity Securities  F-51




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The Company has investments in the equity securities of Echelon Corporation
and Red Electrica Espanola. For Italian GAAP purposes, the investments are
accounted for under the cost method, with adjustments to earnings in order
to reflect declines in value judged to be other than temporary. For U.S.
GAAP purposes, the securities are accounted for in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities,
classified as available-for-sale and are carried at their fair market
value, with the unrealized holding gains and losses reflected under Other
comprehensive income in shareholders equity. Realized gains and losses,
dividends and declines in value judged to be other than temporary are
included in income. The reconciliations below include an adjustment to
recognize the investments in accordance with SFAS No. 115. As of December 31,
2002 and 2001 the investment in Echelon has the same carrying amount for
both Italian and U.S. GAAP. The investment in Red Electrica Espanola was
purchased during 2003. Current and Deferred Taxes  The Company records deferred taxes in accordance with Italian Accounting
Standard No. 25, which is substantially consistent with U.S. GAAP, as set
forth in SFAS No. 109, Accounting for Income Taxes. For Italian GAAP
purposes, the Company is not required to recognize deferred taxes on
capital reserves if they are not expected to be distributed and the Company
has not provided deferred taxes for the Legal Reserves, Law 292/93 Reserves
or retained earning. For Italian GAAP purposes, the tax effect will be
recognized when these amounts are distributed to the shareholders. For U.S.
GAAP purposes, these taxes are required to be recognized since certain
criteria have been met. The reconciliation below includes the adjustments
to recognize income taxes in accordance with SFAS No. 109. Additional adjustments to income taxes are also set forth in the
reconciliation below to reflect the impact on deferred taxes related to the
other Italian GAAPU.S. GAAP differences described above. The benefit of investment tax credits, including the Tremonti-bis law
incentive, is recognized as a reduction of income tax expense in the year
in which the credit is claimed for tax purposes. Accounting for Asset Retirement Obligations Under Italian GAAP, legal obligations associated with the retirement of long
lived assets are recognized, as other provisions for risks and charges, when
the obligation is probable and the amount is objectively quantified on the
basis of the information available at the balance sheet date. Under U.S. GAAP, effective January 1, 2003, ENEL adopted SFAS No. 143
Accounting for asset retirement obligations (SFAS 143), which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The standard applies to legal obligations associated with the
retirement of long-lived assets that results from the acquisition,
construction, development or normal use of assets. Under this standard, a
liability is recognized for such an obligation at its fair value when incurred
and a corresponding asset retirement cost is added to the carrying amount of
the related asset. The reconciliation below
includes an adjustment to the consolidated net income and consolidated shareholders
equity for the year ended December 31, 2003 to record asset retirement obligations arising in 2003 at their
present value, which were recorded at nominal value under Italian
GAAP. Classification Differences  In addition to recognition and measurement differences there are a number
of classification differences between Italian GAAP and U.S. GAAP. The main
classification differences are: F-52




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Extraordinary Income and Expenses As discussed in Note 2, items are recorded as extraordinary under Italian
GAAP if they meet certain criteria. U.S. GAAP requires more stringent
conditions for the classification of extraordinary items by also requiring
the underlying event or transaction to clearly possess a high degree of
abnormality and be of a type that would not reasonably be expected to recur
in the foreseeable future, taking into account the environment in which the
event occurs. Items recorded by the Company as extraordinary in the years
presented herein for Italian GAAP would not qualify as extraordinary
items under
U.S. GAAP. Such items would be included within operating income under
U.S. GAAP. Cash Flow Statements Under Italian GAAP, the Company determines net cash flow from operating
activities by the indirect method, starting from income before minority
interests. Under U.S. GAAP, net cash flow from operating activities is
presented starting from net income. Additionally, under Italian GAAP, extraordinary contributions to pension
funds and the payment of substitute tax on the release of reserves are
treated as cash flows from financing activities, while under U.S. GAAP they
are classified as cash flows from operating activities. Summarized cash flows determined in accordance with U.S. GAAP are presented
below: 2001
    
    2002
    
    2003
    
    2003(millions of(millions of euro)
    
    U.S. dollars)Net cash provided by operating activities
    
    
    5,554
    
    
    
    3,815
    
    
    
    6,843
    
    
    
    8,620Net cash used in investing activities
    
    
    (8,707
    )
    
    
    (4,241
    )
    
    
    (4,730
    )
    
    
    (5,958
    )Net cash (used in) provided by financing activities
    
    
    3,249
    
    
    
    239
    
    
    
    (2,061
    )
    
    
    (2,596
    )
 Recently Issued Accounting Standards  In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
143, Accounting for Asset Retirement Obligations. The statement applies
to legal obligations associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development and/or
the normal operation of a long-lived asset, except for certain obligations
of lessees. SFAS 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of
the long-lived asset and subsequently allocated to expense over the assets
useful life. The liability is changed at the end of each period to reflect
the passage of time (i.e. accretion expense) and changes in the estimated
future cash flows underlying the initial fair value measurement. The
Company was required to adopt SFAS 143 on January 1, 2003 (see note 25). On April 22, 2002, the FASB issued SFAS No. 145 Rescission of FASB
Statements Nos 4, 44 and 64, Amendment of SFAS No. 13 and Technical
Corrections. The principal change is that gains or losses from
extinguishments of debt will no longer be classified as extraordinary items
as they were under SFAS No. 4. The Company was required to adopt SFAS No
145 on January 1, 2003, except for the provisions relating to the
amendments of SFAS 13, which had been F-53




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adopted for transactions occurring subsequent to May 15, 2002. The full
adoption of SFAS No. 145 did not have a material impact on the Companys
financial position, results of operations or cash flows. In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities. The statement requires that a liability
for costs associated with exit or disposal activities be recognized in the
period in which the costs are incurred. Under previous accounting guidance,
a liability could be recognized when management has committed to an exit
plan. The provisions of SFAS 146 were effective for exit or disposal
activities initiated after December 31, 2002. The
reconciliations below include an adjustment for certain costs which were
recognized for Italian GAAP purposes in 2003 which do not qualify as a
liability under SFAS 146. In November 2002, the
Emerging Issues Task Force (EITF) reached a consensus
on EITF Issue 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables. This Issue addresses certain aspects of the accounting by a
vendor for arrangements under which it will perform multiple
revenue-generating activities. In some arrangements, the different
revenue-generating activities (deliverables) are sufficiently separable,
and there exists sufficient evidence of their fair values to separately
account for some or all of the deliverables (that is, there are separate
units of accounting). In other arrangements, some or all of the
deliverables are not independently functional, or there is not sufficient
evidence of their fair values to account for them separately. This Issue
addresses when and, if so, how an arrangement involving multiple
deliverables should be divided into separate units of accounting. This
Issue does not change otherwise applicable revenue recognition criteria.
The provisions of this Issue were effective for the Company for revenue arrangements
entered into beginning January 1, 2004. The Company does not expect the
adoption of EITF 00-21 to have a significant impact on the Companys
financial position, results of operations or cash flows. In November 2002, the FASB issued FASB Interpretation (FIN) 45,
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others  an interpretation
of FASB statements 5, 57, and 107 and rescission of FASB Interpretation
34. This Interpretation elaborates on the disclosure to be made by a
guarantor in its financial statements regarding obligations under certain
guarantees that it has issued. FIN 45 also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the
fair value of the non-contingent portion of the obligation due to the
issuance of the guarantee or, if higher, a probable loss under SFAS 5,
Accounting for Contingencies. The initial recognition and measurement
provisions of FIN 45 were applicable to guarantees issued or modified after
December 31, 2002. As of December 31, 2003, ENEL has guarantees of
indebtedness in favour of two unconsolidated investments. The term of
the guarantee generally covers the related indebtedness of
such unconsolidated investments. The guarantee given by ENEL to Elcogas
S.A. of euro 14 million was not issued or modified after December 31, 2002,
and therefore not subject to the initial recognition and measurement
provisions of FIN 45. The non-contingent portion of the guarantee
given by ENEL to CESI for euro 3 million has been determined by
management to have a fair value of a negligible amount. Considering the fair value of the
CESI guarantee is a negligible amount, ENEL has no financial impact of adopting FIN 45.
Additionally, the related indebtedness of the CESI guarantee was paid
in full by CESI in May 2004. The maximum potential amount of undiscounted future payments resulting from
such guaranties is euro 17 million as of December 31, 2003. In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities  an interpretation of ARB No. 51, which clarifies the
application of the consolidation rules to certain variable interest
entities. In December 2003, the FASB issued a revised version of FIN 46
(FIN 46R) to address certain technical corrections and implementation
issues. FIN 46 F-54




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established a new multi-step model for the consolidation of variable
interest entities when a company has a controlling financial interest based
either on voting interests or variable interests. Consolidation based on
variable interests is required by the primary beneficiary if the equity
investors lack essential characteristics of a controlling financial
interest or if the equity investment at risk is not sufficient for the
entity to finance its activities without additional subordinated financial
support from other parties. The primary beneficiary of a variable interest
entity is the party that absorbs a majority of the entitys expected
losses, receives a majority of its expected residual returns, or both, as a
result of holding variable interests. Regarding a foreign private issuer
such as ENEL, the requirements of FIN 46 are effective January 1, 2004, and
the requirements of FIN 46R apply to entities other than special purpose
entities for the period ended December 31, 2004 and to special purpose
entities no later than January 1, 2004. FIN 46 and FIN 46R also provide
disclosure requirements related to investments in variable interest
entities, whether or not those entities are consolidated. Certain of these
disclosure requirements apply to all financial statements issued after
December 31, 2003, regardless of when the variable interest entity was
established. In connection with the matter discussed in note 4, concerning
the securitization of receivables carried out by WIND, the Company has
determined that the entity described in that note will qualify as a
variable interest entity upon adoption of FIN 46R and therefore will be
consolidated as of January 1, 2004. The maximum exposure as of December 31, 2003 amounts to the
carrying value of the financial notes for euro 149 million. The Company has
not identified any other entities which could qualify as variable interest
entities. On October 25, 2002, the EITF reached a consensus on Issue 02-3,
Recognition and Reporting of Gains and Losses on Energy Trading Contracts
Under EITF Issues No. 98-10 and No. 00-17, that changed the accounting for
certain energy contracts. EITF 02-3 prohibits the use of mark-to-market
accounting for any energy-related contracts unless they are derivatives.
Any contracts subject to EITF 02-3 must be accounted for on the accrual
basis if they are not derivatives. This change applied immediately to new
contracts executed after October 25, 2002 and applied to all existing
non-derivative energy-related contracts beginning January 1, 2003. The
EITF minutes on Issue 02-3 also indicate that an entity should not record
unrealized gains or losses at the inception of derivative contracts unless
the fair value of the contracts is evidenced by observable market data.
EITF 02-3 required the recording of a non-cash, cumulative effect
adjustment to convert non-derivative contracts to accrual
accounting no later than January 1, 2003. The Company did not
have any non-derivative contracts that required mark-to-market
accounting as of January 1, 2003. On April 30, 2003, the FASB issued FASB Statement No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, which
amends FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, to address (1) decisions reached by the Derivatives
Implementation Group, (2) developments in other Board projects that address
financial instruments, and (3) implementation issues related to the
definition of a derivative. SFAS 149 had multiple effective date provisions
depending on the nature of the amendment to SFAS 133. The adoption of SFAS
149 did not have a significant impact on the Companys consolidated
financial statements. On May 15, 2003, the FASB issued FASB Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. This Statement establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of F-55




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those instruments were previously classified as equity. This statement was
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatory redeemable
financial instruments of nonpublic entities. SFAS 150 is implemented by
reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of SFAS 150 and
still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The adoption of SFAS 150 did not have
any impact on the Companys consolidated financial statements nor
does the Company expect a significant impact on the Companys consolidated
financial statements from provisions yet to be effective. In May 2003, the EITF reached a consensus on EITF 01-8, Determining
Whether an Arrangement contains a Lease. EITF 01-8 clarifies certain
provisions of SFAS 13, Accounting for Leases, with respect to the
identification of lease elements in arrangements that do not explicitly
include lease provisions. Any lease element identified under EITF 01-8
should be accounted for under current lease accounting literature by
lessors and lessees. The Company will be required to apply the provisions
of EITF 01-8 prospectively to arrangements newly agreed to, modified, or
acquired in a business combination beginning January 1, 2004.
The Company does not expect the adoption of EITF 01-8 to have a
significant impact on the Companys consolidated financial statements. In November 2003, the EITF reached a partial consensus on EITF 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments, EITF 03-1 addresses the meaning of other than temporary
impairment and its application to investments classified as either
available-for-sale or held-to-maturity under SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, and investments accounted for under
the cost method or the equity method. Although no consensus was reached on how
to evaluate when an impairment of securities or investments is other than
temporary, the EITF agreed on certain quantitative and qualitative disclosures
about unrealized losses pertaining to debt and equity securities classified as
available-for-sale or held-to-maturity. The Company has two investments in
equity securities which have been classified as available for sale and
considered a long term. Other Comprehensive Income reflects an unrealized gain
in Red Electrica Espanola of euro 2 million and an unrealized loss in Echelon
Corporation of euro 5 million. Management believes that the unrealized loss in
Echelon Corporation based on the difference between the carrying amount and
fair value as of December 31, 2003 is temporary due to the volatility of the
stock price and the positive prospective performance foreseen by the Company in
the medium term. The Company has not recorded any realized gains or losses on
investments in equity securities during the year ended December 31, 2003. In December 2003, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer. SOP 03-3 is applicable to loans and debt
securities with characteristics of loans acquired in a transfer (including
business combinations) and limits recognition and display of the accretable
yield to the excess of cash flows expected to be collected over the initial
investment. The SOP prohibits carrying over or creation of valuation
allowances at initial recognition. Any subsequent increases in cash flows
expected to be collected will be recognized prospectively. Any subsequent
decreases will be recognized as impairment. The provisions are effective
for loans acquired in fiscal years beginning after December 15, 2004.
Impairment provisions apply prospectively for loans existing at December
14, 2004, for fiscal subsequent years. In December 2003, the
FASB issued SFAS 132 (revised 2003) (SFAS 132R), Employers
Disclosure about Pensions and Other Post-retirement Benefits (revised
2003) and amendment of FASB 87, 88, and 106, which requires additional
disclosures about the Companys defined benefit plan and other
post-retirement plan assets, obligations, net costs, and cash flows. The
Company has F-56




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adopted the new disclosure requirements as of December 31, 2003 (see note
25).  (24)
    RECONCILIATION BETWEEN NET INCOME AND SHAREHOLDERS EQUITY DETERMINED
UNDER ITALIAN GAAP AND U.S. GAAP The following table summarizes the significant adjustments to consolidated
net income for the years ended December 31, 2001, 2002 and 2003 that would
be required if U.S. GAAP had been applied instead of Italian GAAP: 2001
    
    2002
    
    2003
    
    2003(millions
of euro)(a)
    
    (millions ofU.S.
dollars)(a)Net income as reported in the consolidated statements of income
    
    
    4,226
    
    
    
    2,008
    
    
    
    2,509
    
    
    
    3,161Items increasing (decreasing) reported net income:Fixed assets and related depreciation
    
    
    570
    
    
    
    391
    
    
    
    110
    
    
    
    138Capitalized
interest and related depreciation (b)
    
    
    (90
    )
    
    
    (37
    )
    
    
    (67
    )
    
    
    (85
    )Customers connection fees
    
    
    
    
    
    
    (491
    )
    
    
    (497
    )
    
    
    (626
    )Unbilled revenues
    
    
    (501
    )
    
    
    
    
    
    
    
    
    
    
    Pension and employee termination accounting
    
    
    117
    
    
    
    (71
    )
    
    
    (7
    )
    
    
    (9
    )Other post-retirement benefits accounting
    
    
    (23
    )
    
    
    (22
    )
    
    
    (24
    )
    
    
    (30
    )Derivatives
    
    
    (179
    )
    
    
    (42
    )
    
    
    (3
    )
    
    
    (4
    )Advertising costs
    
    
    23
    
    
    
    25
    
    
    
    30
    
    
    
    38Start-up costs
    
    
    12
    
    
    
    (13
    )
    
    
    10
    
    
    
    13Internal use of software
    
    
    (5
    )
    
    
    1
    
    
    
    (4
    )
    
    
    (5
    )Reorganization
of companies under common control
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    3FS (Italian State Railways) Right of Way
    
    
    (4
    )
    
    
    (4
    )
    
    
    (4
    )
    
    
    (5
    )Sundry differences regarding telecommunications activity
    
    
    9
    
    
    
    3
    
    
    
    (2
    )
    
    
    (3
    )Goodwill amortization and other intangibles
    
    
    5
    
    
    
    594
    
    
    
    535
    
    
    
    674Goodwill impairment
    
    
    
    
    
    
    (825
    )
    
    
    
    
    
    
    Camuzzi purchase price allocation
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )
    
    
    (5
    )Restructuring reserve and conversion costs
    
    
    (11
    )
    
    
    (2
    )
    
    
    121
    
    
    
    152Italian pension system obligation
    
    
    (523
    )
    
    
    (446
    )
    
    
    124
    
    
    
    156Investment in equity securities
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    Deferred taxes on equity reserves, including revaluations
    
    
    (49
    )
    
    
    (3
    )
    
    
    (371
    )
    
    
    (467
    )Asset retirement obligations
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    3Tax effects of reconciling items
    
    
    151
    
    
    
    340
    
    
    
    (77
    )
    
    
    (97
    )Impact of reconciling items on minority interest
    
    
    (4
    )
    
    
    (5
    )
    
    
    (7
    )
    
    
    (9
    )Net income in accordance with U.S. GAAP before the cumulative
effect of implementation of SFAS 133, net of
taxes
    
    
    3,691
    
    
    
    1,399
    
    
    
    2,376
    
    
    
    2,993Cumulative effect of implementation of SFAS 133, net of taxes
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    Net income in accordance with U.S. GAAP
    
    
    3,688
    
    
    
    1,399
    
    
    
    2,376
    
    
    
    2,993Basic
earnings per share in accordance with U.S. GAAP(c)
    
    
    0.61
    
    
    
    0.23
    
    
    
    0.39
    
    
    
    0.49Diluted
earnings per share in accordance with U.S. GAAP(d)
    
    
    0.61
    
    
    
    0.23
    
    
    
    0.39
    
    
    
    0.49
    (a)
    
    Except per-share data which is in Euro and U.S. dollars.(b)
    
    Includes related depreciation of euro 72 million, euro 72 million,
euro 70 million and U.S. $ 88 million, respectively.(c)
    
    The per share amount has been calculated in accordance with SFAS No.
128, Earnings Per Share. See Note 27 for additional information on
earnings per share. For purposes of these calculations the weighted
average number of shares, taking into account the reverse stock split,
was 6,063,075,189 shares as of December 31, 2001, 2002 and 2003,
respectively.(d)
    
    Diluted per share amounts have been calculated in accordance with
SFAS No. 128, Earnings Per Share and take into
account the options outstanding with a potentially dilutive effect as of December 31, 2003. F-57




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The following table summarizes the significant adjustments to consolidated
shareholders equity as of December 31, 2002 and 2003 that would be
required if U.S. GAAP had been applied instead of Italian GAAP: 2002
    
    2003
    
    2003(millions of(millions of euro)
    
    U.S. dollars)Shareholders equity as reported in the consolidated Balance Sheet
    
    
    20,772
    
    
    
    21,124
    
    
    
    26,610Items increasing (decreasing) reported shareholders equity:Fixed assets and related depreciation (a)
    
    
    (381
    )
    
    
    (313
    )
    
    
    (394
    )Capitalized interest and related depreciation (b)
    
    
    1,348
    
    
    
    1,281
    
    
    
    1,614Customers connection fees
    
    
    (491
    )
    
    
    (988
    )
    
    
    (1,245
    )Pension and employee termination accounting
    
    
    (94
    )
    
    
    (46
    )
    
    
    (58
    )Other post-retirement benefits accounting
    
    
    (1,100
    )
    
    
    (1,124
    )
    
    
    (1,416
    )Derivatives
    
    
    (338
    )
    
    
    (358
    )
    
    
    (451
    )Advertising costs
    
    
    (55
    )
    
    
    (25
    )
    
    
    (31
    )Start-up costs
    
    
    (38
    )
    
    
    (56
    )
    
    
    (70
    )Internal use of software
    
    
    (33
    )
    
    
    (37
    )
    
    
    (47
    )Reorganization under common control
    
    
    (10
    )
    
    
    (8
    )
    
    
    (10
    )FS (Italian State Railways) Right of Way
    
    
    (18
    )
    
    
    (22
    )
    
    
    (28
    )Sundry differences regarding telecommunications activity
    
    
    2
    
    
    
    
    
    
    
    Camuzzi purchase price allocation
    
    
    31
    
    
    
    27
    
    
    
    34Goodwill
impairment, related amortization and other intangibles
    
    
    (310
    )
    
    
    225
    
    
    
    283Restructuring reserve and conversion costs
    
    
    
    
    
    
    121
    
    
    
    152Italian pension system obligation
    
    
    (1,546
    )
    
    
    (1,422
    )
    
    
    (1,791
    )Investments in equity securities
    
    
    
    
    
    
    (3
    )
    
    
    (4
    )Deferred taxes on equity reserves, including revaluations
    
    
    (191
    )
    
    
    (627
    )
    
    
    (790
    )Asset retirement obligations
    
    
    
    
    
    
    2
    
    
    
    3Tax effects of reconciling items
    
    
    972
    
    
    
    885
    
    
    
    1,115Impact of reconciling items on minority interest
    
    
    6
    
    
    
    15
    
    
    
    19Shareholders equity in accordance with U.S. GAAP
    
    
    18,526
    
    
    
    18,651
    
    
    
    23,495
   (a)
    
    Includes related accumulated depreciation of euro 10,428 million,
euro 10,374. million, and U.S. $ 13,068 million, respectively.(b)
    
    Includes related accumulated depreciation of euro 544 million, euro
604. million and U.S. $ 761 million, respectively. The condensed consolidated balance sheets as of December 31, 2002 and 2003
presented below have been restated to reflect the differences between
Italian GAAP and U.S. GAAP. CONSOLIDATED BALANCE SHEETS As of December 31,2002
    
    2003
    
    2003(millions of U.S.(millions of euro)
    
    dollars)AssetsCurrent Assets
    
    
    14,220
    
    
    
    14,299
    
    
    
    18,012Fixed Assets, net
    
    
    38,304
    
    
    
    37,407
    
    
    
    47,122Other non-current assets
    
    
    13,899
    
    
    
    16,799
    
    
    
    21,16266,423
    
    
    
    68,505
    
    
    
    86,296Liabilities and Shareholders Equity
 F-58




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##### Table of Contents



As of December 31,2002
    
    2003
    
    2003(millions of U.S.(millions of euro)
    
    dollars)Current liabilities
    
    
    22,255
    
    
    
    23,268
    
    
    
    29,312Long-term debt
    
    
    17,172
    
    
    
    18,005
    
    
    
    22,681Other non-current liabilities
    
    
    8,406
    
    
    
    8,405
    
    
    
    10,587Total liabilities
    
    
    47,833
    
    
    
    49,678
    
    
    
    62,580Minority interest
    
    
    64
    
    
    
    176
    
    
    
    221Shareholders equity
    
    
    18,526
    
    
    
    18,651
    
    
    
    23,49566,423
    
    
    
    68,505
    
    
    
    86,296
 The condensed consolidated statements of income for the years ended
December 31, 2001, 2002 and 2003 presented below have been restated to
reflect the differences between Italian GAAP and U.S. GAAP. CONSOLIDATED STATEMENTS OF INCOME 2001
    
    2002
    
    2003
    
    2003(millions of U.S.(millions of euro)
    
    dollars)Total operating revenues
    
    
    28,781
    
    
    
    30,604
    
    
    
    31,237
    
    
    
    39,349Total operating expenses
    
    
    25,140
    
    
    
    30,600
    
    
    
    26,620
    
    
    
    33,533Gains on disposals of generation businesses
    
    
    1,696
    
    
    
    2,613
    
    
    
    349
    
    
    
    439Operating income
    
    
    5,337
    (1)
    
    
    2,617
    (2)
    
    
    4,966
    
    
    
    6,255Financial income
    
    
    (1,252
    )
    
    
    (1,185
    )
    
    
    (1,098
    )
    
    
    (1,383
    )Losses on equity method investments
    
    
    (120
    )
    
    
    (59
    )
    
    
    (70
    )
    
    
    (88)Income before income taxes
    
    
    3,965
    
    
    
    1,373
    
    
    
    3,798
    
    
    
    4,784Income tax expense
    
    
    547
    
    
    
    207
    
    
    
    1,497
    
    
    
    1,886Income before minority interest
    
    
    3,418
    
    
    
    1,166
    
    
    
    2,301
    
    
    
    2,898Minority interest (loss)
    
    
    (270
    )
    
    
    (233
    )
    
    
    (75
    )
    
    
    (95
    )Net Income
    
    
    3,688
    
    
    
    1,399
    
    
    
    2,376
    
    
    
    2,993
  (1)
    
    Includes gain on sale of Elettrogen, previously classified as
other non-operating income (expense) and now recorded gains on
disposals of generation businesses.(2)
    
    Includes gain on sale of Eurogen, previously classified as
other non-operating income (expense) and now recorded gains on
disposals of generation businesses. The condensed consolidated statements of changes in shareholders equity
for the years ended December 31, 2003, 2002 and 2001 presented below have
been restated to reflect the differences between Italian GAAP and U.S. GAAP
as discussed above. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY Retained
    
    OtherShare capital
    
    earnings
    
    comprehensive income
    
    Total(millions of euro)Balance as of December 31, 2000
    
    
    6,263
    
    
    
    11,507
    
    
    
    (332
    )
    
    
    17,438Restatement of the share capital in euro and reverse stock split
    
    
    (200
    )
    
    
    200
    
    
    
    
    
    
    
    Cumulative effect from implementation of SFAS 133, net of taxes
    
    
    
    
    
    
    
    
    
    
    (159
    )
    
    
    (159
    )Net income
    
    
    
    
    
    
    3,688
    
    
    
    
    
    
    
    3,688Unrealized loss on equity securities
    
    
    
    
    
    
    
    
    
    
    65
    
    
    
    65Derivatives
    
    
    
    
    
    
    
    
    
    
    114
    
    
    
    114Minimum pension liabilities
    
    
    
    
    
    
    
    
    
    
    (107
    )
    
    
    (107
    )Other changes
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    6Dividends
    
    
    
    
    
    
    (1,578
    )
    
    
    
    
    
    
    (1,578
    )Balance as of December 31, 2001
    
    
    6,063
    
    
    
    13,817
    
    
    
    (413
    )
    
    
    19,467Net income
    
    
    
    
    
    
    1,399
    
    
    
    
    
    
    
    1,399Derivatives
    
    
    
    
    
    
    
    
    
    
    (135
    )
    
    
    (135
    )Minimum pension liabilities
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )Other changes
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    (19
    )Dividends
    
    
    
    
    
    
    (2,183
    )
    
    
    
    
    
    
    (2,183
    )Balance as of December 31, 2002
    
    
    6,063
    
    
    
    13,033
    
    
    
    (570
    )
    
    
    18,526Net income
    
    
    
    
    
    
    2,376
    
    
    
    
    
    
    
    2,376Derivatives
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    (12
    )Minimum pension liabilities
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    38Investments in equity securities
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Other changes
    
    
    
    
    
    
    (85
    )
    
    
    (7
    )
    
    
    (92
    )Dividends
    
    
    
    
    
    
    (2,183
    )
    
    
    
    
    
    
    (2,183
    )
 F-59




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##### Table of Contents



Retained
    
    OtherShare capital
    
    earnings
    
    comprehensive income
    
    Total(millions of euro)Balance as of December 31, 2003
    
    
    6,063
    
    
    
    13,141
    
    
    
    (553
    )
    
    
    18,651(millions of U.S. dollars)Balance as of December 31, 2003
    
    
    7,638
    
    
    
    16,554
    
    
    
    (697
    )
    
    
    23,495
 Tax
effects on other comprehensive income are disclosed in Note 25(g). DISCLOSURE OF COMPREHENSIVE INCOME, NET OF TAX 2001
    
    2002
    
    2003
    
    2003(millions of U.S.(millions of euro)
    
    dollars)Net income in accordance with U.S. GAAP
    
    
    3,688
    
    
    
    1,399
    
    
    
    2,376
    
    
    
    2,993Minimum pension liabilities
    
    
    (107
    )
    
    
    (3
    )
    
    
    38
    
    
    
    48Investments in equity securities
    
    
    65
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Derivatives
    
    
    (45
    )
    
    
    (135
    )
    
    
    (12
    )
    
    
    (15
    )Other changes
    
    
    6
    
    
    
    (19
    )
    
    
    (7
    )
    
    
    (9
    )Total comprehensive income
    
    
    3,607
    
    
    
    1,242
    
    
    
    2,393
    
    
    
    3,015
 (25) ADDITIONAL U.S. GAAP DISCLOSURES (a) Concentrations of Risk and Certain Significant Estimates  The Companys business is largely determined by laws, regulations and
policies established by the European Union and the Italian government. As
described in Note 3, the regulatory framework for the Italian electricity
market has changed significantly in recent years with the implementation of the
Bersani Decree, designed to liberalize and create more competition in the
Italian electricity market. The changes caused by the Bersani Decree include
the adoption of a new tariff structure, the restructuring of the Companys
transmission business in order to transfer the management of the transmission
network to the System Operator, the reorganization of the Companys generation,
transmission and distribution operations into separate business units and the
requirement that the Company sell no less than 15,000 MW of its generating
capacity. The Bersani Decree has been amended following the enactment of a law
in October 2003 that provides, among other things, that management and
operation of the national transmission grid be entrusted to a single entity,
which will also own the grid assets and that will be privatized. A
governmental decree enacted in May 2004 requires ENEL to merge Terna, the
subsidiary that owns the majority of the national transmission grid assets,
with the Gestore della Rete in a new entity and to transfer the responsibility
for the management of the national transmission grid and related assets by
October 31, 2005 to this new entity. Upon this transfer, the Company will no
longer control Terna as no electricity operator, including ENEL, shall be
entitled to voting rights in excess of 5% with respect to the appointment of
Ternas directors. In any event, ENEL is required to reduce its holding in
Terna to no more than 20% by July 1, 2007. Tariff Structure A new tariff regime set by the Energy Authority that came into effect
on January 1, 2000, regulates the price paid by Non-Eligible Customers for
electricity, while Eligible Customers pay electricity at market price. Both
Eligible and Non-Eligible Customers pay transmission,
distribution and system charges as set by the Energy Authority. Prior
to January 1, 2002, F-60




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##### Table of Contents



Energy Authority set different prices to cover transmission and
distribution costs for Eligible and Non-Eligible Customers. As a result of
its decision of October 2001, and effective as of January 1, 2002, the
Energy Authority established so-called transport charges which are equal
for both Eligible and Non-Eligible Customers and are meant to cover
transmission and distribution costs. The Energy Authority has also established a mechanism that will allow
the Company to recover a portion of its stranded costs through the
transport charges paid by all customers. The new tariff regime administered by the Energy Authority that took
effect on January 1, 2000, significantly lowered the fixed tariff
components for generation, transmission and distribution. In 2003, 2002 and
2001, reductions in fees also resulted from the application of the price
cap mechanism to transmission and distribution charges established by the
Energy Authority. Once the pool market becomes operational, the tariff
component for generation will be periodically adjusted to reflect prices on
that market, while the tariff components for transmission and distribution
will continue to be subject to a system of price caps. In 2003, the European Union adopted a new Directive and a Regulation to
further liberalize the electricity market. The new Electricity Directive
retains the main principles of the old Directive, which it replaces. It
enables all consumers to freely choose their supplier by 2007, irrespective of
consumption levels, with all non-household consumers enjoying this
right to choose from
2004. Further, the new Electricity Directive introduces new definitions of
public service obligations and security of supply, establishes a regulator in
all European Union member states with well defined functions, and, finally,
requires legal unbundling of network activities from generation and supply.
European Union Member States have until July 1, 2004, to pass implementing
legislation. Italy has not yet implemented such directive. The Regulation
establishes common rules for the cross-border trade in electricity; it lays
down principles on charges to be paid as a result of transit flows and access
to networks as well as on congestion management; more detailed rules can be
issued by the European Union Commission, acting together with a special
committee. Increased Competition For many years the Company has had virtually no competition in the
generation, transmission and distribution of electricity market in Italy.
The Company currently faces competition from independent power producers
and municipal utilities in generation. In addition, the disposal of the Gencos has exposed the Company to
increasing competition from other operators of electricity generating
capacity, including Italian and international power companies. The Company also faces competition from suppliers and wholesalers for
sales to customers that are intensive users of electricity and may freely
purchase electricity from different producers. The Company expects that competition will increase further due to:  
    
    An increase in bilateral contracts between its competitors and final customers;  
    
    The introduction of the pool market, on which prices will be
determined by competitive bidding;  
    
    Regulations limiting each operators access to international
electricity sources to a maximum percentage of available
interconnection capacity; and  
    
    The construction of new generation facilities by its
competitors and the development of new interconnection lines that
would increase the volume of electricity that may be imported in
Italy. Basis of Presentation The preparation of financial statements in conformity with Italian
GAAP, along with the F-61




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##### Table of Contents



reconciliation to U.S. GAAP, requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. (b) UFEE Acquisition  On June 16, 2003, ENEL and Uniòn Fenosa signed an agreement for the
acquisition by ENEL of 80% of Uniòn Fenosa Energìas Especiales (UFEE), a
company that groups the activities of the Spanish operator in the field of
energy produced from renewable resources for euro 178 million, while Uniòn
Fenosa holds a call option on 30% of the shares expiring at the end of
2007. Since the transaction was concluded in December 2003, the purchase
price allocation, based on the fair value of the assets acquired and
liabilities assumed on the date of acquisition, is preliminary. In
particular, the Company is still in process of obtaining information
regarding the fair value of intangible assets acquired. In this preliminary
stage, goodwill of euro 123 million has been assigned to the International
Division. The following table summarizes a preliminary estimate of the fair
value of the assets acquired and liabilities assumed, on a U.S. GAAP basis,
which approximated book value at the date of acquisition: (millions ofeuro)Current assets
    
    
    46Fixed assets, net
    
    
    168Goodwill
    
    
    123Other non-current assets
    
    
    39Total assets acquired
    
    
    376Current liabilities
    
    
    (47
    )Long-term debt
    
    
    (135
    )Minority interest
    
    
    (14
    )Other non-current liabilities
    
    
    (2
    )Total liabilities assumed
    
    
    (198
    )Net assets acquired
    
    
    178
 The acquisition was treated as a purchase. For U.S. GAAP purposes the
goodwill is not amortized. (c) WIND Acquisition  On March 20, 2003, ENEL reached an agreement for the acquisition of
the 26.6% share in WINDs capital stock held by the France Telecom Group
(France Telecom), thus achieving the full ownership of WIND. The price paid
was euro 1,389 million and the purchase agreement included the cancellation
of the call option held by France Telecom giving France Telecom the right
to increase its share in WIND to 44%. The agreement provides for payments
of additional consideration to France Telecom in case ENEL should sell
WIND shares before December 31, 2004 receiving a cash price per share higher
than that paid by ENEL to France Telecom. The transfer of the shares and the
payment of the price, in addition to the transfer of the euro 175 million
subordinated loan, took place on July 1, 2003. The following table summarizes the fair value of the assets acquired
and liabilities assumed, on a U.S. GAAP basis, at the date of acquisition: F-62




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##### Table of Contents



(millions ofeuro)Current assets
    
    
    395Fixed assets, net
    
    
    922Goodwill
    
    
    855Intangible assets
    
    
    595Other non-current assets
    
    
    1,284Total assets acquired
    
    
    4,051Current liabilities
    
    
    (622
    )Long-term debt
    
    
    (1,855
    )Minority interest
    
    
    (7
    )Other non-current liabilities
    
    
    (178
    )Total liabilities assumed
    
    
    (2,662
    )Net assets acquired
    
    
    1,389
 The
acquisition was accounted for as a purchase. Of the euro 595 million
acquired intangible assets, euro 408 million was assigned to brands which
are determined to have an indefinite useful life and therefore are not
amortized, euro 103 million was assigned to customer relationships and is
being amortized over 5 years, deemed to be appropriate based on estimated
customer turnover, and euro 84 million was assigned to the GSM license and
is being amortized over the residual duration of the license (which will
expire in 2018). The resulting goodwill of euro 855 million was assigned to the Telecommunications
Division. The minority interest
represents third parties interests in a subsidiary of WIND. d) Maritza Acquisition  On March 5, 2003, as part of the program aimed at expansion of its
international operations, the Company acquired 60% of the share capital of
the Dutch company Entergy Power Holding Maritza BV, which in turn controls
73% of the Bulgarian company Maritza East III Power Company AD. The latter
will carry out the refurbishment and environmental upgrade of a
lignite-fired generation plant located in Bulgaria. The following table summarizes the fair value of the assets acquired
and liabilities assumed, on a U.S. GAAP basis, which approximated book
value at the date of acquisition: (millions ofeuro)Current assets
    
    
    95Fixed assets, net
    
    
    57Goodwill
    
    
    28Other non-current assets
    
    
    9Total assets acquired
    
    
    189Current liabilities
    
    
    (53
    )Long-term debt
    
    
    Minority interest
    
    
    (61
    )Other non-current liabilities
    
    
    Total liabilities assumed
    
    
    (114
    )Net assets acquired
    
    
    75
 The
acquisition was accounted for as a purchase. The resulting goodwill of euro 28 million
was assigned to the International Division. (e) Viesgo Acquisition  On January 8, 2002, as part of the program aimed at expansion of its
international operations, the Company acquired 100% of the share capital of
Electra de Viesgo SL, the holding
company of the Viesgo Group, the fourth largest electricity operator
in Spain, for euro 1,920 million in cash. F-63




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##### Table of Contents



The following table summarizes the fair value of the assets acquired
and liabilities assumed, on a U.S. GAAP basis, at the date of acquisition: (millions ofeuro)Current assets
    
    
    252Fixed assets, net
    
    
    1,421Goodwill
    
    
    757Other non-current assets
    
    
    123Total assets acquired
    
    
    2,553Current liabilities
    
    
    (457
    )Long-term debt
    
    
    (12
    )Minority interest
    
    
    (19
    )Other non-current liabilities
    
    
    (145
    )Total liabilities assumed
    
    
    (633
    )Net assets acquired
    
    
    1,920
 The
acquisition was accounted for as a purchase. The resulting goodwill of euro 757
million was assigned to the Generation and Energy Management segment.
Minority interest relates to certain Viesgo subsidiaries. (f) Camuzzi Acquisition  On
May 23, 2002, consistent with its strategy to expand its operations in
the natural gas distribution and sales activities, the Company purchased
98.81% of the share capital of Camuzzi Gazometri SpA, the second largest
distributor of natural gas in Italy, for euro 1,045 million in cash. The following table summarizes the fair value of the assets acquired
and liabilities assumed, on a U.S. GAAP basis, at the date of acquisition: (millions ofeuro)Current assets
    
    
    479Fixed assets, net
    
    
    866Intangible assets
    
    
    632Other non-current assets
    
    
    98Total assets acquired
    
    
    2,075Current liabilities
    
    
    (658
    )Long-term debt
    
    
    (228
    )Minority interest
    
    
    (2
    )Other non-current liabilities
    
    
    (142
    )Total liabilities assumed
    
    
    (1,030
    )Net assets acquired
    
    
    1,045
 The
acquisition was accounted for as a purchase. Of the euro 632 million of
acquired intangible assets, euro 566 million was assigned to customer
relationships and is being amortized over a period of 15 years, deemed to
be appropriate of view of estimated customer turnover, and euro 66 million
was assigned to the licenses for the distribution of gas and is being amortized over
the duration of the license of 9 years. If the license is not renewed, the
customer relationship continues to exist even though the license is held by
another party. (g) Accounting for Income Taxes  Income taxes are accounted for under the assets F-64




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##### Table of Contents



and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes
the enactment date. A detail of the provision for income taxes under U.S. GAAP for the
years ended December 31, 2001, 2002 and 2003 is as follows: 2001
    
    2002
    
    2003
    
    2003(millions of U.S.(millions of euro)
    
    dollars)Current
    
    
    1,569
    
    
    
    285
    
    
    
    1,479
    
    
    
    1,863Deferred
    
    
    (1,022
    )
    
    
    (78
    )
    
    
    18
    
    
    
    23Total
    
    
    547
    
    
    
    207
    
    
    
    1,497
    
    
    
    1,886
 The difference between the statutory and effective tax rate for the
years ended December 31, 2001, 2002 and 2003, is due to the following
factors: 2001
    
    2002
    
    2003Normal tax rate (a)
    
    
    47.0
    %
    
    
    47.0
    %
    
    
    45
    %Change in tax rates
    
    
    
    
    
    
    (1.7
    )
    
    
    (0.5
    )Reversal of deferred tax provision following
the release of accelerated depreciation
reserves
    
    
    (15.0
    )
    
    
    (2.7
    )
    
    
    (0.0
    )Capital gains subject to a 19% substitute tax
    
    
    (20.0
    )
    
    
    (65.4
    )
    
    
    (4.3
    )Increase in valuation allowance
    
    
    
    
    
    
    40.1
    
    
    
    Other differences
    
    
    1.8
    
    
    
    (2.2
    )
    
    
    (0.8
    )Effective tax rate
    
    
    13.8
    %
    
    
    15.1
    %
    
    
    39.4
    %
  (a)
    
    See note 20 for the definition of normal tax rate. The components of the deferred tax assets (liabilities) under U.S.
GAAP as of December 31, 2002 and 2003 are as follows: 2002
    
    2003
    
    2003(millions of U.S.(millions of euro)
    
    dollars)Deferred tax assets:Other post
retirement benefits accounting
    
    
    374
    
    
    
    371
    
    
    
    467Revaluation
of utility plant
    
    
    146
    
    
    
    117
    
    
    
    147Provision
for litigation and contingent liabilities
    
    
    896
    
    
    
    646
    
    
    
    814Allowance for doubtful accounts
    
    
    77
    
    
    
    83
    
    
    
    105Tax loss carryforwards
    
    
    965
    
    
    
    1,513
    
    
    
    1,906Customers
connection fees
    
    
    192
    
    
    
    368
    
    
    
    464Goodwill
impairment and amortization
    
    
    105
    
    
    
    
    
    
    
    Other
    
    
    145
    
    
    
    481
    
    
    
    606Valuation allowances
    
    
    (269
    )
    
    
    (572
    )
    
    
    (721
    )Subtotal
    
    
    2,631
    
    
    
    3,007
    
    
    
    3,788Deferred tax liabilities:Accelerated depreciation of utility plant
    
    
    (2,077
    )
    
    
    (1,663
    )
    
    
    (2,095
    )Capitalization of interest on utility plant
    
    
    (516
    )
    
    
    (477
    )
    
    
    (601
    )Equity reserves
    
    
    (133
    )
    
    
    (572
    )
    
    
    (721
    )Goodwill impairment and amortization
    
    
    
    
    
    
    (76
    )
    
    
    (96
    )Other
    
    
    (501
    )
    
    
    (383
    )
    
    
    (482
    )Subtotal
    
    
    (3,227
    )
    
    
    (3,171
    )
    
    
    (3,995
    )
 F-65




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##### Table of Contents



2002
    
    2003
    
    2003(millions of U.S.(millions of euro)
    
    dollars)Net deferred tax liabilities
    
    
    (596
    )
    
    
    (164
    )
    
    
    (207
    )
 Deferred tax assets on tax loss carryforwards as of December 31, 2003
of euro 941 million primarily relate to WIND for euro
859 million, Enel Distribuzione Gas for euro 29 million and
to Enelpower for euro 17 million and are stated net of a
valuation allowance of euro 572 million, of
which euro 544 million related to WIND. The balance as of December 31, 2002
related to WIND for euro 651 million and Enelpower for euro 45 million net
of a valuation allowance of 269 million totally related to WIND.
No valuation allowance was recorded prior to January 1, 2002. The tax loss carryforwards as of December 31, 2003 expire as follows:  
    
    2005: euro 107 million;  
    
    2006: euro 509 million;  
    
    2007: euro 896 million;  
    
    2008: euro 679 million;  
    
    no limits: euro 545 million. There are no deferred tax liabilities not recognized with respect to
investments in foreign subsidiaries. As
of December 31, 2003 and 2002, respectively, income tax has been
allocated to each item in Other Comprehensive Income as follows: 2002
    
    2003(millions of euro)Pension
    
    
    193
    
    
    
    176Derivatives
    
    
    94
    
    
    
    99Investments
in securities
    
    
    
    
    
    
    1
 There is no difference between Italian GAAP and U.S. GAAP in the
classification of deferred tax assets and liabilities. In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not that the Company
will realize the benefits of these deductible differences and tax
carryforwards, net of the existing valuation allowances at December 31, 2003.
The amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced. (h) Segment Information  In 2002, the new management team made a strategic decision to move away
from the diversification strategy the Company had been pursuing in recent years
to refocus on the core energy business. To support this strategy, in July 2002,
the Company reorganized its operations into six business divisions in order to
increase the focus of the activities on the market and to better control costs
and enhance synergies among the Companys various subsidiaries. These divisions
were: Generation and Energy Management; Sales, Infrastructure and Networks;
Transmission; Telecommunications; Services and Other Activities and Corporate.
In 2003, the Company added a
seventh division: International. Each division has its own management
structure, headed by a senior manager who reports directly to the Chief
Executive Officer of ENEL. The Corporate division includes the Parent which
defines the strategic objectives for ENEL and coordinates the activities of F-66




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##### Table of Contents



the
other divisions. The Parent also manages finance operations and insurance risk
coverage for all ENEL companies (in the case of finance operations, other than
WIND) and provides assistance and guidelines on organizational, industrial
relations, accounting, administrative, tax and legal issues. The Generation and Energy Management Division is responsible for
operations related to the production of electricity and the procurement of
fuel for electricity generated. The key subsidiaries in this division
include Enel Produzione S.p.A., for energy generation; Enel Green Power
S.p.A., for generation of energy from renewable sources; and Enel Trade
S.p.A., which purchases fuel for all of ENELs generating operations
and is active in the fuel trading and logistics sector. The Sales, Infrastructure and Networks Division comprises two business
units, which operate as independent units under the umbrella of Enel
Distribuzione S.p.A., the divisions lead company. The Infrastructure and
Networks business unit operates mainly through Enel Distribuzione S.p.A.,
which distributes electricity in Italy. The Sales business unit sells
electricity and gas and provides electricity-related services. The key
subsidiaries in this business unit include Enel Distribuzione S.p.A., which
sells electricity on the regulated market in Italy; Enel Energia S.p.A.,
which sells electricity on the free market in Italy; Enel Gas S.p.A., which
resells natural gas to end users in Italy; Enel So.l.e. S.p.A., which
offers public and art lighting services; and Enel.si S.p.A. which offers
electricity systems-related services and beyond the meter products and
services, such as consulting and sale of electrical equipment. The International Division includes the operations in electricity
generation and distribution outside of Italy. The main companies in this
division include the following: Viesgo Generaciòn S.L., Viesgo Distribuciòn
S.L., Viesgo Energia S.L. and Uniòn Fenosa Energias Especiales in Spain, Enel
North America Inc. in U.S., Enel Latin America LLC, in Central and South
America, and Maritza East III Power Company AD in Bulgaria. Terna S.p.A., a company controlled by the Company, constituting the
Transmission Division, owns approximately 94% of Italys national
transmission grid. The
Telecommunications Divisions operations are carried out by
WIND. The Services and Other Activities Division includes other non-core
business operations, such as, among others, Enel Real Estate S.p.A (now
Newreal S.p.A.), which provides commercial real estate management
services (in June 2004, the Company agreed to sell this company for
euro 1,400 million);
Enelpower S.p.A., which provides power-related engineering and construction
services; and Enel.it S.p.A., the group-wide information technology unit.
Individually, none of these other activities met the quantitative
thresholds for determining reportable segments in the periods covered by
these consolidated financial statements and therefore have been grouped for
purposes of segment reporting. ENEL constitutes the Corporate Division and, as the Parent, defines
the strategic objectives for ENEL and coordinates the activities of all of
these divisions. In addition, ENEL manages finance operations and insurance
risk coverage for all ENEL companies and provides assistance and guidelines
on organizational, industrial relations, accounting, administrative, tax
and legal issues. The accounting policies of the segments are the same as those
described as significant accounting policies (Note 2). No geographic
information has been presented since foreign operations represent
approximately 6%, 5% and 1% of total revenues for the years ended
December 31, 2003, 2002 and 2001, respectively, and approximately 5%
and 6% of total assets as of December 31, 2003 and 2002, respectively. F-67




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Considering the aforementioned segment redefinition which occurred in
2002 and 2003, the segment information for prior years has been restated
for comparative purposes. Information about the Companys segments, prepared in accordance with
Italian GAAP, for the years ended December 31, 2001, 2002 and 2003 is as
follows: Generation and
    
    Sales,energy
    
    infrastruc
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Servicesmanage
    
    tures and
    
    Tran
    
    Internation
    
    
    
    
    
    
    
    
    
    and other
    
    Elimina
    
    Consoliment
    
    networks
    
    smission
    
    al
    
    Telecom.
    
    Corporate
    
    activities
    
    tions
    
    dated(millions of euro)2001Revenues
    
    
    12,563
    
    
    
    22,206
    
    
    
    793
    
    
    
    68
    
    
    
    3,176
    
    
    
    3,980
    
    
    
    2,321
    
    
    
    (16,326
    )
    
    
    28,781Operating Income
    
    
    2,560
    
    
    
    1,526
    
    
    
    229
    
    
    
    10
    
    
    
    (1,237
    )
    
    
    336
    
    
    
    128
    
    
    
    (74
    )
    
    
    3,478Depreciation and Amortization
    
    
    1,342
    
    
    
    1,580
    
    
    
    240
    
    
    
    21
    
    
    
    1,068
    
    
    
    2
    
    
    
    206
    
    
    
    
    
    
    
    4,459Capital
Expenditures (1)
    
    
    755
    
    
    
    1,366
    
    
    
    173
    
    
    
    73
    
    
    
    1,185
    
    
    
    
    
    
    
    531
    
    
    
    
    
    
    
    4,083Identifiable Assets
    
    
    21,322
    
    
    
    19,254
    
    
    
    4,537
    
    
    
    364
    
    
    
    16,899
    
    
    
    6,093
    
    
    
    7,636
    
    
    
    (12,915
    )
    
    
    63,1902002Revenues
    
    
    10,881
    
    
    
    20,586
    
    
    
    828
    
    
    
    923
    
    
    
    3,921
    
    
    
    1,973
    
    
    
    2,874
    
    
    
    (12,009
    )
    
    
    29,977Operating Income
    
    
    1,373
    
    
    
    2,100
    
    
    
    271
    
    
    
    95
    
    
    
    (1,019
    )
    
    
    164
    
    
    
    (50
    )
    
    
    (54
    )
    
    
    2,880Depreciation and Amortization
    
    
    1,167
    
    
    
    1,217
    
    
    
    247
    
    
    
    148
    
    
    
    1,496
    
    
    
    4
    
    
    
    198
    
    
    
    
    
    
    
    4,477Capital Expenditures (1)
    
    
    939
    
    
    
    1,855
    
    
    
    178
    
    
    
    93
    
    
    
    1,550
    
    
    
    
    
    
    
    494
    
    
    
    
    
    
    
    5,109Identifiable Assets
    
    
    19,697
    
    
    
    21,306
    
    
    
    4,635
    
    
    
    3,403
    
    
    
    15,678
    
    
    
    7,505
    
    
    
    8,839
    
    
    
    (14,044
    )
    
    
    67,0192003Revenues
    
    
    12,111
    
    
    
    20,047
    
    
    
    874
    
    
    
    921
    
    
    
    4,383
    
    
    
    1,139
    
    
    
    2,778
    
    
    
    (10,936
    )
    
    
    31,317Operating Income
    
    
    2,388
    
    
    
    2,299
    
    
    
    408
    
    
    
    100
    
    
    
    (840
    )
    
    
    223
    
    
    
    234
    
    
    
    (80
    )
    
    
    4,732Depreciation and Amortization
    
    
    1,081
    
    
    
    1,200
    
    
    
    145
    
    
    
    156
    
    
    
    1,717
    
    
    
    4
    
    
    
    213
    
    
    
    
    
    
    
    4,516Capital Expenditures (1)
    
    
    652
    
    
    
    1,620
    
    
    
    183
    
    
    
    223
    
    
    
    685
    
    
    
    
    
    
    
    260
    
    
    
    
    
    
    
    3,623Identifiable Assets
    
    
    16,937
    
    
    
    22,111
    
    
    
    5,681
    
    
    
    3,977
    
    
    
    16,366
    
    
    
    7,113
    
    
    
    9,253
    
    
    
    (12,508
    )
    
    
    68,930(millions of U.S. Dollars)2003Revenues
    
    
    15,256
    
    
    
    25,253
    
    
    
    1,101
    
    
    
    1,160
    
    
    
    5,521
    
    
    
    1,435
    
    
    
    3,499
    
    
    
    (13,775
    )
    
    
    39,450Operating Income
    
    
    3,008
    
    
    
    2,896
    
    
    
    514
    
    
    
    126
    
    
    
    (1,058
    )
    
    
    281
    
    
    
    295
    
    
    
    (101
    )
    
    
    5,961Depreciation and Amortization
    
    
    1,362
    
    
    
    1,512
    
    
    
    183
    
    
    
    197
    
    
    
    2,163
    
    
    
    5
    
    
    
    267
    
    
    
    
    
    
    
    5,689Capital Expenditures
(1)
    
    
    821
    
    
    
    2,041
    
    
    
    231
    
    
    
    281
    
    
    
    863
    
    
    
    
    
    
    
    327
    
    
    
    
    
    
    
    4,564Identifiable Assets
    
    
    21,336
    
    
    
    27,853
    
    
    
    7,156
    
    
    
    5,010
    
    
    
    20,616
    
    
    
    8,960
    
    
    
    11,656
    
    
    
    (15,756
    )
    
    
    86,831
  (1)
    
    Tangible assets. The Companys segment information, prepared in accordance with U.S.
GAAP, for the years ended December 31, 2001, 2002 and 2003 presented below
has been restated to reflect the differences between the Companys
accounting policies under Italian GAAP and U.S. GAAP. Generation and
    
    Sales,energy
    
    infrastruc
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Servicesmanage
    
    tures and
    
    Tran
    
    Internation
    
    
    
    
    
    
    
    
    
    and other
    
    Elimina
    
    Consoliment
    
    networks
    
    smission
    
    al
    
    Telecom.
    
    Corporate
    
    activities
    
    tions
    
    dated(millions of euro)2001Revenues
    
    
    12,563
    
    
    
    22,206
    
    
    
    793
    
    
    
    68
    
    
    
    3,176
    
    
    
    3,980
    
    
    
    2,321
    
    
    
    (16,326
    )
    
    
    28,781Operating
Income (1)
    
    
    2,659
    
    
    
    1,233
    
    
    
    212
    
    
    
    10
    
    
    
    (1,293
    )
    
    
    2,230
    
    
    
    360
    
    
    
    (74
    )
    
    
    5,337Depreciation and Amortization
    
    
    1,291
    
    
    
    1,746
    
    
    
    220
    
    
    
    21
    
    
    
    1,034
    
    
    
    2
    
    
    
    164
    
    
    
    
    
    
    
    4,478Capital
Expenditures (2)
    
    
    796
    
    
    
    1,366
    
    
    
    173
    
    
    
    73
    
    
    
    1,185
    
    
    
    
    
    
    
    531
    
    
    
    
    
    
    
    4,124
 F-68




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##### Table of Contents



Generation and
    
    Sales,energy
    
    infrastruc
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Servicesmanage
    
    tures and
    
    Tran
    
    Internation
    
    
    
    
    
    
    
    
    
    and other
    
    Elimina
    
    Consoliment
    
    networks
    
    smission
    
    al
    
    Telecom.
    
    Corporate
    
    activities
    
    tions
    
    dated(millions of euro)Identifiable Assets
    
    
    22,039
    
    
    
    20,225
    
    
    
    4,490
    
    
    
    364
    
    
    
    16,658
    
    
    
    6,117
    
    
    
    6,821
    
    
    
    (12,915
    )
    
    
    63,7992002Revenues
    
    
    11,888
    
    
    
    21,045
    
    
    
    828
    
    
    
    923
    
    
    
    3,967
    
    
    
    1,973
    
    
    
    2,962
    
    
    
    (12,982
    )
    
    
    30,604Operating Income (3)
    
    
    1,203
    
    
    
    1,452
    
    
    
    234
    
    
    
    150
    
    
    
    (2,839
    )
    
    
    2,471
    
    
    
    
    
    
    
    (54
    )
    
    
    2,617Depreciation and Amortization
    
    
    1,152
    
    
    
    1,516
    
    
    
    230
    
    
    
    102
    
    
    
    930
    
    
    
    1
    
    
    
    138
    
    
    
    
    
    
    
    4,069Capital
Expenditures(2)
    
    
    974
    
    
    
    1,855
    
    
    
    178
    
    
    
    93
    
    
    
    1,550
    
    
    
    
    
    
    
    494
    
    
    
    
    
    
    
    5,144Identifiable Assets
    
    
    20,457
    
    
    
    21,102
    
    
    
    4,567
    
    
    
    3,426
    
    
    
    15,286
    
    
    
    7,616
    
    
    
    8,013
    
    
    
    (14,044
    )
    
    
    66,4232003Revenues
    
    
    11,678
    
    
    
    20,202
    
    
    
    874
    
    
    
    950
    
    
    
    4,401
    
    
    
    1,186
    
    
    
    2,882
    
    
    
    (10,936
    )
    
    
    31,237Operating Income
    
    
    2,214
    
    
    
    1,771
    
    
    
    404
    
    
    
    152
    
    
    
    (376
    )
    
    
    601
    
    
    
    280
    
    
    
    (80
    )
    
    
    4,966Depreciation and Amortization
    
    
    1,231
    
    
    
    1,592
    
    
    
    138
    
    
    
    107
    
    
    
    1,200
    
    
    
    7
    
    
    
    231
    
    
    
    
    
    
    
    4,506Capital Expenditures(2)
    
    
    686
    
    
    
    1,620
    
    
    
    183
    
    
    
    224
    
    
    
    685
    
    
    
    
    
    
    
    260
    
    
    
    
    
    
    
    3,658Identifiable Assets
    
    
    20,680
    
    
    
    22,142
    
    
    
    4,779
    
    
    
    3,789
    
    
    
    10,035
    
    
    
    29,612
    
    
    
    16,873
    
    
    
    (39,405
    )
    
    
    68,505(millions of U.S. Dollars)2003Revenues
    
    
    14,711
    
    
    
    25,448
    
    
    
    1,101
    
    
    
    1,197
    
    
    
    5,544
    
    
    
    1,494
    
    
    
    3,630
    
    
    
    (13,776
    )
    
    
    39,349Operating Income
    
    
    2,789
    
    
    
    2,231
    
    
    
    509
    
    
    
    191
    
    
    
    (474
    )
    
    
    757
    
    
    
    353
    
    
    
    (101
    )
    
    
    6,255Depreciation and Amortization
    
    
    1,551
    
    
    
    2,005
    
    
    
    174
    
    
    
    135
    
    
    
    1,512
    
    
    
    9
    
    
    
    290
    
    
    
    
    
    
    
    5,676Capital
Expenditures (2)
    
    
    864
    
    
    
    2,041
    
    
    
    231
    
    
    
    282
    
    
    
    863
    
    
    
    
    
    
    
    327
    
    
    
    
    
    
    
    4,608Identifiable Assets
    
    
    26,072
    
    
    
    27,892
    
    
    
    6,020
    
    
    
    4,773
    
    
    
    12,641
    
    
    
    37,302
    
    
    
    21,265
    
    
    
    (49,638
    )
    
    
    86,296
  (1)
    
    Includes gain on sale of Elettrogen, previously classified as
other non-operating income (expense) and now recorded gains on
disposals of generation businesses.(2)
    
    Tangible assets.(3)
    
    Includes gain on sale of Eurogen, previously classified as
other non-operating income (expense) and now recorded gains on
disposals of generation businesses. (i) Earnings per Share  In accordance with SFAS No. 128, Earnings per Share, basic earnings per
share is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding. The number of
shares included in the computation of diluted earnings per share is
increased to include the effect, if dilutive, of any potentially issuable
common shares. Potentially issuable shares include options, warrants, and
convertible securities. For the years ended December 31, 2001 and 2002, the
Company had no dilutive potential common shares, therefore basic and
diluted earnings per share were equal. For the year ended December 31,
2003, the Company had dilutive common shares resulting from outstanding stock options with a potentially dilutive effect. The computation of basic and diluted earnings per share for the years ended
December 31, 2001, 2002 and 2003, in accordance with U.S. GAAP,
are as follows: 2001
    
    2002
    
    2003
    
    2003(millions of U.S.Basic and Diluted EPS
    
    (millions of euro) (*)
    
    dollars) (*)Net income available to common shareholders
    
    
    3,688
    
    
    
    1,399
    
    
    
    2,376
    
    
    
    2,993Weighted average shares outstanding (in millions)
    
    
    6,063
    
    
    
    6,063
    
    
    
    6,063
    
    
    
    6,063Basic earnings per share
    
    
    0.61
    
    
    
    0.23
    
    
    
    0.39
    
    
    
    0.49Diluted earnings per share
    
    
    0.61
    
    
    
    0.23
    
    
    
    0.39
    
    
    
    0.49
  (*) Except per-share data which is in euro and U.S. dollars (j) Fair Value of Financial Instruments   As required by SFAS No. 107,  Disclosures about Fair Value of
Financial Instruments, the Company has estimated the fair values of
its financial instruments held. F-69




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In the normal course of its business, the Company utilizes various
types of financial instruments. These instruments include recorded
assets and liabilities, as well as items that principally involve
off-balance sheet risks. Information about the fair value of the
Companys financial instruments is presented below.  
    
    Cash and cash equivalents: the carrying values of cash and
cash equivalents approximate their fair values because of their
short maturities.  
    
    Investments in equity securities classified as available for
sale: the carrying value of such investments reflects their fair
value as of the balance sheet date,  
    
    Short-term debt: the carrying value of short-term debt
approximates fair value because of the short period of time
between the origination and maturity of the borrowings.  
    
    Other noncurrent assets: the carrying value of such assets
reflects their fair value as of the balance sheet date.  
    
    Bonds payable-listed: the fair value of bonds payable-listed
is based upon period-end market prices.  
    
    Other bonds and long-term debt (including current
maturities): the fair values of other bonds and long-term debt
(including current maturities) are based on discounted cash flow
analyses. As of December 31,2002
    
    2003Carrying
    
    
    
    
    
    CarryingAmount
    
    Fair Value
    
    Amount
    
    Fair Value(millions of euro)Bonds payable-listed
    
    
    5,527
    
    
    
    5,691
    
    
    
    7,780
    
    
    
    7,873Other bonds and long-term debt, including current maturities
    
    
    12,765
    
    
    
    12,606
    
    
    
    14,236
    
    
    
    14,085
  Derivative financial instruments: the fair value of derivatives
generally reflects the estimated amounts that the Company would pay
or receive to terminate the contracts at the reporting date, thereby
taking into account the current unrealized gains or losses of open
contracts. Appropriate pricing models and current market input data
(such as volatility, interest rate curves and foreign exchange rates)
have been used to estimate the fair value of the Companys
derivatives. As of December, 312002
    
    2003Fair Value
    (millions of euro)Interest rate swaps
    
    
    (342
    )
    
    
    (354
    )assets
    
    
    3
    
    
    
    10liabilities
    
    
    (345
    )
    
    
    (364
    )Interest rate collars
    
    
    (14
    )
    
    
    (12
    )assets
    
    
    
    
    
    
    liabilities
    
    
    (14
    )
    
    
    (12
    )Forward Rate Agreements
    
    
    
    
    
    
    assets
    
    
    
    
    
    
    liabilities
    
    
    
    
    
    
    Swaptions
    
    
    (2
    )
    
    
    1assets
    
    
    
    
    
    
    1liabilities
    
    
    (2
    )
    
    
    Total interest rate derivatives
    
    
    (358
    )
    
    
    (365
    )assets
    
    
    3
    
    
    
    11liabilities
    
    
    (361
    )
    
    
    (376
    )Forward exchange contracts relating to commodity hedging
    
    
    (32
    )
    
    
    (18
    )assets
    
    
    5
    
    
    
    liabilities
    
    
    (37
    )
    
    
    (18
    )Forward exchange contracts relating to hedge of commercial papers
    
    
    (26
    )
    
    
    (24
    )
 F-70




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##### Table of Contents



As of December, 312002
    
    2003Fair Value
    (millions of euro)assets
    
    
    1
    
    
    
    0liabilities
    
    
    (27
    )
    
    
    (24
    )Forward exchange contracts relating to hedge of future cash flows
    
    
    6
    
    
    
    (9
    )assets
    
    
    31
    
    
    
    32liabilities
    
    
    (25
    )
    
    
    (41
    )Other Forward exchange contracts
    
    
    0
    
    
    
    0assets
    
    
    18
    
    
    
    2liabilities
    
    
    (18
    )
    
    
    (2
    )Options
    
    
    0
    
    
    
    0assets
    
    
    1
    
    
    
    2liabilities
    
    
    (1
    )
    
    
    (2
    )Total
    
    
    (410
    )
    
    
    (416
    )assets
    
    
    59
    
    
    
    47liabilities
    
    
    (469
    )
    
    
    (463
    )
 Fair value of derivatives contracts is disclosed in Note 21. As of December 31, 2003, the Company had outstanding forward
exchange contracts and options used to hedge its several risks with
an aggregate notional amount of euro 2,384 million (euro 4,095 million as of December 31, 2002). In particular, the Company had:  
    
    contracts with a notional amount of euro 1,681 million
used to hedge the foreign exchange risk related to fuel
purchases, electricity imports and expected cash flows in
currencies other than the euro (euro 2,445 million as of December
31, 2002); and  
    
    contracts with a notional amount of euro 440 million
used to hedge the foreign exchange risk related to the repayment
of the commercial paper issued in foreign currency (euro 725 as
of December 31, 2002). The Company generally enters into these contracts with respect to the same
amount and date of the repayment obligation or the cash flow that the Company
expects to generate, thus any change in fair value of these contracts deriving
from a possible appreciation or depreciation of the euro against other
currencies would be fully offset by a corresponding change in the fair value of
the underlying position. At the end of 2003,the Company also had in place euro 153 million of
foreign exchange forward contracts (euro 671 million as of December 31, 2002) and
euro 110 million of options (euro 254 million as of December 31, 2002) used to
hedge any residual foreign exchange risk on an aggregate basis. Interest rate derivatives used by the Company mainly consist of
interest rate swaps, forward rate agreements, interest rate collars
and swaptions, in order to lock in a fixed
interest rate to balance the fix/floating ratio of its long-term
debt. F-71




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##### Table of Contents



The Companys derivative financial instruments were recorded in the
Italian GAAP financial statements at carrying amounts of euro 38
million and euro 36 million as of December 31, 2003 and 2002,
respectively. (k) Effects of Regulation  As discussed in Note 3, the Company is subject to the regulatory
control of the Energy Authority with additional oversight provided by
numerous laws, decrees and codes. The current regulatory tariff structure
provides the Company with recovery of certain levels of cost through a
price cap framework, and not necessarily its specific cost of providing
service. Accordingly, SFAS No. 71,  Accounting for the Effects of Certain
Types of Regulation, which relates to an entity whose rates are regulated
on an actual cost basis, is not currently applicable to these consolidated
financial statements. (l) Utility Plant  The Companys net utility plant, under U.S. GAAP consists of the
following: 2002
    
    2003
    
    2003(millions of(millions of euro)
    
    U.S. dollars) (*)Utility plant, gross:Generating Plant:Hydroelectric
    
    
    6,453
    
    
    
    6,447
    
    
    
    8,121Thermal
    
    
    16,740
    
    
    
    16,966
    
    
    
    21,372Geothermal and other renewable resources
    
    
    1,778
    
    
    
    1,944
    
    
    
    2,449Transmission line
    
    
    5,668
    
    
    
    6,245
    
    
    
    7,867Distribution Network
    
    
    31,205
    
    
    
    31,189
    
    
    
    39,289Distribution Gas Network
    
    
    2,564
    
    
    
    2,559
    
    
    
    3,224Telecommunication
    
    
    4,484
    
    
    
    5,124
    
    
    
    6,455Land and Buildings
    
    
    1,968
    
    
    
    2,339
    
    
    
    2,946Other
    
    
    2,349
    
    
    
    2,272
    
    
    
    2,862Construction in progress
    
    
    2,442
    
    
    
    2,140
    
    
    
    2,696Total
    
    
    75,651
    
    
    
    77,225
    
    
    
    97,281Accumulated depreciation:Generating Plant:Hydroelectric
    
    
    2,208
    
    
    
    2,309
    
    
    
    2,909Thermal
    
    
    7,763
    
    
    
    8,209
    
    
    
    10,341Geothermal and other renewable resources
    
    
    763
    
    
    
    893
    
    
    
    1,125Transmission Line
    
    
    2,340
    
    
    
    2,409
    
    
    
    3,035Distribution Network
    
    
    20,175
    
    
    
    20,875
    
    
    
    26,296Distribution Gas Network
    
    
    890
    
    
    
    973
    
    
    
    1,226Telecommunication
    
    
    1,236
    
    
    
    1,868
    
    
    
    2,353Land and Buildings
    
    
    523
    
    
    
    799
    
    
    
    1,007Other
    
    
    1,449
    
    
    
    1,483
    
    
    
    1,868Construction in progress
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    37,347
    
    
    
    39,818
    
    
    
    50,160Utility plant, net:Generating Plant:Hydroelectric
    
    
    4,245
    
    
    
    4,138
    
    
    
    5,212Thermal
    
    
    8,977
    
    
    
    8,757
    
    
    
    11,031Geothermal and other renewable resources
    
    
    1,015
    
    
    
    1,051
    
    
    
    1,324Transmission Line
    
    
    3,328
    
    
    
    3,836
    
    
    
    4,832
 F-72




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##### Table of Contents



2002
    
    2003
    
    2003(millions of(millions of euro)
    
    U.S. dollars) (*)Distribution Network
    
    
    11,030
    
    
    
    10,314
    
    
    
    12,993Distribution Gas Network
    
    
    1,674
    
    
    
    1,586
    
    
    
    1,998Telecommunication
    
    
    3,248
    
    
    
    3,256
    
    
    
    4,102Land and Buildings
    
    
    1,445
    
    
    
    1,540
    
    
    
    1,939Other
    
    
    900
    
    
    
    789
    
    
    
    994Construction in progress
    
    
    2,442
    
    
    
    2,140
    
    
    
    2,696Total
    
    
    38,304
    
    
    
    37,407
    
    
    
    47,121
 (m) Stock-Based Compensation  The Company accounts for all stock-based compensation issued under the
provision and related interpretation of Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees. In accordance
with SFAS No. 123, Accounting for Stock-Based Compensation, the Company
intends to continue to apply APB No. 25 for purposes of determining net
income and to present the pro forma disclosures required by SFAS No. 123 as
amended by SFAS No. 148 Accounting for Stock-Based Compensation 
Transition and Disclosure an amendment of FASB Statement No. 123. In 2000, following the authorization obtained in an ENEL Shareholders meeting,
the Company launched the Stock Option Plan (tranche 2000) of which 5,513,200
was still outstanding as of January 1, 2001. In 2001, the Company granted a second
tranche of options under the plan (Tranche 2001) for additional 34,274,050
options. This tranches options vest if certain target prices, or other
criteria, are met. Since certain targets were not achieved, a portion of the
options were forfeited. The status of the stock options granted under the Stock
Option Plan, as of December 31, 2001, was as follows: Number of
    
    AverageOptions
    
    Grant Price(euro)Outstanding at January 1, 2001
    
    
    5,513,200
    
    
    
    8.60Granted
    
    
    34,274,050
    
    
    
    7.27Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (15,080,582
    )
    
    
    7.27Outstanding at December 31, 2001
    
    
    24,706,668
    
    
    
    7.57
 The average fair value of options granted during 2001 was
approximately euro 0.48 per share. The fair value of each option grant is
estimated using a standard Black-Scholes option-pricing model with the
following weighted-average assumption used for estimating fair value: Tranche 2001Future dividends per share
    
    
    euro 0.36Risk-free interest rate
    
    
    4.05
    %Expected life
    
    
    2.5 yearsExpected volatility
    
    
    27
    %
 In 2002, following the authorization obtained in a ENEL Shareholders
meeting, the Parent launched a new Stock Option Plan, granting to
certain of its executive 41,748,500 options. Among the beneficiaries of the
2002 stock-option plan, in their capacity as General Manager, were also
those who held, at different times, the position of ENELs Chief Executive
Officer during that year. Options under this plan vested if earnings before interest, taxes,
depreciation and amortization (EBITDA), of ENEL for the fiscal year 2002
exceeded the estimated EBITDA as indicated in the budget approved by the
Board of Directors, and if the price of ENEL shares on F-73




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##### Table of Contents



Telematico
outperformed a specified reference index over the same period. If
either
of these conditions were not met, all the options expire. In March 2003, the
Companys Board of Directors determined that the conditions for all the
options to vest had been satisfied. In previous plans, exercise conditions
did not include performance targets such as EBITDA and were mainly related
to target prices of ENEL shares. The status of the stock options granted under the Stock Option Plan,
as of December 31, 2002, was as follows: Number of
    
    AverageOptions
    
    Grant Price(euro)Outstanding at January 1, 2002
    
    
    24,706,668
    
    
    
    7.57Granted*
    
    
    41,748,500
    
    
    
    6.43Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at December 31, 2002
    
    
    66,455,168
    
    
    
    6.85
 The average fair value of options granted during 2002 was
approximately euro 0.17 per share. The fair value of each option grant is
estimated using a standard Black-Scholes option-pricing model with the
following weighted-average assumption used for estimating fair value: Future dividends per share
    
    Euro 0.28Risk-free interest rate
    
    
    2.82
    %Expected life
    
    2.0 yearsExpected volatility
    
    
    28
    %
 In 2003, following the authorization obtained in a ENEL Shareholders
meeting, the Parent launched a new Stock Option Plan, granting to
certain of its executive 47,624,005 options. Among the beneficiaries of the
2003 stock-option plan, in their capacity as General Manager, were also
those who held, at different times, the position of ENELs Chief Executive
Officer during that year. This plan is based on conditions similar to the 2002 plan. In March
2004, the Companys Board of Directors determined that the condition for
all the options to vest had been satisfied. The status of the stock options granted under the Stock Option Plan,
as of December 31, 2003, was as follows: Number of
    
    AverageOptions
    
    Grant Price(euro)Outstanding at January 1, 2003
    
    
    66,455,168
    
    
    
    6.85Granted**
    
    
    47,624,005
    
    
    
    5.24Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at December 31, 2003
    
    
    114,079,173
    
    
    
    6.18
   *
    
    2,503,500 granted to Enel#s Chief Executive Officer at euro 6.480.**
    
    4,200,000 granted to Enel#s Chief Executive Officer at euro 5.240. F-74




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##### Table of Contents



The average fair value of options granted during 2003 was
approximately euro 0.67 per share. The fair value of each option grant is
estimated using a standard Black-Scholes option-pricing model with the
following weighted-average assumption used for estimating fair value: Future dividends per share
    
    Euro 0,28Risk-free interest rate
    
    
    2.82
    %Expected life
    
    2.0 yearsExpected volatility
    
    
    28
    %
 The following table summarizes certain information for the options
granted by the Parent, outstanding at December 31, 2003: Options Outstanding
    
    Options exercisableWeighted
    
    Weighted
    
    Weighted
    

    WeightedAverage
    
    Average
    
    Average
    
    AverageRange of
    
    Remaining
    
    Grant
    
    Grant
    
    Grant
    
    
    
    FairTranche
    
    Grant Prices
    
    Options
    
    Life
    
    Price
    
    Options
    
    Price
    
    Value(euro)
    
    
    
    (years)
    
    (euro)
    
    
    
    (euro)
    
    (euro)2000
    
    
    8.60
    
    
    
    5,513,200
    
    
    
    0.5
    
    
    
    8.60
    
    
    
    5,513,200
    
    
    
    8.60
    
    
    
    0.472001
    
    
    7.27
    
    
    
    19,193,468
    
    
    
    1.5
    
    
    
    7.27
    
    
    
    19,193,468
    
    
    
    7.27
    
    
    
    0.482002
    
    
    6.43
    
    
    
    41,748,500
    
    
    
    2.5
    
    
    
    6.43
    
    
    
    41,748,500
    
    
    
    6.43
    
    
    
    0.172003
    
    
    5.24
    
    
    
    47,624,005
    
    
    
    3.5
    
    
    
    5.24
    
    
    
    47,624,005
    
    
    
    5.24
    
    
    
    0.67
 In 2001, WIND launched a Stock Option Plan on WIND shares. Options
under this plan were scheduled to vest and would have been available for
exercise starting in 2002 if certain targets were met, or other criteria
were met during 2002 and WINDs proposed IPO was executed before September
2003. Since these conditions were not met, the options expired in 2003. Number of
    
    AverageWIND Plan
    
    Options
    
    Grant Price(euro)Outstanding at January 1, 2001
    
    
    
    
    
    
    Granted
    
    
    4,947,150
    
    
    
    22.46Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at December 31, 2001
    
    
    4,947,150
    
    
    
    22.46Granted
    

    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (718,570
    )
    
    
    22.46Outstanding at December 31, 2002
    
    
    4,228,580
    
    
    
    22.46Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled due to expiration
    
    
    (4,228,580
    )
    
    
    22.46Outstanding at December 31, 2003
    
    
    
    
    
    
    
 The average fair value of options granted by WIND during 2001 was
approximately euro 4.70 per share. The fair value of each option grant is
estimated using a standard Black-Scholes F-75




---



##### Table of Contents



option pricing model with the following weighted-average assumption
used for estimating fair value: Future dividend per share
    
    
    Risk-free interest rate
    
    
    4.70
    %Expected life
    
    5 yearsExpected volatility
    
    
    
 The Companys pro forma earnings for the years ended December 31,
2001, 2002 and 2003, had compensation costs, relating to the plan launched
by the Parent and its subsidiary WIND, been recorded in accordance with
SFAS No. 123, as amended by SFAS No. 148, are presented below (millions of
euro): 2001
    
    2002
    
    2003Net income in accordance with
U.S. GAAP, as
reported
    
    
    3,688
    
    
    
    1,399
    
    
    
    2,376Stock-based employee
compensation expense, as
reported
    
    
    
    
    
    
    
    
    
    
    Stock-based employee
compensation expense under
fair
value
    
    
    (6
    )
    
    
    (6
    )
    
    
    (12
    )Pro forma net income
    
    
    3,682
    
    
    
    1,393
    
    
    
    2,364
 The Companys pro forma earnings per share for the years ended
December 31, 2001, 2002 and 2003, had compensation costs, relating to the
plan launched by the Parent and its subsidiary WIND, been recorded in
accordance with SFAS No. 123, as amended by SFAS No. 148, are presented
below: 2001
    
    2002
    
    2003As Reported
    
    Pro Forma
    
    As Reported
    
    Pro Forma
    
    As Reported
    
    Pro FormaBasic and diluted earnings per share
    
    
    0.61
    
    
    
    0.61
    
    
    
    0.23
    
    
    
    0.23
    
    
    
    0.39
    
    
    
    0.39
 The effects of applying SFAS No. 123 in this pro forma disclosure
should not be interpreted as being indicative of future effects. (n)   Pension and Other Post-Retirement Benefit Costs  Certain employees of ENEL are covered under pension plans, which allow
for retirement benefits based upon compensation and years of service (see
Notes 2 and 11). In accordance with SFAS No. 87, the Company accrues the
amount due to each employee at year-end based upon these dates and certain
assumptions. Certain employees of ENEL are also covered under certain other
post-retirement benefit plans (see Note 2). In accordance with SFAS No.
106, the Company accrues the amount due to each employee at year-end based
upon these dates and certain assumptions. F-76




---



##### Table of Contents



Other post-retirementPensions benefits
    
    benefits2002
    
    2003
    
    2002
    
    2003(millions of euro)
    
    (millions of euro)Change in Benefit Obligation:Benefit obligation at January 1
    
    
    2,051
    
    
    
    2,087
    
    
    
    1,067
    
    
    
    1,149Service cost
    
    
    88
    
    
    
    84
    
    
    
    13
    
    
    
    10Interest cost
    
    
    102
    
    
    
    101
    
    
    
    53
    
    
    
    56Actuarial (gain) loss
    
    
    (24
    )
    
    
    (52
    )
    
    
    60
    
    
    
    (20
    )Curtailment cost/Initial accrual
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    PBO of business acquired (disposed)
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    Benefits paid
    
    
    (205
    )
    
    
    (291
    )
    
    
    (43
    )
    
    
    (43
    )Adjustment
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    Benefit obligation at December 31
    
    
    2,087
    
    
    
    1,985
    
    
    
    1,150
    
    
    
    1,152Change in plan assets: (a)Fair value of plan assets at beginning of year
    
    
    
    
    
    
    111
    
    
    
    
    
    
    
    15Actuarial return on plan assets
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    1Employer contributions
    
    
    198
    
    
    
    284
    
    
    
    
    
    
    
    2Plan participants contribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Benefits paid
    
    
    (198
    )
    
    
    (290
    )
    
    
    
    
    
    
    Intercompanies reallocation of plan assets
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    Adjustments
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    Gains (losses)
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    Fair value
of plan assets at end of year
    
    
    
    
    
    
    129
    
    
    
    
    
    
    
    18Reconciliation of Funded Status of the Plans:Funded (un-funded) status
    
    
    (2,087
    )
    
    
    (1,985
    )
    
    
    (1,150
    )
    
    
    (1,152
    )Unrecognized net (gain) loss
    
    
    550
    
    
    
    435
    
    
    
    7
    
    
    
    (15
    )Unrecognized net transition obligation
    
    
    (40
    )
    
    
    (17
    )
    
    
    
    
    
    
    Accrued benefit cost
    
    
    (1,577
    )
    
    
    (1,567
    )
    
    
    (1,143
    )
    
    
    (1,167
    )Adjustment for minimum liability
    
    
    (406
    )
    
    
    (344
    )
    
    
    
    
    
    
    Amount recognized in the Consolidated Balance Sheet
    
    
    (1,983
    )
    
    
    (1,911
    )
    
    
    (1,143
    )
    
    
    (1,167
    )Information for pension plans with an accumulated
benefit obligation in excess of plan assets: (a)Projected benefit obligation
    
    
    (1,974
    )
    
    
    (1,983
    )
    
    
    
    
    
    
    (45
    )Accumulated benefit obligation
    
    
    (1,832
    )
    
    
    (1,851
    )
    
    
    
    
    
    
    (45
    )Fair value of plan assets
    
    
    
    
    
    
    129
    
    
    
    
    
    
    
    18
 (a) 2002 figures do not include amounts related to Viesgo, the subsidiary
located in Spain, which are not available, as well as detailed information on
the plan assets which relate only to Viesgo. Pensions benefits
    
    Other post-retirement benefits2001
    
    2002
    
    2003
    
    2001
    
    2002
    
    2003(millions of euro)Components of Net Periodic Benefit Cost:Service cost
    
    
    87
    
    
    
    89
    
    
    
    84
    
    
    
    12
    
    
    
    13
    
    
    
    10Interest cost
    
    
    109
    
    
    
    102
    
    
    
    101
    
    
    
    55
    
    
    
    52
    
    
    
    56Expected return on plan assets
    
    
    
    
    
    
    (5
    )
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    1Net amortization and deferral
    
    
    16
    
    
    
    20
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    Net periodic benefit cost
    
    
    212
    
    
    
    206
    
    
    
    207
    
    
    
    67
    
    
    
    65
    
    
    
    67Curtailment
gain/initial accrual
    
    
    (69
    )
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Settlement cost
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    Total cost accrual
    
    
    143
    
    
    
    281
    
    
    
    220
    
    
    
    67
    
    
    
    65
    
    
    
    67
 Assumptions F-77




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##### Table of Contents



Pensions Benefits
    
    Other Post-retirement BenefitsWeighted Average Assumptions as of December 31:
    
    2001
    
    2002
    
    2003
    
    2001
    
    2002
    
    2003Discount rate
    
    
    5.0
    %
    
    
    5.0
    %
    
    
    5.0
    %
    
    
    5.0
    %
    
    
    5.0
    %
    
    
    5.0
    %Expected long term rate of return on plan assets
    
    
    N/A
    
    
    
    5.0
    %
    
    
    5.0
    %
    
    
    N/A
    
    
    
    2.5
    %
    
    
    5.0
    %Rate of compensation increase
    
    
    3.5
    %
    
    
    3.5
    %
    
    
    3.5
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    3.5
    %
 Assumed health care cost trend rates at December 31
    
    2002
    
    2003Health care cost trend rate assumed for next year
    
    
    3.5
    %
    
    
    3.5
    %Rate to which the cost trend rate is assumed to decline (the ultimate
trend rate)
    
    
    3.5
    %
    
    
    3.5
    %Year that the rate reaches the ultimate trend rate
    
    
    2003
    
    
    
    2004
 Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change
in assumed health care cost trend rates would have the following effects: 1- Percentage-Point Increase
    
    1- Percentage-Point Decrease(millions of euro)Effect on total cost
    
    
    0.4
    
    
    
    (0.3
    )Effect on post-retirement benefit obligation
    
    
    24.6
    
    
    
    (20.0
    )
 ENEL expects to contribute euro 116 million to its pension plan and
euro 45 million to its other post-retirement benefit plan in 2004. Contributions Estimated Future Benefit Payments The following benefit payments, including benefits attributable to estimated future employee service, are expected to be paid: Pension Benefits
    
    Other Benefits(millions of euro)2004
    
    
    116
    
    
    
    452005
    
    
    122
    
    
    
    472006
    
    
    128
    
    
    
    492007
    
    
    134
    
    
    
    512008
    
    
    141
    
    
    
    54Years 2009-2013
    
    
    813
    
    
    
    312
 (o) Derivative Financial Instruments 
 Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standard No. 133 (SFAS 133), Accounting for Derivative Instruments and
Hedging Activities, which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts (embedded derivatives), and for hedging
activities. SFAS 133 requires that all derivatives, whether designated in
hedging relationships or not, be recorded on the balance sheet at fair
value. The accounting for changes in fair value of a derivative instrument
depends on its intended use and the resulting designation. F-78




---



##### Table of Contents



As of January 1, 2001, the Company classified for U.S. GAAP purposes
all of its derivative instruments into two categories, for which the
accounting are as follows:  
    
    For cash flow hedges, the effective portion of the gain or
loss from the derivative hedging instrument is accumulated in other
comprehensive income (''OCI) and recognized in earnings during
the period that the hedged forecasted transaction impacts earnings.
The ineffective portion of the gain or loss from the derivative
hedging instrument is recognized in earnings immediately.
    
    For all other derivative contracts which do not qualify for the
special hedge accounting treatment under SFAS 133, gains and losses
are recorded in earnings each reporting period. Under U.S. GAAP, a derivative instrument is defined as a contract with all
three of the following characteristics:  a.
    
    It has (1) one or more underlying and (2) one or
more notional amounts or payment provisions or both.b.
    
    No initial net investment or an initial net
investment that is smaller than would be required for other
types of contracts that would be expected to have a similar
response to changes in market factors.c.
    
    Its terms require or permit net settlement, it
can readily be settled net by a means outside the contract,
or it provides for delivery of an asset that puts the
recipient in a position not substantially different from net
settlement. Since the adoption of SFAS 133, the Company implemented a control to
identify and, if necessary, recognize any potential derivatives or embedded
derivatives. The Company subjected all significant contracts to such control and found
that its contracts do not require valuation under SFAS No. 133 and related
interpretations. Furthermore, through December 31, 2003, no embedded
derivatives were required to be separated from the underlying obligation
and carried at fair value. Cash Flow Hedges ENELs cash flow hedges primarily include hedges of certain floating
rate medium and long-term debt. The Company has swapped these variable interest rate liabilities into
fixed interest rate liabilities. Interest rate swaps are the most common
type of derivative contract used to modify exposure to interest rate risk
by converting floating rate liabilities to fixed rate liabilities. ENEL
also enters into Swaptions, Forward rate agreements and Interest rate
collars. ENELs cash flow hedges also include hedges of fixed rate medium and
long-term foreign currency debt. In order to hedge the variability of the
foreign functional currency equivalent cash flows on the liabilities ENEL
has entered into combinations of interest rate swaps to effectively
switch the foreign fixed interest rate debt into euro fixed interest
debt. These transactions must be viewed in combination and are designated
jointly as a hedging instrument. F-79




---



##### Table of Contents



In addition, the Company also enters into combinations of interest
rate swaps to switch the structured rate paid on certain medium and
long-term debt into fixed interest rate outflows. The breakdown of the hedging instruments, and the amounts recognized
in other comprehensive income (loss) are as follows: OCI at

    Gains/losses

    Reclassified to

    OCI at

    Gains/losses

    Reclassified to

    OCI at
    
    Gains/losses
    
    Reclassified to
    
    OCI atDecember 31,
    
    recorded in
    
    earnings in
    
    December 31,
    
    recorded in
    
    earnings in
    
    December 31,
    
    recorded in
    
    earnings in
    
    December 31,Type of operation
    
    2000
    
    2001
    
    2001
    
    2001
    
    2002
    
    2002
    
    2002
    
    2003
    
    2003
    
    2003Interest rate swaps
    

(20
)


(52
)





    
    (72
    )
    
    
    (201
    )
    
    
    3
    
    
    
    (270
    )
    
    
    (29
    )
    
    
    14
    
    
    
    (285
    )Interest rate collars
    












    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )
    
    
    (3
    )
    
    
    
    
    
    
    (7
    )Swaptions
    












    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )
    
    
    2
    
    
    
    
    
    
    
    Total
    

(20
)


(52
)





    
    (72
    )
    
    
    (207
    )
    
    
    3
    
    
    
    (276
    )
    
    
    (30
    )
    
    
    14
    
    
    
    (292
    )
 For each transaction, ENEL documents the hedging relationship, the
risk management objective and strategy for undertaking the hedge, the
nature of the risk being hedged, how ENEL measures ineffectiveness, and how
the hedging instruments effectiveness in offsetting the exposure to
changes in the hedged items cash flows attributable to the hedged risk
will be assessed. The Company assumes no ineffectiveness in the hedge relationships that
qualify for the short-cut method. For the cash flow hedges that do not meet
the requirements for use of the short-cut method, ENEL formally assesses,
both at the inception of the hedge and on an ongoing basis, whether the
hedging derivatives are highly effective in offsetting changes in cash
flows of hedged items. All components of each derivatives gain or loss are
included in the assessment of hedge effectiveness. When it is determined
that a derivative is not highly effective as a hedge, the Company
discontinues hedge accounting and recognizes changes in fair value of these
contracts directly in earnings. The
total ineffectiveness recorded in earnings during the years ended
December 31, 2003 and 2002 amounts to euro 0.1 million and
euro 0.7 million, respectively. For all cash flow hedges, ENEL recognizes all other changes in fair
value of the hedging instrument in other comprehensive income and
subsequently reclassifies them into earnings as the hedged forecasted
transaction impacts earnings. The Company estimates that euro 176 million of net derivative losses
included in other comprehensive income as of December 31, 2003 will be
reclassified into earnings within the next twelve months. Other Derivative Contracts The Company enters into other derivative contracts used to mitigate
the effects of crude oil, electricity, gas, foreign currency and interest
rate price fluctuations. The Company has decided not to formally designate
these contracts as hedges of specific assets, liabilities, firm commitments
or anticipated transactions under the provisions of SFAS 133. Accordingly,
the Company records these contracts at fair value with all changes in fair
value being recorded as a component of income from continuing operations
during the period that such contracts remain outstanding and, based on the
guidance of SFAS 52, remeasures foreign-currency-denominated liabilities
related to these contracts to spot exchange rates. F-80




---



##### Table of Contents



Gain/lossesincluded inearningsType of Operation
    

2001
    
    2002
    
    2003Interest rate swaps
    
    
    (46
    )
    
    
    (6
    )
    
    
    (2
    )Interest rate collars
    
    
    (6
    )
    
    
    (1
    )
    
    
    3Swaptions
    
    
    
    
    
    
    5
    
    
    
    (1
    )Forward exchange agreements
    
    
    18
    
    
    
    (52
    )
    
    
    34Options
    
    
    
    
    
    
    
    
    
    
    Commodity swaps
    
    
    11
    
    
    
    (13
    )
    
    
    (5
    )Commodity futures
    
    
    8
    
    
    
    25
    
    
    
    (33
    )Total
    
    
    (15
    )
    
    
    (42
    )
    
    
    (4
    )
 Derivative instruments are reported on a net-by-counterparty basis on
the consolidated balance sheet when a legal right of
setoff exists under an enforceable netting agreement.  (p)
    
    Amortization of Intangible Assets Customer Relationship
    
    Licences
    
    Customer portfolioGross carrying amount, January 1, 2002
    
    
    
    
    
    
    
    
    
    
    Additions in 2002
    
    
    566
    
    
    
    66
    
    
    
    1182002 amortization expense
    
    
    (22
    )
    
    
    (5
    )
    
    
    (4
    )Balance as of December 31, 2002, net
    
    
    544
    
    
    
    61
    
    
    
    114Additions in 2003
    
    
    103
    
    
    
    84
    
    
    
    2003 amortization expense
    
    
    (48
    )
    
    
    (10
    )
    
    
    (14
    )Balance as of December 31, 2003, net
    
    
    599
    
    
    
    135
    
    
    
    100
 Accumulated amortization as of December 31, 2003 was euro 70 million for
customer relationship, euro 15 million for licences, and euro 18 million for
the customer portfolio. Accumulated amortization as of December 31, 2002 was
euro 22 million for customer relationship, euro 5 million for licences and
euro 4 million for the customer portfolio.
In addition, trademarks of euro 408 million, which are not subject to
amortization, are recorded as of December 31, 2003. The estimated amortization of intangible assets for each year in the
period from 2004 to 2008 amounts to approximately euro 596 million, euro
555 million, euro 342 million, euro 237 million and
euro 237 million,
respectively.  (q)
    
    Asset Retirement Obligations ENEL has
asset retirement obligations associated with a geothermal power plant
as well as a certain property owned by the State. ENELs obligations relate to
the return on expiration of the license or authorization of such assets to the State in same condition as originally
conveyed. F-81




---



##### Table of Contents



Below is a reconciliation of the beginning and ending aggregate carrying amount
of asset retirement obligations for the year ended December 31, 2003. Year ended December 31, 2003Balance January 1, 2003 prior to adoption of SFAS 143
    
    
    20Initial adoption
    
    
    Liability incurred during 2003
    
    
    6Liability settled in 2003
    
    
    Accretion expense
    
    
    Balance as of December 31, 2003
    
    
    26
 Regarding
ENELs other geothermal plants, generally, the license or
authorization is renewed, and no historical experience exists of discontinuing
a license or authorization. The Company does not have sufficient information
available to estimate a range of potential settlement dates in which asset
retirement obligations relating to these plants will be incurred. The liability
will be initially recognized in the period in which sufficient information
exists to estimate a range of potential settlement dates that is needed to
employ a present value techique to estimate fair value.  (26)
    
    SUBSEQUENT EVENTS(a)
    
    Public Offer for Terna On June 23, 2004, the Company completed the Initial Public Offering (IPO)
of 50% of the share capital of Terna, its subsidiary constituting the
Transmission Division. Under the terms of the IPO, 1,000,000 shares have
been sold to financial institutions and to the public at euro 1.70 per
share. The proceeds resulting from the sale are approximately euro 1.7
billion.  (b)
    
    ENEL and ESN-Energo Won a Contract for the Management of a Thermal
Plant in St. Petersburg In 2003, Enel Generation Holding BV, a wholly owned subsidiary, formed a 50/50
partnership with a Russian company named ESN Energo. The partnership, named
Enel ESN Management BV, holds the entire capital stock of the Russian company
Enel ESN Energo. In February 2004, Enel ESN-Energo was awarded a contract to
manage the North Thermal power plant near St. Petersburg, Russia for three
years, with the possibility of a one year extension. The plant, which consists
of one 450 MW combined-cycle unit and generates about 3.4 billion kWh per year,
supplies electricity to the Russian and Finnish markets.  (c)
    
    Offer for the Acquisition of Two Electricity Distribution Companies
in Romania On March 2, 2004, the Board of Directors of the Parent bid for the acquisition
of a majority stake in two Romanian electricity distribution companies, Banat
and Dobrogea, which together serve about 1,400,000 customers, representing 17%
of the countrys total customer base. F-82




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On June 17, 2004, ENEL and OPSPI, the Romanian Privatization Office of the
Ministry of Economy and Commerce, have signed a protocol finalizing
negotiations for the acquisition by ENEL of a 51% stake in two electricity
distribution companies, Electrica Banat and Electrica Dobrogea, for euro 112
million . The payment will cover the transfer of shares and capital increases
of both companies. Closing is expected by year end.  (d)
    
    Exit from Water Sector As part of ENELs strategy to focus on its core electricity and gas business,
on March 2, 2004, the Board of Directors of the Parent resolved ENELs gradual
exit from the water sector. This will be achieved through the disposal of
Enel.Hydro by direct negotiation, after the spin-off of engineering activities
and of sewage treatment into a new subsidiary. These activities will be
individually enhanced and sold.  (e)
    
    Start of Operation of the Pool Market At the end of March 2004, the Authority issued a number of regulations
defining the most significant rules for the start of the Pool Market.
Through the Pool Market, producers make competing offers and the
dispatching of electricity follows a merit order mechanism. Under this
mechanism, efficiency and lower environmental impact will be promoted.  (f)
    
    EuroBond Issue On May 6, 2004, ENEL launched a euro 1.5 billion fixed-rate bond issue. The
issue is divided into two equal parts expiring respectively in 7 and 20 years.
The seven-year bonds have an annual coupon of 4.125%, corresponding to a 25
basis point spread over the 7-year swap rate, while the 20-year bonds have an
annual coupon of 5.25%, corresponding to a 48 basis point spread over the
20-year swap rate.  (g)
    
    Disposal of Newreal On June 3, 2004, ENEL and the consortium formed by DB Real Estate Global
Opportunities 1B, L.P., an investment fund affiliated with Deutsche Bank, and
CDC IXIS, through its vehicle Excelsia Otto, signed a contract for the transfer
of the share capital of New Real S.p.A., an ENEL company to which the real
estate branch of Enel Real Estate was transferred in December 2003. The total
value of the transaction, as approved by the Board of Directors of ENEL on
March 18, 2004, is euro 1.4 billion and refers to 887 properties which are for
the most part used by ENEL and will continue to be used by ENEL after the sale. The transfer of
shares, which will complete the
operation, is expected at the beginning of July 2004. In preparation for the
sale, a further 333 properties will be transferred from New Real S.p.A. to an
ENEL company, Dalmazia Trieste, for the purpose of value enhancement.  (h)
    
    Contributions on Revenues from Telecommunications Services On
June 8, 2004, the European Court of Justice readdresses the
inquiry made by the Tribunale Amministrativo del Lazio (the competent
Italian Authority) related to the claim made by Italian
telecommunications operators regarding contributions due on revenues
from telecommunications services. Regarding this claim, the European
Court of Justice formally ruled on June 8, 2004 that the
Italian law requiring the payment of such fees is not compliant with
European regulations regarding such matters. Considering
the formal ruling above, the Italian court is obligated to issue a
ruling consistent with the European Court of Justice. Consequently,
the related provision of euro 194 million accounted for as of
December 31, 2003 (see Note 12) will be reversed in 2004. F-83




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of
Wind Telecomunicazioni SpA We have audited the consolidated balance sheets of Wind Telecomunicazioni SpA
(an Italian corporation) and its subsidiaries (the ''Company) as of December
31, 2003 and 2002, and the related consolidated statements of operations,
changes in shareholders equity and cash flows for each of the two years in the
period ended December 31, 2003 (all expressed in Euro). These financial
statements are the responsibility of the Companys directors. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wind
Telecomunicazioni SpA and its subsidiaries as of December 31, 2003 and 2002,
and the results of their operations and their cash flows for each of the two
years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in Italy. We draw your attention to the matters regarding deferred tax assets and
intangible assets as described in the notes to the consolidated financial
statements. We also draw your attention to the fact that this opinion relates only to the
financial statements referred to above that were prepared under the Italian
regulation governing financial statements and do not conform with accounting
principles generally accepted in the United States (U.S. GAAP). Rome, 16 March 2004 /s/ PRICEWATERHOUSECOOPERS PricewaterhouseCoopers SpA F-84




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SIGNATURES The
registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized. ENEL
S. P. A.(Registrant) /s/ Fulvio ContiFULVIO CONTIChief Financial Officer Date: June 30, 2004




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INDEX TO EXHIBITS  1.1
    
    By-laws of the Company2.1    
Deposit Agreement, as amended, among Enel S.p.A. and Citibank N.A., as
Depositary, and the owners of American Depositary Receipts (incorporated by
reference to the Registrants Registration Statement (File No. 333-6868) on
Form F-6 effective as of October 29, 1999 and the Post-effective Amendment No.
1 to Form F-6 effective as of July 9, 2001).3.1
    
    List of Subsidiaries4.1
    
    Code of Ethics12.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200212.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200213.1
    
    Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002