Impact of the Transition on the Income Statement at December 31, 2004
(in millions of euros) In accordance with IAS/IFRS Data at 12/31/04
  the old accounting restatements in accordance
  principles   with IAS/IFRS
Sales revenues 5,696 (69) 5,627
Other revenues and income, net 801 54 855
Total net revenues 6,497 (15) 6,482
Raw materials and services used (-) (4,995) 279 (4,716)
Labor costs (-) (248) (43) (291)
EBITDA 1,254 221 1,475
Depreciation, amortization and writedowns (-) (639) (21) (660)
EBIT 615 200 815
Net financial income (expense) (248) (62) (310)
Income from (Expense on) equity investments 1 (16) (15)
Other income (expense), net 16 4 20
Profit before taxes 384 126 510
Income taxes (151) 63 (88)
Profit (Loss) from continuing operations 233 189 422
Profit (Loss) from discontinuing operations - - -
Profit (Loss) 233 189 422
Of which:      
Minority interest in (profit) loss 78 (10) 68
Group interest in profit (loss) 155 199 354
The changes that occurred in the most significant components of the income statement for the year ended December 31, 2004 are attributable primarily to the consolidation of Edipower and reflect the impact of the use of fair value as deemed cost to value property, plant and equipment (which produced an increase in depreciation and had an impact on Income taxes due to the reversal of deferred taxes recognized in connection with fair value measurement) and the inability to amortize goodwill.
Risk, Management, Types of Financial Risks
and Hedging Strategies
The operations of the Edison Group are exposed to several types of risk, including fluctuations in interest rates, foreign exchange rates and prices, and cash flow risks. The Group minimizes these risks through the use of derivative contracts that are executed within the framework of its risk management activities. As a rule, derivatives and similar instruments are not used for trading purposes.
All such transactions are carried out in accordance with special organizational guidelines that govern risk management activities. In particular, the Group has adopted procedures designed to monitor all transactions that involve derivative instruments. More specifically, all risk management transactions are centrally managed. An exception is made for certain transactions of limited size that are executed by Edipower, which has independent risk management procedures, mainly in the financial area.
Interest Rate Risk
The strategy pursued by the Group is to have substantially balanced positions in its fixed- and variable-interest exposure, with the goal of minimizing the impact of market rate fluctuations.
At December 31, 2005, the Group's exposure to the risk of changes in interest rates was roughly equivalent to 40% of its total exposure, despite the fact that some of the existing hedges entail the use of variable interest rates.
The most significant medium and long term positions have been hedged, with special emphasis on transactions involving bond issues and project financing. In the case of Edipower, the main purpose of hedging transactions is to minimize the risk component. Accordingly, the Group implemented a structure of financial derivatives based on an interest-rate corridor with rates ranging between about 3% and 4.20%.
Currency Risk
With the exception of issues discussed below in the paragraph that discusses price risk, the Group does not have a significant exposure to currency risks. Whatever exposure there is, it is limited to the translation of the financial statements of certain foreign subsidiaries, since most of the Group's operating companies use the same currency for invoices issued and invoices received.
Price Risk
The Group is exposed to price risk, including the related currency risk, for all of the energy commodities with which it is involved, including electric power, natural gas, coal, oil and refined products. This risk exists because both purchases and sales are affected by changes in the prices of energy commodities, either directly or through pricing formulas and indexing mechanisms.
In its management of price risk, the Group uses the financial markets for hedging purposes only to a limited degree, relying instead on exploiting the vertical and horizontal integrations of its different business operations.
The first step toward achieving this goal is to plan how to physically balance the volumes of the Group's actual market sales of energy commodities among the various delivery deadlines by using proprietary production assets and the existing portfolio of medium/long term contracts and spot contracts.
In addition, the Group pursues a policy designed to achieve homogeneity of physical sources and uses, so that the formulas and indexing mechanisms that affect revenues from the sale of energy commodities reflect, as closely as possible, the formulas and indexing mechanisms that have an impact on the costs the Group incurs to purchase energy commodities in the market and acquire supplies for its production assets.
To manage the residual risk, the Group can use the structured hedges that are available in the financial markets, in accordance with a cash flow hedging strategy. Hedging transactions can be used to lock in the margin on an individual transaction or a limited number of like transactions (operational hedging), or to protect a maximum level of exposure to price risk, computed in a centralized manner for the Group's entire net portfolio, for a legal entity that is part of the Group or a group of physical and contractual assets that, taken as a whole, are significant for the Group (strategic hedging). Transactions in