2. Investment Property
The Group's investment property, which consists of land and buildings that are not used for production purposes, totaled 49 million euros, or 13 million euros less than a year ago. The main reason for this decrease was the sale of two buildings, which did not generated significant gains.
A breakdown of this item is provided below:
(in millions of euros) 12/31/05
Balance at 12/31/04 (A) 62
Changes in 2005:  
- Disposals (7)
- Depreciation (1)
- Reclassification (5)
Total changes (B) (13)
Balance at 12/31/05 (A+B) 49
- Historical cost 68
- Accumulated depreciation (2)
- Writedowns (17)
Net carrying amount 49
Reclassifications refer to amounts that were posted to the provisions for risks in 2004 to adjust the carrying value of certain buildings and which were reclassified as a deduction to this account for the sake of greater clarity.
3. Goodwill
Goodwill totaled 3,505 million euros, or 2 million euros less than at December 31, 2004. The divestiture of the engineering operations is the reason for this decrease. The remaining balance is an intangible asset with an indefinite useful life. As such, it cannot be amortized in regular installments. As explained in the paragraph below, goodwill was tested for impairment, as required by IAS 36.
Impairment Test Applied to the Value of Goodwill, Property, Plant and Equipment and Other Intangibles
Because goodwill is an intangible asset with an indefinite useful life and, therefore, cannot be amortized in regular installments, IAS 36 requires that its value be tested for impairment at least once a year. Since goodwill does not generate cash flow independently and cannot be sold separately, IAS 36 requires a test of the value that can be recovered on a residual basis. This is accomplished by determining the cash flows generated by the complex of assets that constitute the business or businesses to which goodwill is attributable (the cash generating unit or units).
Keeping in mind the strategic and organizational decisions of the Edison Group, goodwill was tested by making reference to the two different cash generating units to which goodwill has been allocated (the electric power operations and the hydrocarbons operations) and the Group as a whole.
Allocation of goodwill (in millions of euros) 12/31/05 12/31/04
- Electric power operations 2,823 2,823
- Hydrocarbons operations 682 682
- Other operations - 2
Total 3,505 3,507
Consistent with past practice, the test was carried out by an independent appraiser, using financial flows that were determined on the basis of the 2006-2013 financial plan approved by the Board of Directors. The test was extended to subsequent periods covered by the useful lives of the various assets and took into account any changes in their destination and/or profitability.
Specifically, the recoverable value (understood as value in use) of each of the two abovementioned operations was determined by estimating the present value of future cash flows from operations before taxes that these operations are expected to generate over the Company's 2006-2013 plan and a terminal value beyond the plan's horizon. The terminal value of both operations was estimated by determining an operating cash flow, duly normalized to reflect regular operating conditions and a nominal annual growth rate of between zero and 2%. In addition, the cash flows attributed to the electric power operations until 2019 were estimated taking into account for each year the impact of the expiration of CIP-6 contracts and incentives.
Consistent with the cash flows described above, the discount rates applied were estimated by determining the average weighted cost of capital. Specifically, the pretax rates used were 9% for the electric power operations and 10% for the hydrocarbons operations.
The recoverable value was estimated using the financial method. It was obtained by using simulations for different variables - the most significant of which include discount rates, growth rates and nondiscretional investments required to keep the Company operating at a normal level - and applying such statistical simulation techniques as the Montecarlo method.
Specifically, the pretax rates used were 9% for electric power assets and 10% for hydrocarbons assets.
The recoverable values determined by applying the statistical process described above were greater than the corresponding carrying amounts, which are the same as the net invested capitals of the various cash generating units.
Edison tested in the same manner the components of property, plant and equipment and intangibles held by the core businesses of the Edison Group (except for regulated activities) that could be identified as cash generating units.
As was the case for the goodwill impairment test, the analysis was carried out by identifying the recoverable value (understood as value in use) of the cash generating unit, based on detailed operating and financial plans for each cash generating unit and on a time horizon equal to the useful lives of the assets. As was done when testing goodwill for impairment, the recoverable value was estimated by applying the financial method, used in combination with the Montecarlo simulation technique.
The financial flows used in connection with the abovementioned plans were indicative of specific production profiles and prices and took into account such items as decommissioning costs and residual values, when identifiable. The pretax flows used for each cash generating unit, which were consistent with those provided in the Company plan, were than discounted at rates that were consistent with those applied when testing goodwill for impairment. Specifically, the pretax rates used were 9% for electric power assets and 10% for hydrocarbons assets. The latter rate was increased further when the assets were located in a foreign country with a significant country risk.
The recoverable value of certain thermoelectric power plants, computed in the manner described above, was lower than the corresponding carrying amount, requiring writedowns totaling 81 million euros.
These writedowns were required by the detection of certain impairment indicators, the most significant of which was the introduction of a new cost applied to the Emissions Trading System, which regulates the trading of greenhouse gas emissions quotas within the European Union, without a corresponding increase in the rates charged for electric power. The resulting writedowns were applied to plant and machinery accounts.
In the case of two power plants, the writedown was related the risk entailed by contracts to supply steam to sugar mills that were affected by recent EU decisions. For two other power plants, the writedowns became necessary when these facilities lost their cogenerating status and the resulting exemption from the payment of green certificates due to a failure by customers to take delivery of all of the steam covered by the existing contracts.