Financial expense of 339 million euros includes the following:
  • 123 million euros in interest accrued on bond issues (124 million euros in 2004).
  • 111 million euros in charges paid on derivatives, broken down as follows: 95 million euros generated by contracts that hedge the risk of interest rate fluctuations (70 million euros attributable to completed contracts and 25 million euros in fair value adjustments to contracts outstanding at December 31, 2005) and 16 million euros in charges representing the differentials on the portion of derivatives executed to manage risks related to the price of raw materials that cannot be classified as hedges pursuant to IAS 39.
  • 71 million euros in interest paid to banks (104 million euros in 2004).
  • 15 million euros in bank fees (39 million euros in 2004).
Financial expense also includes a charge of 7 million euros that has as its offset a provision for risks related to the decommissioning and remediation of industrial sites by the hydrocarbons operations and a charge of 3 million euros related to the provision for employee severance benefits recognized as a result of the adoption of IAS 19.
As explained earlier in a separate disclosure contained in these notes, the financial impact of interest rate differentials reflects the positive effect of derivatives that hedge the risk of changes in the prices of raw materials, which offset in part the negative balance generated by commercial transactions executed by companies that use foreign currencies and by the translation into the Group's reporting currency of financial statements denominate in foreign currencies.
26. Income from (Expense on) Equity Investments
A breakdown of the credit balance of 23 million euros is as follows:
Income:
  • A gain of 23 million euros on the sale of a 5.1% interest in AEM Spa;
  • 7 million euros in dividends received from publicly traded companies (5 million euros from AEM Spa);
  • A gain of 4 million euros on the sale of a 90% interest in Edison LNG;
  • A gain of 2 million euros on the sale of the interest held in Gemina;
  • 1 million euros generated by writing up to market value equity investments held for trading.
Expense:
  • A loss of 3 million euros on the sale of a 39% interest in Sidi Krir Generating Company Ltd (2 million euros) and of the interest held in Edison France (1 million euros);
  • A charge of 11 million euros booked to recognize the writedowns of interests held in certain Group companies, with IPSE 2000 accounting for the largest writedown (8 million euros).
27. Other Income (Expense), Net
Other expense of 17 million euros is the net result of certain residual items that are not related directly to the Group's industrial operations. The main items included in this account are:
Income
  • 67 million euros from the recognition in earnings of the portion of certain reserves that exceeded the amount paid out, the largest of which had to do with the settlement of the Cereol/Oleina dispute (32 million euros), the Iniziativa Edilizia dispute (7 million euros), the Ferrocemento Cambogi dispute (5 million euros) and tax disputes, offset by a corresponding tax item.
  • 16 million euros in miscellaneous income.
Expense:
  • 83 million euros for additions to the provisions for risks, broken down as follows: 63 million euros for contingent liabilities incurred in 2005, including accrued statutory interest; 13 million euros for future charges in connection with the remediation of non-industrial Group sites; 4 million euros for writedowns of prior-period IRPEG refunds receivable; and 3 million euros for contingent liabilities for guarantees provided upon the sale of equity investments.
  • 17 million euros for miscellaneous charges.
28. Income Taxes
Income taxes recognized on the income statement amounted to 16 million euros (88 million euros at December 31, 2004), broken down as follows:
(in millions of euros) 2005 2004 Change % Change
Current taxes 139 261 (122) (87.8%)
Net deferred-tax liabilities (assets) (123) (73) (50) 40.7%
Dividend tax credits - (100) 100 n.s.
Total for the Group 16 88 (72) n.s.
Current taxes include liabilities of 88 million euros for corporate income taxes (IRES) and 46 million euros for local income taxes (IRAP). Other taxes due outside Italy account for the balance.
The effects of the first-time filing of a consolidated tax return produced a net tax benefit of 2 million euros for the Group's Parent Company.
The balance shown for deferred taxes is the result of the following items:
  • Booking of deferred-tax liabilities of 71 million euros attributable as follows: 11 million euros for latent taxes arising from the adoption of IAS 39 to value financial instruments held by Group companies, 35 million euros for the excess depreciation and amortization booked for tax purposes by the Edipower subsidiary and 5 million euros for the impact of accounting for finance leases in accordance with IAS 17, with sundry items accounting for the balance.
  • Utilization of 126 million euros in deferred-tax liabilities related mainly to depreciation of property, plant and equipment that is not tax deductible because it results from the use of the fair value method to value industrial facilities and to writedowns.
  • Booking of deferred-tax assets of 108 million euros attributable mainly to the recognition of a tax loss carryforward of 60 million euros (41 million euros attributable to the Group's Parent Company and 19 million euros attributable to Edipower), to taxed provisions for risks totaling 36 million euros and to the impact of the adoption of IAS 39 and valuation differences of non-current assets for the balance.
  • Utilization of 40 million euros in deferred-tax assets. This amount includes 27 million euros attributable to the Edipower subsidiary, including 16 million euros from the reversal of the amortization of goodwill not recognized for IAS purposes.
The tax rate was lower than its theoretical level, due mainly to the success of programs implemented in recent years to streamline and optimize the Group's organization and the recognition of tax loss carryforwards.