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Endesa SA – ‘20-F’ for 12/31/03

On:  Wednesday, 6/30/04, at 4:25pm ET   ·   For:  12/31/03   ·   Accession #:  1047469-4-22216   ·   File #:  333-07654

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 6/30/04  Endesa SA                         20-F       12/31/03   10:4.4M                                   Merrill Corp/New/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F        Annual Report of a Foreign Private Issuer           HTML   3.34M 
 2: EX-1.1      Underwriting Agreement                              HTML     84K 
 3: EX-1.2      Underwriting Agreement                              HTML     90K 
 4: EX-4.5      Instrument Defining the Rights of Security Holders  HTML    111K 
 5: EX-8.1      Opinion re: Tax Matters                             HTML    456K 
 6: EX-11.1     Statement re: Computation of Earnings Per Share     HTML     24K 
 7: EX-11.2     Statement re: Computation of Earnings Per Share     HTML     26K 
 8: EX-12.1     Statement re: Computation of Ratios                 HTML     12K 
 9: EX-12.2     Statement re: Computation of Ratios                 HTML     11K 
10: EX-13.1     Annual or Quarterly Report to Security Holders      HTML     10K 

SECURITIES AND EXCHANGE COMMISSION

FORM 20-F

Commission file number: 1-9932

ENDESA, S.A.
(Exact name of Registrant as specified in its charter)

Kingdom of Spain
(Jurisdiction of incorporation)

Ribera del Loira, 60
28042 Madrid, Spain
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

*

Listed on the New York Stock Exchange not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the New York Stock Exchange.

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

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

The number of issued shares of each class of stock of Endesa, S.A. as of December 31, 2003 was:

        Ordinary shares, nominal value €1.20 each: 1,058,752,117

        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 ý                        No o

        Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o                        Item 18 ý

TABLE OF CONTENTS

i

CERTAIN TERMS AND CONVENTIONS

        As used in this annual report on Form 20-F, "Endesa" and first person, personal pronouns such as "we", "us" or "our" refer to Endesa, S.A. and its consolidated subsidiaries which comprise the Endesa Group unless the context otherwise requires. When we use second person, personal pronouns in this report, such as "you" and "your", we mean exclusively persons who have purchased our American depositary receipts or securities issued or guaranteed by Endesa or one of its consolidated subsidiaries as the context requires.

        References to "GW" and "GWh" are to gigawatts and gigawatt hours, respectively; references to "MW" and "MWh" are to megawatts and megawatt hours, respectively; references to "kW" and "kWh" are to kilowatts and kilowatt hours, respectively; and references to "kV" are to kilovolts. References to "Nm3" are to normal cubic meters and references to "bcm" are to billions of cubic meters. Unless otherwise indicated, statistics provided in this annual report with respect to electricity generation facilities are expressed in MW, in the case of the installed capacity of such facilities, and in GWh, in the case of the aggregate annual electricity production of such facilities. One GW = 1,000 MW, and one MW = 1,000 kW. Statistics relating to aggregate annual electricity production are expressed in GWh and are based on a year of 8,760 hours. Statistics relating to our production do not include electricity consumed by our generators. 25.2 thermies are equivalent to a therm.

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

PRESENTATION OF FINANCIAL INFORMATION

        When we use "euro" or "€" in this annual report, we mean the European Union euro, which is Spain's legal currency. When we use "dollars", "U.S.$" or "$" in this annual report, we mean United States dollars. When we use "pesetas" or "Ptas" in this annual report, we mean Spanish pesetas, which was formerly Spain's legal currency. The word "billion" refers to one thousand million.

        We historically published our financial statements in Spanish pesetas. Beginning in 2001, we began publishing our financial statements in euro. The exchange rate at which the Spanish peseta has been irrevocably fixed against the euro is Ptas 166.386 = €1.00. Financial data for periods prior to January 1, 1999 were restated from Spanish pesetas into euro using the irrevocably-fixed rate of exchange. Comparative financial data for periods prior to January 1, 1999 reported in euro depict the same trends that would have been presented had we continued to present financial statements in Spanish pesetas. However, financial data for periods prior to January 1, 1999 are not comparable with that of other companies reporting in euro that restated these amounts from a currency other than the Spanish peseta.

1

FORWARD-LOOKING STATEMENTS

        This annual report contains statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements that include the words "expect", "project", "anticipate", "believe", "should", "seek", "intend", "probability", "risk", "target", "goal", "objective", "estimate", "future" and similar expressions or variations on such expressions. These statements appear in a number of places in this annual report and include statements regarding our intent, belief or current expectations with respect to, among other things, trends affecting our business, financial condition or results of operations.

        These forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of various factors that may be beyond our control. The accompanying information contained in this annual report, including, without limitation, the information under "Item 3. Key Information—Risk Factors", "Item 4. Information on the Company" and "Item 5. Operating and Financial Review and Prospects" identifies important factors that could cause such differences.

        Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to release publicly the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the dates thereof, including, without limitation, changes in our business strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.

PART I

ITEM 1.    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

A. DIRECTORS AND SENIOR MANAGEMENT.

        Not applicable.

B. ADVISERS

        Not applicable.

C. AUDITORS

        Not applicable.

ITEM 2.    OFFER STATISTICS AND EXPECTED TIMETABLE

        Not applicable.

2

ITEM 3.    KEY INFORMATION

A. SELECTED FINANCIAL DATA

Selected Consolidated Financial Information

        The following table presents selected consolidated financial data of Endesa, S.A. You should read this table in conjunction with "Item 5. Operating and Financial Review and Prospects" and our audited consolidated financial statements beginning on page F-1. The consolidated income statement data for each of the three years in the period ended December 31, 2003 and the consolidated balance sheet data of December 31, 2003 and 2002 set forth below have been derived from, and are qualified in their entirety by reference to, our audited consolidated financial statements and notes thereto appearing elsewhere in this annual report. Our audited consolidated financial statements have been prepared in accordance with Spanish GAAP, which differs in certain significant respects from U.S. GAAP. See Note 26 to our consolidated financial statements. The principles of consolidation are described in Note 3 to our consolidated financial statements. The consolidated income statement data for each of the two years in the period ended December 31, 2000 and the consolidated balance sheet data as of December 31, 2001, 2000 and 1999 set forth below have been derived from our audited consolidated financial statements, which are not included herein.

3

(1)

Per ordinary share and per ADS data has been computed based on the weighted average number of ordinary shares outstanding for the periods presented. Each ADS represents one ordinary share.

(2)

In respect of the years indicated.

(3)

Long-term debt does not include current maturities. See Note 16 to our consolidated financial statements.

(4)

Other non-current liabilities includes negative goodwill, deferred revenues and provisions for contingencies and expenses.

(5)

Capital stock does not include long-term debt or redeemable preferred stock.

(6)

Computed using the noon buying rate for U.S. dollars on December 31 of each year presented.

Exchange Rates

        The following table sets forth, for the periods and dates indicated, certain information concerning the noon buying rate for dollars expressed in pesetas per $1.00.

(1)

The average of the noon buying rates on the last day of each month during the relevant period.

        Effective January 1, 1999, the following 11 European Union member states adopted the euro as a common currency: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain. They also established fixed conversion rates between their respective former sovereign currencies and the euro. On January 1, 2001, Greece joined the European Economic

4

and Monetary Union. The exchange rate at which the Spanish peseta had been irrevocably fixed against the euro is Ptas 166.386 = €1.00. On January 1, 2002, the participating member states began issuing new euro-denominated bills and coins for use in cash transactions. As of March 1, 2002, the participating member states have withdrawn the bills and coins denominated in their respective former currencies from circulation, and they are no longer legal tender for any transactions.

        The Federal Reserve Bank of New York no longer quotes a noon buying rate for the currencies of any of the participating member states, including Spain. The noon buying rate for the euro on June 25, 2004 was $1.2145 = €1.00.

        The following tables set forth, for the periods and dates indicated, certain information concerning the noon buying rate for euro expressed in U.S. dollars per euro.

(1)

The average of the noon buying rates on the last day of each month during the relevant period.

        Unless otherwise indicated, where this annual report provides translations into euro of amounts denominated in or resulting from transactions effected in currencies other than the euro, the conversion has been effected at the relevant exchange as published by the Spanish Central Bank.

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

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

B. CAPITALIZATION AND INDEBTEDNESS

        Not applicable.

C. REASONS FOR THE OFFER AND USE OF PROCEEDS

        Not applicable.

5

D. RISK FACTORS

Risks Related to Our Latin American Operations

We may not be able to implement our principal strategies in Latin America.

        The future results of operations of our Latin American subsidiaries will depend in significant part upon their ability to implement some of their principal strategies, namely, operating and financial cost reductions. The success of the plan to cut costs substantially, generally will depend upon numerous factors, including the cost and availability of financing and the ability to achieve operating efficiencies. If any of these strategies are unsuccessful, the profitability of our Latin American subsidiaries could suffer. The ability to carry out these strategies could be harmed by a number of factors, including among others, the failure of new meters and transformers being installed in Argentina, Brazil, Colombia and Peru to reduce electricity theft from our operations in those countries.

Our Latin American subsidiaries are subject to a variety of risks, including economic downturns and political risks.

        A material portion of our operations and investments outside Spain are located in Latin America and are exposed to various risks inherent in operating and investing in Latin America, including risks related to the following:

•

changes in government regulations and administrative policies;



•

imposition of currency restrictions and other restraints on movements of funds;



•

changes in the business or political environment in which we operate;



•

economic downturns, political instability and civil disturbances affecting operations;



•

government expropriation of assets; and



•

exchange rate fluctuations.

        In addition, revenues from operations of our Latin American subsidiaries, their market value and the dividends collected from these subsidiaries are exposed to material country risk as a result of adverse economic conditions in the region that may adversely affect demand, consumption and exchange rates.

The current macroeconomic and political situation in Argentina and changes to regulations affecting our Argentine subsidiaries could have a material adverse effect on our business, financial condition and results of operations.

        Our Argentine subsidiaries' financial condition and results of operations depend to a significant extent on economic and political conditions prevailing in Argentina and on the rates of exchange between the Argentine peso and the U.S. dollar. The Argentine economy has experienced a severe recession in recent years and the abandonment of dollar-peso parity has led to significant devaluation of the peso against major international currencies.

        The macroeconomic and political situation in Argentina has also led to legislation resulting in the repeal of certain provisions of one of our subsidiary's concession contracts that permitted its distribution tariffs to be pegged to the dollar and provided for certain price indexation mechanisms, and in the pesification of all privately negotiated contracts and spot energy market prices. Such legislation also authorizes the Argentine Federal Executive Branch to renegotiate all public service contracts, including one of our subsidiary's concession contracts, and establishes certain guidelines relating thereto which may adversely affect such subsidiary.

        As of December 31, 2003, the debt of our Argentine subsidiaries amounted to approximately $645 million. The macroeconomic and political situation in Argentina has resulted in the imposition by

6

the Argentine government of a number of monetary and currency exchange control measures that have included restrictions on the free transfer of funds deposited with banks and severe restrictions on transferring funds abroad (including payments of dividends and principal and interest on debt), with certain exceptions for transfers related to foreign trade and other authorized transactions. Although these restrictions were gradually relaxed from January to May 2003, should the Argentine Central Bank reimpose restrictions on the transfer of funds outside of Argentina that prevent our Argentine subsidiaries from paying principal on certain of their external debt, a substantial portion of their debt obligations may become due and payable, unless new financing is funded outside Argentina and is available to our Argentine subsidiaries or they are able to renegotiate or obtain a waiver with respect to the indebtedness that would be subject to such restrictions. In addition, if similar restrictions are imposed again, our Argentine subsidiaries may not be able to obtain new financing, renegotiate or obtain waivers with respect to indebtedness subject to foreign exchange restrictions or make cash distributions.

        The conditions described above have adversely affected and will continue to adversely affect the financial condition of our Argentine investments and their results of operations. We cannot predict what result any further deterioration in economic and political conditions in Argentina, or other legal or regulatory developments relating to Argentina, including amendments to existing legislation or the regulatory framework, could have on our Argentine subsidiaries or their business, financial condition or results of operations.

Risks Related to Our Business and Industry

Our operations are subject to extensive government regulation, and our inability to comply with existing regulations or requirements or changes in applicable regulations or requirements may have an adverse effect on our business, financial condition and results of operations.

        Our operating subsidiaries are subject to extensive regulation of tariffs and other aspects of their business in Spain and in each of the other countries in which we operate. While we believe that we are in substantial compliance with applicable laws and regulations, we remain subject to a varied and complex body of laws and regulations that both public officials and private parties may seek to enforce. In addition, some of our operating subsidiaries benefit from subsidies provided by various governmental agencies. The introduction of new laws or regulations or changes in existing laws or regulations, or the elimination of such subsidies, could have a material adverse effect on our business, financial condition and results of operations.

Our operations are subject to extensive environmental regulation, and our inability to comply with existing environmental regulations or requirements or changes in applicable environmental regulations or requirements may have an adverse effect on our business, financial condition and results of operations.

        We and our operating subsidiaries are subject to environmental regulations, which, among other things, require us to perform environmental impact studies on future projects, to obtain regulatory licenses, permits and other approvals and to comply with the requirements of such licenses, permits and regulations. As with any regulated company, we cannot assure you:

•

that these environmental impact studies will be approved by governmental authorities;



•

that public opposition will not result in delays or modifications to any proposed project; or



•

that laws or regulations will not change or be interpreted in a manner that increases our costs of compliance or adversely affects our operations or plants or our plans for the companies in which we have an investment.

        In recent years statutory environmental requirements have been becoming stricter both in Spain and in the EU. Although we have been making the necessary investments to comply with this

7

legislation, the future evolution and application thereof may have a material adverse effect on our business, financial condition and results of operations.

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

        We are exposed to market price risk for the purchase of fuel (including fuel-oil, coal and natural gas) used to generate electricity and the sale of a portion of the electricity that we generate in Spain and Italy. We have entered into long-term revolving fuel supply contracts in order to provide for the secure supply of fuel for our generation activities in Spain. Because the prices under these contracts are not fixed, we enter into derivative contracts (primarily swaps) in order to manage the market price risk relating to our fuel requirements. There can be no assurance that such derivative contracts will eliminate all market price risk relating to our fuel requirements.

        We are also exposed to market price risk with respect to a portion of the energy that we generate in Spain, consisting of the excess of our production over the amount of energy that we sell to deregulated and regulated customers. This amount is equivalent to approximately 5% of the energy that we produce in Spain annually. We do not hedge this exposure to electricity price volatility. To the extent a net open position exists, fluctuating electricity prices could have a material adverse effect on our business, financial condition and results of operations.

Our results of operations may be adversely affected by tariff deficits.

        Under Spanish law, we are entitled to receive partial compensation for the costs we incur as a result of the transition to a fully-liberalized electricity industry in Spain. We refer to these as "competition transition costs", or CTCs. As a result of a change in Spanish regulation in 2001, CTCs are recoverable exclusively pursuant to what we refer to as the "system of differences". In accordance with the system of differences, we are entitled to receive as CTCs our corresponding portion of the positive difference between (i) the aggregate amount of electricity tariffs billed to final customers and (ii) a basket of costs related to the generation, transmission and distribution of electricity such as the aggregate cost of electricity purchased by distribution companies from the energy pool, transmission costs and distribution costs, as determined by the Spanish government on a yearly basis. If, however, the basket of costs, as determined by the Spanish government in a given year, is greater than the aggregate amount of electricity tariffs billed to final customers, then the Spanish electricity companies entitled to receive CTCs, including us, are liable for their proportionate share of the difference between (i) such basket of costs and (ii) the aggregate amount of electricity tariffs billed to final customers. We refer to this difference as a "tariff deficit". Because certain costs included in the basket of costs, particularly the cost of energy purchased from the energy pool, are determined in a competitive market, whereas electricity tariffs are fixed by the government, our results of operations may be adversely affected if prices in the energy pool increase.

        Through Law 53/2002 the Government guaranteed generators to recover before 2010 the deficit that arose in 2000, 2001 and 2002. Royal Decree 1432/2002 established that in the period 2003 through 2010, a portion of the electricity system's revenues will go towards the payment of tariffs deficits incurred by the relevant companies in 2000, 2001 and 2002, expressly contemplating that such revenues could be securitized by the parties entitled to payments of the tariff deficits. On December 22, 2003, electricity companies entitled to payment of tariff deficits sold these rights to certain financial institutions, receiving in exchange cash for the assignment of the outstanding balance of the rights. Therefore, there is a limit to the risks posed by tariff deficits for 2000, 2001 and 2002.

        For future tariff deficits, however, Royal Decree 1432/2002 establishes that the average and regulated tariff will increase up to 0.60% year to year, as a consequence of the revision of the projections used in the calculation of the tariffs in effect during the two preceding years in relation to certain variables and so long as certain limits are exceeded, such as in respect of consumer demand,

8

interest rates, Special Regime surcharges and gas prices. Therefore, the tariff deficit will be considered at the time of fixing the yearly tariffs only if such deficit has been caused by the aforementioned variables and such variables have exceeded the specified limits.

Our business may be affected by hydrological conditions.

        Our operations in Spain and those of our Latin American affiliates, particularly Endesa Chile, involve hydroelectric generation and, accordingly, we and our Latin American affiliates are dependent upon hydrological conditions prevailing from time to time in the broad geographic regions in which our hydroelectric generation facilities are located. If hydrological conditions result in droughts or other conditions that negatively affect our hydroelectric generation business, our results of operations could be materially adversely affected.

        Our financial condition and results of operations may be adversely affected if we do not effectively manage our exposure to interest rate and foreign currency exchange rate risk.

        We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes and foreign currency exchange rate fluctuations. Our risk management strategies may not be successful, however, in limiting our exposure to changes in interest rates and foreign currency exchange rates, which could adversely affect our financial condition and results of operations.

Construction of new facilities may be adversely affected by factors commonly associated with such projects.

        The development of power generation, transmission and distribution facilities can be time-consuming and highly complex. In connection with the development of such facilities, we must generally obtain government permits and approvals, land purchase or leasing agreements, equipment procurement and construction contracts, operation and maintenance agreements, fuel supply and transportation agreements, off-take arrangements and sufficient equity capital and debt financing. Factors that may affect our ability to construct new facilities include, among others:

•

delays in obtaining regulatory approvals, including environmental permits;



•

shortages or changes in the price of equipment, materials or labor;



•

opposition of political and ethnic groups;



•

adverse changes in the political and regulatory environment in the countries where we and our related companies operate;



•

adverse weather conditions, which may delay the completion of power plants or substations, or natural disasters, accidents or other unforeseen events; and



•

the inability to obtain financing at rates that are satisfactory to us.

        Any of these factors may cause delays in completion or commencement of operations of our construction projects and may increase the cost of contemplated projects. If we are unable to complete the projects contemplated, the costs incurred in connection with such projects may not be recoverable.

We could be subject to environmental and other liability in connection with our operations.

        We face environmental risks inherent in our operations. Accordingly, we may be subject to claims for environmental and other damages in connection with our power generation, distribution and transmission facilities as well as our coal mining activities.

        We are also subject to risks arising from the operation of nuclear facilities and the storage and handling of low-level radioactive materials. Spanish law and regulations limit the liability of nuclear plant operators for nuclear accidents. Such limits are consistent with international treaties ratified by

9

Spain. Spanish law provides that the operator of each nuclear facility is liable for no more than €150.3 million as a result of claims relating to a single nuclear accident. Our potential liability relating to our interests in nuclear facilities is fully covered by insurance for liabilities up to €150.3 million. Our potential liability with respect to pollution or other damages to third parties or third party assets is similarly insured up to €150 million. If we were subject to liability for environmental and other damages in connection with our operations (other than our nuclear operations) for amounts in excess of our insurance coverage, it could have a material adverse effect on our business, financial condition and results of operations.

The liberalization of the electricity industry in the European Union led to increased competition and lower prices.

        The liberalization of the electricity industry in the European Union (including the countries in which we are present, such as Spain, Italy, France and Portugal) led to increased competition as a result of consolidation and the entry of new market participants in European Union electricity markets, including the Spanish electricity market. The liberalization of the electricity industry in the European Union also led to lower electricity prices in some market segments as a result of the entry of new competitors and cross-border energy suppliers and the establishment of European electricity exchanges, which led to increased liquidity in the electricity markets. The exact scope of increased competition and any adverse effects on our results of operations and market share resulting from the full liberalization of European electricity markets, in particular, the Spanish electricity market in January 2003, will depend on a variety of factors that cannot be assessed with precision and that are beyond our control.

Risks Related to Integrating Our Acquired Companies

The costs and difficulties of integrating acquired companies or businesses could limit our future growth and adversely affect our competitiveness.

        Any acquisition may expose us to the following risks:

•

the difficulty of assimilating the operations and personnel of acquired entities;



•

the failure to maintain uniform standards, controls, procedures and policies; and



•

the impairment of relationships with employees as a result of changes in management and ownership.

Other Risks

Forward-looking statements contained in this annual report may not be realized.

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

•

our 2004-2008 strategic plan, including our anticipated capital expenditures and divestitures;



•

our ability to implement our cost-reduction plan in Spain, Italy, France and Latin America;



•

trends affecting our business, financial condition or results of operations, including market trends in the Spanish energy sector and the impact of regulations on the energy sector;



•

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



•

our exposure to various types of market risks, such as interest rate risk and foreign exchange rate risk;



•

anticipated changes in foreign currency exchange rates;



•

our proposed dividend payout rate;

10

•

macroeconomic growth and inflation in Latin America and the region's growth potential in terms of capacity and consumption of electricity; and



•

expansion opportunities and potential future acquisitions or dispositions in developed and emerging markets.

        These statements reflect our current expectations. They are subject to a number of risks and uncertainties, including but not limited to:

•

our ability to achieve targeted savings from personnel reductions;



•

inability to access the debt or equity capital markets;



•

our ability to find interested buyers who will pay acceptable prices for assets expected to be divested;



•

an increase in the market interest rates;



•

adverse changes in currency exchange rates;



•

adverse decisions by regulators in the European Union, Spain, Italy, Chile, Argentina or elsewhere;



•

general macroeconomic conditions in the markets where we generate and distribute electricity;



•

our ability to implement successfully our plan and objectives for our subsidiaries, which includes cost reductions;



•

the impact of fluctuations in fuel and electricity prices;



•

our ability to maintain a stable supply of fuel;



•

our ability to manage the risks involved in the foregoing; and



•

other factors described in this annual report, including but not limited to "Item 4. Information on the CompanyCRegulationCNew Regulatory Structure" and "Item 5. Operating and Financial Review and Prospects".

        In light of the many risks and uncertainties, you should understand that we cannot assure you that the forward-looking statements contained in this annual report will be realized. We disclaim any responsibility or obligation to update or revise any forward-looking statements in this annual report. You are cautioned not to put undue reliance on any forward-looking information.

ITEM 4.    INFORMATION ON THE COMPANY

A. HISTORY AND DEVELOPMENT OF THE COMPANY

        We are a limited liability company (sociedad anónima) organized under the laws of the Kingdom of Spain. Our ordinary shares are publicly traded on the Madrid, Barcelona, Bilbao and Valencia stock exchanges and the Santiago Off Shore Stock Exchange in Chile, and our ADSs are listed on the New York Stock Exchange. We were formed under the laws of Spain on November 18, 1944 as "Empresa Nacional de Electricidad, S.A." and changed our name to Endesa, S.A. by resolution of the shareholders' meeting of June 25, 1997. Our principal executive office is located at Ribera del Loira, 60, 28042 Madrid, Spain, and our telephone number is (3491) 213 1000. Our agent for service of process in the United States is Endesa North America, Inc., 410 Park Avenue, Suite 410, New York, NY 10022.

11

B. BUSINESS OVERVIEW

Overview

        We are the largest electricity company in Spain in terms of installed capacity, market share in generation and distribution, and market capitalization, with a significant presence in the Southern European electricity market, in particular in Italy and one of the leading private-sector multinational electricity companies in Latin America. Our core business is energy. We are also involved in other activities related to our core energy business such as renewable energies and co-generation and the distribution and supply of natural gas. In addition, we hold interests in other businesses such as telecommunications.

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

        At December 31, 2003, we had a total installed capacity of 41,836 MW, and in 2003, we generated 159,558 GWh and sold 161,499 GWh, supplying electricity to approximately 20.9 million customers in 12 countries. At that date, we had 26,777 employees, 48% of whom were located outside Spain, and our total assets amounted to approximately €46,047 million, 44% of which were located outside Spain.

        The geographic breakdown of net sales for the periods indicated is as follows:

Our Core Business

Electricity and gas

        Our electricity business is conducted in Spain, the rest of Europe and Latin America. Our gas business is conducted in Spain and Portugal:

12

Spain

        Electricity Generation and Distribution.    We are the leading electricity generator and distributor in Spain with an approximately 42.7% market share (including purchases from the Special Regime and imports) in generation and a 42.9% market share in distribution at December 31, 2003. We operate hydroelectric, nuclear, coal, fuel oil and gas generating facilities with a total installed capacity in Spain of 21,602 MW at December 31, 2003 and a total net generation of 92,348 GWh in 2003. In 2003, we sold 67,701 GWh to approximately 10.4 million regulated customers (i.e., those who have not chosen to contract with suppliers) in Catalonia, Andalusia, Aragon, the Balearic Islands, the Canary Islands, parts of Extremadura, Ceuta and Melilla. We are also one of the largest suppliers of electricity and gas to deregulated customers (i.e., those who have chosen to contract with suppliers) with an approximately 36.6% market share at December 31, 2003. In 2003, Endesa Energía sold 23,154 GWh to 49,049 points of supply corresponding to deregulated customers.

        Natural Gas Distribution.    We conduct our natural gas distribution business through Endesa Gas which, together with the natural gas distribution companies in which it holds stakes, had more than 316,000 customers in Spain and approximately 220,700 customers in Portugal at December 31, 2003, an approximate increase of 9.5% from December 31, 2002. We are the third largest natural gas distributor in Spain, with an approximately 5.4% market share in the domestic regulated market and an approximately 9.0% market share in the liberalized market (including supplies to our gas-powered facilities) at December 31, 2003. We also seek to secure the supply of natural gas for our generation activities. In Spain, our goal is to be present in the businesses of import, re-gasification, transport, distribution and supply of natural gas.

Europe

        We have entered into the electricity business in Southern Europe, taking advantage of opportunities arising from the deregulation process in Europe and the demand for the cross-border supply of electricity to deregulated customers throughout Europe. We operate plants in Italy with total installed capacity of 5,860 MW and have interests in an additional 3,534 MW in Snet (France) and Tejo (Portugal) at December 31, 2003 and a total net generation in the participated companies of 31,122 GWh in 2003. In 2003, we supplied electricity to 779 points of consumption in Europe (outside Spain) and North Africa.

        In September 2001, a consortium led by us, with a 45.3% stake, acquired Elettrogen (subsequently renamed Endesa Italia), one of the three largest generators of electricity in Italy. We acquired an additional 5.7% stake in the consortium in March 2002. Due to our 51% stake in the consortium that owns Endesa Italia, we control the consortium and consolidated the results of Endesa Italia in our financial statements for 2002.

        On December 22, 2003, we entered into an agreement with Santander Central Hispano (SCH) pursuant to which we acquired effective control over the shares in Endesa Italia held by SCH, which resulted in our control of 85% of the voting rights at Endesa Italia. As a result of this transaction, our consolidated financial statements of 2003 reflect, as of December 22, 2003, a participation in Endesa Italia of 85.3%, decreasing the corresponding balance in minority interests and recording €817 million in long-term creditors in respect of the obligation to pay SCH for its 34.3% stake in Endesa Italia.

        On June 16, 2004, we exercised an option, which was granted to us in connection with the September 2001 transaction described above, to acquire an additional 34.3% stake in Endesa Italia from SCH, for €817 million. This amount, as described above, was recorded as a liability on our consolidated balance sheet as of December 31, 2003 and therefore, this transaction will not affect our consolidated financial statements. Following this transaction, Endesa Italia has two shareholders: Endesa, with a 85.3% interest and ASM Brescia, with a 14.7% interest.

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        In April 2001, we acquired a 30.0% interest in Societé Nationale d'Electricité et Thermique (Snet), France's second largest electricity generator. On March 3, 2004, we announced that we had entered into an agreement with Charbonnages de France (CDF) to acquire, through our subsidiary Endesa Europa, an additional 35% in Snet, in which we already own a 30% interest, subject to approval by EU competition authorities and the French Privatization Committee. As of the date of this annual report, the EU competition authorities have approved the transaction and we are awaiting the approval of the French Privatization Committee.

        In Northern Africa, we hold an 18% stake in Lydec, a distributor of electricity and water in Casablanca, and we hold a 32% stake in a consortium with Office National de l'Electricité (ONE) to construct a 400 MW combined cycle gas turbine plant (located in Tahaddart).

Latin America

        We are involved in the generation, transmission, distribution and supply of electricity in six countries in Latin America. We participate in more than 20 electricity companies in the region, either directly or through our controlling stake in the Latin American electricity group, Enersis, of which we acquired control in 1999, becoming one of the largest private electricity groups in Latin America in terms of consolidated assets and operating revenues. Endesa Chile manages our electricity generation business in Latin America and Chilectra manages our electricity distribution business in Latin America. Both Endesa Chile and Chilectra are controlled by Enersis. In 2003, we had a total installed capacity of 13,333 MW in the region, generated 46,480 GWh and distributed 49,526 GWh to more than 10.5 million customers. At December 31, 2003, assets in Latin America represented 32.6% of our total assets. For 2003, Latin American operations contributed 21.8% of operating revenues and 34.1% of operating income.

Other Businesses: Related Businesses

Renewable Energies and Cogeneration

        We maintain a leading position in the cogeneration and renewable energies market in Spain, with an estimated market share of approximately 6.8% at December 31, 2003. At that date, our total installed capacity in this business area amounted to 1,858 MW, and we had an additional 210 MW of capacity under construction.

Other Businesses: Non-Core Businesses

Telecommunications

        In Spain, we are the largest shareholder of Auna, with a 29.88% interest at December 31, 2003. We currently hold a 32.88% interest in Auna following our acquisition of an additional 3% in February 2004. Auna is one of the largest integrated telecommunications operator in Spain principally through:

•

Auna Telecomunicaciones, a fixed-line telephony and cable telecommunications operator in Spain; and



•

Amena, the third largest mobile telephony operator by market share in Spain.

        In Latin America, we own 100.0% of Smartcom, a Chilean wireless communications operator.

Other

        We are present in the field of technologies related to information and electricity networks through our various initiatives, especially, the transmission of voice and data through the low-voltage electricity network, which is known as powerline communications technology, or PLC.

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        Through Endesa Servicios, we also provide a variety of products and services, including information and management control systems, supply management and environmental services, to other companies within the Endesa Group as well as third parties.

Strategy

        In February 2002 we presented to the market our Strategic Plan for 2002-2006, the key objectives of which were as follows:

•

To increase the profitability of our present businesses, focusing principally on our core business activity.



•

To take advantage of the organic growth of our markets.



•

To manage our portfolio of assets.



•

To strengthen our financial position.

        In October 2002, in view of the trends and outlook for the main macroeconomic indicators and the foreseeable performance of the markets in the medium term, we decided to revise our Strategic Plan, setting much more ambitious targets in terms of optimizing investments and stepping up divestments. Pursuant to this revised Plan, we will focus on the following priorities in the coming years:

•

Maintaining our leadership in the Spanish electricity industry.



•

Consolidating the presence we have achieved in Southern Europe.



•

Optimizing current investments in the international electricity business, and harnessing the high growth potential based on the improved economic situation in Latin America.



•

Obtaining the maximum possible value from our current position in the telecommunications business.



•

Continuing the effort to strengthen our financial position.



•

Strengthening our focus on customer service and, in particular, to quality of service to increase our competitive position in the electricity market.

        Pursuant to the Investment Program for 2004-2008, we expect to invest an aggregate amount of €13,100 million in our businesses. Investments in maintenance of our existing operations are expected to amount to €7,600 million and investments designed to achieve organic growth are expected to amount to €5,500 million, broken down as follows:

•

€3,700 million in the Spanish electricity business.



•

€1,000 million in the European electricity business.



•

€500 million in the Latin America electricity business.



•

€300 million in the telecommunications and other businesses.

        We will evaluate and carry out these investments within the context of our commitment to strengthen of our balance sheet and improving our financial position.

        For a further discussion on our current investment plan, see Item 5. "Operating and Financial Review and Prospects".

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        The objectives of the Strategic Plan 2004-2008 are as follows:

Program for new generating capacity in Spain

        The Strategic Plan 2004-2008 envisages a significant investment (€3,700 million) in the construction of new capacity in the Spanish electricity system, with the threefold objective of contributing to security of supply, protecting the environment and maintaining a competitive and diversified production mix.

        Under this program, we expect to build a total of 5,847 MW of new capacity between 2004 and 2008, in addition to which we will add 1,400 MW of capacity through the conversion of units burning Spanish coal to enable them to burn imported coal.

        The breakdown, by technology, of this total capacity will be as follows:

•

2,800 MW of new capacity at new mainland combined cycle plants, increasing our total capacity at this type of plant in the mainland market to 4,000 MW.



•

929 MW of new capacity in the islands systems to meet increased demand in that market, demand which is growing at a much higher rate than the average for Spain as a whole.



•

2,089 MW of renewable energy facilities and a further 29 MW of plants using other renewables technologies.

        We believe that these new facilities will enable us to offset the elimination of 2,319 MW at obsolete plants. These new investments will enable us to maintain a generating capacity that exceeds the demand in the markets we serve in Spain, with a high level of protection against the sharp fluctuations in hydro production. The resulting production system, in addition to the benefits we will derive from the fact that it will be competitive and diversified, will make a significant contribution to the achievement of the objectives regarding CO₂ emissions established in our sustainability policy.

        We expect that as a result of the actions described above, our installed capacity in the mainland electricity system will be approximately 22,200 MW in 2008.

Improved service quality

        Under the Investment Plan 2004-2008, we expect to invest €3,800 million to achieve quality of service improvements in the Spanish electricity business.

        As a consequence of this considerable investment, we will strengthen our competitive edge in the Spanish electricity market, consolidate our current position in the geographical areas in which we distribute electricity and increase our customer base, all with the goal of maintaining our leadership position in the Spanish electricity market.

        Investments in network improvements will principally be made in distribution assets in the regions experiencing the highest increases in demand or in those in which it is necessary for us to carry out additional work to reduce supply incidents. The investments in distribution facilities will be supplemented with new commercial measures aimed at improving the quality of our customer service, establishing personalized service channels through our customer manager teams, the sales office network for personal visits, Endesa Service Points and Stores; and the Customer Hotline.

Consolidation in Southern Europe

        We hold a significant position in the electricity industry in Southern Europe and have a presence in all the countries that we have identified as targets, principally Italy, France and Portugal.

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        The companies in which we hold interests have a total capacity of 9,394 MW and an annual output of 31,122 GWh; in addition, they supply a total of 12,318 GWh to customers in various deregulated markets.

        Our strategic objective in Southern Europe is to consolidate this position and capture value from the organic growth in the markets in which we have a presence using our existing asset base.

        Our main objectives in Italy are to:

•

Complete Endesa Italia's thermoelectric facility repowering program, which will increase its installed capacity to approximately 6,500 MW in 2008 with an annual output of approximately 32,000 GWh, which represents almost a two-fold increase from the annual output in 2003, as well as a significant increase in the efficiency of the facilities and a reduction in their environmental impact.



•

Assure the self-financing of Endesa Italia's investment program.



•

Enable dividends to be paid out of 2003 income in 2004. In March 2004, Endesa Italia distributed €30 million to its shareholders in dividends.

        Our main objective in France is to complete the changes in the shareholder structure of the French electricity generator Snet, which could result in an increase in our interest in Snet and the sale by any of the other shareholders of its stake to another player. On March 3, 2004, we announced that we had entered into an agreement with Charbonnages de France (CDF) to acquire, through our subsidiary Endesa Europa, an additional 35% in Snet, in which we already own a 30% interest, subject to approval by EU competition authorities and the French Privatization Committee. As of the date of this annual report, the EU competition authorities have approved the transaction and we are awaiting the approval of the French Privatization Committee.

        Our main objective in Portugal is to continue to take the measures required to ensure that we are in a favorable position with a view of leveraging the interest we have in Tejo Energía and our retailing activities in the deregulated market to optimize our position in the forthcoming Iberian electricity market.

Taking advantage of organic growth in Latin America

        We believe that we have achieved the appropriate size in the Latin American electricity market. Accordingly, our strategy for the coming years will focus on harnessing the organic growth potential of the assets that we hold in the region and on continuing to strengthen the financial position of our investees, thereby maintaining the self-financing capacity of our Latin American business.

        Regarding potential for organic growth, we believe that the increase in electricity demand in the main countries in which we operate, interest rate trends and the rate hikes planned in Brazil and Colombia will lead to a substantial increase in the free cash flow generated, which will make a significant contribution to reducing the indebtedness of Enersis and Endesa Chile.

        In addition, the success of the capital increase at Enersis and the debt refinancing transactions at Enersis and Endesa Chile in 2003, together with the adoption of new measures to complete the financial strengthening of these companies, place this business in a solid position from which to take advantage of the economic recovery that the recent trends in the main macroeconomic indicators appear to signal. This recovery, if it continues, will have a positive effect on the earnings and dividends paid by Enersis.

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Expansion in the gas market

        In the natural gas business, the Strategic Plan projects a significant increase in our presence in the gas market, from two points of view:

•

We will become an important player in the European gas market with a supply portfolio in 2008 of 11,700 million m³ (11.7 bcms). Our strategy as a buyer is based upon diversification of our supply sources, prioritizing the establishment of flexible contractual terms and conditions and assuming commitments only when purchasing volumes are guaranteed.



•

Our strategy as a supplier is to maintain our current share of the regulated gas supply market of approximately 5% and to increase our share of the deregulated market to approximately 15% in terms of sales to end customers, which, combined with the sales made to our combined cycle power plants, will give us a total market share of approximately 20%.

Improving and capturing value from the telecommunications business

        Our Spanish telecommunications business has been improving steadily in recent years and reported net income for the first time in the third quarter of 2003.

        Our strategic objective is for the Auna Group to make a positive contribution to our annual earnings from 2004 onwards and for it to self-finance its operations.

        We will continue to assess the telecommunications industry and related opportunities to capture additional value from our existing investments in the telecommunications business.

Environmental and sustainable development strategy

        We will implement our Strategic Plan while simultaneously stepping up our commitment to the principles of sustainable development in its three facets: social, economic and environmental sustainable development, in respect of which we approved a Strategic Plan for the Environment and Sustainable Development for 2003-2004.

        We expect to achieve our strategic objectives on the basis of providing our customers with a quality of service in a responsible and efficient manner, creating value for our stockholders, fostering excellence and the professional training of our employees, strictly applying the principles of good corporate governance, contributing to the social development of the areas in which we operate and using in a sustainable manner the natural resources required in order to carry out our business activities.

        Our corporate programs focus mainly on climate change, preserving biodiversity, continuing to implement environmental management systems, integral waste management, greater adhesion to sustainability criteria in relation with contractors and suppliers and, in general, increasing the integration of sustainable development criteria into our management activities.

        Our operating programs address matters relating to adaptation to the Law on the integrated prevention and control of pollution, the reduction of the impact of facilities on the atmosphere and on water systems, the improvement of emission control, and the achievement of savings in the consumption of fuel, water and other raw materials.

        Of significance is our decision to continue to adopt measures aimed at reducing, by 2007, our specific emissions by 35% with respect to 1990 levels, which involves, in addition to the investments in combined cycle and renewable energy technologies, measures to improve the efficiency of coal-fired power plants, the closure of the least efficient fossil-fuel plants and the maintenance of a safe, competitive, diversified and balanced production mix.

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Electricity Business in Spain

Generation

        We operate coal, nuclear, hydroelectric and fuel oil and gas generation facilities in Spain with a total installed capacity of 21,602 MW at December 31, 2003, representing 42.4% of total installed capacity in Spain (excluding installed capacity of cogeneration and renewable energies facilities with an installed capacity of less than 50 MW). Our net energy production in Spain in the year ended December 31, 2003 was 92,348 GWh, representing a market share of approximately 42.6%. In 2003, we produced an additional 2,863 GWh using renewable energies (e.g., wind, small-scale hydro power cogeneration and others). The following table sets forth our total installed capacity by type of generating facility at December 31, 2003.

        The changes in installed energy generation capacity in 2003 were primarily the result of:

•

the end of operations of an aggregate of 220 MW of installed capacity relating to fuel oil/gas plants;



•

the commencement of operations of a new combined cycle gas turbine (CCGT) at Tarragona (363 MW) and the increase in generation capacity (38 MW) in the CCGT plants at San Roque and Besós;



•

the commencement of operations of two gas turbines at a new CCGT plant, Son Reus II, which added 150 MW of installed capacity in the Balearic Islands; and



•

the commencement of operations of two gas turbines at a new CCGT plant, Barranco de Tirajana I, a gas turbine at a new CCGT plant, Granadilla I, and other generation plants, which added an aggregate of 288 MW of installed capacity in the Canary Islands;

        Our investment in generation capacity in 2003 totaled approximately €524 million, consisting of investments in the construction of new facilities (€324 million) and the expansion and improvement of existing ones. We built a new CCGT plant at Tarragona, which commenced operations in October 2003. Construction costs related to this new CCGT plant amounted to €238 million.

        We are in the process of constructing four new CCGT plants: two in the Canary Islands (in Tenerife and Gran Canaria), one in the Balearic Islands at Son Reus and one on the Spanish mainland. The expected total installed capacity of these four plants is 1,075 MW, 375 MW of which commenced operations in 2003.

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        The following table sets forth for each type of generating facility the percentage of our total electricity generated, average age of plant, average capacity utilization and average availability factor.

(1)

Average capacity utilization is defined as actual production as a percentage of theoretical maximum production.

(2)

Average availability factor is defined as the total number of hours per year that a power station is available for production as a percentage of the total number of hours in such year.

        The balance in the types of generation facilities means our plants' energy output is highly regular. We also believe our production centers are well-located, with ease of access to fuels and proximity to gas pipelines.

        The table below sets forth our gross production of electricity (excluding production by cogeneration and renewable energies facilities with a capacity of less than 50 MW) measured at the point of production by type of power station during the past five years. Our gross electricity production in 2003 totaled 96,057 GWh, and our energy production, net of our own consumption, was 92,348 GWh.

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Coal-Fired Power Stations

        We operate coal-fired power stations in Spain with total installed capacity of 6,269 MW at December 31, 2003. The following table sets forth our coal-fired power stations at December 31, 2003, installed capacities, years of commencement of operation, average capacity utilization and average availability factor.

(1)

Average capacity utilization is defined as actual production as a percentage of theoretical maximum production.

(2)

Average availability factor is defined as the total number of hours per year that a power station is available for production as a percentage of the total number of hours in such year.

(3)

Represents our 33.3% ownership interest in this facility. In addition, we operate the Elcogas plant (335 MW), one of the largest plants in the world to use coal gasification technology, on behalf of a third party.

        As of December 31, 2003, we had invested €6 million on the conversion to imported coal of our As Pontes plant in order to extend its useful life for 20 years. The first converted unit is expected to commence operations in 2005. This investment is in line with the environmental requirements contained in European Council Directive 88/609/EEC on the limitation of emission of certain pollutants from large combustion plants.

        Our coal-fired power stations were supplied with 20,351 KT of coal in 2003, of which 38% was provided by our coal operations. We use approximately 80% of the coal we produce in our generation activities. In order to meet our total needs for coal, we supplement our own coal production with purchases in Spain and foreign markets. We have consolidated fuel purchase functions into a single management group, which operates through Carboex, our coal, liquid fuel and gas importer.

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        The following table sets forth the amounts of coal we extracted and the amounts purchased in Spain and foreign markets in each of the last five years.

        We have a significant interest in the mining of Spanish coal. Our interest amounted to approximately 35% of overall Spanish production in 2003. Many of the coal mines are located near our coal-fired power stations. The following table sets forth our coal production in 2001, 2002 and 2003 by type of coal.

        Total coal production in our mines in 2003 was 7.8 million tons, equal to 18.7 billion thermies, representing a 7.3% decrease in terms of tonnage and a 6.7% decrease in terms of thermies compared with 2002. In 2003, adjustments of production were made in accordance with the 1998-2005 Coal Plan in connection with our strategy to achieve a more environmentally friendly fuel mix. In accordance with environmental regulations on emissions, we mix imported coal, which has a higher calorific and a lower sulfur content, with domestic coal at our As Pontes and Teruel facilities, which improves the competitiveness of those facilities. The interest in shaft mining as a proportion of the total production of the Endesa Group has decreased from 1.0% in 2002 to 0.8% in 2003. Open cast mine production decreased 7.1% in 2003 compared with 2002.

        We believe that our coal reserves in open cast mines will be sufficient to cover a substantial part of our coal requirements during the useful life of our conventional coal-fired plants. In addition, we have a combination of short-term self-renewing and long-term supply contracts with coal producers in Spain which we believe are sufficient to meet our needs for domestic coal in the long term.

Nuclear Power Stations

        We have controlling interests in three nuclear power stations, Ascó I, Ascó II and Vandellós II, all located in northeastern Spain. In addition, we have a 50% interest in Nuclenor, S.A., which owns the Santa Maria de Garoña nuclear power station. We also have interests in three additional nuclear power stations, including the Central Nuclear Almaraz, A.I.E., consisting of Almaraz I and II, and Trillo. All such stations are operational.

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        The following table sets forth our nuclear power stations at December 31, 2003, our ownership interest and each station's installed capacity, system type, year of commencement of operation and average availability factor.

(1)

Adjusted for our ownership interest in jointly-owned nuclear power facilities.

(2)

Average availability factor is defined as the total number of hours per year that a power station is available for production as a percentage of the total number of hours in such year.

(3)

Pressurized water reactor.

(4)

Boiling water reactor.

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

        Enusa meets its requirements for uranium through long-term supply contracts with various suppliers outside Spain. Enusa is also party to contracts with various uranium enrichment facilities outside Spain. Our management believes that Enusa can meet the requirements for uranium of all nuclear generating facilities in Spain throughout their useful lives.

        Empresa Nacional de Residuos Radioactivos (Enresa) administers a fund to finance certain activities in connection with a program to decommission nuclear power stations and dispose of nuclear waste (the "Plan General de Residuos Radioactivos"). Enresa and the fund are financed by contributions of a specified portion of rates collected by all electricity distribution utilities. Enresa is solely responsible for the decommissioning of nuclear stations and the treatment and disposal of nuclear waste.

        Nuclear waste from power stations in which we participate is temporarily stored at storage facilities at each station's site. Given the number of years of operation of such nuclear power stations, the amount of nuclear waste generated to date is small and we believe that the current storage facilities are sufficient to meet future storage needs. Each Spanish operator of a nuclear facility has an agreement with Enresa that defines its responsibilities with respect to stored nuclear waste. Once transported off-site, the responsibility for the nuclear waste lies with Enresa, until permanently stored, at which point the Spanish Government assumes full responsibility.

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

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        We are liable for damages caused by our nuclear power stations up to €150.3 million, in respect of which we have liability insurance to cover up to such amount. The Spanish government is liable for damages caused by our and other's nuclear power stations in excess of €150.3 million up to €208 million (equivalent to 175 million special drawing rights). The countries that are signatories to the Paris and Brussels Conventions are proportionately responsible for liabilities between 175 million and 300 million special drawing rights (approximately €208 million and €356 million, respectively, at December 31, 2003). The special drawing right is a basket currency established by the International Monetary Fund. Neither of these treaties nor Spanish law or regulations allocates responsibility for liabilities in excess of 300 million special drawing rights. Moreover, the nuclear plants in which Endesa participates have insurance against damages to the facilities, including machinery breakdowns, with maximum coverages ranging from $700 million to $900 million.

Hydroelectric Power Stations

        At December 31, 2003, we operated hydroelectric generating facilities in Spain with an installed capacity of 5,368 MW, which vary widely as to type and size. The hydroelectric generating facilities were constructed between 1933 and 1993 and are located primarily along rivers in the northwest, northeast and south of Spain. Our hydroelectric power plants are operated by concession from the Kingdom of Spain for a maximum term of 75 years.

        The following table sets forth the installed capacity of our hydroelectric facilities.

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Fuel Oil and Gas Power Stations

        We operate fuel oil and gas power stations in Spain with total installed capacity of 6,329 MW, including the combined cycle gas turbine plants in San Roque 2, Besós 3 and Tarragona 1, at December 31, 2003, which are located in Andalusia and Catalonia, respectively. These power stations form part of our generation and production network in those areas. The following table sets forth the installed capacity of our fuel oil and gas power stations.

        At December 31, 2003, the mean age of our fuel oil and gas power plants on the Spanish mainland was 20 years and 1 year, respectively, and the mean age of our fuel oil and gas power plants outside the Spanish mainland (i.e., the Balearic Islands, the Canary Islands, Ceuta and Melilla) was 15 years.

        We have a portfolio of gas supply contracts that provides us with flexibility in determining the amount of gas required. We have several collaboration agreements with Gas Natural SDG, S.A., including a long-term contract under which we expect to have a reliable source of natural gas supply available at competitive terms and prices, which will be necessary for our construction program for new combined cycles gas turbine plants. Prices under this contract are linked to the price of certain baskets of fuel-oils and oil products. Through this contract, which is not exclusive for either of the two parties,

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we purchase an amount of gas from Gas Natural that is equal to a significant part of our estimated installed power consumption needs for combined cycle gas turbine plants until 2005-2006. Supply began in 2002 according to a delivery schedule that is based on our combined cycle construction plan, which will consist of 4,000 MW of installed capacity. We also have a long-term supply contract with Sonatrach which secures the aggregate supply of 1 bcm of natural gas. We are also seeking additional sources of gas in order to diversify our portfolio of suppliers.

        During 2003, among other actions, we signed long-term supply contracts with gas producers to secure the supply of natural gas for electricity generation and for sales to domestic customers for the coming years. The most important of these agreements are with Nigeria LNG Limited and Ras Laffan LNG for the annual supply of 1 bcm each from 2006 and 2005, respectively. Also, we complemented our long-term supply agreements with short-term supply shipments, which provided us with a more flexible gas supply portfolio.

Fuel Prices

        Prices for coal on the international coal market reached yearly lows in May 2003 due to relatively low levels of global economic growth and the SARS crisis in Asia. Thereafter, increases in freight and FOB coal prices, which were mainly due to increased demand for iron ore in China and congestion in several ports led to overall coal price increases. The spot ARA MCIS index, which reflects the CIF price of coal, reached $64.75 per ton by the end of 2003 compared to $35.90 per tone in January 2003.

        Oil prices began 2003 at high levels and increased until the end of the Iraqi conflict, at which point the annual maximum Brent price was reached at $34.7 per barrel. After a period of low prices in April and May, oil prices resumed their rise to $27-$30 per barrel due to increased consumption and unrest in the Middle East. The price of oil derived products and natural gas varied accordingly. As of the end of May 2004 the price of Brent crude had risen to approximately $35 per barrel.

Distribution and Sales to Customers

        In 2003, we supplied electricity to approximately 10.5 million customers throughout Spain resulting in sales of approximately €7.1 billion in distribution, transmission and supply and representing approximately 42.3% of total energy sales in Spain. Approximately 15% of our customers are commercial and industrial clients and 85% are residential customers. In 2003, we sold 67,701 GWh to regulated retail customers and 35,472 GWh to deregulated customers (including 12,318 GWh to foreign customers), for total sales of 103,173 GWh, a 11.4% increase over 2002. In the wholesale market, we sold 81,849 GWh and acquired 77,386 GWh (including 1,904 GWh used to pump water from hydroelectric facilities) to supply our distribution and supply subsidiaries. The difference between the energy we generated and the energy we sold is due to:

•

sales to third parties in the wholesale market;



•

acquisitions of energy from cogenerators and self-producers;



•

purchases and sales in other countries; and



•

losses that occur in the transmission and distribution process.

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Retail Distribution to Regulated Customers

        We currently distribute electricity in the following regions in Spain: Catalonia, Andalusia, Aragon, the Balearic Islands, the Canary Islands, Ceuta, Melilla and Extremadura. As part of the culmination of the corporate restructuring process which we commenced in 1998, in November 2001, our Board of Directors approved the consolidation of our five retail electricity distribution companies, each of which operated in a separate region. As part of this consolidation process, we formed two new companies, Endesa Distribución Eléctrica and Endesa Operaciones y Servicios Comerciales, each of which is wholly-owned by our newly-named distribution holding company, Endesa Red. Endesa Distribución Eléctrica will assume the transmission, distribution and regulated supply activities formerly carried out by the five retail electricity distribution companies. Endesa Operaciones y Servicios Comerciales will provide support functions such as billing and collections, customer support, sales offices and other administrative functions. Endesa Operaciones y Servicios Comerciales will also provide these support functions to other companies in the Endesa Group, including Endesa Energía, which supplies electricity and gas to deregulated customers, and companies involved in the distribution of natural gas. We believe that this new structure will enable us to improve our operating efficiency and quality of service.

        In 2003, we distributed 91,970 GWh to approximately 10.5 million customers, representing a 2.2% increase in the number of customers over 2002, which was principally due to Spaniards and foreigners setting up second homes in areas like Canary Islands, Balearic Islands and Andalusia.

Supply to Deregulated Customers

        As of January 1, 2003, the Spanish electricity sector became completely liberalized, as a result of which all consumers are able to choose their electricity supplier. See "—Regulation—Regulation of the Spanish Electricity Sector—New Regulatory Structure" and "—Eligible Customers".

        Eligible customers who exercised the right to choose their own suppliers, and therefore became deregulated, accounted for approximately 29% of Spanish energy consumption. We expect that this number will increase as a result of the full liberalization of the Spanish energy sector.

        We sell to deregulated customers through Endesa Energía. During 2003, Endesa Energía sold 23,154 GWh to 49,049 points of consumption in Spain, which represents a 9.0% increase over the prior year and a 36.6% share of the liberalized market. We seek to provide integrated and flexible energy solutions at affordable prices, and offer to supply electricity, steam, natural gas, compressed air and demineralized water.

        During 2003, in anticipation of growth in the number of retail customers allowed to choose their electricity supplier, we launched diverse product and service offerings, focusing on providing an attractive offer to the different types of clients in the liberalized market by tailoring the offer based on the type of client, the client's energy consumption patterns and the geographical location of the client. We have also focused on improving customer service through:

•

segmentation of the consumer market;



•

the use of new information technologies; and



•

the implementation of a wide network of Endesa Stores (including three stores in regions in which we do not distribute electricity) and service points (puntos de servicio) throughout Spain.

        We have integrated our telephone customer service capabilities into four Centros de Atención Telefónica (CATS), which handled over 9.2 million calls in 2003. We have also carried out telephone polls in 2003 regarding the level of satisfaction with our service and level of customer support. We have also implemented promotional programs aimed at the household and small- and medium-sized business sectors.

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        Our on-line initiatives include Endesa On Line (www.endesaonline.com), a web site dedicated to offer Endesa Energía's value added services to satisfy the needs of deregulated customers, enabling them, among other things, to monitor their consumption of energy and to request services.

        Throughout 2003, we continued to develop a range of products designed for customers in the deregulated market, leveraging our household customer base for sales of additional value added products such as life insurance policies and electrical appliances, including air conditioners and heating machines.

Integrated Home Services

        Since 2001, as part of our efforts to strengthen our core energy business and customer base, we have offered integrated home services to our electricity customers in three major Spanish cities, Sevilla, Zaragoza and Valladolid, under the brand name Egar. We market home repair and refurbishing services, security system installation, air conditioning installation, insurance and telecommunications services, including fixed-line telephony, mobile telephony and cable.

Supply of Natural Gas

        We believe that there is a tendency towards convergence of the markets for the supply of electricity and natural gas in the Iberian peninsula, and as part of our new strategy, we have become an integrated energy supplier, providing both electricity and natural gas to our customers. We believe that we were well-positioned for our entry into the natural gas supply market in 2001 as a result of our consumption of large quantities of natural gas in connection with our electricity generation business and our experience supplying electricity to our customers. In 2001, we began to supply natural gas through Endesa Energía to eligible customers to whom we also supply electricity. At December 31, 2003, we had 2,110 points of supply whose annual consumption requirements total approximately 6,926 GWh. Our market share for the supply of natural gas in Spain at December 31, 2003 was an estimated 4.2% and an estimated 9% including the supply to our power plants.

The Spanish Wholesale Market

        The wholesale market, which was established in 1998, performed well in 2003. Our market share of daily sales was approximately 40.3%, a decrease from 42.2% the prior year principally due to hydrological conditions (2003 was a wet year).

        We sold a total of 83,463 GWh in the daily market in 2003, with a total value of €2.5 billion and a unit value of €3.02 cents/kWh. This represents a increase in energy supply of 7.1% in physical terms and a decrease of 16.9% in economic terms over 2002. Sales in the set of markets downstream of the daily market (such as intraday, constraints management and ancillary services) resulted in total sales in the wholesale market of 81,849 GWh with a value of €2.6 billion in 2003. Acting as purchaser, we contracted for a total of 87,590 GWh (excluding energy used to pump water from hydroelectric facilities), of which 63,510 GWh went to our retail distribution subsidiaries and the remainder went to Endesa Energía.

Transmission and Distribution Network

        At December 31, 2003, the total length of our transmission and distribution network was approximately 283,101 kilometers, 23% of which was underground lines.

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        The table below provides summary information of the transmission and distribution lines of our electricity transmission network at the dates indicated.

(1)

The figures for 2001 include figures attributable to Viesgo, which we sold in January 2002, and which accounted for 1,682 km in aerial high-voltage lines, 15,682 km in aerial medium-voltage lines and 16,408 km in aerial low-voltage lines at December 31, 2001.

(2)

The figures for aerial and underground high-voltage lines in 2001 and 2002 include figures attributable to REE, which we sold in March 2003, and which accounted for approximately 5,900 km in lines.

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

        In November 2002, our board of directors approved the sale of our Spanish mainland electricity transmission assets, including any assets that were in service as of December 31, 2002, as well as certain construction projects in progress that were scheduled to commence operations in 2003 to Red Eléctrica de España (REE) for €1,052 million. Under the agreement, we will provide REE with operating and maintenance services, as well as other technical assistance and consultancy services, in relation to the transferred assets for four years. As part of the transaction, we will retain the right to use the fiber optic cable installed in the electricity lines we sold for a period of 99 years and will share with REE the right to install new fiber optic lines over the existing electricity lines. The transaction will not affect our ability to carry out electricity transmission activities pursuant to the prevailing regulatory framework in Spain. The transaction closed in the first quarter of 2003. See "—Capital Expenditures and Divestitures—Divestitures".

        In 2003, the gross investment in our transmission and distribution network in Spain was €781 million, approximately 46% of which was dedicated to meeting new supply requirements due to the 7.4% increase in the amount of energy distributed and the connection of 232,040 new customers. The other approximately 54% was invested in improving the quality of service and procedures. As a result of these investments, in 2003 we increased the total length of our transmission and distribution network by more than 2,935 kilometers (8,739 kilometers excluding the lines sold to REE) to 283,101 kilometers as at December 31, 2003. Of this increase, 3,967 kilometers related to medium-voltage lines and 4,657 kilometers related to low-voltage lines. High-voltage lines decreased 5,689 kilometers (an increase of 115 kilometers excluding the lines sold to REE). In 2003, we also constructed 29 new substations and more than 4,913 transforming centers (from medium- to low-voltage). Investments to improve quality of service and procedures included:

•

the replacement of lines with higher capacity lines;

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•

the installation of more sophisticated circuits;



•

the installation of double power supply systems;



•

the enlargement and modernization of substations and transformer centers;



•

the automation of medium-voltage networks by installing telecontrol and other devices; and



•

the installation of new equipment and lines to reinforce facilities in certain areas.

        We have continued work on the integration of systems and procedures which are key to improving operational efficiency. We have identified best practices in the provision of services, which are being introduced. We have also begun to consolidate the sales systems of former distributors. This will enable us to take advantage of the economies of scale provided by a larger customer base to develop advanced technology.

Regasification

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

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

        We hold a 21% interest in Reganosa, which will be built in Mugardos (La Coruña) and which is expected to have a storage and regasification capacity of 300,000 cubic meters and distribution capacity of 412,500 Nm3 per hour, equivalent to 3.6 bcm per year of natural gas. This plant will include a 130 kilometer pipeline network and is expected to commence operations in 2007.

        We hold a 20% interest in Planta Regasificadora de Sagunto, S.A., which will be built in Sagunto (Valencia) and which is expected to have a storage capacity of 300,000 cubic meters and a regasification capacity of 600,000 Nm3 per hour, equivalent to 5.25 bcm per year. We expect this plant to commence operations in 2006.

        We hold a 74% interest in Compañía Transportista de Gas de Canarias. We are currently carrying out studies and initial activities for new projects in Arinaga (Gran Canaria) and Granadilla (Tenerife), which we expect to commence operations in 2008 and 2009, respectively. Each of the Arinaga and Granadilla plants are expected to have a storage capacity of 150,000 cubic meters and a regasification capacity of 210,000 Nm3 per hour, equivalent to 1.8 bcm per year.

Distribution of Natural Gas

        We distribute piped natural gas to residential, commercial and industrial customers in seven Spanish autonomous regions through Endesa Gas and several companies in which it holds stakes. In addition, Endesa Gas holds stakes in companies that distribute piped natural gas in Portugal. We are the third largest natural gas distributor in Spain, with a market share of approximately 5.4% at December 31, 2003. We are also present in the Portuguese natural gas distribution market through our interests in Setgas and Portgas. At December 31, 2003, Endesa Gas and the companies in which it holds stakes had more than 316,000 customers in Spain and approximately 220,700 customers in Portugal. In 2003, the volume of energy sold in Spain by Endesa Gas and the companies in which it holds stakes increased approximately 18% to 4,260 GWh and the volume of energy sold in Portugal increased 15.8% to 2,514 GWh. In accordance with our strategic plan 2004-2008, we intend to increase our market share in each of the Spanish and Portuguese markets for the distribution of natural gas.

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The following table shows certain information with respect to the companies in which Endesa Gas held stakes at December 31, 2003:

Transport and Distribution Infrastructure

        We participate in the gas transport sector through our wholly-owned subsidiary Endesa Gas Transportista. In 2003, we constructed 266 kilometers of network, with an investment of €24 million, reaching 2,245 kilometers of the distribution network in Spain, which represents an increase of 13% with respect to the previous year.

        The most significant gas pipelines on which we worked in 2003 were the supply gas pipeline to the Tarragona Power and Endesa Generación plants in Tarragona, the Santa Ana-Alcalá la Real gas pipeline, the Cuencas Mineras de Teruel gas pipelines, and the gas pipeline to la Plataforma Logistica de Zaragoza.

        Our distribution network, in conjunction with the Spanish market, extends 5.308 Km. We distributed 6,527 GWh of energy through our distribution networks to regulated customers and customers in the liberalized market in 2003, representing an increase of 17% with respect to the previous year.

        Regarding our transmissions infrastructure, we hold a 12% interest in the technical and economic viability study for the new gas pipeline that will connect Algeria and Spain. Medgaz, the company incorporated for the purpose of this pipeline, is carrying out preliminary technical work.

Electricity Business in Europe

General

        Our strategy with respect to our electricity business in Europe responds to the business opportunities arising from the current liberalization and deregulation of the European electricity market. Directive 96/92/EC of the European Union sets forth as its goal the creation of a single electricity market.

        We have focused principally on markets in the Southern European region and on specific opportunities outside of such region, in particular in Northern Africa.

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Generation

Italy

        In September 2001, a consortium in which we held a 45.3% stake acquired the Italian generation company, Elettrogen, from Enel SpA for an enterprise value of approximately €3.6 billion, of which €1.4 billion was assumed debt. The other members of the consortium included Santander Central Hispano (SCH) and ASM Brescia. In January 2002, we merged Elettrogen with and into a newly-formed company, Endesa Italia SRL, as a result of which Endesa Italia became the successor to Elettrogen.

        In connection with this acquisition, we entered into an agreement with Santander Central Hispano pursuant to which we have the option to acquire its 40.0% stake, in whole or in part, at any time through the fifth anniversary of the date of its acquisition of such stake. In March 2002, we partially exercised this option, acquiring an additional 5.7% stake in the consortium from Santander Central Hispano for €126.9 million. In December 2003, we entered into an agreement with SCH pursuant to which we acquired effective control over the shares in Endesa Italia held by SCH, which resulted in our control of 85% of the voting rights at Endesa Italia. Spanish GAAP does not specifically address these types of transactions; nevertheless, we decided to record our obligation to pay SCH €817 million as a liability on our consolidated balance sheet as of December 31, 2003 in accordance with the accounting treatment which will be required under IFRS, instead of recording SCH's interest in Endesa Italia as a minority interest. On June 16, 2004, we exercised an option, which was granted to us in connection with the September 2001 transaction described above, to acquire an additional 34.3% stake in Endesa Italia from SCH, for €817 million. This amount, as described above, was recorded as a liability on our consolidated balance sheet as of December 31, 2003 and therefore, this transaction will not affect our consolidated financial statements. Following this transaction, Endesa Italia has two shareholders: Endesa, with a 85.3% interest and ASM Brescia, with a 14.7% interest.

        Under our shareholders' agreement with ASM Brescia, resolutions adopted by shareholders at general shareholders' meetings require the approval of 55% of the shareholder votes, and resolutions adopted at extraordinary shareholders' meetings require the approval of 60% of the shareholder votes. In addition, we granted to ASM Brescia certain rights customarily given to minority shareholders. Our shareholders' agreement with ASM Brescia is valid for a term of seven years and is renewable for one or more three-year periods, unless terminated earlier upon the occurrence of certain events, including if either party ceases to be a shareholder of Endesa Italia or upon a change of control of either party.

        Endesa Italia, which merged into Endesa Holding Italia to form Endesa Italia S.p.A. in December 2003, is one of the three largest generators of electricity in Italy with an installed capacity of approximately 5,860 MW as of December 31, 2003, including 3,870 MW of installed capacity relating to its fuel oil and gas generating plants, 1,014 MW relating to its hydroelectric plants, and 976 MW relating to its coal-fired plants.

France

        In November 2000, we entered into an agreement with Charbonnages de France (CDF) to acquire a 30% interest in the French electricity generator, Societe Nationale d'Electricité et de Thermique (Snet). We acquired our 30% interest in Snet, following our receipt of clearance from the European Commission, in April 2001 for €450 million. CDF holds a 51.25% interest in Snet and Electricité de France holds an 18.75% interest. Snet has eight coal plants with an aggregate installed capacity of 2,604 MW at December 31, 2003 and generated 9,079 GWh in 2003, with an approximately 1.9% market share in France. In addition, Snet holds a 52.3% interest in a cogeneration plant with 330 MW of installed capacity in Poland and a 50% interest in Altek, a Turkish company, which operates a 40 MW hydroelectric plant and has a 90 MW CCGT plant under construction.

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        On March 3, 2004, we announced that we had entered into an agreement with Charbonnages de France (CDF) to acquire, through our subsidiary Endesa Europa, an additional 35% in Snet, in which we already own a 30% interest, subject to approval by EU competition authorities and the French Privatization Committee. As of the date of this annual report, the EU competition authorities have approved the transaction and we are awaiting the approval of the French Privatization Committee. The purchase price is €571 million, which includes the price for the 30% interest previously acquired (€450 million). Of the remaining €121 million, €3.4 million is payable upon consummation of the sale and €117.6 million is payable at the end of 2006, 30% of which depends on Snet's operating cash-flow between 2003 and 2005.

        We also have a 25% interest in Soprolif, whose principal business is the construction and operation of a circulating fluidized-bed boiler at Gardanne (France), with capacity of 250 MW. Snet also has a 10% direct interest and a 8.42% indirect interest in Soprolif.

Portugal

        In Portugal, we hold a 35% stake in Tejo Energia-Producão e Distribucião de Energia Eléctrica S.A., which owns a 600 MW coal-fired plant, accounting for 6.5% of generation capacity in Portugal at December 31, 2003. In 2003, the plant generated approximately 4,176 GWh of electricity. All of the electricity generated by the plant is sold under a long-term power purchase agreement with the national grid concessionaire.

        We continue to develop out plans in Portugal to ensure a favorable position in the electricity market. We also lead Portugal's cogeneration market through our 50% interest in Sociedade Termica Portuguesa, which has 71 MW of installed capacity in Portugal.

Northern Africa

        We hold a 32% stake in Energie Eléctrique du Tahaddart, S.A. (EET), Office Nationale d'Electricité holds a 48% stake and Siemens holds the remaining 20%. EET has initiated the construction of a combined cycle gas turbine plant with an expected installed capacity of 400 MW in Morocco. We expect that the plant will commence operations in March 2005.

Distribution

Northern Africa

        We operate in water and electricity distribution in the city of Casablanca with an 18% stake in the company Lyonnaise Des Eaux Casablanca, Lydec.

Supply

        We seek to take advantage of the opportunities arising from the growing number of customers in Europe that can contract freely with suppliers. We have entered into supply agreements with deregulated customers in France, Italy, Portugal, Germany, Belgium and Andorra, and in 2003, we supplied more than 12,318 GWh to 779 points of supply in these countries.

        In France, Snet supplied 5,554 GWh of electricity in 2003, and in Italy, Endesa Italia supplied 4,623 GWh to deregulated customers.

        In Portugal we have strengthened our position in the supply of electricity to deregulated customers through a 50:50 joint venture with the Sonae Group, called Sodesa S.A. The joint venture intends to initially target large customers, selling electricity and offering a wide range of energy-related services.

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        In February 2003, we entered into an agreement with Forces Electriques d'Andorra to supply electricity to Andorra until December 2008, which agreement extends a prior agreement from December 1998. Under the terms of the agreement, we will supply 50% of Andorra's electricity needs.

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

Cross-border Electricity Exchange

        In 2003, we exported 1,379 GWh to Endesa Energía's customers outside Spain (principally, Forces Electriques D'Andorra in Andorra and Office Nationale d'Electricité in Morocco), conducted wholesale electricity sales to other electricity systems (specifically, REN in Portugal) and, through Endesa Trading, sold energy to other electricity systems across the French border.

The European Wholesale Market and Energy Trading

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

        Endesa has followed a proactive strategy to facilitate the development of wholesale markets in Europe. In 1999, we acquired a 10% interest in the Amsterdam Power Exchange (which has been renamed ENDEX), which established the first organized spot market in continental Europe, of which we now hold 2.5% due to our decision not to participate in a capital increase in 2002. We were subsequently a founding member and owner of a 10% interest in Towarowa Gielda Energii, a company that operates a power exchange in Poland. In November 2001, we acquired a 5% interest in Powernext, which began operating an organized spot market in France at the end of 2001.

        The objective of our trading activities in Europe is to support our generation and supply businesses by seeking to increase the return on our assets while hedging the market risk associated with generation and supply activities. During 2003, our trading activities involved purchases and sales of electricity, substantially all of which were physical transactions, both under medium-term (typically one year) contracts and in short-term transactions through over-the-counter markets (bilateral transactions) and the main European exchanges. Other important activities have involved sourcing energy for sales to deregulated customers in France, as well as hedging purchases and sales of natural gas to deregulated customers in Spain.

Electricity Business in Latin America

Overview

        We are involved in the generation, transmission, distribution and supply of electricity in six countries in Latin America, where we had an installed capacity of 13,333 MW and approximately 10.5 million customers at December 31, 2003. We are one of the largest private electricity operators in Latin America in terms of consolidated assets and operating revenues. We are present in Chile, Argentina, Colombia, Peru, Brazil and the Dominican Republic.

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        Our electricity business in Latin America is conducted principally through our subsidiary Enersis in which we currently hold a 60.62% interest as well as through interests we have acquired directly in companies in the region. See "Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financial Strengthening Plan of Enersis and Endesa Chile". We acquired control of Enersis in April 1999. Enersis is an electricity utility company primarily engaged, through its principal subsidiaries and related companies, in the generation, transmission and distribution of electricity in Chile, Argentina, Brazil, Colombia and Peru. Through Endesa Chile, one of Enersis' consolidated subsidiaries, Enersis is the largest private sector electricity generation company in Latin America in terms of installed capacity. Enersis also owns electricity distribution companies in Latin America directly or through Chilectra with over 10 million customers at December 31, 2003. Each of Enersis' and Endesa Chile's American depositary shares, evidencing American depositary receipts, are traded on the New York Stock Exchange, and each of Enersis and Endesa Chile is a reporting company in the United States that files annual reports on Form 20-F with, and furnishes periodic reports to, the SEC.

        The following table sets forth, at December 31, 2003, our principal subsidiaries active in the Latin American electricity business.

*

Transmission company.

**

Installed capacity included in Endesa Chile.

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        In August 2003, Elesur sold its interest in Enersis to Endesa Internacional. In December 2003, Elesur sold an additional interest it had acquired in Enersis from Chispa to Endesa Internacional. After both of these transactions, Endesa Internacional holds all of our interest in Enersis and is the holding company through which all of our Latin American operations are held, which has served to clarify and simplify our Group. Likewise, in 2003, Elesur sold to Endesa Internacional its interests in Cerj and Edesur.

Financial Strengthening Plan of Enersis and Endesa Chile

        On October 4, 2002, Enersis' and Endesa Chile's Boards of Directors unanimously approved a financial strengthening plan in order to enhance their capital structure and permit them to be better positioned in light of the current economic situation in Latin America, which had been affecting their investments and liquidity risk. This plan consisted of four main objectives: (i) refinancing of $2.33 billion of bank debt, (ii) a capital increase of up to $2 billion, (iii) asset sales of up to $900 million and (iv) improvement in the generation of free cash flow. As of December 31, 2003, Enersis and Endesa Chile had refinanced the target $2.33 billion of bank debt, completed a capital increase of $2.1 billion and Enersis and Endesa Chile had sold $764 million of non-strategic assets. The main assets sold included Enersis' stake in Rio Maipo, S.A and the Central Hidroeléctrica Canutillar plant and Endesa Chile's stake in Infraestructura 2000, S.A., in each case described in more detail under "—Non-Core Diversified Assets—Capital Expenditures and Divestitures—Divestitures". As of December 31, 2003, the financial strengthening plan of Enersis and Endesa Chile was successfully completed. For additional information on the financial strengthening plan of Enersis and Endesa Chile, see "Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financial Strengthening Plan of Enersis and Endesa Chile".

Electricity Generation and Transmission

Generation

        At December 31, 2003, we had an installed capacity of 13,333 MW in Latin America, most of which is held through our subsidiary Endesa Chile, of which we hold a 36.37% economic interest through Enersis. Approximately 60% of the installed capacity corresponds to hydroelectric power stations and approximately 40% to thermal power stations.

        The following table shows the installed capacity of our consolidated subsidiaries in Latin America by country for the periods indicated.