Group Financial Risk Management

This chapter describes the policies and principles adopted by the Edison Group to manage and control the commodity price risk that arises from the volatility of the prices of energy commodities and environmental securities (CO2 emissions credits, green certificates and white certificates) and other risks related to financial instruments (foreign exchange risk, interest rate risk, credit risk and liquidity risk).

In accordance with IFRS 7 and consistent with the disclosure provided in the Report on Operations, the paragraphs that follow provide information about the nature of the risk related to financial instruments, based on accounting and management sensitivity considerations.

1. Commodity Price Risk and Exchange Rate Risk Related to Commodity Transactions

The Edison Group is exposed to the risk of fluctuations in the prices of all of the energy commodities that it handles (electric power, natural gas, coal, petroleum products and environmental securities), which have an impact on the revenues and expenses of its production, storage and marketing operations. These fluctuations affect the Group both directly and indirectly through indexing mechanisms contained in pricing formulas. Moreover, because some of the abovementioned commodity prices are quoted in U.S. dollars, the Group is also exposed to the resulting exchange rate risk.

Consistent with its Energy Risk Policies, the Group may use hedging derivatives to minimize or contain risk. From an organizational standpoint, the governance model adopted by the Group requires the separation of the risk control and management functions from the derivatives trading activity.

At the operational level, the net exposure is computed for the Group’s entire portfolio of assets and contracts (so-called Industrial Portfolio), except for those related to trading activities described below (so-called Trading Portfolios), which is the net residual exposure after maximizing all available vertical and horizontal integrations provided by the different business operations. This net exposure is then used to compute the overall level of Economic Capital involved (stated in millions of euros), which measured in terms of Profit at Risk (PaR1) with a confidence index of 97.5% and an annual time horizon.

Each year, the Board of Directors Edison Spa approves the Economic Capital ceiling concurrently with the approval of the annual budget. The Risk Management Committee, which is headed by a representative of Senior Management, reviews monthly the Group’s net exposure and, if the Profit at Risk is higher than the predetermined ceiling, defines the appropriate Strategic Hedging policies, which may involve the use of suitable derivatives instruments.

Provided transactions are approved in advance by the Risk Office, which determines whether they are consistent with the Group’s risk management objectives and with the Group’s total exposure, the Edison Group, responding to specific requests from individual Business Units, may also use other types of hedges called Operational Hedges.

At December 31, 2010, outstanding derivatives instruments were measured at fair value against the forward market curve at the end of the reporting period, when the underlying assets were traded on markets that provided official and liquid forward prices. When no forward market quotes were available, projected price curves based on simulation models developed internally by the Edison Group were used.

The Italian forward market for electric power does not yet meet IFRS requirements to qualify as an active market. Specifically, both the OTC markets operated by brokerage firms (e.g., TFS) and those operated by Borsa Italiana (IDEX) and the GME (MTE) lack sufficient liquidity for peak and off-peak products and for maturities longer than one year.

Consequently, market price data obtained from those market should be viewed as input for the internal valuation model used to measure at fair value the abovementioned products.

As required by IFRS 7, a simulation is carried out for the derivatives instruments that hedge the Industrial Portfolio, some of which qualify for hedge accounting under IAS 39 (Cash Flow Hedges) while others qualify as Economic Hedges, to assess the potential impact that fluctuations in the market prices of the underlying assets could have on the fair value of outstanding derivatives. The simulation is carried out for a length of time equal to the residual lives of outstanding derivatives contracts, the farthest maturity of which is currently December 31, 2012. For derivatives contracts maturing in 2011, the method requires the simulation of 10,000 scenarios, as they apply to each material price driver, taking into account the volatility data and correlations of the spot markets. For financial contracts maturing after 2011, the method requires the use of the volatilities and correlations of the forward markets. If available, the forward market curves at the end of the reporting period are used as a reference level. Having thus obtained a probability distribution for changes in fair value, it then becomes possible to extrapolate the maximum expected negative change in the fair value of outstanding derivatives contracts over the length of a reporting year with a level of probability of 97.5%.

Based on the method explained above, the maximum negative variance in the fair value of hedging derivatives instruments expected by the end of 2011, with a 97.5% probability, compared with the fair value determined at December 31, 2010, is 178.5 million euros (87.4 million euros at December 31, 2009), as shown in the table below:

In other words, compared with the fair value determined for hedging derivatives contracts outstanding at December 31, 2010, the probability of a negative variance greater than 178.5 million euros by the end of 2011 is limited to 2.5% of the scenarios.

The higher amount, compared with the level measured at December 31, 2009, is due primarily to an increase in the derivative hedges executed during the year, due to the higher volume of electric power sold at a fixed price in Italy, in order to lock-in the cost of the natural gas needed to produce the electric power.

The hedging strategy deployed in 2010 enabled the Group to comply with its risk management objectives, lowering the Industrial Portfolio’s commodity price risk profile within the approved limit of Economic Capital. Without hedging, the average amount of Economic Capital absorbed in 2010 by the Industrial Portfolio would have been equal to 98% of the approved limit, with a peak of 128% in December 2010 (in 2010, the approved limit was exceeded by an average of 10%). With hedging, the average amount of Economic Capital absorbed in 2010 by the Industrial Portfolio was 62%, with a peak of 96% in December 2010.

Approved activities that are part of the core businesses of the Edison Group include physical and financial commodity trading, which must be carried out in accordance with special procedures and segregated at inception in special Trading Portfolios, separated from the Group’s Industrial Portfolio. Trading Portfolios are monitored based on strict risk ceilings. Compliance with these ceilings is monitored by an organizational unit independent of the trading unit. The daily Value-at-Risk (VaR²) limit with a 95% probability on the Trading Portfolios is 3.1 million euros, with a stop loss limit of 16.5 million euros. The VaR limit was 2% utilized at December 31, 2010, with an average utilization of 43% for the year.

As is the case for the Industrial Portfolio, an Economic Capital that represents the total risk capital available to support the market risks entailed by trading activities is allocated to the entire set of Trading Portfolios. In this case, the Economic Capital ceiling takes into account the risk capital associated with the VaR of the portfolios and the risk capital estimated by means of stress tests for possible illiquid positions. The Economic Capital ceiling for the entire set of Trading Portfolios is 48 million euros. This limit was 2% utilized at December 31, 2010, with an average utilization of 43% for the year. This measurement, like the use of VaR, takes also into account transfers of electric power from physical assets, the impact of which on the financial statements is monitored with other ad hoc limits.

² Value at risk is a statistical measurement of the maximum potential negative variance in the portfolio’s fair value in response to unfavorable market moves, within a given time horizon and confidence interval.

2. Foreign Exchange Risk

The foreign exchange risk arises from the fact that some of Edison’s activities are carried out in currencies other than the euro or are influenced by changes in foreign exchange rates through indexing formulas. Revenues and expenses denominated in foreign currencies can be affected by fluctuations in foreign exchange rates that have an impact on sales margins (economic risk). Likewise, the amount of trade and financial payables and receivables denominated in foreign currencies can be affected by the translation rates used, with an impact on profit or loss (transaction risk). Lastly, fluctuations in foreign exchange rates have an impact on consolidated results and on shareholders’ equity attributable to Parent Company shareholders because the financial statements of subsidiaries denominated in a currency other than the euro are translated into euros from each subsidiary’s functional currency (translation risk).

Edison’s policy in managing its foreign exchange risk is to minimize its exposure both to the economic risk and the transaction risk inherent in commodity activities (see the preceding paragraph with regard to this issue). Also with regard to the transaction risk, the Group is exposed to the foreign exchange risk on some cash flows in foreign currencies (U.S. dollars, for the most part) in connection with international development and exploration projects by the hydrocarbons operations and, for limited amounts, purchases of equipment. Lastly, the Group has a marginal exposure to the translation risk, specifically with regard to the translation of the financial statements of certain foreign subsidiaries. As a rule, foreign subsidiaries use the same currencies in the invoices they issue and the invoices they pay.

3. Interest Rate Risk

The Edison Group is exposed to fluctuations in interest rates specifically with regard to the measurement of debt service costs. Consequently, it values on a regular basis its exposure to the risk of fluctuations in interest rates, which it manages with hedging derivatives, some of which qualify for hedge accounting under IAS 39 (Cash Flow Hedges and Fair Value Hedges), while others qualify as Economic Hedges. The Euribor is the interest rate to which the Group has the largest exposure.

(*) For a breakdown of gross financial debt see the "Liquidity Risk" paragraph of this Report.

Considering that, at December 31, 2010, the Group held 472 million euros in liquid assets earning interest at market rates, when the abovementioned percentages are computed based on net financial debt, including outstanding derivative transactions, they become about 61% (variable rate) and about 39% (fixed rate), respectively.

The interest rate risk exposure shown in the analysis schedule provided above can be explained by taking into account both operating developments that had an impact on the financial structure of Edison Group and trends in market interest rates in 2010.

More specifically, Edison Spa floated two fixed-rate bond issues in 2010, in connection with which it executed hedging derivative transactions as follows:

• In March 2010, it floated a 500-million-euro bond issue maturing on March 17, 2015, maintaining a portion of the total amount (275 million euros) at the fixed contractual rate of 3.25% and converting the balance (225 million euros) to a variable rate by means of Interest Rate Swaps that qualify as Fair Value Hedges.
• In November 2010, it floated a 600-million-euro bond issue maturing on November 10, 2017 that accrues interest at a fixed rate (3.875%), converted to a variable rate by means of Interest Rate Swaps that qualify as Fair Value Hedges.
• It negotiated a derivatives structure for 500 million euros that currently enables it to stay floating within a contractually established cap and floor. Thanks to this structure, Edison Spa was able to reset a portion of its debt exposure at a fixed rate and retain a funding source protected from the risk of an increase in interest rates, without giving up the benefits provided by the low level of short-term interest rates.

The strategy pursued in 2010, which consisted of selecting long-term financial instruments with a fixed interest rate and combining them with hedging transactions that, over the short term, make it possible to benefit from variable rates that are lower than the fixed rate and reduce borrowing costs, is similar to the one implemented in 2009. Specifically, in the case of the 700-million-euro (face value) bond issue floated by Edison Spa in July 2009, which accrues interest at a fixed rate of 4.25% and matures on July 22, 2014, a portion of the face value amounting to 500 million euros was converted to a variable rate also by means of Interest Rate Swaps.

With regard to the indebtedness of other Group companies, it is worth mentioning that a portion of the financial debt of Edipower Spa, which was the recipient of a variable rate syndicated facility carried at 1,250 million euros face value (Edison’s pro rate share is 625 million euros) in the financial statements at December 31, 2010, was hedged with financial derivatives. More specifically, 64% of Edipower’s outstanding debt at December 31, 2010 was converted to a variable rate by means of Interest Rate Swaps that qualify as Cash Flow Hedges.

The table below provides a sensitivity analysis that shows the impact on the income statement and shareholders’ equity, respectively, of a hypothetical shift of the forward curve of plus or minus 50 basis points compared with the rates actually applied in 2010 and provides a comparison with the same period in 2009.

4. Credit Risk

The credit risk represents Edison Group’s exposure to potential losses that could be incurred if a commercial or financial counterpart fails to meet its obligations. This risk arises primarily from economic/financial factors (i.e., that the counterpart defaults on its obligations), as well as from factors that are technical/commercial or administrative/legal in nature (disputes over the type/quantity of goods supplied, the interpretation of contractual clauses, supporting invoices, etc.).

The Edison Group’s exposure to credit risk is related mainly to sales of electric power and natural gas. To control this risk (a task specifically assigned to the Credit Management Office, which is part of the Central Finance Department), Edison implemented procedures and programs designed to evaluate customer credit worthiness (using specially designed scoring grids) and subsequently monitor the expected cash flows and any collection actions. The policies and tools used to preventively assess credit worthiness and the monitoring and collection activities employed vary depending on the customer type and the consumption level profile. As required by internal credit policies and depending on the customer’s credit worthiness, in some cases the Group may ask customers to provide it with guarantees. Generally, these are sight bank or insurance sureties issued by entities with a high credit rating. In addition, during the year, Edison executed transaction assigning receivable without recourse on a revolving and spot basis for a total amount of 4,335 million of euros. At December 31, 2010, the risk of recourse that still existed on these transactions was not material. Lastly, when it comes to choosing counterparties for transactions to manage temporary excess liquidity or execute financial hedging contracts (derivatives), Edison deals only with entities with a high credit rating. At December 31, 2010, there were no significant exposures to risks related to a possible further deterioration of the overall financial environment.

The payment terms applied to most customers require payment within 30 days from the date of the invoice, which, as a rule, is issued monthly during the month that follows the month when the service was provided. In cases of late payment, Edison, consistent with express provisions of the underlying supply contracts, charges customers delinquent interest at the rate allowed under the applicable laws, reserving the right to termination, i.e., physically cutting off supply, for the most serious cases. Trade receivables are shown in the financial statements net of any writedowns, which are recognized with a conservative approach using different rates that reflect the degree by which different groups of receivables were being disputed on the balance sheet date.

The table below shows an overview of gross trade receivables, the corresponding allowance for doubtful accounts and the guarantees that the Group holds to secure its receivables. The higher amount of receivables outstanding at December 31, 2010, compared with the previous year, is largely due to an increase in revenues booked in the year.

5. Liquidity Risk

The liquidity risk is the risk that the Group may not have access to sufficient financial resources to meet its financial and commercial obligations in accordance with agreed terms and maturities. The table that follows provides a worst-case scenario, showing undiscounted nominal future cash flows required for financial liabilities that include, in addition to principal and accrued interest, all future interest payments estimated for the entire length of the underlying debt obligation, and taking into account the effect of interest rate derivatives. The result is a disclosure of the aggregate liability, which is an amount greater than the gross financial debt amount used to compute the Group’s net financial debt. In addition, assets (cash and cash equivalents, trade receivables, etc.) are not taken into account and financing facilities are treated as if repayable on demand, in the case of revocable lines of credit, or on the first due date when repayment can be demanded, in other cases.

(*) These guarantees, mainly of a commercial nature and related to the Group’s core businesses, are shown based on their remaining contractual maturity. For further details, see the "Commitments and Contingent Risks" section of this Report.

The Group’s strategic objective is to minimize the impact of financial debt maturities by maintaining access to existing credit lines and adequate liquidity and implementing on a timely basis negotiations for the funding of maturing financing facilities, as well as through the placement of bond issues.

As shown in the table above, short-term financial debt (due within one year) totaled 1,375 million euros at December 31, 2010. Net of available liquid assets of 472 million euros, this amount is less than the balance of the unused committed credit lines (958 million euros). Most of these credit lines are part of a standby syndicated facility of 1,500 million euros that expires in 2013, 650 million euros of which had been drawn down at December 31, 2010. This amount was recognized as a financial debt due after one year. Moreover, in December 2010, Edison Spa and the European Investment Bank executed a loan agreement pursuant to which the Bank is making available to Edison a long-term credit facility of 250 million euros to finance certain natural gas storage projects. This credit line was not included among the available facilities because at December 31, 2010 the conditions precedent governing disbursement were still being negotiated.

The main components of short-term financial debt are:

• 500 million euros for a variable rate bond issue floated by Edison Spa in 2003 and maturing on July 19, 2011;
• 636 million euros for principal repayment and accrued interest due on a loan owed by Edipower Spa that matures on December 31, 2011.

In addition, the Elpedison Power Sa investee company renegotiated its financing facilities, changing their due date to September 30, 2011.

The early repayment in 2010 of the bank facility provided to Edison Spa on a club deal basis (600 million euros) and the abovementioned reclassification to current liabilities of Edipower’s financial debt account for the reduction of “Financial debt and other financial liabilities” due after one year.

At the same time, the portion of long-term debt (due after one year) represented by bonds increased, reflecting the Edison Spa placement of two bond issues with a total face value of 1,100 million euros in 2010. The first bond issue, with a face value of 500 million euros, a term of five years and a fixed 3.25% coupon, was floated in March. The second bond issue, which was floated in November, after the Euro Medium Term Note Program had been increased to 3 billion euros in October 2010, totaled 600 million euros, has a term of seven years and carries a gross annual fixed coupon of 3.875%. Both bond issues were placed with institutional investors and are traded on the Luxembourg Stock Exchange. These new capital market transactions enabled the Group to stabilize it sources of funds and lengthen their maturity.

The table that follows provides a breakdown by maturity of the Group’s gross financial debt at December 31, 2010. However, the amounts shown are not accurately indicative of the exposure to the liquidity risk because they do not reflect expected nominal cash flows, using instead amortized cost or fair value valuations for derivatives, i.e., the amounts at which financial liabilities were recognized in the accounting records at December 31, 2010.

6. Default Risk and Debt Covenants

This type of risk arises from the possibility that loan agreements or bond indentures to which Group companies are a party may contain provisions that, if certain events were to occur, would empower the lenders, be they banks or bondholders, to demand that the borrower repay immediately the loaned amounts, which, consequently, would create a liquidity risk (see the “Liquidity Risk” paragraph above).

Four issues of debt securities (Euro Medium-term Notes), for a total face value of 2,300 million euros, are outstanding. As mentioned earlier in these Notes, the last two bond issues (500 million euros, with a term of five years, and 600 million euros, with a term of seven years) were floated in March and November 2010, respectively. Their conditions are described in the paragraphs below.

In addition, considering the pro rata consolidation of Edipower’s debt, the Group is a party to nonsyndicated loan agreements for a total face value of 285 million euros and syndicated loan agreements with a total face value of 2,328 million euros (958 million euros unused at December 31, 2010).

Consistent with international practice for similar transactions, both the bank loan agreements and the Euro Medium Term Note Program provide the lender bank or the bondholder with the right to demand the payment of the loaned amount and terminate ahead of schedule their relationship with the borrower whenever the borrower is declared insolvent and/or is a party to bankruptcy proceedings (such as receivership or composition with creditors) or is undergoing liquidation or another procedure with similar effects.

Specifically, the bond indentures, consistent with market practices, include a series of standard clauses that, in the event of non-performance, require that the issuer immediately redeem the bonds. The main clauses of this type are: (i) negative pledge clauses, by virtue of which the borrower undertakes to refrainto provide Group assets as collateral beyond a specific amount; (ii) cross default/cross acceleration clauses, which establish an obligation to immediately repay the bonds in the event of material failures to perform obligations that arise from or are generated by other loan agreements that affect a significant portion of the indebtedness owed by Group companies; and (iii) clauses that establish an obligation of immediate repayment even if just some Group companies were to be declared insolvent.

As for credit line agreements and bilateral or syndicated loan agreements to which Edison is a party, it is important to note that the agreement for a syndicated credit line of 1,500 million euros provided to Edison sets forth, among other clauses, Edison’s obligation to comply with certain commitments, which include making sure that the lender banks are being afforded a treatment equal to the one offered under other unsecured creditors (pari passu clause), as well as restrictions on Edison’s Spa ability to provide collateral to new lenders (negative pledge clause).

Neither the loan agreements governing the bank facilities provided to Edison Spa nor the bond indentures contain clauses allowing early termination of the loan if the credit rating assigned to Edison Spa by the rating agencies is downgraded or cancelled. Moreover, following the early repayment, in March and April 2010, of the club deal facility of 600 million euros, Edison Spa is no longer required to comply with specific financial covenants under the terms of any of its credit lines.

As for the other Group companies, certain loan agreements that some of them have negotiated set forth, in addition to the clauses discussed above, the obligation to achieve and/or maintain certain financial ratios (typically indicative of a borrower’s ability to repay the indebtedness over the long term

- Long Life Cover Ratio, or ratio between net financial debt and EBITDA or shareholders’ equity, clause) and place restrictions on the ability to distribute dividends. Any violation of these clauses would accelerate the repayment of the loaned amount.

Lastly, the syndicated loan agreement executed by Edipower in January 2007 for a total contractual amount of 2,000 million euros (1,000 million euros attributable to Edison) contains negative pledge, pari passu and cross default clauses and includes the obligation to comply with certain financial covenants, which include ratios between minimum EBITDA and financial expense and between net financial debt and EBITDA of Edipower. The content of the abovementioned financial covenants was determined by Edipower, based on its industrial plan and using a suitably conservative approach.

At present, none of the Group companies has been declared in default by any of the lender banks.

Analysis of Forward Transactions and Derivatives

Forward Transactions and Derivatives

The Edison Group engages in trading for its own account in physical energy commodities and financial derivatives based on such commodities, in a manner consistent with special Energy Risk Policies.

Accordingly, it defined an appropriate risk control structure and the necessary guidelines and specific procedures. The Group views this activity as part of its regular operations and the results derived from it are recognized in the income statement and are included in reported EBITDA. Whenever possible, the Group uses hedge accounting, provided the transactions comply with the requirements of IAS 39.

Forward transactions and derivatives can be classified as follows:

1) Derivatives that qualify as hedges in accordance with IAS 39. This category includes transactions that hedge the risk of fluctuations in cash flow (Cash Flow Hedges - CFH) and those that hedge the fair value of the hedged item (Fair Value Hedge - FVH).

2) Forward transactions and derivatives that do not qualify as hedges in accordance with IAS 39. They can be:

a. Transactions to manage interest rate and foreign exchange and price risk on energy commodities. For all derivatives that comply with internal risk policies and procedures, realized results and expected values are either included in EBITDA, if they refer to activities related to the Industrial Portfolio, or recognized as financial income or expense, in the case of financial transactions.

b. Trading Portfolios. As explained above, they include physical and financial energy commodity contracts; both realized results and expected values of these transactions are included in EBITDA.

Fair Value Hierarchy According to IFRS 7

IFRS 7 requires that the classification of financial instruments in accordance with their fair value be based on the reliability of inputs used to measure fair value.

The IFRS 7 ranking is based on the following hierarchy:

• Level 1: Determination of fair value based on quoted prices (unadjusted) for identical assets or liabilities in active markets. Instruments with which Edison Group operates directly in active markets (e.g., futures) are included in this category;
• Level 2: Determination of fair value based on inputs other than the quoted prices of Level 1 but which are directly or indirectly observable. (e.g., forward contracts or swaps in futures markets);
• Level 3: Determination of fair value based on valuation models with inputs not based on observable market data (unobservable inputs). At the moment, there are three types of instruments that are included in this category.

The valuation of financial instruments can entail significant subjective judgment. However, Edison uses prices quoted in active markets, when available, as the best estimate of the fair value of all derivatives.

Instruments Outstanding at December 31, 2010

The tables that follow provide an illustration of the information listed below:

• fair value hierarchy;
• derivatives that were outstanding, classified by maturity;
• the value at which these contracts are reflected on the balance sheet, which is their fair value;
• the pro rata share of the fair value referred to above that was recognized on the income statement as of the date of execution.

The difference, if any, between the value on the balance sheet and the fair value recognized on the income statement is the fair value of contracts that qualify as Cash Flow Hedges, which, in accordance with the reference accounting principles, is posted directly to equity reserves.

A) Interest Rate and Foreign Exchange Rate Risk Management

(*) Represents the sum of the notional amounts of the basic contracts that would result from an unbundling of complex contracts.
(**) Represents the net receivable (+) or payable (-) recognized on the balance sheet following the measurement of derivatives at fair value.
(***) Represents the cumulative adjustment to fair value of derivatives recognized on the income statement from the inception of the contract until the date of the financial statements.
(****) For the definition see the previous paragraph "Fair Value hierarchy according to IFRS 7".

B) Commodity Risk Management

(*) + for net purchases, - for net sales.
(**) Represents the net receivable (+) or payable (-) recognized on the balance sheet following the measurement of derivatives at fair value.
(***) Represents the cumulative adjustment to fair value of derivatives recognized on the income statement from the inception of the contract until the date of the financial statements.
(****) For the definition see the previous paragraph "Fair Value hierarchy according to IFRS 7".

C) Trading Portfolios

(*) + for net purchases, - for net sales.
(**) Represents the net receivable (+) or payable (-) recognized on the balance sheet following the measurement of derivatives at fair value.
(***) Represents the cumulative adjustment to fair value of derivatives recognized on the income statement from the inception of the contract until the date of the financial statements.
(****) For the definition see the previous paragraph "Fair Value hierarchy according to IFRS 7".

Effects of Hedging Derivative and Trading Transactions on the Income Statement and Balance Sheet in 2010

The disclosure below provides an analysis of the financial results generated by derivative hedging and trading transactions in 2010, including the effects of physical energy commodity contracts.

(*) Includes the effective portion included in Raw materials and services used (Note 3 to the Income Statement) for purchases of natural gas.
(**) Includes the ineffective portion.
(***) Amounts included in Sales revenues (Note1 to the Income Statement) under margin on trading activities.
(****) Amounts included in Other revenues and income (Note 2 to the Income Statement) under margin on trading activities.
(&) Includes the fair value adjustments of trading inventories, the carrying amount of which was virtually nil at December 31, 2010.

The table below provides a breakdown of the amounts recognized in the balance sheet following the measurement at fair value of the derivatives and physical contracts outstanding on the date of the financial statements:

With regard to the items listed above, please note that the receivables and payables shown are offset by a positive Cash Flow Hedge reserve amounting to 121 million euros, before the corresponding deferred-tax assets and liabilities.

Classes of Financial Instruments

The table provided below, which lists the types of financial instruments recognized in the financial statements showing the valuation criteria applied and, in the case of financial instruments measured at fair value, whether gains or losses were recognized in earnings or in equity and their classification on the fair value hierarchy, completes the disclosures required by IFRS 7. The last column in the table shows, if applicable, the fair value of financial instruments at December 31, 2010.

The Edison Group has chosen not to adopt the value option and, consequently, as the table shows, neither financial debt nor bonds were restated at fair value.

(a) Assets and liabilities measured at fair value, with changes in fair value recognized in earnings.
(b) Cash flow hedges.
(c) Available-for-sale financial assets measured at fair value, with gains/losses recognized in equity.
(d) Loans, receivables and financial liabilities valued at amortized cost.
(e) Available-for-sale financial assets consisting of investments in unlisted securities the fair value of which cannot be measured reliably are valued at cost, reduced by any impairment losses.
(f) Includes receivables and payables resulting from the measurement of derivatives at fair value.
(g) Includes 86 million euros in loans receivable classified as long term following the adoption of IFRIC 4.
(h) Includes equity investments held for trading.
(i) Includes receivables and payables from the measurement at fair value of physical contracts in Trading Portfolios.
(l) The fair value of the components of these items that are not derivatives or loans was not computed because it is substantially the same as their carrying value.
(m) The fair value on Level 3 is recorded on trading physical margin.