José Bogas, CEO of Endesa

Dear Shareholder,

Yet another year, the publication of ENDESA’s Annual Activities Report gives me the opportunity to inform you of the aspects which, in my opinion, are the most representative of the management in our businesses in 2016 and of sharing a series of thoughts about the present and future of our Company.

We are living in difficult and accelerated times, filled with uncertainties and surprises. 2016 was not an exception. In Spain, the Government had to face ten months of acting government and there was a real possibility that third general elections would have to be held. Internationally, we witnessed Brexit, the electoral victory of Donald Trump, the ratification by up to 114 countries (now more than 140) of the climate change agreement known as COP 21 established in Paris at the end of 2015.

These are just a few examples of events that are transforming the social, political and economic scenario in a sometimes unpredictable way. And they go hand in hand with other factors of change, that have been in place longer and with profound long-term consequences (continuous technological advances, increasing digitisation, greater decision-making power of customers…), that constantly test companies’ capacities to fulfil their objectives. As regards the energy scenario, raw material prices were internationally highly volatile in 2016. In Spain, the electricity demand, despite the country’s better economic climate, barely grew 0.6% on the Mainland, which became a drop of 0.1% if we correct the effects of employment factors and temperature, and the wholesale electricity market prices sharply fell.

As I will detail below, our Company was capable, in this complex and unfavourable context, of achieving excellent economic and financial results, which has allowed us to go beyond the commitments we had announced to the markets through our Industrial Plan.

Furthermore, in the month of June 2016, we completed the acquisition of up to 100% of the company Enel Green Power España, the fourth producer of electricity with renewable energies, of which we already held 40%. This acquisition has undoubted strategic importance for our company, since it increases, diversifies and improves our generation mix, provides us with a solid growth platform in renewable energies and is an essential step in our progress towards a fully decarbonized energy system.

Regarding the Company’s main financial figures, it should be stressed that in 2016 ENDESA achieved, Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) of 3,432 million euros, 13% higher than 2015. To fairly assess this result, it must be considered that this included the full consolidation of the incorporation of Enel Green Power España, with a contribution of 75 million euros; that in financial year 2015 the EBITDA included a non-recurrent positive impact of 184 million euros for the sale of emission rights (EUAs); and that in 2015 and in 2016, the company made provisions for an amount of 380 million euros and of 226 million euros, respectively, to materialise various workforce optimisation projects within the framework of its continuous cost efficiency process.

If we remove these extraordinary factors from both financial years, the 2016 EBITDA increases by 348 million euros, i.e. by 10.8% in comparison with the previous year. Net profit was 1,411 million euros in 2016, with a 30% increase. Again, if we discount the effect of these main extraordinary factors, the increase is 27%.

Gross investments were 1,221 million euros, 12.6% more than in 2015, which makes ENDESA one of the Spanish companies with greatest investment effort. Another significant aspect of the 2016 results was the confirmation of ENDESA’s proven capacity to generate high cash flows. The working cash flow was 2,995 million euros, with an increase of 339 million euros. Thanks to this high cash flow generation, and despite the acquisition of Enel Green Power España and payment of the dividend charged to the 2015 results for a value of 1,086 million euros, the Company’s net debt only increased by 615 million euros compared to 2015 year-end, standing at 4,938 million euros.

In short, this information shows you ENDESA’s capacity to provide solid and stable results, in addition to fulfilling the economic-financial commitments. These good results are basically explained by the good management of the deregulated business, the stability of the regulated business and by the progress made thanks to the successive cost efficiency plans that the Company has applied in recent years in all its businesses.

The deregulated business had very positive behaviour. Its gross margin grew by 13% in comparable terms as a consequence of lower production costs due to less thermal production; lower taxes on generation and reduced fuel costs, and the decrease in average costs in the purchase of electricity because of the 21.2% drop in price in the wholesale market, which largely compensated the decrease in average sales price.

The regulated business, which represented more than 63% of the 2016 EBITDA, had a stable evolution and its margin was in line with that of the previous year. In terms of cost efficiency, the various plans in progress made it possible to reduce fixed costs by 3% compared with 2015, measured in homogeneous terms, thus giving continuity to the cost optimisation process that the company has been maintaining throughout recent years and which has become one of the most characteristic signs of its business management.

This information and facts, which confirm ENDESA’s capacity to fulfil the demanding objectives we periodically announce to the markets, places us in a solid position to tackle the long-term changes that energy companies currently must face on an international level if they want to form an active part of building a more sustainable future. The first, which links or binds all the others in one way or another, is undoubtedly the objective of achieving full decarbonisation of the energy system in line with the COP21 agreements. This involves, for European Union countries, the reduction of greenhouse gas emissions by 40% in 2030, and between 80% and 95% in 2050, compared with 1990.

To achieve these objectives, Spain must go from 330 Mt of current emissions to 66 Mt in 2050. This will only be possible if effective measures are urgently put in place that allow giving a decisive boost to electrification of the final energy demand; reduction in emissions from “diffuse sectors”, such as transport, promoting e-mobility with much more intensity than at present, so that in 2050 90% of the cars are electric or hybrid, 35% or 40% of goods transport is by rail and there is at least 10% of light electric trucks; and the full roll-out of smart networks to enable implementation of continuous technological progress and the integration of renewable energies.

The latter must continue to be incorporated in the electricity system, replacing conventional technologies, as part of an Energy Transition Plan which enables this in a way that is compatible with supply security and economic competitiveness. This is increasingly feasible since these technologies have finally reached a high maturity as an energy alternative. This is proven by the costs of solar photovoltaic energy being reduced by approximately 90% and wind power by 50% over the last 7 years.

A third challenge is given by customers’ rising decision-making power. These customers have unquestionably become the main source of value of our business, and, due to this, a great opportunity for growth. Our customers are increasingly digital, connected and social; they demand instant access to information through their mobile devices; they want to perform all types of transactions with them simply, quickly and securely; they use any opportunity to self-manage their own consumption; they want to enjoy genuine personalized experiences before, during and after purchase of the products and services; they acquire and use technological solutions (distributed generation, electric cars, smart meters, home automation solutions, etc.) that have a strong impact on electrical infrastructures.

Our Industrial Plan, whose update we presented to the markets in November 2016, consistently responds to these and other fundamental challenges. It includes a net investment effort of 4,700 million euros, which allows tacking efficient and selective environmental actions; the growth in renewable energies through Enel Green Power España; the total roll-out of smart networks; the development of a large number of channels and digital offers, in addition to an extension of our portfolio of value added products and services, to take on the challenge of focusing on the customer, and an ambitious Digitisation Plan to continue promoting the digital transformation of our industrial assets, the improvement in our workforce’s digital abilities, the efficient management of cybersecurity risks and new advances in cost efficiency.

In short, an Industrial Plan clearly aimed at making ENDESA an active company in building a sustainable future through the implementation of Enel Group’s own values and key priorities of the global positioning, which, under the global concept of Open Power, is clearly focused on facilitating access to progress through the energy of all communities where we are present; in the promotion of new technologies, uses and forms that are more efficient and better at managing and using the energy, in establishing lasting  alliances with all stakeholders to enable common goals to be achieved. We, therefore, have a solid present and a consistent long-term vision that should allow us to successfully deal with an increasingly challenging, but also increasingly promising, future.

A future to which I am undoubtedly looking forward with hope and optimism. Because all of us that form part of this great company have the firm decision of forming part of it, providing value to society and supplying a quality and affordable basic and indispensable service, in benefit of all citizens.

None of this would be possible without the trust and support of our shareholders. I would, therefore, like to repeat our deepest thanks for contributing to opening the doors of that future we are building among all of us.

 

José D. Bogas Gálvez

Endesa CEO