Dear shareholder,

Again this year, it is my pleasure to present you with ENDESA’s Activities Report, which allows us to detail the most relevant actions carried out by our Company, in addition to the results obtained throughout 2016. In this way, ENDESA offers the public all necessary information to understand the running of our Company and assess the progress made to fulfil the ambitious objectives that we have been setting during the last few years and that are being achieved in a more than satisfactory way.

This report gives me the unique opportunity of directly addressing all our shareholders, essential backing for our business activities, to show them how we face our challenges with efficient and responsible asset management, a financial strategy that allows us to look to the future with solvency and an industrial project that guarantees our long-term leadership in the markets where we operate.

Our industry is in the midst of a profound structural transformation process, where all involved agents will be affected and which will require maximum commitment from the private sector, the public administrations and regulatory bodies. ENDESA has not only joined this energy revolution but firmly desires to spearhead it.

With a view to the new energy scenario considered, 2016 has been a vitally important year for agreements in favour of the environment and of the future sustainability of the energy industry. Almost one year after the Paris summit took place, the Marrakech summit was staged in November 2016. Here, most member countries of the United Nations Framework Convention have committed to the global agreement to limit the planet’s temperature increase.

In this very regard, the energy transition has been strongly backed on the European continent after the year-end launch of the European Union “Winter Package”, under the motto “Clean energy for all Europeans». This set of regulations and directives establishes a legislative initiative that has 3 main objectives: give priority to energy efficiency, turn Europe into world leader in renewable energies and place consumers at the centre of all energy decisions.

I would like to place special emphasis on this last point since, for the first time, the consumer holds the reins in this change process: a party qualified to make his/ her own energy decisions. Self-consumption, energy storage, access to price comparison, smart meters or consumer protection as some aspects regulated in the provisions in this regard that will set the determine the course of the European Union’s energy policy in the coming years.

Here at ENDESA we are fully aware of this and are constantly striving to be able to offer a range of products and services to the market which suit customers’ needs, whilst focusing on optimising the industry to achieve a less polluted world and a more efficient and competitive industry. Finding this balance will be our great challenge in the near future and we are ready to tackle it.

On a government level, we have the certainty that Spain will actively participate and contribute to development of this energy transition, also aware that it will be an important opportunity for the country and its industry. To do this, it will be necessary to establish a more flexible and coherent strategy with future commitments, which defines the path in a transparent and objective manner for all parties involved.

If we review last year, 2016 has been particularly stamped by national and international political incertainty. During this period, Spain has had the longest acting government in the history of democracy, and yet, this situation has not affected economic growth, which has shown a 3.2% rise in GDP at year-end. Furthermore, we have learned a particularly hopeful piece of information: growth in employment close to 2.7%.

Internationally, uncertainty has held predominance, with the referendum on the UK’s exit from the European Union, the US elections or the great doubts in the electoral processes in European countries, as symptoms of widespread political discontent, the lack of trust in political leaders and the growth of strongly populist tendencies. These events generate great unknown in the markets and do not favour growth of the economy.

In this context, ENDESA very successfully completed the purchase of 60% of Enel Green Power España in mid-year for an amount of 1,207 million euros, which gave control over this Company’s entire capital. This transaction made ENDESA direct owner of 1,675 MW in renewable facilities, of which 97% are wind power, in addition to a very significant project portfolio. In total, 91 generation power plants with production exceeding 3,704 GWh in 2016.

Through this operation, ENDESA substantially improves its generation mix, giving the Company a solid growth platform in the renewables industry. This means we can take yet a further step towards achieving 2050 objectives where all our electricity generating capacity must be emission-free.

Our Company’s plan for acquiring renewable assets, which would complement our participation in the coming auctions for new capacity in Spain, demonstrates the Company’s strong commitment to clean energies as one of the cornerstones for growth. This type of investment, in any case, will fulfil our priority of value creation for shareholders, and with this in mind we seek financially attractive formulas that allow us to obtain real added value.

As regards 2016 results, I am enormously pleased to say that they have greatly exceeded the commitments proposed by ENDESA to the markets in the 2016-2019 strategic plan. In 2016, we have achieved an Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) of 3,432 million euros, a growth of 10.8% compared to the previous year, after eliminating the extraordinary impacts.

These results are due to excellent management of the deregulated business with a 13% increase in our contribution margin, the stable evolution of the regulated business (63% of our EBITDA) and cost reduction through efficiency plans. They also reflect the excellent comprehensive management of the margin which is one of our cornerstones and which always allows us to obtain stable results in different energy market price scenarios.

Together with this efficient and profitable strategy in the deregulated market, we can add a very effective regulatory and legal management.

ENDESA’s net profit during 2016 has come to 1,411 million euros, a 27% increase, after eliminating extraordinary impacts. Other factors which have also assisted in this increase have been the lower production costs, less thermal generation, fewer generation taxes and reduced fuel cost, in addition to the decrease in average electricity purchase costs due to the drop in price in the wholesale market. This has been widely compensated by the decrease in average sale price.

With these results, and with the shareholders’ interests in mind, the proposed distribution of the dividend for financial year 2016 presented by the ENDESA Board of Directors to the Shareholders’ Meeting shall be a gross amount of 1.33 euros per share charged to the 2016 net profit, a 30% increase compared to 2015.

We can rightly be proud, since our solid results allow us to uphold and increase our market shares (35% in ordinary mainland generation, 44% in electricity distribution and 35% in sales to deregulated market customers).

The number of customers who have trusted in us as reseller in the deregulated market has increased by 6.7% compared with 2015 year-end, reaching the figure of 5,423,040 customers in this segment.

Finally, I would not like to end without remembering all the employees that form part of this great Company and who work extremely hard to reach the ambitious goals we set, the more than 12.5 million total electricity and gas customers that trust in our Company and, very especially, the more than 200,000 shareholders who support us in the exciting challenges we have decided to enthusiastically undertake. Together we are achieving great success, directing our efforts in the same direction to help this Company consolidate its leadership in such a complex and exciting industry.

As ENDESA chairman, I feel very proud to show the thousands of shareholders that have trusted in us that we have fulfilled and shall continue to fulfill the promises made some years back, and that I commit to all of them to continue playing a great role in these times of change, to continue contributing to the development of this country and to that of our Company.

 

Borja Prado Eulate

Chairman of Endesa