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Endesa's deregulated business drives ordinary net profit up 3%

The General Manager of Administration, Finance and Control Iberia, Luca Passa, with Endesa CEO José Bogas
The General Manager of Administration, Finance and Control Iberia, Luca Passa, with Endesa CEO José Bogas
Millions of euros
2019
2018
% Change
Revenues
20,158
20,195
-0,2
EBITDA
3,841 3,627 6
EBIT
388 1,919 -80
Net income
171(1) 1,417 -80
Ordinary net profit (2)
1,562 1.511 3
Operating cash flow
3,181 2,420 31
Net financial debt
6,377 5,770 11
Gross investments (3)
2,202 1,470 50

(1) The accounting record of impairment of the coal-fired plants and plants off mainland had an impact of 1,409 million euros on net income.

(2) Net ordinary income = Profit/(loss) of the Parent - Net gain/(loss) on disposal of non-financial assets (over 10 million euros) - Net impairment losses on non-financial assets (over 10 million euros).

(3) Excluding business combinations in the period.

Endesa closed out 2019 surpassing the objectives that the company announced to the market within the framework of its Strategic Plan. These positive results are still predicated on the good management of its deregulated market under highly complex electricity and gas market conditions, in addition to the stability of the regulated market and its successful cost containment policy.

Electricity demand fell substantially in the year (-2.7% like-for-like) because of warmer temperatures during the period and the impact of the economic slowdown on the consumption of large companies.

The higher price of CO2 emission rights, coupled with a substantial fall in gas prices, increased renewable production and more imports made peninsular coal-fired plants significantly less competitive, thus excluding them from the market. For this reason, and given that the situation is unlikely to improve in the future, the company announced that it would promote shutting down these imported coal-fired plants in September and subsequently submitted a request in December to close the imported coal-fired power plants in addition to the ones submitted for domestic coal-fired plants.

This comes in tandem with the significant drop in the remuneration figures calculated for plants off mainland Spain (which are regulated) for the 2020-2025 period, thus also requiring the corresponding accounting adjustment.

Overall, Endesa consequently presented an accounting record of impairment on its assets of 1,873 million euros (1,469 million euros on coal-fired plants and 404 million euros on non-mainland plants), with an impact on the net income of 1,409 million euros.

The accounting record of impairment will have no effect on the company's ordinary net profit or shareholder remuneration through dividends.

The aforementioned market situation in turn is causing the company to step up decarbonisation efforts for its electricity generation assets in Spain. In this context, Endesa has substantially increased its 2019 investments in renewable energies (+211%), thus becoming the first company to incorporate all the capacity awarded in the 2017 government-run auctions into the system (879 MW).  Approximately 70% of Endesa's development investments last year were allocated to conceive renewable generation projects, resulting in CO2-free emissions for 73% of the mainland generation and 59% of Endesa's total generation in 2019.

Endesa CEO José Bogas maintained that "Endesa will lead the energy transition in Spain, which is why we are making such an enormous effort investing in renewable energies and digitalisation, the keys that will enable us to continue having good results in an increasingly complex market. Our portfolio of new renewables projects are now reaching approximately 20,000 MW, of which 5,700 MW have already been awarded connection points."

 

Trends in key financial figures

The company's trends for its key 2019 figures were as follows:

  • EBITDA rose by 6% because of a solidly performing deregulated business, a stable regulated business and efforts to rein in fixed costs:

-The company's strategy on the deregulated market helped pave the way for a 22% increase in EBITDA to 1,475 million euros.

- The gross margin in the deregulated business increased to 2,722 million euros (+12%). This performance was driven mainly by:

-The resilience of the margin, which increased by 8.3% in unitary terms in a market climate shaped by lower demand, falling hydro output and higher CO2 prices.

-Endesa's renewables subsidiary, Enel Green Power España (EGPE), also contributed positively to the margin, reporting an EBITDA of 223 million euros (+5.2%), due mainly to the increased investment in renewables.

-The improved gas business margin (+95%), which tallied 269 million euros, thanks to the combined effect of the hedging strategy for retail customers and greater flexibility in procurement contracts.

-EBITDA in the regulated business fell 2% to 2,366 million euros, due to the reduction in EBITDA in non-mainland territories generation. However, distribution business EBITDA rose slightly (+2%). EBITDA for the regulated business accounted for over 60% of the total for Endesa.

  • Further, Endesa went to great lengths to rein in costs: fixed operating expenses fell by 0.5% like-for-like in a period characterised by a sharp increase in the company's investments in renewable energies.
  • EBIT decreased by 80% due mainly to the impairment in the value of the aforementioned assets for the amount of 1,873 million euros, and the impact of IFRS 16, the new international standard that requires companies to activate lease agreements. Application of this standard resulted in the recognition of 34 million euros under depreciation and amortisation. 
  • Net financial results stood at 184 million euros, increasing by 45 million euros compared to the previous year due mostly to the update of provisions and the impact of IFRS 9 and 16.

 

Operating cash flow, net financial debt and investments

  • Endesa's operating cash flow in 2019 totalled 3,181 million euros, i.e. an increase of 31% from the 2018 figures and a record high (since 2014), mainly the result of greater profit in the year and the substantially relevant improvement in working capital.
  • Net financial debt stood at 6,377 million euros, an increase in 607 million euros compared to 31 December 2018 due to various factors, specifically the aforementioned implementation of IFRS 16, which resulted in the recognition of an additional 274 million euros of net debt, the investments made to develop new renewable generation capacity and the payment of an interim dividend against 2018 profits, for the amount of 1,520 million euros.
  • The net debt/EBITDA ratio is only 1.7x, leaving the company plenty of room to undertake the substantial investment in renewable energies and digitalisation it has committed to in order to meet the objectives of its Strategic Plan and energy transition targets.
  • Gross investments totalled 2,202 million euros, up 50%, due mainly to efforts being made by the company in the area of digital transformation and to develop new wind and photovoltaic capacity.

 

Operating results 

Operating results
GWh
2019
2018
Change %
MAINLAND OUTPUT 
49.459 61.338 -19,4
SALES TO THE DEREGULATED MARKET
85.117 84.246 1
SALES TO THE REGULATED MARKET
13.335 14.432 - 7,6
ELECTRICITY DISTRIBUTED
116.611 117.029 -0,4
GAS SALES(1)
79.784 86.729 - 8

(1) Net of consumption from own power generation.

  • Mainland Spain's electricity demand in 2019 fell 1.7%, or 2.7% adjusted for working days and temperatures.
  • Renewable generation in Spain in the period met 42% of total mainland electricity demand. Compared to 39% in the same period the previous year.
  • Endesa's mainland electricity output dropped by 19% due to the lower hydro and coal output (-31% and -72% respectively).

-CO2-free technology (hydro, wind, solar and nuclear) amounted to 59.2% of Endesa's mainland generation mix, thus surpassing the 48.8% achieved in 2018. 

-Endesa's production in non-mainland territories (TNP) was 11,943 GWh (-7.1%).

  • In the period, Endesa recorded market shares of 18.3% in mainland generation, 44.1% in distribution and 34.1% in electricity sales to customers on the deregulated market, thus confirming the company's leading position in the Spanish electricity sector.
  • There were 5,827,786 electricity customers in the deregulated market at 31 December 2019, a 1.8% increase compared with the existing number of customers at 31 December 2018.
  • Endesa attained a market share of 15.6% of gas sales to deregulated market customers.

 

Dividends

In November, Endesa's Board of Directors agreed to pay its shareholders a gross interim dividend against 2019 profit of 0.70 euros per share, which gave rise to a pay-out of 741 million euros on 2 January 2020.

The proposed distribution of profit in 2019 to be presented for approval by Endesa's Board of Directors at the General Shareholders' Meeting will be the distribution of a total gross dividend of 1.475 euros per share to its shareholders.

Overall, the dividend proposal is a 3% increase over the dividend against 2018 profits.

When considering the dividend paid out in 2019 against 2018 profits and this year's share price revaluation, shareholders yielded 25.3%. 

The company's dividend policy for 2019-2020 establishes that the ordinary dividend per share agreed to be distributed with a charge to those years shall be equal to 100% of the ordinary net profit attributable to the Parent in the consolidated financial statements of the Group headed by it. Therefore, the aforementioned accounting record of impairment does not affect shareholder remuneration through the dividend paid against 2019 profits.

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