Endesa’s free market business drives net income up 3% in 1H 2019

(1) Net ordinary income = Profit of the Parent Company – Net gains/(losses) on disposal of non-financial assets (of over 10 million euros) - Net impairment losses on non-financial assets (of over Euros 10 million).

(2) As of December 31st, 2018.

(3) Excluding M&As in the period.

Endesa posted excellent results in 1H 2019, mostly due to effective management of its free market business and despite the challenging electricity and gas market scenario. Through these solid results, the company feels confident to confirm the guidance disclosed to the market for full year 2019.

On top of the strong free market performance, the company also benefitted from the stability of the regulated business and actions to contain costs. These actions have proven to be key in a period in which the company significantly stepped up its investments, mainly relating to the development and construction of 879 MW of renewable projects awarded in the 2017 auction, which are expected to be operational by year-end.

Overall electricity demand in Spain declined substantially in 1H 2019 due to high temperatures and the impact of the economic slowdown on the energy use of large companies.

Furthermore, the higher price of CO2 emission rights and the reduced hydro output led to a 3.4% increase in wholesale energy prices, to 51.8 euros/MWh.

Endesa CEO José Bogas said: “The two main drivers of our investments are renewables and digitalisation. A key role is also played by a major pipeline of new renewable projects that can reach up to 9,000 MW. Our sound strategy reinforces the excellent results that could more than offset the impact of a challenging market scenario, putting us in an advantageous position to lead the energy transition in Spain.”

Endesa's key figures in 1H 2019:

• EBITDA up 5% year-on-year on the back of the good free market performance and stability in the regulated business, as well as the impact of cost-containment actions:
  
  
  • The company's free market strategy resulted in a 21% EBITDA increase of this segment to 745 million euros.
    
    
    • The gross margin in the free market business increased by 104 million (+8.5%) euros, mainly attributable to:
      
      
      • The increase in reference prices for this business more than offset the increase in variable costs caused by higher CO2 prices, as well as the reduction in sales caused by lower demand and lower hydro output.
      • The positive contribution of Endesa's renewable subsidiary, Enel Green Power España (EGPE), which reported a gross margin of 150 million euros, mainly due to the consolidation of the wind farms acquired from Gestinver.
      • A 35% improvement in the gas business margin to 89 million euros.
         
  • EBITDA in the regulated business fell slightly (-3%) to 1,149 million euros, due to the lower margin of generation from non-mainland territories. Nevertheless, the margin in the distribution business increased by 1% in the overall Spanish territory. Regulated business EBITDA accounted for 60% of Endesa’s total EBITDA.
    
    
  • Furthermore, Endesa went to great lengths to contain costs: fixed operating expenses in 1H 2019 fell by 4% on a like-for-like basis (-6% reported) compared with 1H 2018, in spite of the sharp increase in renewable investments carried out by the company.
     
• EBIT up 4% despite the increase in depreciation and amortisation, which was mainly due to the investment effort in digitalisation and grid optimisation as well as the impact of IFRS 16, the new international standard that requires active lease agreements to be included within the scope of the standard. Application of this standard resulted in the recognition of 13 million euros under depreciation and amortisation in the period. 
  
  
• Financial expenses increased mostly due to the update of provisions for workforce restructuring and the dismantling of facilities, in addition to the impact of IFRS 9 and 16.
  
  
• As a result of all these factors, Endesa’s net income grew by 3%.

Operating cash flow, net financial debt and investments

• Endesa's operating cash flow in 1H 2019 totalled 907 million euros, up 42% on the same period of 2018. This increase was largely due to the improvement in working capital (-33%) and EBITDA growth.
  
  
• Net financial debt increased by 1,025 million euros compared to December 31st, 2018 due to various factors, specifically the implementation of IFRS 16, which resulted in the recognition of an additional 186 million euro of net debt as of January 1st, 2019, the investments carried out on the development and construction of new renewable capacity as well as the payment on January 2nd, 2019, of an interim dividend on 2018 net income, totalling 741 million euros.
  
  
• The net debt/EBITDA ratio is just 1.8x, leaving the Company an ample scope to carry out substantial investment in renewables and digitalisation as it has committed to with the aim to meet energy transition targets.
  
  
• Gross investments totalled 956 million euros in the period, up 72.6% on 1H 2018, mainly due to wind and solar projects as well as digitalisation.
   

(1)     Net of consumption from own power generation.

• In 1H 2019, electricity demand in mainland Spain fell by 2.2%, or 2.3% adjusted for working days and temperatures.
  
  
• Renewable generation in Spain in the period met 43.2% of total mainland electricity demand compared to 42.1% in 1H 2018.
  
  
• Endesa's mainland electricity output dropped by 14.1% due to the lower hydro and coal output (-47% and -48% respectively).
  
  
  • CO2 emission-free technologies (hydro, wind, solar and nuclear) accounted for 60% of the Company's generation mix in 1H 2019, up from the 55% posted in 1H 2018.
  • Endesa's production in non-mainland territories was 5,717 GWh (-7.2%).
     
• In the period, Endesa recorded market shares of 20% in mainland generation, 43.5% in distribution and 32.5% in electricity sales to free market customers, confirming its leading position in the Spanish electricity sector.
  
  
• The Company's free market customer base stood at 5,811,096 as of June 30th, 2019, an increase of 1.5% from the year-earlier figure.
  
  
• At the end of 1H 2019, Endesa held a 16.1% share of gas sales to free market customers.

Dividends

Endesa's General Shareholders' Meeting of April 12th, 2019 approved the payment to shareholders of a total dividend of 1.427 euros per share (gross) against 2018 net income, for a total amount of 1,511 million euros.

Factoring in an interim dividend of 0.7 euros (gross) per share paid on January 2nd, 2019, for a total amount of 741 million euros, the final dividend on 2018 net income was 0.727 euros (gross) per share (770 million euros), paid on July 2nd, 2019