Letter from the CEO

Dear Shareholder,

Every year, the presentation of the ENDESA Activity Report is an excellent opportunity to review the work done during the previous year, including our achievements and difficulties, to be able to explain the results obtained and the objectives we set for the future.

Starting with the former, I am pleased to report that the results of the 2018 financial year have confirmed, once again, the ability of our company to effectively manage its business.

Indeed, despite the fact that last year was marked by high prices of raw materials for generating energy and a significant rise in CO2 prices - which, in turn, led to high prices in the wholesale electricity market, ENDESA's gross operating profit (EBITDA) stood at 3,627 million euros and net profit reached 1,417 million euros, figures that exceed the commitments we had communicated to the markets.

The proper management of the electricity business, the recovery of the gas business margin and the stable evolution of the regulated market were among the factors that enabled us to achieve these results and others in excess of our commitments.

Wholesale market prices grew almost 10% to 57.3 euros / MWh. However, ENDESA managed to increase its gross margin in the electricity market by 327 million euros. In turn, the contribution of the gas business to the gross margin amounted to 138 million euros, representing an increase of 82 million euros compared to the previous year.

ENDESA also made great efforts to contain costs during the year, confirming its ability to be one of the most efficient companies in the market. As a result of these efforts, fixed operating costs were similar to the previous year, absorbing both the impact of inflation and the growth of the company's business.

On the other hand, in 2018, ENDESA redoubled its efforts to strengthen the stability of its business for the future, especially in the context of the challenges facing Spain in terms of energy transition and decarbonisation of the economy.

ENDESA not only fully assumes these objectives, but sees them are essential aspects of its business vision, as evidenced by the Strategic Plan presented to the markets in November 2018.

Last year, 50% of the company's electricity production was free of CO2 emissions and the goal is to raise that percentage to 56% by 2021, 65% by 2030 and 100% by 2050.

To achieve this, the company is making significant investments in renewable energy. As a result, 39% of the investments planned by ENDESA for 2019 will be allocated to the development of renewable technology facilities, which will involve the incorporation of some 900 MW of new power. Throughout the 2018-2021 period, the company will have invested a total of 2,000 million euros in renewables. This will allow the company to increase from 6.5 GW of installed capacity in renewables today, to 8.4 GW in 2021.

In turn, digitalisation and modernisation of the electricity grid will be among the company’s major investments under its Strategic Plan. A total of 1.9 billion euros will be allocated to its development. This considerable effort is essential, not only to meet increasing demand and growth, but above all to enable  incorporation of new renewable power,  deployment of charging points required because of growing demand for electric mobility and access to products and services aimed at responding to our customers’ new needs and expectations.

Indeed, new trends developing in the electricity market, from distributed generation to sustainable mobility to new relationships with customers, require both constant renewal of the business model and a special ability to detect new opportunities that arise as part of this accelerated process of change.

A good example of this is ENDESA's commitment to electric mobility. At the end of last year, the company announced an ambitious plan to install more than 100,000 public and private charging points for electric vehicles, for an investment of 65 million euros. We will do this through ENDESA X, our company's new line of business that offers new services and technological solutions in the energy world that include, in addition to driving electric mobility, the development of efficient lighting systems in cities, photovoltaic installations for self-consumption, energy advisory services for companies, etc.

As another way of updating its business, between 2018 and 2021, ENDESA will allocate a total of 1.3 billion euros to the digitalising of its assets and processes, most of which will be spent on the distribution network. The development of smart grids -  intelligent networks that introduce information and telecommunication technologies in electrical networks - is key to improving the efficiency of the electrical system and addressing a new model where flows of energy are no longer unidirectional - from the large generation plant to the consumer - but become bi-directional.

The objectives of energy transition and decarbonisation are testing the ability of companies to undertake long-term challenges that require a radical transformation of much of their business. To succeed in these challenges, determination, knowledge and skills are essential. This means that determination, knowledge and skills are three essential aspects of the attitude that companies must maintain to demonstrate their willingness to be significant agents when building a sustainable future.

ENDESA has decided to address these challenges in a firm and determined way, because they obviously cannot be achieved without hard work on a task for which the company has a proven vision and capacity: the increasing electrification of final energy demand. Without it, the energy transition and the decarbonisation of our economy will not be possible. Therefore, with great humility, but also with great conviction, our company has decided to assume a leading role to overcome this great challenge.

José D. Bogas Gálvez

CEO of ENDESA