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Letter to shareholders and other stakeholders

Letter to shareholders and other stakeholders

Dear shareholders and stakeholders,

the year 2018 was another year of impressive performance: we achieved all the goals we set ourselves. Today, we are a company characterized by greater sustainability, efficiency, profitability and lower risk: all key factors in continuing to attract and remunerate our investors appropriately and create lasting value for all stakeholders. Among private operators in this industry, we remain leaders in the main areas of the energy transition: 73 million end users, 43 GW of installed renewables capacity, 70 million retail customers (electricity and gas) and 6.2 GW in active demand management. Enel operates globally along the entire value chain. This strategic approach and operational capacity are key levers that, once again in 2018, enabled the Group to seize opportunities and tackle new challenges in a context of increasing volatility and complexity. The Group’s effective strategic positioning was also reflected in the performance of the Enel stock, which outperformed the FTSE-MIB index and matched that of the EuroSTOXX Utilities index. This enabled us to close 2018 as the largest utility by capitalization in Europe.

The macroeconomic environment

In 2018 the world economy expanded by around 3%, in line with the pace registered in 2017. The United States and China continued to play a leading role, while growth in the euro area was more moderate. The normalization of monetary policies in the advanced countries generated considerable pressures on emerging markets. Geopolitical uncertainty has characterized the external environment, slowing trade and investment decisions. The European Central Bank announced that it would end its extraordinary asset purchase program (quantitative easing) after December 2018, but it continued to maintain an accommodative stance. The euro-area economies moved at different speeds. Italy was impacted by political uncertainty and discussions with the European Union about the expansionary budget package, with the country entering a technical recession in the 2nd Half of 2018 (2018 GDP grew by 0.75% overall). Despite an unstable political situation, Spain continued to record rapid growth (2018 GDP rose by 2.5%), driven by strong domestic demand. The United States saw growth accelerate sharply (2018 GDP expanded by 2.9%), with unemployment at a historic low and general inflation above the target of the central bank (the CPI rose by 2.4%). In Latin America, the deterioration in the global macroeconomic situation has shone a light on the structural weaknesses of some countries (Argentina in particular), while other economies (Chile, Colombia, Peru) have displayed considerable resilience. More specifically, Argentina experienced a severe recession (2018 GDP contracted by 2.6%), exacerbated by exceptional events, such as drought and a stringent fiscal and monetary austerity plan. In Brazil, the uncertainty about the outcome of the elections and the delay in implementing the necessary structural reforms slowed the economic recovery (2018 GDP grew by 1.1%). In general, in almost all countries of interest to the Group (the only exception being Argentina and, partly, Mexico) inflation has remained low, which helps foster domestic consumption while ensuring compliance with fiscal constraints. The first nine months of the year saw oil prices rise steadily, with Brent increasing to $86 a barrel, while in the 4th Quarter prices plunged to $54 a barrel, reflecting the signs of a slowdown in global growth. The European gas market also experienced periods of high volatility. The early months of 2018 were marked by strong demand, and unusual price tensions were recorded during the summer. Starting in October, the situation reversed, driven by the sudden drop in the price of oil, the large flow of LNG bound for Europe and less buoyant demand.

The dynamics of the coal market in Europe were characterized by the fuel’s competitiveness with gas, which was a source of volatility. In the Pacific, China was again the main market mover, pushing the price of coal 20 percentage points higher than the previous year. Europe experienced a strong recovery in CO2 prices, which rose to €25/ton at the end of the year, mainly due to the launch of the Market Stability Reserve, which is designed to absorb excess allowances in order to revive the CO2 market. The positive trend in electricity demand in the countries in which the Enel Group operates, which began in 2017, continued last year. The increase in electricity consumption traveled at two different speeds: barely positive but steady growth in Europe (about 1%) and more rapid expansion in Latin America (about 3%). After the broad decline that characterized the last few years, 2018 saw an increase in energy prices in most of the countries in which the Group is present, partly reflecting the average annual increase in the prices of the fossil fuels still used to varying degrees in the electricity supply chain.


In a context characterized by the depreciation of currencies in South America and the normalization of market conditions for conventional generation after a very favorable 2017, the Enel Group was able to achieve all the financial targets set for 2018. In particular, the Group closed the year with ordinary EBITDA of €16.2 billion, an increase on the €15.6 billion posted the previous year and in line with the guidance provided to investors. Ordinary net income, which is used to calculate the dividend, reached €4.1 billion, an increase of 9% compared with the previous year. The 2018 dividend amounts to €0.28 per share, an increase of 18% compared with the €0.237 distributed the previous year and in line with the minimum dividend guaranteed to shareholders. Consistent with the interim dividend policy already applied last year, an interim dividend of €0.14 per share was distributed in January 2019. The ratio of FFO to net debt, an indicator of financial soundness, reached 27%, better than the target set and in line with the value at the close of 2017. Net debt amounted to €41.1 billion and is at the lower end of the range announced to investors (between €41 billion and €42 billion). The figure increased compared with the previous year following extraordinary transactions carried out in the period and investments in growth (equal to about €8.5 billion, in line with 2017).

Key developments

With regard to industrial growth, the expansion of renewable generation continued in 2018, with more than 3 GW of new additional capacity. Thanks to this growth, for the first time in the Group’s history zero-emission technologies contributed more than 50% of annual output, supporting the goal of reducing CO2 emissions (down 11% compared with 2017). The digitalization effort also continued, with the Group increasing the number of new smart meters by 1.2 million, thus reaching a total of almost 44 million smart meters installed globally (15% of which are second generation devices). These activities are in line with the goal of developing high quality, reliable and resilient infrastructures and making cities more sustainable, consistent with Sustainable Development Goals (SDG) 9 and 11.1 Our electric mobility strategy was supported by the acceleration of the public charging infrastructure installation plan in Italy and the launch of two similar projects in Spain and Romania. This effort helped us exceed the annual target, enabling us to close 2018 with a total of 49,000 public and private recharging points installed. The Group also demonstrated that it can seize the opportunities generated by the growing need for flexible resources for electrical systems, reaching 6.2 GW of active demand management and achieving 70 MW of battery storage for both industrial customers and grid stabilization services. Among extraordinary transactions, the acquisition of Eletropaulo, renamed Enel Distribuição São Paulo in Decem ber, boosted the Group’s end users to 73 million, up 11% compared with 2017. In Mexico the sale of a majority stake of 1.7 GW 2 of renewables capacity was finalized, while retaining responsibility for plant operation, in accordance with the Build, Sell and Operate (BSO) business model. In addition, in Italy the sale to F2i of 50% of the EF Solare Italia joint venture was completed for €214 million, while the Finale Emilia biomass plant was sold for €59 million to F2i SGR. This latter operation forms part of an agreement between the Enel Group and F2i SGR for the sale of the entire biomass portfolio in Italy. Finally, in Spain Enel Green Power signed an agreement for the acquisition of five wind plants in Galicia and Catalonia with a total capacity of some 132 MW. From a financial point of view, 2018 was an exciting year, characterized by major achievements: from the issue of the second green bond, to receipt of the Yankee Bond Award 2017, the multi-tranche issue of euro-denominated subordinated non-convertible hybrid bonds and the launch of a $4 billion bond issue on the US market. These results were achieved also thanks to the continued rationalization of our organizational structure, which included the corporate reorganization in Chile, the merger of Enel Green Power Latin America SA into Enel Chile and the increase in Enel’s interests in Enel Américas.

Strategy and forecasts for 2019-2021

In recent years we have witnessed profound structural changes in many industrial sectors, leading to the emergence of new markets and opportunities, but also to the need to renew consolidated business models and rethink the methods of use of the resources available to us. The energy sector is also experiencing a constant and inexorable evolution: the competitiveness of renewable energy sources and the digitalization of assets, together with growing consumer awareness of sustainability and respect for the environment, are opening up electricity to new uses, allowing the decarbonization of the economy. To meet these challenges, in November 2018 Enel presented its 2019-2021 Strategic Plan, which takes up and strengthens the lines of development set out in recent years. The path of growth outlined in the Plan shows a constant acceleration, with Group target for ordinary EBITDA of €19.4 billion in 2021, compared with €16.2 billion in 2018 (+20%). Over the next three years, the Group envisages total gross investment of around €27.5 billion, up 12% compared with the previous plan. Out of a total of about €16.5 billion in growth investment, some €10.6 billion will be dedicated to renewables, once again the driver of the Group’s growth. It will be directed not only at markets where Enel has an integrated presence, such as Italy, Spain, Chile, Brazil, Colombia and Peru, but also at other markets such as North and Central America, Africa, Asia and Oceania, thus taking on an increasingly clear global dimension. This growth is in line with Enel’s commitment to combating climate change from a perspective that, in addition to risk management, also seeks to identify new development opportunities. In this regard, this year’s Report contains a section dedicated to implementing the recommendations of the Task force on Climate-related Financial Disclosures (TCFD) of the Financial Stability Board. Investments in grids will amount to around €11.1 billion, with the main objective of completing the integration of recently acquired assets, in particular Eletropaulo in Brazil, as well as promoting, especially through digitalization, the efficiency of grids and enhancing service quality in all countries in which the Group is present. The Group also remains focused on achieving operational efficiencies of €1.2 billion over the next three years, and the digitalization of all business sectors will be the main enabler of cost reduction. Another pillar of future value creation is represented by the simplification of the corporate structure through the reduction of non-controlling interests and the rotation of assets, with a view to improving the overall return on capital employed and increasing the Group’s economic interest. Enel’s strategy is explicitly sustainable, with an approach aimed at creating shared value with the people and communities with which the Group interacts, seeking to produce positive effects for the environment, society and the economy in the long term. This is the motivation behind Enel’s support for the initiatives undertaken by the countries in which it operates, aimed at achieving the objectives established in the Paris Agreement. The commitment to the SDGs was strengthened by setting targets through 2030, strengthening the objective of reducing specific CO2 emissions to 0.23 kg/kWheq (SDG 13) and increasing the level of interaction between the Group and local communities, fostering their access to education (SDG 4), energy (SDG 7) and employment as well as sustainable and inclusive economic growth (SDG 8).3 Specific targets were introduced for SDG 9 and SDG 11: the Group expects to install about 47 million smart meters and 455 thousand charging points for electric mobility and to invest €5.4 billion in digitalization in 2019-2021. The sustainability and the global dimension of the integrated business model over the entire value chain are at the root of the Strategic Plan’s resilience and the demonstrated robustness of operating performance. In light of this awareness, the dividend policy based on a 70% pay-out of the Group’s ordinary net income has been confirmed until 2021, with the establishment, for the first time, of a minimum dividend per share for the entire 2019-2021 period. For 2019, Enel therefore expects to distribute the greater of: a) a dividend per share based on the 70% pay-out indicated previously; and b) a minimum dividend per share of €0.32.

Patrizia Grieco 
Chairman of the Board of Directors

firma Grieco

Francesco Starace
Chief Executive Officer and General Manager

firma Starace

1 SDG 9 - Industry, Innovation and Infrastructure and SDG 11 - Sustainable Cities and Communities.
2 An additional 0.1 GW will be transferred in 2019, as provided for in the agreement with the counterparty.
3 SDG 13 - Climate Action, SDG 4 - Quality Education, SDG 7 - Affordable and Clean Energy and SDG 8 - Decent Work and Economic Growth.