Dear shareholders and stakeholders,
in 2017 the Enel Group once again had to cope with strong and sudden changes in macroeconomic conditions: the strategic decisions taken in the recent past prepared the Group to tackle the emerging challenges and seize the opportunities that presented themselves in a highly volatile and increasingly complex environment. The effectiveness of our strategic approach and our capacity to implement it on the operational level enabled Enel to become the European utility with the largest market capitalization during the year, confirming the soundness of the choices made in recent years.
The macroeconomic environment
In 2017, global economic activity expanded at an average rate of 3.7%, the fastest pace since 2011. Economies in the advanced phase of the expansion consolidated their positions, while those that in 2016 had begun the recovery process posted further gains.
Despite the persistence of a number of sources of uncertainty, such as the Brexit negotiations and the renegotiation of NAFTA, the positive data on the state of the global economy helped to boost the general level of confidence and reduce volatility in the financial markets. In 2017, economies benefited especially from the rise in commodity prices, the recovery in global trade and, in some cases, a reduction in inflation, which enabled the implementation of more accommodative monetary policies. More specifically, growth in the euro-area economies outpaced expectations, and inflationary pressures, while mixed, gradually increased. Although the exceptional volume of liquidity in the system remains, driven by the expansionary monetary stances of the main central banks, the improvement in the macroeconomic situation prompted the ECB to reduce the volume of its asset purchases under quantitative easing and to announce the possible termination of the program, indicating its intention to begin a gradual process of normalizing monetary policy.
The United States continues to grow rapidly. Structural inflation, supported by an extremely strong labor market, is close to the 2% target, prompting the Federal Reserve to undertake a monetary tightening.
Last year was also one of economic growth in Latin America: Brazil and Argentina emerged from recession, while Peru and Mexico displayed considerable resilience to external shocks, and Colombia and Chile continued to post strong growth, albeit at a slower pace compared with previous years.
On the commodity front, over the course of 2017 the price of oil went from initial broad stability (with a low of about $45 a barrel at the end of June) to a period of steady increases, ending the year above $65 a barrel following the OPEC agreement to cut production. The price of coal was much higher than in 2016, mainly due to the sharp increase in demand in China, the high temperatures registered during the summer in southern Europe and structural difficulties in Indonesia and Australia, which limited flows of coal towards international markets. The gas market was characterized by the growing role of LNG and by a sharp increase in European demand, driven both by seasonal factors and by the reduced availability of French nuclear plants in the first part of the year, which exerted upward pressure on prices compared with the previous year.
In addition, 2017 saw a substantial and consistent recovery in electricity demand in almost all the countries in which the Enel Group operates. In particular, in Europe demand expanded by around 1% compared with the previous year, thanks to especially hot weather during the summer and cold temperatures in the latter part of the year. South America (with the exception of Argentina) also registered an expansion in electricity consumption.
The year was also characterized by an exceptional wave of drought and, consequently, poor availability of water resources, which heavily penalized hydroelectric generation in a number of key markets such as Italy, Spain and Chile.
Despite the adverse market conditions for gas and coal and the limited availability of hydro resources, the Enel Group managed to surpass the financial targets set for 2017.
In particular, the Group closed the year with ordinary EBITDA of €15.6 billion, up from €15.2 billion the previous year, outpacing the guidance provided to the market.
Ordinary net income, on which the dividend is calculated, increased by 14%, reaching €3.7 billion compared with €3.2 billion the previous year.
The 2017 dividend amounts to 23.7 eurocents per share (with an implicit pay-out of 65%), an increase of 32% compared with the 18 eurocents registered the previous year and well above the minimum dividend of 21 eurocents guaranteed to shareholders. In line with the dividend payment policy in effect since 2016, an interim dividend of 10.5 eurocents was distributed in January 2018. The ratio of FFO to net debt, an indicator of financial strength, reached 27%, in line with the target and an improvement on the 26% posted in 2016. Net debt remained broadly stable at €37.4 billion, an improvement on the guidance of €37.8 billion, despite the continuation of Group investment for growth (which in 2017 was around €8.1 billion, only slightly lower than the record level posted in 2016).
These decidedly positive results were reflected in the performance of the Enel stock, which in 2017 rose by about 21.5%. This performance was even more significant when compared with the benchmark index for the European utilities sector (Euro STOXX Utilities UEM), which rose by about 14.6%, and with the benchmark index for the Italian market as a whole (FTSE-MIB), which over the same period posted a gain of 11.7%.
With regard to industrial growth, the development of renewable energy also continued in 2017, with the installation of 2,600 MW of new capacity, of which 300 MW of managed capacity. During the year, Enel was also awarded contracts for the supply of renewable energy (through public tenders or private agreements) totaling about 5,000 MW in the Americas, Spain, Russia, Australia and Ethiopia. Significant transactions were also carried out, involving the termination of tax partnerships in the United States and the signing of disposal agreements to implement the BSO business model (“Build, Sell and Operate”) in Mexico.
Acquisitions also played a prominent role in 2017. In particular, those carried out through the new Enel X Global Business Line involved companies active in the fields of demand response, energy storage and the construction of infrastructure for electric mobility. At the same time, acquisitions in the distribution sector enabled the Group to become the second largest electricity distributor in Brazil.
One of the most important challenges in 2017 concerned the mass installation of smart meters in the countries in which the Group’s distribution companies operate. In particular, in Italy – a country historically in the vanguard on this front – the plan to replace 32 million first-generation digital meters with the new Open Meters (the second generation) was launched in June.
In 2017, the installation of 1.7 million Open Meters in Italy made it possible to activate previously unexplored functions and make progress towards the world of smart grids. In addition, in Spain more than 11 million digital meters have already been installed, of which about 2 million in 2017 alone, while in Romania about 290,000 are installed, of which more than half in 2017.
In 2017, the Group’s efforts to create an ultra-broadband fiber optic network in Italy also continued. The main transactions undertaken as part of the active portfolio management program included the purchase of minority interests in the Romanian companies and the sale of the stake in the coal mine at Bayan in Indonesia.
As part of its commitment to electric mobility, in November 2017 Enel presented a National Plan for the installation of charging infrastructure for electric vehicles. The plan provides for comprehensive coverage of Italy, with the installation of some 7,000 charging stations by 2020, rising to 14,000 by 2022.
The year 2017 was also busy on the financial front, with the issue of the first Green Bond and the launch of two bond issues on the US market. Our commitment to innovation also continued in 2017, where, in implementation of the Open Innovation strategy, the network of seven innovation hubs – including three newly opened hubs in San Francisco, Moscow and Madrid – enables the Group to seize the opportunities generated by the world’s leading innovation ecosystems and actively foster collaboration with the best startups in the world. Today, the Group boasts a portfolio of 126 active collaborations, mainly in the fields of electric mobility and smart charging, energy efficiency, advanced automation of generation plants, digitization of networks and the Internet of Things.
These results were also achieved thanks to the continuing rationalization of the organizational structure, which is now more streamlined and efficient, thanks in part to the corporate reorganization in Chile.
Strategy and forecasts for 2018
The strategy adopted in recent years, together with its effective implementation, has enabled the Group to achieve its objectives, confirming a significant capacity for generating value and the Group’s clear positioning in the ongoing energy transition. Enel is now recognized as a global leader in renewable generation and in distribution through smart grids: two key pillars in an energy context that is evolving towards the electrification of final consumption and the deep decarbonization of the energy mix.
Our industry is currently experiencing far-reaching change under the impetus of two fundamental drivers that mutually fuel and reinforce each other: digitization, with technologies that enable the roll-out of innovative processes and services at an increasingly rapid pace and at lower cost; and a focus on customers, who are ever more actively involved and equipped to choose in a more knowledgeable and informed fashion.
To lend further impetus to the strategic journey we have undertaken, the 2018-2020 Strategic Plan was presented in November 2017. It essentially confirms the substance and medium-term objectives of the Group’s strategy, incorporating 2020 within the plan horizon. The Enel Strategic Plan is the outcome of the shared efforts of management and the Board of Directors, which is called upon to approve the strategy and to periodically monitor its implementation.
In the Strategic Plan, digitization and customer focus are again the key enablers of the Enel Group’s strategy.
More specifically, the digitization of operations represents a fundamental lever for the creation of long-term value, thanks to the transformation of processes, the introduction of new systems, the continuous dialogue with technology to enhance efficiency and effectiveness, and to be increasingly resilient and flexible in responding to sudden changes in the competitive environment. For precisely these reasons, in the new Strategic Plan investments in digitization in the next three years have increased to €5.3 billion from the €4.7 billion envisaged in the previous plan. In particular, the investment plan focuses on digitizing not only grid assets (smart meters, remote control and connectivity of systems), but also the customer relationship, while at the same time promoting a stronger digital orientation among all of Enel’s people.
Customer focus will receive a significant boost from the creation of the new Enel X Global Business Line, whose commercial offer supplements the traditional business of selling electricity and gas, focusing on the delivery of valueadded services for domestic and industrial customers, and for cities, as well as on electric mobility, with the aim of generating €3.3 billion of EBITDA in 2020.
After the major gains achieved in recent years, the Group’s path of industrial growth continues to strengthen. In 2018-2020, Enel plans to allocate 70% of resources to investments for growth and 30% to maintenance activities, with a total investment of €24.6 billion. This will consolidate growth and at the same time keep the level of debt in 2020 at current levels, thanks to solid cash generation. More specifically, 80% of the investment program for growth is dedicated to mature markets, contributing to a further reduction in risk and underscoring considerable flexibility in allocating resources to the most attractive growth opportunities.
The Group also plans to continue the rationalization of existing assets over the next few years, mainly by focusing on thermal generation plants and exiting non-strategic countries. We also plan to invest up to €4.7 billion in strategic acquisitions.
People are a central element of Enel’s strategy, and for this reason the Group aims to leverage skills to an ever greater extent, as they are the engine of development and change in a vision inspired by the principles of ethics, transparency, inclusiveness, diversity, respect for human rights and maximum attention to safety.
Continuing along the road undertaken, the Strategic Plan promotes the implementation of a sustainable business model along the entire value chain, with particular reference to the 17 Sustainable Development Goals (SDGs) of the United Nations. For Enel, sustainability – in essential combination with innovation – is central to the Group’s strategy and is fully integrated with its industrial and financial dimension, fully aware that it is only possible to remain competitive in the long term and create value in a changing environment by identifying sustainable business solutions that can reduce environmental impact and increase interaction and cooperation with all stakeholders.
The actions taken by the Group in line with this vision contributed to the achievement in 2017 of some of the SDG commitments that the Group had set for 2020. In particular, Enel has confirmed and increased its specific commitment to the following SDGs:
- 800,000 beneficiaries of quality education by 2020, doubling the previous target of 400,000 beneficiaries (SDG 4);
- 3 million beneficiaries of access to clean and low-cost energy by 2020, mainly in Africa, Asia and South America (SDG 7);
- 3 million beneficiaries of employment and sustainable and inclusive economic growth by 2020, doubling the previous target of 1.5 million (SDG 8);
- in the fight against climate change (SDG 13), Enel will continue the process of decarbonizing its generation mix with the aim of reducing average CO2 emissions per kWh generated to 350 gCO2/kWheq by 2020, following the trajectory for complete decarbonization by 2050.
The Enel Group is moving forward with the process of transformation undertaken some years ago. This journey is based on the transparency and full visibility with respect to our shareholders and other stakeholders of the actions that will be undertaken in the coming years, with the aim of offering our shareholders an attractive return on their investment and generating sustainable value over the long term for all stakeholders.
Chairman of the Board
Chief Executive Officer
and General Manager