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Letter to shareholders and other stakeholders

Dear shareholders and stakeholders,

Last year was characterized by major and often rapid changes in macroeconomic conditions, in response to which Enel made significant progress in implementing our strategy, enabling the Group to seize opportunities in highly complex environments. Enel has become the European utility with the largest market capitalization, underscoring the effectiveness of our strategic approach and capacity for operational implementation.

The macroeconomic environment

The year 2016 was marked by a volatile international environment, with major events occurring in various geographical areas, including the referendum on the exit of the United Kingdom from European Union and the election of the new President of the United States at the end of the year. In the United States, data on growth and the labor market showed a positive trend, as did inflation, which in converging on the target level of 2% prompted the first long-awaited increase in interest rates by the Federal Reserve (Fed) in December 2016.
The euro-area economy displayed considerable resilience in response to a series of intra- and extra-European developments that, despite having weakened expected performance, did not prevent continued positive signs of recovery. Euro-area GDP has in fact grown steadily in recent quarters, although it is still affected by the delay in the economic recovery in a number of euro-area countries and by the persistent disparity in growth between Northern and Southern Europe.
Inflationary pressure in the euro area was below the target level of the European Central Bank (ECB), which has continued to implement an expansionary monetary policy using unconventional tools, but did announced a phased reduction of quantitative easing.
Many of the emerging economies are still suffering the effects of the end of the “commodities super cycle”, political instability and financial difficulties caused by lower revenue and capital outflows. All these factors contributed to producing one of the slowest average growth rates for the emerging economies since 2010.
Globally, commodity markets were highly volatile throughout 2016. In particular, oil prices rose from the lows posted early in the year, at around $30 a barrel, to peaks of over $50 a barrel in the latter part of the year. Coal prices, which were strongly impacted by Chinese government measures aimed initially at limiting local production and subsequently at increasing it, varied significantly, rising from lows of around $40/metric ton early in the year to double that level at the end 2016.
As for European gas, weak fundamentals in the first nine months of the year kept the benchmark TTF price at €12-14/MWh, before experiencing a sharp rise in the 4th Quarter in conjunction with the start of the winter season, increasing to €20/MWh.
Despite the high volatility of commodity prices, investments in renewable energy around the world continue to expand, confirming the trend of recent years.

The main results

For Enel, 2016 was a very positive year. The Group exceeded its targets, which had already been revised upwards during the year.
More specifically, the Group ended 2016 with ordinary EBITDA of €15.2 billion, up from €15 billion last year and better than the guidance provided to the market. Ordinary net income, which is used to calculate the dividend, increased by 12% to €3.2 billion, compared with €2.9 billion last year. The dividend for 2016 amounted to 18 eurocents per share, up 12% compared with 16 eurocents a year earlier. The FFO to net debt ratio, an indicator of financial strength, reached 26%, an improvement over the objective that the Group set itself and an increase on the 25% posted the previous year. As a result of improved cash generation, an interim dividend policy was reinstated with effect as from 2016, which saw the distribution of an interim dividend of 9 eurocents per share in January 2017. Net debt remained broadly stable at €37.6 billion, despite the significant increase in investment for growth (which rose by €1.5 billion compared with 2015) and the increase in dividends distributed.
These very positive results are reflected in the performance of the Enel stock, which in 2016 posted an increase of about 8 percentage points (+12% if one includes dividends distributed during the year). The positive performance of Enel shares is even more significant if compared with the Italian benchmark index (FTSE-MIB), which fell by 10%, and the European sector index (Euro STOXX Utilities EMU), which posted a decline of 8% over the same period.
The Group also posted significant progress towards achievement of the commitments made with regard to the Sustainable Development Goals of the United Nations (SDG), an integral part of our Strategic Plan.
Compared with the targets set for 2020, Group has already reached 75% of the goal of 400,000 beneficiaries under SDG 4 (quality education), about 50% of the 3 million beneficiaries under SDG 7 (affordable energy) and 70% of the new target of 1.5 million beneficiaries under SDG 8 (decent work and economic growth). The Group also closed 2016 having made substantial progress on SDG 13 (combat climate change) and its path towards total decarbonization of the generation mix by 2050: grams of CO2/kWheq amounted to about 395 compared with a target of less than 350 for 2020.

The main developments

With regard to industrial growth, in 2016 Enel set a record for the installation of renewables capacity in a year, exceeding the threshold of 2,000 MW built. The Group also launched a new business model denominated “BSO” (Build, Sell and Operate), a less capital-intensive approach that is intended to further accelerate the development of Enel‘s extensive global project pipeline in renewables.
In Italy, Enel presented the roll-out plan for the new generation of smart meters, which will be installed in 32 million homes and businesses and is one of the central elements of the Group‘s innovation process. The new digital meters enable users to have increasingly open, accessible, technologically advanced and sustainable power.
Also in Italy, 2016 saw the launch of a project to build an ultra-broadband network infrastructure, with the aim of seizing new opportunities for value creation available to those who can offer, with certain timing and on a competitive basis, a modern, future-proof interconnectivity infrastructure. Work also continued on the Futur-e project in Italy, which seeks to redevelop, with a circular economy approach, 23 of Enel’s thermal power stations that have come to the end of their useful life, encouraging the direct involvement of all stakeholders and local communities. To date, four sites have already been redeveloped, and design contests were launched in 2016 for another five sites.
In Spain, the roll-out of the “Cervantes” model digital meter continued last year, with mass installation scheduled for completion in 2017, well in advance of the planned deadline.
In Spain and Portugal, Enel initiated a plan for growth through the acquisition of companies distributing and selling electricity to end users. The program has already started to bear fruit and will continue in the coming years.
In 2016, environmental upgrading continued in Spain at the Litoral coal-fired plant (in Almeria), which saw unit 2 enter service in November 2016, while work on unit 1 began in December. These measures are designed to transform the plant into one of the most environmentally efficient in Europe.
With regard to activities in other countries, in December 2016 the Group won the tender for the acquisition of a major Brazilian distribution company, Celg Distribuição SA, which has about 3 million customers and a network of over 200,000 kilometers. In addition, Enel won major tenders for the construction of renewable generation capacity in Indonesia, Morocco, Mexico, Peru and Zambia.
Major transactions in Enel’s active portfolio management program included the completion of the first phase of the sale of its stake in Slovenské elektrárne, and the signing of an agreement for the sale of Marcinelle Energie,with the consequent exit of Enel from the Belgian market. The Italian upstream gas assets were also sold.
With regard to Enel’s efforts in electric mobility, we installed the world’s first vehicle-to-grid (V2G) hub in Denmark.
Using V2G technology, electric vehicles can improve the stability of the grid and further promote the integration of renewable energy in the generation mix, which is a key objective of Enel’s global energy strategy.
Moreover, in accordance with Enel’s ”Open Innovation” philosophy, an innovation hub was also opened in Israel, with a view to fostering collaboration with actors in the Israeli ecosystem.
These activities and results were also achieved thanks to a more rational and efficient organizational structure.
In 2016, the merger of Enel Green Power into Enel was completed, with the convergence of the entire hydroelectric area within the “Global Renewable Energy” business line. Enel also completed the second phase of the corporate restructuring process in Latin America, which is aimed at separating operations in Chile from those in other countries in the area. This led, in December 2016, to the listing of Enel Américas shares on the New York Stock Exchange.
Finally, in 2016, the new Enel logo and brand were presented: an important decision, one that involved the re-branding of the most visible physical assets in different countries and the launch of a new website, a new intranet and new channels of social engagement.
It represented a change in line with the evolution of the Enel culture, which, with its innovative and sustainable vision, is playing increasingly important role in the global energy scenario. A leadership that, in full implementation of “Open Power” values, aspires to contribute every day to the future of the energy world through the creation of value for shareholders and all stakeholders.

Strategy and forecasts for the year 2017

The year 2016 saw the sudden emergence of a profound transformation of the energy sector, which in the coming years will decisively impact the very nature of this industry.
The drive of technological evolution and the pervasive spread of digitization are bringing electricity to meet needs that have previously been met by fossil sources.
This growing penetration of electricity in social life and economic activity is sustaining, on the one hand, a potential reduction of greenhouse gas emissions globally and, on the other hand, represents a major opportunity for the growth and diversification of the Enel Group‘s activities.
Achieving this depends on firmly pursuing a sustainable and inclusive path of development of all the social structures in which Enel operates, and on continuing the search for efficiency and the progressive decarbonization of the Group‘s generation resources, accompanied by the digitization of assets and operating processes.
The growth process that has recovered so vigorously in recent years will also continue and accelerate, pursuing the new opportunities that technology and digitization are offering. To do this, a new global organizational unit will be created, charged with identifying and developing all the possible areas of value creation in this new field.
In November 2016, the 2017-2019 Strategic Plan was presented, updating the content of the Group's strategy. The Enel Strategic Plan, which is prepared on an annual basis, is the product of a collaborative effort between management and the Board of Directors, which is called upon to give final approval of the strategy and periodically monitor its implementation.
The Enel Strategic Plan considers sustainability, in inescapable combination with innovation, as an essential factor in creating lasting value for the Company and all its stakeholders, through the identification of new solutions to reduce environmental impact and enhance relationships with local communities. We are aware that the contribution of our business is not only gauged in financial terms, but increasingly on the basis of our ability to generate positive effects for all stakeholders. In this light, as mentioned earlier, four Sustainable Development Goals of the United Nations have been integrated in the Group Strategic Plan, for which Enel has made formal commitments regarding access to energy, quality education, decent work and economic growth, and climate action.In this latter regard, the Strategic Plan provides for the Group‘s renewable capacity to reach approximately 46 GW by 2019, including capacity through the new “BSO“ business model (Build, Sell and Operate). Today, 46% of Enel’s output is zero emissions, a figure that will reach 56% in 2019, with the objective of total decarbonization of the Group’s energy mix by 2050.
In order to achieve such a result, further development of network infrastructure will be of fundamental importance. It will have the task of integrating renewable energy sources in the electrical system, managing the bidirectional electricity flows associated with the growing share of distributed generation. For this reason, aware of the key role that networks will play, the new Strategic Plan increases investment in expanding network infrastructure in Italy and abroad, for a total of €5.8 billion between 2017 and 2019.
Today, Enel has a simpler, more focused, efficient organization, able to execute the strategy effectively and achieve the expected returns: this is underscored by the fact that the objectives that Enel had set in the previous Group Strategic Plan have been achieved well in advance, and this has allowed us to set even more ambitious targets for the coming years.
With the 2017-2019 Strategic Plan, the fundamental pillars of the strategy already in place (i.e. operational efficiency, industrial growth, the simplification of the Group structure and active management of our portfolio) have been expanded to include digitization and customer focus, two key aspects already present in the Group‘s strategy, but which we have decided to make explicit.
In an evolving macroeconomic environment, Enel is seeking to shape the future of the energy sector by applying digital innovation, not only to increase the efficiency of the business at all stages of the generation, distribution and sale of electricity, but also to offer customers increasingly innovative and quality services. For these reasons, over the horizon of the Plan, plans call for the investment of €4.7 billion to digitize the assets, operations and processes of the Group and to strengthen connectivity, in order to generate value through efficiency and growth.

Enel is a pioneer in the deep transformation of the global energy sector, well positioned to face the difficulties and challenges thrown up by often sudden changes in the scenario. The Company stands ready to use all the levers and the flexibility gained in the past three years to seize the opportunities for growth and creation of new value, which the changes taking place in the industry are making possible.

The Chairman of the Board of Directors
Patrizia Grieco
The Chief Executive Officer
Francesco Starace

L'Amministratore Delegato
Francesco Starace