Endesa (NYSE:ELE)
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Results
JANUARY-SEPTEMBER 2006
Excellent results firmly underpinned by efficient business management
Gross operating profit (EBITDA) rose 24.6% vs. 9M05 to Euro 5,479
million.
Operating profit (EBIT) advanced 32.3% to Euro 4,109 million.
Strong growth in all businesses
The Spanish and Portuguese business recorded net income of Euro 1,503
million, up 43% over 9M05.
Net income from the business in Europe rose 50.5% to Euro 426 million.
In Latin America, net income jumped by 119.4% to Euro 408 million.
These results leave ENDESA on track to easily meet 2005-2009
Strategic Plan targets, which were revised up in July 2006
Forecasts for net income and EBITDA growth for full-year 2006 are in
line with targets.
The company’s proactive business management
policy and its healthy project portfolio ensure efficient growth over
the next few years.
Net income performance is in line with the company’s
target to pay out Euro 9,900 million in dividends during 2005-2009
Results for the first nine months of 2006 confirm that the Company
will be in a position to propose a dividend payment of at least Euro
1.6 per share against this year´s earnings
at the General Shareholders' Meeting.
ENDESA’s Board of Directors has agreed to
pay a gross interim dividend of Euro 0.50 per share against 2006
earnings. This represents an increase of 63.9% on the interim dividend
paid against 2005 earnings.
KEY FACTS AND FIGURES FOR 9M06
SHARP NET INCOME GROWTH IN ALL BUSINESSES
ENDESA reports net income of Euro 2,508 million, an increase of 61.2%
vs. 9M05.
The business in Spain and Portugal posted net income of Euro 1,503
million in 9M06, an increase of 43%.
Net income from the business in Europe rose 50.5% to Euro 426 million.
Net income from the business in Latin America jumped 119.4% to Euro
408 million.
STRONG INCREASES IN MAIN INCOME STATEMENT ITEMS
The gross margin in the first nine months of the year was Euro 7,819
million, 20.3% higher than in 9M05.
EBITDA rose 24.6% to Euro 5,479 million.
EBIT increased 32.3% to Euro 4,109 million
Cash flow from operating activities totalled Euro 3,318 million, 13.3%
higher than in 9M05.
IMPROVED OUTPUT AND SHARP INCREASE IN ELECTRICITY SALES IN ALL BUSINESSES
ENDESA’s total generation output in the
first nine months of 2006 amounted to 141,029 GWh, an increase of 2.9%
on the 9M05.
Sales totalled 164,324 GWh, 9% more than in the first nine months of
2005, with increases of 9.1% in the Spanish and Portuguese business,
13.4% in Europe and 5.2% in Latin America.
THESE RESULTS LEAVE THE COMPANY ON TRACK TO EASILY MEET TARGETS SET FOR
2006 IN THE STRATEGIC PLAN
In the first nine months of the year the Company generated 79.1% and
86.5% of the full-year EBITDA and net income targets, respectively.
The Board of Directors agreed to pay a gross interim dividend against
2006 earnings of Euro 0.50 per share, 63.9% higher than the interim
dividend paid against 2005 earnings.
This dividend payment is in line with the goal of paying a dividend of
at least Euro 1.6 per share against 2006 earnings and a total of Euro
9,900 million between 2005 and 2009.
BUSINESS IN SPAIN AND PORTUGAL
Strong increases in the main income statement items against a backdrop
of regulatory change
Net income from the business in Spain and Portugal increased by 43% to
Euro 1,503 million over 9M05 and accounted for 59.9% of ENDESA's total
net income.
EBITDA grew 22.9% to Euro 2,926 million and EBIT by 29.3% to Euro
2,112 million.
The excellent performance by this business was achieved despite having
to record generation sales to the Company’s
regulated customers at the provisional price of €42.35
per MWh pursuant to Royal Decree Law 3/2006, significantly below
market prices. The negative impact of this provisional price on EBITDA
and net income was Euro 254 million and Euro 165 million, respectively.
With the enactment in 1Q06 of the regulation for the island and
non-mainland electricity systems, in 9M06 ENDESA booked Euro 197
million of higher compensation after tax for generation in these
systems between 2001 and 2005.
9M06 figures also included a Euro 1,194 million asset related to the
revenue shortfall from regulated activities in the period. Had this
asset not been recorded, the impact of the deficit on net income would
have been Euro 776 million.
Competitive position reinforced by mainland generation mix
Through September this year, which featured a major drought, ENDESA’s
hydro and nuclear generation output accounted for 42% of the mainland
generation mix, compared to 33.1% for the rest of the sector.
ENDESA’s mainland thermal plants achieved a
73% load factor in 9M06, well above the 61% average for the rest of
the sector. The load factor at the Company’s
coal plants was a noteworthy 79%.
The trend in ENDESA’s mainland unit fuel
costs in the first nine months was positive, rising just 0.1% over
9M05, despite market price increases and compared to an estimated 7.3%
rise for the rest of the sector.
Active management of CO2 emission costs
ENDESA has a broad portfolio of carbon credits derived from its Clean
Development Mechanisms (CDM) at highly competitive prices.
ENDESA signed Emissions Reduction Purchase Agreements (ERPA) for a
total of 71.9 million tonnes of CO2, Letters
of Intent (LOI) for 25.1 million tonnes of additional volume and has
projects under analysis amounting to another 104.1 million tonnes of CO2.
982 MW of new installed capacity in 9M06
ENDESA added 982 MW of new capacity to its generation facilities in
9M06, representing 74.4% of new capacity planned for the full year and
indicating significant progress in the New Capacity Plan.
New capacity includes the completion of the 400 MW Cristóbal
Colón CCGT in Huelva, 424 MW in
non-mainland systems installed to meet growing demand in these
markets, and 158 MW of new renewables/CHP capacity.
Work on the 800M MW CCGT As Pontes plant (La Coruña)
is progressing according to schedule. This plant is scheduled to be
commissioned in 2007. Group 3, 367MW conversion to imported coal.is
also on track.
In Portugal, this October the Eólicas de
Portugal consortium – in which ENDESA has a
30% stake – was awarded the project to
develop 1,200 MW of wind capacity, the largest in the Portuguese wind
tender.
ENDESA, together with International Power, has been awarded a
connection point for two 400MW CCGTs at the Tejo site. The operating
license should be awarded before the end of this year.
Strong growth in EBIT from CHP and renewables: +33.3%
Revenues from sales of renewable/CHP energy generated by ENDESA’s
consolidated companies totalled Euro 195 million, 29.1% more than in
the first nine months of 2005.
EBITDA from this business increased by 33.3% to Euro 132 million, and
EBIT by 32.3% to Euro 86 million.
Service quality at record high levels; value unlocked at the supply
business
In 9M06 the cumulative average interruption duration index (SAIDI) was
1 hour and 39 minutes, an improvement of 9% vs. 9M05.
These figures confirm the success of the operational enhancements
implemented and investments made in new distribution infrastructure in
recent years. They enable the Company to consolidate its market
position and leverage the value of its broad customer base, which
currently stands at 11,139,395 in the regulated market and 1,084,386
in the deregulated market.
Sales by ENDESA in the deregulated market rose 5% to 28,802 GWh in 9M06,
with an average sales price at €73 per MWh.
This activity represents an important hedge against wholesale market
prices volatility, as well as providing the generation business with a
reasonable and guaranteed return over the medium and long term.
The largest investor of any Spanish utility
ENDESA invested Euro 1,725 million in Spain and Portugal in 9M06, of
which Euro 1,549 million, or 89.8%, was capex. This underscores its
status as the largest investor among Spanish utilities.
Euro 854 million of capex was spent on distribution facilities.
Total market share of 11.9% in the natural gas market
ENDESA sold a total of 19,603 GWh in the Spanish natural gas market in
9M06, 21.6% more than in 9M05. These sales, coupled with gas
consumption by its own plants, represent a market share of 11.9%.
Gas sales revenues in the deregulated market in the first nine months
of 2006 totalled Euro 458 million, up 112% from 9M05, while regulated
gas distribution revenues were Euro 33 million, an increase of 3.1%.
Combined, these two businesses contributed a gross margin of Euro 109
million.
BUSINESS IN EUROPE
Growth in the main financial items underscores the strength of the
business
Net income from the business in Europe increased by 50.5% to Euro 426
million in 9M06 and accounted for 17% of ENDESA’s
total net income.
This figure includes Euro 118 million after minorities related to the
increase in value of this business caused by the restatement of the
tax base of Endesa Italia’s fixed assets to
their book values, in accordance with Italian legislation.
EBITDA stood at Euro 890 million, up 26.8% versus 9M05, and EBIT at
Euro 693 million, an increase of 34.6%.
Excellent results underpinned by strong operating performance
ENDESA’s total generation in Europe in the
first nine months of 2006 amounted to 26,443 GWh, an increase of 8.3%
on the year before.
Electricity sales were up 13.4% to 38,913 GWh.
Italy: strong growth in main financial indicators plus progress on new
capacity and regasification projects
EBITDA from Endesa Italia was Euro 739 million, 31.7% higher
than in 9M05, while EBIT reached at Euro 622 million, a 36.4% increase.
Construction on the two 400MW CCGTs at the Scandale plant (Calabria),
in which Endesa Italia owns 50%, is proceeding according to schedule,
as is the preliminary work on the offshore regasification terminal off
Livorno, which is scheduled to come on-stream at the end of 2008.
In September, Endesa Europa acquired 58.35% of Centro Energia Teverola
and Centro Energia Ferrara. Each of these companies owns a 150 MW CCGT
subject to a subsidised tariff.
In line with planned growth in renewable energies, the company added
14 MW Iardino wind farm to its generation mix, and will include 42 MW
Montecute wind farm, completed on October 6, as well as Vizzini and
Trapani wind farms with a combined capacity of 56 MW, scheduled to
come on stream on November.
In the first nine months of the year, Endesa Italia sold 24,914 GWh of
electricity, of which 11,700 GWh, or 47%, were accounted for by direct
sales and sales to large end customers. Thus, the supply business goes
a long way to ensuring placement of the business’
significant generation capacity.
France: Good performance of Snet with significant new capacity projects
and new supply contracts
In 9M06, French generator Snet contributed Euro 147 million to ENDESA’s
EBITDA, 8.1% more than in 9M05, and Euro 70 million to EBIT, an
increase of 29.6%.
Total electricity sales amounted to 13,888 GWh, an increase of 24.4%
over 9M05.
Snet closed significant supply deals during the period. It signed an
agreement with the French multinational company Auchan to supply 400
GWh of power in 2006 and another with the French railway operator SNCF
to supply 6,600 GWh in the period 2007-2011.
In the generation business, after receiving the pertinent permits,
Snet has begun building a 800 MW CCGT Émile
Huchet site. Meanwhile, the development of an additional 800 MW CCGT
in Lacq and another with capacity of over 400 MW, which could be
located its Lucy or Hornaing sites is being studied.
In addition, Snet has acquired the right to build a 10 MW firm wind
farm in Léhaucourt during the current year
and has committed to new wind projects in other regions such as Ambon,
Muzillac and Cernon, adding a combined capacity of nearing 65 MW.
BUSINESS IN LATIN AMERICA
Sharp increases in main financial figures, underscoring progress by this
business
ENDESA’s Latin American operations posted a
119.4% increase in 9M06 net income to Euro 408 million, contributing
16.3% to the Company's total net income.
EBITDA and EBIT rose 25.7% and 35.3% to Euro 1,663 million and Euro
1,304 million, respectively.
Increases in EBITDA and EBIT were attained in both generation and
transmission business (+22% and +29.4%, respectively) and in
distribution (+33% and +46.6%, respectively), highlighting the strong
business momentum, underpinned by its operating performance.
Increased margins in generation and distribution
The generation unit margin reached US$25.1 per MWh in 9M06, an
increase of 21.8% compared to 9M05, and the distribution unit margin
reached US$35.9 per MWh, an increase of 17.8%.
Sharp generation, distribution and sales pick-up and lower energy losses
across all countries
ENDESA’s total generation in Latin America
in the first nine months of 2006 amounted to 46,364 GWh, a
like-for-like increase of 8.7% on the year before, while distribution
increased 5.2% to 43,175 GWh. The Company recorded significant
increases in both generation and distribution in all its countries of
operation.
Organic growth of the markets in which ENDESA operates drove total
revenues from its Latin American companies 22.6% higher in 9M06.
ENDESA’s total customer base in Latin
America was 11.5 million at September 30, 2006, i.e., 300,000 more
than at the beginning of the period.
Energy distribution losses were lower in all countries in 9M06, most
notably in Brazil, where losses were down 0.7 percentage points as
compare to 9M05.
New generation facilities
Capacity at ENDESA’s Latin American
companies so far this year increased by 358 MW as a result of
contribution of the Termocartagena plant (Colombia) and completion of
the first CCGT at the Ventanilla plant (Peru).
In 3Q06, work continued on schedule on the construction of the 377 MW
San Isidro II CCGT and of the 32 MW Palmucho hydro facility, both in
Chile.
In the same period, Endesa Chile incorporated Centrales Hidroeléctricas
de Aysén, 51%-owned by ENDESA’s
subsidiary, Endesa Chile, and 49% by Colbún.
The purpose of this new company is to analyse, finance, build and
operate the Aysén Project, which consists
of four hydro plants with a total capacity of 2,355 MW. Construction
is currently scheduled to begin in 2008.
Cash return target for 2009: 43% achieved
Cash returns from ENDESA’s Latin American
business to the parent company in the first nine months of the year
totalled Euro 125 million.
This, coupled with the Euro 308 million achieved in 2005, means that
43% of the target for 2009 in the Strategic Plan has now been achieved.
Debt reduction
Net debt in the Latin American business declined by 5.4%, or Euro 329
million, in 9M06 to Euro 5,780 million as of September 30, 2006.
DISPOSALS
Pursuant to an agreement reached on December 2005, in 1Q06 ENDESA sold
its 5.01% stake in telecoms operator Auna to Deutsche Bank. This deal,
which generated net capital gains of Euro 171 million, marked a full
disposal of the Company’s telecom business –
one of the main goals of the Strategic Plan.
In May, ENDESA sold its 49% stake in the Portuguese company NQF Gas
for Euro 59 million, booking a net capital gain of Euro 21 million.
In the second quarter, the generation business of Brazilian company,
Ampla –whose core business is the
distribution and sale of electricity to over 2 million customers–
was sold for Euro 39 million, generating a gross capital gain of Euro
30 million and net capital gains after taxes and minorities of Euro 12
million.
In the third quarter, ENDESA sold, through its subsidiary Bolonia Real
Estate, assets on the so-called “Levante
Sector” of Palma de Mallorca to the Neinver
Group for Euro 240 million, generating a net capital gain of Euro 165
million.
SUSTAINABILITY
In September 2006, ENDESA was rated the leading electric utility in
Europe and the world for its commitment to sustainable development,
according to the Dow Jones Sustainability World Index and Dow Jones
Sustainability Stoxx Index, respectively. These indices, regarded as
global benchmarks in the field of sustainability, select the leading
companies from across different industries that stand out for their
commitment to making sustainable development one of the cornerstones
of their business strategy.
ENDESA has been selected for inclusion in these indices for the sixth
year in a row. Some of the areas where ENDESA was most highly rated
this year include codes of conduct, customer relations, environmental
policy, climate change strategy, workplace health and safety, and
social initiatives.
DIVIDENDS
On July 3, ENDESA paid its final dividend against 2005 results. As
approved at the General Shareholders’
Meeting held on February 25, the Company made a gross dividend payment
of Euro 2.095 per share, bringing total shareholder remuneration
against last year’s results, including the
gross interim dividend of Euro 0.305 paid out on January 2, 2006, to
Euro 2,541 million.
Results for the first nine months of 2006 confirm that the Company
will be in a position to propose at the General Shareholders’
Meeting the payment of a dividend of at least Euro 1.6 per share
against earnings this year, of which around Euro 1.27 will be
generated by net income from ordinary activities and the remainder
from capital gains arising from the disposal of non-core assets.
To this end, the Board of Directors of ENDESA, in its meeting on
October 24, 2006, agreed to pay a gross interim dividend against 2006
earnings of Euro 0.50 per share, representing a 63.9% increase on the
interim dividend paid against 2005 earnings.
CONSOLIDATED RESULTS
Net income up 61.2%
ENDESA reported net income in 9M06 of Euro 2,508 million, a 61.2%
increase on 9M05.
This increase includes the net impact of the Euro 396 million of capital
gains obtained on asset sales made in the first nine months of the year,
of which Euro 171 million correspond to the sale of the 5.01% stake in
Auna to Deutsche Bank and Euro 165 million from the Palma de Mallorca
real estate sell to Neinver Group.
Stripping out these capital gains from both periods, growth in net
income in 9M06 vs. 9M05 was 58.2%.
NET INCOME IN 9M06
Euro million
% Chg vs. 9M06
% of total NI
2005*
% of total NI
2006*
Spain and Portugal
1,503
43.0
69.2
64.3
Europe
426
50.5
18.6
18.2
Latin America
408
119.4
12.2
17.5
Capital gains from sale of 5.01% stake in Auna
171
--
--
--
TOTAL
2,508
61.2
100.0
100.0
(*) Only net income from electricity businesses.
We note that this sharp increase in net income, due essentially to good
operating performance of all the Company's business lines, has been
achieved despite a scenario which has been existing for the last 12
months triggered by various corporate operations directed at ENDESA.
This shows how the Company has been able to uphold the excellence of its
management team and roll out its Strategic Plan within this special
context.
Net income growth across all the Company’s
businesses
The business in Spain and Portugal posted net income of Euro 1,503
million in 9M06, an increase of 43% on 9M05.
This includes Euro 197 million of higher compensation, net of tax, from
the non-mainland generation deficit for the period 2001-2005 pursuant to
Ministerial Orders passed on March 30, 2006.
In Europe, net income advanced 50.5% to Euro 426 million. This figure
includes Euro 118 million, net of minority interests, related to a
write-up in the valuation of this business as Endesa Italia revalued the
tax bases of its fixed assets to their book values, as allowed by
current legislation in Italy.
Finally, net income for Latin America was Euro 408 million, 119.4% more
than in 9M05. This figure includes Euro 101 million, net of minority
interests, from a tax credit carryforward derived from the
Elesur-Electra merger.
Total electricity sales up significantly: +9%
Both electricity output (+2.9%) and electricity sales (+9%) rose in the
first nine months vs. 9M05.
Increases were particularly high in the European and Latin American
businesses, where output rose by 8.3% and 8.2%, respectively, amply
offsetting the 2.2% drop in output in Spain.
Total electricity sales in the Spanish and Portuguese, European and
Latin American businesses rose by 9.1%, 13.4% and 5.2%, respectively.
ELECTRICITY OUTPUT AND SALES IN 9M06
Output
Sales
GWh
% Chg. vs. 9M05
GWh
% Chg. vs. 9M05
Spain and Portugal
68,222
(2.2)
82,236
9.1
Rest of Europe
26,443
8.3
38,913
13.4
Latin America
46,364
8.2
43,175
5.2
TOTAL
141,029
2.9
164,324
9.0
Appropriate output/sales balance
ENDESA met 85.8% of its total electricity sales in 9M06 from its own
output.
This balanced situation between production and demand should
considerably mitigate the risk of its electricity business and provides
ENDESA with a significant competitive advantage.
Revenue growth outstrips costs
The Company’s total revenues in the first
nine months of 2006 amounted to Euro 14,847 million, an increase of
17.4% on the year before, outstripping growth in physical electricity
sales.
Sales growth was greater by value than by volume because of increases in
electricity prices in countries were the Company operates due to higher
power generation costs.
The growth in sales in 9M06 covered the 16.9% increase in purchases and
service expenses (variable costs), which was caused by increases in fuel
costs and energy purchases.
Sharp growth in key income statement line items
As revenue growth offset the increase in costs, the company reported
significant rises in gross margin (+20.3%), EBITDA (+24.6%) and EBIT
(+32.3%).
Gross margin
EBITDA
EBIT
Euro
million
% Chg vs.
9M05
Euro
million
% Chg vs.
9M05
Euro
million
% Chg vs. 9M05
Spain and Portugal
4,339
18.6
2,926
22.9
2,112
29.3
Rest of Europe
1,137
20.4
890
26.8
693
34.6
Latin America
2,343
23.8
1,663
25.7
1,304
35.3
TOTAL
7,819
20.3
5,479
24.6
4,109
32.3
Net financial expenses: -9.6%
ENDESA reported net financial losses of Euro 720 million in 9M06, a 3.7%
improvement over 9M05.
Net financial losses were lower despite the fact that in 9M06 the trends
in the exchange rates in which the Group’s
debt is denominated led to a Euro 50 million decrease in exchange-rate
gains.
Net financial expense totalled Euro 736 million, down 9.6% on 9M05. This
figure includes financial revenue of Euro 31 million related to the
portion not recorded as of December 31, 2005 of the interest accrued on
compensations derived from non-mainland generation deficit calculated in
accordance with Ministerial Orders passed on March 30.
Increase in net debt caused by financing revenue deficit on regulated
activities in Spain does not impact net financial expenses. Both the
cumulative amount of the deficit financed and the amounts pending
collection as compensation for the non-mainland generation deficit earn
interest that offset the expenses.
Asset disposals
1Q06 marked the end of the period for Auna shareholders to exercise
their pre-emptive rights on the 5.01% stake ENDESA sold to Deutsche Bank
on December 30, 2005. After the end of this period, the sale of these
shares was formalised and all the conditions required under
International Financial Reporting Standards (IFRS) regarding
derecognition of the shares from ENDESA’s
balance sheet and recognition of the related capital gain in its income
statement have been met.
Therefore, as indicated in ENDESA’s
consolidated financial statements for the year ended December 31, 2005,
in 9M06 the Company recorded a capital gain of Euro 196 million (Euro
171 million after tax) for the sale of the aforementioned investment.
With this disposal, the “Other businesses”
line has been removed from ENDESA’s accounts,
so for the rest of 2006, this capital gain will be the only entry under
this caption.
In addition, in 2Q06, ENDESA sold its 49% holding in NQF Gas for Euro 59
million, booking a capital gain of Euro 27 million (Euro 21 million net
of taxes) and sold off generation assets of Brazilian operator, Ampla,
for Euro 39 million, recording a gain of Euro 30 million (Euro 12
million after taxes and minorities).
Finally, in 3Q06, and as part of ENDESA’s
strategic goal of maximising value of its real estate assets, the
Company, through its subsidiary Bolonia Real Estate sold assets through
a competitive process in the so-called “Levante
Sector” of Palma de Mallorca to the Neinver
Group. The assets sold include planning rights for approximately 180,000m2.
In addition, the Company made a financial investment in the Neiver Group
company, which will head up the land’s
development, taking a 45% stake. The sole purpose of this investment is
to participate, based on its percentage ownership, in potential
additional capital gains that could arise from future development of the
land in question. ENDESA will not participate in the management of this
company and its investment risk is limited to the amount of capital
contributed.
The total deal size is Euro 240 million, generating a gross capital gain
of Euro 185 million (Euro 165 million after-tax), net of the costs of
transferring the electric facilities that were located on the land and
the cost of the 45% equity stake taken in the development company.
Cash flow from operating activities: +13.3%
Cash flow from operating activities in 9M06 was Euro 3,318 million, up
13.3% on 9M05.
CASH FLOW FROM OPERATING ACTIVITIES
Euro million
% Chg vs. 9M05
Spain and Portugal
1,876
12.4
Rest of Europe
531
5.8
Latin America
911
18.9
TOTAL
3,318
13.3
Investment: Euro 2,682 million
ENDESA invested a total of Euro 2,682 million in 9M06, of which Euro
2,396 million was capex and intangible assets while the remaining Euro
286 million was invested in financial investments.
INVESTMENTS
Euro million
Capex and
intangible assets
Financial
TOTAL
Spain and Portugal (1)
1,620
105
1,725
Rest of Europe
166
138
304
Latin America
610
43
653
TOTAL
2,396
286
2,682
(1) Additionally, a financial investment of Euro 1,194 million
for the revenue deficit from regulated activities in 9M06 and Euro
101 million from the restatement of the 2005 deficit was booked.
Debt performance
ENDESA’s net debt was Euro 21,016 million as
of September 30, 2006, 15% higher than at year-end 2005.
BREAKDOWN BY BUSINESS LINE OF ENDESA’S
NET DEBT
Euro million
30/9/06
31/12/05
Change
% Chg
Business in Spain and Portugal
13,731
11,461
2,270
19.8
Business in Europe
-Endesa Italia
-Other
1,505
730
775
1,286
815
471
219
(85)
304
17.0
(10.4)
64.5
Business in Latin America
-Enersis Group
-Other
5,780
4,836
944
6,109
5,207
902
(329)
(371)
42
(5.4)
(7.1)
4.7
Other businesses (1)
--
(575)
575
NA
TOTAL
21,016
18,281
2,735
15.0
(1) At September 30, 2006, there was no debt assigned to “Other
businesses”, as this business line
disappeared as such with the sale of the 5.01% stake in Auna
completed in February 2006. The remaining debt balance was
included in the electricity business in Spain and Portugal.
The increase in debt in Spain and Portugal is due to the need to finance
the tariff deficit in 2005 and the first nine months of 2006. In 9M06,
ENDESA paid Euro 1,417 in this regard. It also reflects the Euro 1,341
million dividend payment made in July in connection with the capital
gains realised in 2005 and which led to a debt reduction in that year.
The distribution of this income to its shareholders was approved at the
General Shareholders’ Meeting.
In Europe, the Euro 219 million increase in debt was caused by the
corporate income tax payment the Company had to make in the second
quarter. It also reflects the growth capex made during the year.
In Latin America, debt was reduced by Euro 329 million in the first nine
months of 2006.
When assessing ENDESA’s debt level, it must
be remembered that at September 30, 2006, ENDESA had the recognised
right to collect Euro 4,207 million in connection with several
regulatory matters: Euro 2,904 million for financing the revenue deficit
from regulated activities, Euro 1,281 million in compensation for the
non-mainland generation deficit and Euro 22 million of stranded costs in
Italy. Stripping out the amounts from these regulatory items, ENDESA’s
net debt at September 30, 2006 was Euro 16,809 million.
At the end of this month (October), ENDESA granted exclusive
securitization of the Euro 1,710 million collection rights corresponding
to the financing of the revenue deficit for regulated activities carried
out by ENDESA in 2005. The contract governing the transfer of the
collection rights will be formalised in November, leaving room for a
significant reduction in debt.
The average cost of ENDESA’s total debt was
5.49% in 9M06, while cost of debt corresponding to the ENERSIS Group was
9.27%. Stripping out Enersis Group debt, the average cost of ENDESA’s
debt was 4.11%.
STRUCTURE OF ENDESA’S NET DEBT
ENDESA
and direct subsidiaries
Enersis
Group
Total
ENDESA Group
Euro
million
% of
total
Euro
million
% of
total
Euro
million
% of
total
Euro
16,115
100
--
--
16,115
77
Dollar
65
-
2,594
54
2,659
13
Other currencies
--
-
2,242
46
2,242
10
Total
16,180
100
4,836
100
21,016
100
Fixed rate
8,345
52
3,950
82
12,295
59
Hedged
1,815
11
99
2
1,914
9
Variable
6,020
37
787
16
6,807
32
TOTAL
16,180
100
4,836
100
21,016
100
Avg. life (years)
5.0
5.3
5.1
The average life of the ENDESA Group’s debt
at September 30, 2006 was 5.1 years.
ENDESA enjoys a high degree of protection against interest-rate risk,
since 68% of its total debt is either fixed-rate or hedged. When
stripping out pending regulatory assets in Spain, which carry
floating-rate interest, this percentage rises to 79%.
As of September 30, 2006, ENDESA in Spain and its direct subsidiaries,
excluding the Enersis Group, had liquidity of Euro 6,159 million, of
which Euro 5,756 million corresponded to unconditional undrawn credit
lines. These balances are sufficient to cover the debt falling due over
the next 20 months.
In addition, the Enersis Group had liquidity of Euro 1,317 million, of
which Euro 492 million corresponded to unconditional undrawn credit
lines from two syndicated loans. This liquidity covers debt maturities
for the next 21 months.
Financial leverage stood at 128.8% at September 30, 2006, 6.2 percentage
points below the level a year earlier.
As a result of Gas Natural’s takeover bid for
ENDESA launched in September 2005, the ratings agencies Standard & Poor’s
and Fitch Ratings decided to place ENDESA’s
credit rating under review for a possible downgrade, while Moody’s
changed its rating outlook from stable to negative.
In all three cases, changes were due to the negative impact the
transaction would have, were it to go ahead, on the new company’s
financial position. As a result, as of October 25, 2006, ENDESA’s
long-term debt ratings are: Standard & Poor’s,
A, under review for a possible downgrade; Moody’s,
A3, negative outlook, and Fitch, A+, under review for a possible
downgrade.
STRATEGIC PLAN PROGRESS
Results achieved by ENDESA in the first nine months of 2006 ensure that
the targets of its Strategic Plan for 2005-2009, which were revised
upwards and released to the markets on July 25, will be met.
These targets are as follows:
EBITDA of Euro 6,930 million in 2006 and Euro 8,330 million in 2009.
Net income of Euro 2,900 million in 2006 and Euro 3,000 million in
2009.
Pay out to shareholders no less than Euro 9,900 million against
earnings for 2005-2009, of which Euro 7,600 million will be generated
by net income from ordinary activities and the remaining Euro 2,300
million from the disposal of non-core assets.
Financial leverage below 140%.
With regard to the EBITDA target, we would point out:
ENDESA reported EBITDA of Euro 5,479 million in 9M06, meeting in nine
months 79.1% of its target for the full year. This target has been 78%
met in Spain and Portugal, 80.9% in Europe and 80% in Latin America.
The EBITDA figure represents an increase of 24.6% vs. 9M05, compared
to the 15.1% which would be required to meet the FY06 target.
On the other hand, EBITDA for the last 12 months i.e. October 2005 –
October 2006, stands at Euro 7,100 million, higher than the FY06
target.
This would suggest that the EBITDA target for 2006 will easily be met.
The Company recorded net income of Euro 2,508 million in 9M06,
generating 86.5% of its FY06 target.
Results for the first nine months of 2006 confirm that the Company will
be in a position to propose at the General Shareholders’
Meeting the payment of a dividend of at least Euro 1.6 per share
against earnings this year, of which Euro 1.27 will be generated by net
income from ordinary activities and the remainder (i.e. no less than
Euro 0.33) from capital gains arising from disposal of non-core assets.
If this dividend payment is approved at the Shareholders’
Meeting, ENDESA will have paid out to its shareholders a total of at
least Euro 4,235 million in dividends against 2005 and 2006 earnings,
i.e. 42.8% of the Euro 9,900 million put aside for this concept in the
period 2005-2009.
Lastly, ENDESA’s leverage stood at
128.8% on September 30, 2006, 11.2 percentage points ahead of its
Strategic Plan target.
In short, the results obtained through September 30, 2006 confirm that
commitments to shareholders and the market assumed by the Company are
being met ahead of schedule.
These results are due largely to the business management strategy rolled
out by ENDESA since the presentation of its Strategic Plan back on
October 2005, despite various corporate transactions launched in the
last 12 months
Maintaining these basic management guidelines in each business line,
coupled with the positive outlook on markets where the company operates
and with their respective regulatory frameworks, as well as projects in
place in each area to maximise organic growth, puts ENDESA on sound
footing to meet all its targets.
RESULTS BY BUSINESS LINE
BUSINESS IN SPAIN AND PORTUGAL
Net income up 43% to Euro 1,503 million
Net income from this business was Euro 1,503 million in 9M06, an
increase of 43% on 9M05 and equivalent to 59.9% to the Company’s
overall bottom line.
EBITDA rose 22.9% to Euro 2,926 million and EBIT by 29.3% to Euro 2,112
million.
These outstanding results are underpinned by active business management
with the goal of leveraging the Company’s
solid fundamentals and competitive advantages in an environment of
significant regulatory change throughout the period.
In terms of operating management, we highlight the maintenance of an
appropriate balance between output and sales, an enhanced generation mix
in the mainland, high load factors at its thermal facilities compared to
its peers, a slowdown in fuel price increases, progress on the New
Capacity Plan, record supply quality levels, ongoing supply activities
to hedge against trends in wholesale prices and an active presence in
the CDM market, which yielded enough emission rights certificates to
meet its commitments on emission reductions in Spain and the rest of
Europe.
On the regulatory front, the negative impact on 9M06 figures from
booking electricity sold to regulated customers in areas where ENDESA
acts as distributor at the provisional price of Euro 42.35 per MWh
established in Royal Decree Law 3/2006 was Euro 254 million. This effect
is only temporary, so the negative impact should be recovered once final
price is established based on objective and transparent market criteria,
as provided for in the same Royal Decree Law.
In 9M06, ENDESA recorded under revenues the amount corresponding to
compensation for the non-mainland generation historical deficit
calculated in accordance with the Ministerial Orders passed on March 30,
2006, which was above the amounts booked at December 31, 2005. This
concept amounted to Euro 227 million and was booked as revenues. At 31
December 2005, these compensations earned Euro 31 million of interest,
recognised as financial revenue. The impact of these amounts on ENDESA’s
net income is Euro 197 million.
Key operating highlights
ENDESA maintained its leading position in the Spanish electricity market
in the first nine months of the year.
The Company reached a 34.7% market share in ordinary regime electricity
generation, a 43.1% share in electricity distributed, 54.4% in sales to
deregulated customers and 41.6% in total sales to final customers.
Competitive advantages in generation relative to peers
In Spain, the Company produced a total of 68,222 GWh in the first nine
months of 2006, compared to total demand of 82,236 GWh. This means it
met 83% of its demand from its own output.
In addition, nuclear and hydro powered energy represented 42% of the
Company’s mainland generation mix in 9M06,
compared to 33.1% for the rest of the sector. Furthermore, at 73%, the
load factor at its thermal facilities was also higher than at its
competitors (61%). The load factor at the Company’s
coal plants was a noteworthy 79%.
All this on top of a positive trend in ENDESA’s
mainland unit fuel costs in the first nine months, which rose just 0.1%
over 9M05, compared to an estimated average 8.7% increase for the rest
of the sector.
982 MW of new installed capacity in 9M06
ENDESA added 982 MW of new capacity to its generation facilities in
9M06, marking significant progress in the New Capacity Plan.
The breakdown of this new capacity is as follows:
The completion and connection to the network of the 400 MW Cristóbal
Colón CCGT in Huelva. When the CCGT begins
commercial operations it will replace the capacity of the plant’s
existing fuel and fuel-oil/gas groups.
New installed capacity on the mainland and non-mainland systems of 424
MW, in line with growing demand in these markets.
158 MW in renewables/CHP.
In addition, construction of the 800MW CCGT and transformation of the
367MW group 3 at the As Pontes site in La Coruña
to imported coal continued on schedule.
With regards to the business in Portugal, on October the Eólicas
de Portugal consortium – in which ENDESA has
a 30% stake – was awarded the project to
develop 1,200 MW of wind capacity, the largest in the Portuguese wind
tender.
Also, ENDESA, together with International Power, has been awarded a
connection point for two 400MW CCGTs at the Tejo site. The operating
license should be awarded before the end of this year.
Market performance: an all-time record in supply quality and value
unlocked at the supply business
As already mentioned, in 9M06 ENDESA’s total
demand in Spain measured through its sales was 82,236 GWh. This
represents a 9.1% increase on 9M05, compared to an average increase of
3.2% for the overall Spanish electricity sector.
The number of customers serviced by ENDESA in the regulated market
reached at 11,139,395 million at September 30, 2006, i.e., 173,158 more
than at the beginning of the period.
In 9M06, the cumulative interruption index in ENDESA’s
markets was 1 hour and 39 minutes, an improvement of 9% vs. 9M05.
These figures confirm the solid and positive trend in the continuity of
supply by ENDESA across all markets served in Spain, reflecting the
success of significant investments made in distribution facilities in
recent years and the efficiency enhancements implemented, also in the
distribution business, within the framework of its Quality Plan.
In the deregulated market, ENDESA ended September with 1,084,386
customers, 12.7% more than the year earlier. The Company’s
position in this market provides a hedge against the volatility of pool
prices and other regulatory and market risks, as well as providing the
generation business with a reasonable and guaranteed return over the
medium and long term.
Carbon credit purchases
ENDESA presently boasts a broad portfolio of carbon credits derived from
its Clean Development Mechanisms (CDM) at a highly competitive average
price.
Specifically, the Company has signed Emissions Reduction Purchase
Agreements (ERPA) for a total of 71.9 million tonnes of CO2,
Letters of Intent (LOI) for 25.1 million tonnes of additional volume and
has projects under analysis amounting to another 104.1 million tonnes of
CO2.
The emission rights acquired under these agreements will allow ENDESA to
meet its CO2 emission reduction commitments
for its operations in Spain, Portugal, France and Italy required by the
Directive on Emissions Trading.
With these, ENDESA is still the leading private purchaser of carbon
credits, via the “Endesa Climate Initiative”,
a pioneering program in this arena though which it has obtained
contracts representing more than 7.5% of the total ERCs (emission rights
certificates) corresponding to all the projects currently registered
with the UN.
NAP 2008-2012: compatible with the ENDESA’s
competitive generation portfolio
On July 12, 2006, the government unveiled details of its proposed
2008-2012 National Allocation Plan for emission rights. Based on
analysis conducted to date on the methodology set out, ENDESA believes
that the allocation that will be made, together with its portfolio of
carbon credits, guarantees that the Company’s
generation assets will operate on a fully efficient and competitive
basis and furthermore is fully compatible with the targets contained in
its Strategic Plan.
We would highlight that:
In terms of allocation of rights to coal plants, preference is
granted, in accordance with the provisions of the National Mining
Plan, to those using Spanish coal and plants that have made
technological modifications to comply with the Community Directive on
Large Combustion Plants (desulphurisation scrapers, conversion to
imported coal, etc.), which means that all of ENDESA’s
coal plants would be applicable for this criteria.
In relation to thermal plants in non-mainland systems, the incremental
costs that could arise from an emission rights deficit would be fully
recognised for purposes of remuneration of generation activities,
pursuant to the provisions of Royal Decree 1,747/2003 and the
Ministerial Orders dated March 30, 2006.
Regulatory update for 9M06
Real Decree Law 3/2006
Royal Decree Law 3/2006, enacted towards the end of February, entailed
material changes that affected power generation revenues in the period.
Since March 3, 2006, sales to the wholesale generation market that
match purchases by a distributor belonging to the same group for sale
to the regulated market are settled at the provisional price of Euro
42.35 per MWh. ENDESA’s accounts since that
date have been drawn up based on this price. However, the Royal Decree
Law stipulates that the government will set the definitive price based
on objective and transparent market prices. Therefore, if generation
costs remain at 9M06 levels during the rest of the year, the final
price will be significantly higher, meaning that ENDESA’s
reported revenues and income will be higher than those appearing in
these accounts.
The amount finally recognised for each business group for financing
the deficit in regulated revenues in 2006 will be deducted by the
value of free CO2 emission rights received
during the period from January 1 and March 2, 2006.
As the norm for making this calculation has not been fully defined,
ENDESA has opted to be conservative, calculating the proportional part
of the period of freely allocated emission rights received in 2006 and
assessing the value taking the average market price in the first two
months of 2006. This methodology gives an amount of Euro 121 million,
recognised as a decrease in revenues from generation sales and a
decrease in the amount receivable to be recouped from the tariff deficit.
Since March 3, 2006, revenues from power sales on the OMEL organised
market at the established price for the market are reduced by the
value of the freely allocated emission rights related to those
revenues.
Since some aspects of the new legislation are provisional, as indicated,
the accounting entries at September 30, 2006 related to its application
are likewise provisional until detailed norms are enacted and the
corresponding settlements are made.
The tariff deficit
The increase in electricity tariffs implemented in 2006, the measures
enacted by Royal Decree Law 3/2006 to reduce the deficit in revenues
from regulated revenues and the reduction in the amount allocated to the
nuclear moratorium have increased the system’s
regulated revenues. However, these adjustments have been insufficient to
cover the system’s entire costs, particularly
generation costs. This led to a deficit in revenues from regulated
activities, estimated at Euro 2,978 million, of which Euro 1,315 million
corresponds to ENDESA.
Of this amount, Euro 121 million corresponding to provisional valuation
of the free CO2 emission rights allocated to
ENDESA in the first two months of the year as established by Royal
Decree 3/2006 were deducted from generation revenues and the remaining
Euro 1,194 million were booked as a financial investment. This
accounting methodology is consistent with the right recognised by law to
recoup the amount, regardless of the fact that its formal recognition
and the exact manner in which it will be recovered will not be regulated
until the end of the fiscal year.
Had this Euro 1,194 million of recoverable revenue shortfall on
regulated activities not been booked as a financial asset, revenues,
EBITDA and EBIT would be lower by that exact amount and net income by
Euro 776 million.
Completion of the regulatory framework for non-mainland systems
On March 30, 2006 the Ministry of Industry, Tourism and Trade approved
the Ministerial Orders which fully develop Royal Decree 1747/2003
governing Spain’s mainland and non-mainland
systems. These orders establish the methodology for calculating
regulated remuneration on generation in these systems and, accordingly,
the compensation to be received by the utilities operating in them.
Application of the orders gives rise to compensation of Euro 902 million
to ENDESA for the 2001-2005 period over the provisional amounts
envisaged in the subsequent Royal Decree tariffs of each year. To
December 31, 2005, ENDESA’s financial
statements recognised revenues for this concept of Euro 644 million,
recording the remaining Euro 258 million in 9M06. Of this amount, Euro
227 million were booked as revenues and the remainder, i.e. Euro 31
million, as financial revenues as they correspond to interest accrued.
With the regulatory framework in place, the mainland and non-mainland
generation business is guaranteed sufficient revenues going forward to
meet the costs of the business and allow for appropriate fuel price
hedges, while ensuring a reasonable return.
July 1, 2006 tariff revision
On June 30, the Spanish Cabinet passed Royal Decree Law 809/2006
revising the electricity tariff from July 1, 2006. This decree
establishes an average increase of 1.38% in the average tariff for the
sale of electricity that came into effect on January 1, 2006.
In the share-out of the increase between the various tariffs, the bulk
was among medium- and high-voltage customers, whose tariffs have risen
by 6%. Conversely, the tolls approved by Royal Decree Law 1556/2005 have
not been modified.
The Royal Decree removes the cap on the annual tariff increase
established in Royal Decree 1432/2002 governing the tariff methodology,
which was set at 1.4% of the change in costs recorded during the year
and a further 0.6% increase due to revisions to estimates made in the
previous two years.
It also stipulates that from July 1, 2006, the amount corresponding to
the annual payment calculated for the straight-line recovery over a
period of 14 and a half years of the NPV of the shortfall in revenues
from regulated activities arising between January 1, 2005 and December
31, 2005 (which stood at Euro 3,810 million at year-end 2005) be
included in the tariff as an expense.
The amount at December 31 of each year is calculated by updating the
pending balance at that date of the previous year applying an interest
rate equivalent to the 3M Euribor and deducting the payments of the
current year.
The Royal Decree Law allows companies entitled to these reimbursements
to transfer to third parties and securitize collection rights.
Prior to the enactment of Royal Decree 809/2006, Royal Decree 470/2006
was passed, which modified the percentage of the electricity tariff
allocated to the nuclear moratorium. This norm reduced the percentage
form 1.724% to 0.33%, thereby freeing up resources available to the
system. This reduction comes on top of the one approved in the
electricity tariff for 2006, which established the percentage for the
nuclear moratorium at 1.724% mentioned previously, vs. the 3.04% applied
in 2005.
Elimination of Competition Transition Costs (CTCs)
On June 23, the Spanish cabinet passed Royal Decree Law 7/2006, adopting
emergency measures for the energy sector. Among other measures, this law
repealed the sixth transitory provision of the Electricity Industry Law
54/1997, of November 27, regarding stranded costs (CTCs), thereby
eliminating them.
The elimination of the CTC mechanism has no impact whatsoever on ENDESA’s
financial statements, as the Company has no future CTCs pending
recovery, nor does it expect any future collections as, under current
circumstances, the estimated amounts will be recovered through the
market.
In addition, the Royal Decree Law empowers the government to set
premiums on domestic coal consumption outside the framework of the CTCs,
so their elimination does not affect the future collection of these
premiums by ENDESA.
Sharp growth in sales: +17.2%
Sales from the business in Spain and Portugal totalled Euro 7,235
million in the first nine months of 2006, up 17.2% on 9M05.
Growth was primarily due to increase in demand, rise in final prices and
volume sales to deregulated customers, to higher pool prices in January
and February, i.e. before Royal Decree Law 3/2006 came into effect, and
to application of the Ministerial Orders regulating the calculation of
remuneration for mainland and non-mainland generation.
The increase in sales was enough to offset the rise in variable costs
(+16%), mainly fuel (+13.5%) and energy purchases (+18.2%).
Revenues: up 17.4%
Revenues for the electricity business in Spain and Portugal reached Euro
7,810 million in the first nine months of 2006, up 17.4% on 9M05. Of
this amount, sales accounted for Euro 7,235 million, 17.2% higher than
in 9M05.
SPAIN AND PORTUGAL SALES
Euro million
9M06
9M05
Change
% Chg
Mainland generation under Ordinary Regime
3,175
3,274
(99)
(3.0)
Sales to deregulated customers
1,334
1,098
236
21.5
Other sales in the OMEL
1,841
2,176
(335)
(15.4)
Renewable/CHP generation
195
151
44
29.1
Regulated revenues from distribution
1,363
1,197
166
13.9
Non-mainland generation and supply*
1,614
975
639
65.5
Supply to deregulated customers outside Spain
224
171
53
31.0
Regulated revenues from gas distribution
33
32
1
3.1
Unregulated gas supply
458
216
242
112.0
Other sales and services rendered
173
159
14
8.8
TOTAL
7,235
6,175
1,060
17.2
* The figure for 9M06 includes Euro 227 million corresponding
to compensation for the non-mainland generation deficit calculated
in accordance with the Ministerial Orders passed on March 30,
2006, which was above the amounts recorded at December 31, 2005.
Mainland generation
ENDESA’s mainland electricity output totalled
57,303 GWh in the first nine months of the year, 3.5% less than in 9M05.
Of this amount, 55,533 GWh corresponded to electricity generated under
the ordinary regime (-3.9%) and 1,770 GWh under renewables/CHP (+12.8%).
The fall in ordinary regime generation was mostly due to higher hydro
output by the system as a whole, to scheduled maintenance downtimes of
several thermal groups and ENDESA’s
prioritisation of margins over market share.
ENDESA’s thermal plants achieved an overall
load factor of 73% in 9M06, significantly above the 61% average for the
rest of the sector. Registering a noteworthy load factor of 79%, ENDESA’s
coal plants continued to play a key role in servicing Spanish
electricity demand, meeting 13.5% of mainland demand in 9M06.
The high load rate at these plants demonstrates their ability to respond
to grid requirements, proving that, in spite of the CCGT and wind farm
capacity additions, coal plants are still indispensable to meet the
country’s electricity requirements.
BREAKDOWN OF GENERATION SALES
GWh
Sales to supply through bilateral contracts
25,148
Sales to distribution from March 3, 2006 (Euro 42.35 per MWh)
16,526
Sales at pool price
13,859
TOTAL
55,533
Sales to the ordinary regime totalled Euro 3,175 million through
September, Euro 99 million or 3% lower than in the same period last year.
This amount includes sales made after March 3 to Endesa Distribución
to supply regulated companies in ENDESA’s
distribution territories, which were recognised at a provisional price
of Euro 42.35 per MWh in accordance with Royal Decree Law 3/2006.
This provisional price is below the average pool price in 9M06 which was
Euro 68.94 per MWh, 12.6% higher than in 9M05.
The negative impact on 9M06 figures from selling the 16,526 GWh produced
from March to September, i.e. the electricity sold to regulated
customers in the markets where ENDESA acts as a distributor, at the
provisional price of Euro 42.35 per MWh, pursuant to the Royal Decree
Law 3/2006, was Euro 254 million. This effect is temporary, so the
negative impact should be recovered once the final price is established
based on objective and transparent market criteria, as provided for in
the same Royal Decree Law.
Moreover, in accordance with Royal Decree Law 3/2006, the sales figure
is net of the Euro 121 million corresponding to the provisional market
value of certain CO2 emission rights allocated
freely from the settlement by OMEL.
ENDESA renewable/CHP generation: +12.8%
Renewable and CHP generation companies fully consolidated by ENDESA
produced 1,770 GWh in 9M06, 12.8% more than in 9M05. In addition, ENDESA
has holdings in other renewable/CHP companies, which generated 2,894 GWh
in the same period.
Revenues from sales of renewable/CHP energy generated by consolidated
companies totalled Euro 195 million, 29.1% more than in 9M05. This
underpinned a 33.3% increase in EBITDA to Euro 132 million and a 32.3%
increase in EBIT to Euro 86 million.
Supply to deregulated customers
In the supply to deregulated customers business, we would highlight that
contrary to the decisions taken by other operators to exit this segment
in light of high pool prices and related regulatory updates, ENDESA has
opted to pursue a selective supply strategy.
This strategy, which targets higher value added customers, enables
ENDESA to leverage the advantages of its vertical integration in
generation-supply and its highly competitive generation mix, providing
the Company with an appropriate hedge against regulatory risk and
volatility in wholesale market prices. This policy will allow ENDESA to
achieve reasonable, guaranteed returns over the medium and long run from
the generation business, thus maximising shareholder returns.
This selective supply policy drove a 13.5% increase in the average
selling price to final customers in the deregulated market in 9M06 vs.
9M05.
ENDESA had 1,084,386 deregulated customers at September 30, 2006, of
which 1,019,208 corresponded to the Spanish mainland deregulated market,
61,678 to the non-mainland systems and 3,500 to other European
deregulated markets.
ENDESA’s sales to these customers totalled
28,802 GWh in the first nine months of 2006, 5% more than in the same
period of 2005. Of this amount, 25,579 GWh were sold on the Spanish
deregulated market, an increase of 4.9%, and 3,223 GWh on other
deregulated European markets, up 5.4%.
Revenues from supply to deregulated customers in Spain (excluding tolls
paid to Endesa Distribución) totalled Euro
1,440 million, a 22.2% increase on 9M05. Of this amount, Euro 1,334
million corresponded to the mainland deregulated market and Euro 106
million to the non-mainland market.
Revenues from supply to deregulated European markets other than Spain
rose 31% to Euro 224 million.
As for customer service, ENDESA’s retention
rate for customers switching to the deregulated market was 99.2%,
outperforming all its competitors and reflecting a high degree of
loyalty towards the Company.
Distribution
ENDESA distributed 86,758 GWh of electricity in the Spanish market
through September, 3.6% more than in the first nine months of last year.
Revenues from regulated distribution activities totalled Euro 1,363
million, up 13.9% on 9M05. This included Euro 43 million in settlements
from prior years, mostly from incentives for energy losses. Stripping
out this effect, revenues from regulated distribution activities would
have increased by 10.3%.
ENDESA supplied 53,434 GWh to customers on the regulated Spanish market
in the period, 11.5% more than in the first nine months of last year.
Non-mainland generation
ENDESA’s output in non-mainland systems rose
5.1% in 9M06 vs. 9M05 to 10,919 GWh. Sales were 65.5% higher, at Euro
1,614 million.
As indicated previously, these sales include Euro 227 million of
additional compensation above that recorded at December 31, 2005 for
deficits in the non-mainland systems in 2001-2005 as recognised in the
Ministerial Orders of March 30.
Gas distribution and supply: total market share of 11.9%
ENDESA sold a total of 19,603 GWh of natural gas in 9M06, 21.6% more
than in the same period last year.
Of this amount, 16,871 GWh were sold to customers in the deregulated
market, 26% more than in 9M05, and 2,732 GWh to regulated customers
through all the gas companies in Spain in which ENDESA has stakes, an
increase of 0.3% on the same period last year.
The 19,603 GWh sold in both the regulated and deregulated markets and
the amount consumed in ENDESA’s own
generation plants imply an 11.9% market share.
Revenues from gas sales in deregulated market rose 112% to Euro 458
million in 9M06 vs. 9M05. Revenues from regulated gas distribution
totalled Euro 33 million, an increase of 3.1% on 9M05. The two
businesses contributed a combined gross margin of Euro 109 million.
Other operating revenues
Other operating revenues in 9M06 came to Euro 575 million, Euro 99
million more than in 9M05.
This item includes Euro 391 million corresponding to the 9M06 portion of
CO2 emission rights allocated to ENDESA within
the scope of the Spanish National Allocation Plan for emissions, which
are recorded under revenues.
This figure is Euro 45 million higher than in 9M05, mostly because of
higher value of the rights received in 2006. Higher revenue is offset by
higher expense recorded for use of the emission rights.
Operating expenses
The breakdown of operating expenses in the Spanish and Portuguese
business is provided below:
OPERATING EXPENSE IN SPAIN AND PORTUGAL
Euro million
9M06
9M06
Change
% Chg
Purchases and services
3,471
2,992
479
16.0
Power purchases
767
649
118
18.2
Fuel consumption
1,695
1,493
202
13.5
Power transmission expenses
272
176
96
54.5
Other supplies and services
737
674
63
9.3
Personnel expenses
758
673
85
12.6
Other operating expenses
760
706
54
7.6
Depreciation and amortisation
814
746
68
9.1
TOTAL
5,803
5,117
686
13.4
Power purchases
Power purchases in the period rose 18.2% to Euro 767 million. These
mainly entail gas purchases to supply deregulated customers, which rose
as a result of increases in sales to these customers and in gas prices.
Fuel consumption
Fuel consumption through September this year amounted to Euro 1,695
million, an increase of 13.5% on the same period in 2005.
This increase is due to a generalised increase in raw materials prices
on international markets. These higher costs, however, were offset by
the Company’s proactive fuel procurement
policy, which resulted in below-market purchasing prices.
Compared to the estimated 8.7% increase in fuel costs at the rest of the
utilities in the mainland system, ENDESA's rose only by 0.1%. This has
considerably strengthened the Company’s
competitive position with respect to price and generation mix.
Other supplies and services
Expenses under this item totalled Euro 737 million in 9M06, Euro 63
million more than in 9M05. This increase reflects the recognition of
Euro 473 million of expenses in connection with rights acquired to cover
the CO2 emissions made throughout the first
nine months of the year, which totalled 36.4 million tonnes: 27.6
million tonnes for the mainland and 8.8 million for non-mainland
production. Despite the higher value assigned to the freely allocated
emission rights in 2006 vs. 2005, this cost was Euro 4 million lower
than in 9M05, due to the lower volume of emissions recorded this year.
Net effect of revenues and expenses booked in 9M06 to cover CO2
emissions was Euro 82 million, corresponding to an estimated rights
deficit of 6.3 million tonnes.
The “Other supplies and services”
item includes a Euro 51 million reversal equivalent to the amount
Extremadura regional government must reimburse ENDESA in connection with
the environmental impact tax on its plants paid by the Company from 1998
to 2005 after the Constitutional Court ruled this to be unconstitutional
on June 13.
Personnel expenses
At September 30, 2006, the workforce in Spain and Portugal was 12,700
employees, 30 fewer than at September 30, 2005.
Personnel expenses rose in 9M06 12.6% vs. 9M05, to Euro 758 million.
These expenses include Euro 65 million corresponding to a headcount
reduction provision, mainly related to the deviation in the provision
caused by the performance of inflation (CPI), a new layoff program in
connection with the Mining Plan and to the provision for the early
layoff of specific workforce groups, which will help the Company to
achieve part of the cost reductions envisaged in the Strategic Plan.
Net financial expenses: down 9%
ENDESA reported net financial expenses for the first nine months of 2006
of Euro 325 million, 9.5% less than in 9M05.
Net financial expenses included Euro 31 million of revenue corresponding
to the interest accrued to December 31, 2005 on higher compensations
derived from non-mainland generation deficit calculated in accordance
with the Ministerial Orders passed on March 30, 2006, and Euro 11
million of revenue corresponding to interest accrued to September 30,
2006 for the environmental impact tax paid by ENDESA from 1998 to 2005,
which, as pointed out previously, must be reimbursed to the Company by
the Extremadura regional government.
When assessing financial results, the financial asset corresponding to
the tariff deficit and non-mainland compensation, both of which bear
financial interest, must be considered.
Net financial debt at the Spain and Portugal business at September 30,
2006 stood at Euro 13,731 million, vs. Euro 11,461 million at December
31, 2005. This increase is due to the Euro 1,417 million paid in 9M06 to
finance the revenue shortfall from regulated activities, as well as the
Euro 1,341 million dividend payment made in July in connection with
capital gains realised in 2005, which had contributed to reducing debt
that year. It was determined at the General Shareholders’
Meeting to distribute these capital gains to shareholders.
Equity-accounted income
Equity-accounted income in the business in Spain and Portugal totalled
Euro 53 million, a 26.2% increase vs. 9M05. This amount includes, among
others, the contribution from Nuclenor.
Cash flow from operating activities: Euro 1,876 million (+12.4%)
Cash flow from operating activities from the Spanish and Portuguese
business totalled Euro 1,876 million in 9M06, an increase of 12.4% on
the same period last year.
Investments: Euro 1,725 million
Investments in Spain and Portugal totalled Euro 1,725 million in 9M06.
The breakdown is as follows:
TOTAL INVESTMENT IN SPAIN AND PORTUGAL
Euro million
9M06
9M05
% Chg
Capex
1,549
1,484
4.4
Intangibles
71
66
7.6
Financial
105
196
(46.4)
Total investments
1,725
1,746
(1.2)
CAPEX IN SPAIN AND PORTUGAL
Euro million
9M06
9M05
% Chg
Generation
652
544
19.9
Ordinary regime
507
491
3.3
Renewables/CHP
145
53
173.6
Distribution
869
916
(5.1)
Others
28
24
16.7
Total
1,549
1,484
4.4
89.8% of total investment was spent on capex to develop or enhance
electricity generation and distribution facilities.
The breakdown of capex reflects the considerable effort the Company has
been making to improve service quality in Spain, with investment in
distribution facilities accounting for 56.1% of the total. As already
stated, these investments are underpinning the improvement in the
quality of customer service provided in the regulated market in Spain.
The significant increase in capital expenditure to expand ENDESA’s
generation capacity, including the construction of the Cristobol Colón
(400 MW) and As Pontes (800 MW) CCGTs and capacity increases in
renewables/CHP, is also noteworthy.
BUSINESS IN EUROPE
Net income of Euro 426 million (+50.5%)
Net income from the electricity business in Europe totalled Euro 426
million in the first nine months of 2006, an increase of 50.5% from the
same period last year.
This figure includes Euro 118 million after minorities due to an
increase in value of the business caused by the restatement of the tax
base of Endesa Italia’s fixed assets to
their book values, in accordance with Italian law.
These results confirm the steady improvement in this business area,
firmly driven by positive performance of its operating indicators and
efficiency gains, and ENDESA’s ability to
leverage growth opportunities in its markets by developing new CCGT and
renewable capacity, gas infrastructure and increasing sales to end
customers, thereby ensuring the long-term sale under favourable terms of
the power produced by its generators.
Growth projects
In 9M06, ENDESA’s business in Europe focused
on achieving its two main strategic targets: consolidating its current
competitive position and seeking new growth opportunities.
New generation capacity
During the third quarter, Endesa Europa acquired 58.35% of Centro
Energia Teverola and Centro Energia Ferrara from Italian companies
Merloni Invest, MPE and Fineldo.
Each of these companies owns a 150 MW CCGT subject to a subsidized
tariff. The first is located in the Emilia Romaña
region in northern Italy and the second in Campania, in the south.
Foster Wheeler Italiana owns 41.65% of each.
Meanwhile, Endesa Italia continued construction on two 400MW Scandale
CCGTs in Calabria according to schedule.
With respect to renewable energies growth, the 14 MW Iardino wind farm
was acquired during the third quarter by Endesa Europa from Gamesa
pursuant to the agreement signed between the two companies.
To be added to this capacity are the Montecute 42 MW wind farm,
completed on October 6 and which forms part of the Gamesa deal, as well
as the Vizzini and Trapani wind farms with a combined capacity of 56 MW.
All these projects mark a major step forward for Endesa Italia towards
achieving its target of having 400 MW of installed wind capacity by 2010.
Meanwhile, during the third quarter the French generating company Snet
received authorisation by the local government in the French city of
Saint Avold to build a 800 MW CCGT at the Émile
Huchet site. It will entail an investment of around Euro 400 million,
and it could come on-stream sometime during the first half of 2009. The
company is also considering installing another two new CCGTs, one 800 MW
at Lacq and one 400 MW, either at Hornaing or Lucy sites.
Elsewhere, during the year the Company won the tender to build a 10MW Léhaucourt
wind farm and has nearly 65 MW of new wind projects committed to other
sites, such as Ambon, Muzillac or Cernon.
These initiatives form part of the business plan to develop up to a
total of 2,000 MW of new capacity in CCGTs and 200 MW in renewables/CHP.
Gas infrastructure
In the third quarter of the year, preliminary work continued on the
offshore regasification terminal to be built off the coast of Livorno,
Italy.
Estimated investment amounts to around Euro 400 million and authorised
regasification capacity is close to 4 billion cubic metres (bcm) per
annum, of which, under the terms of the agreements negotiated, Endesa
Europa will be entitled to approximately 50% of this capacity.
The company owns 25.5% of the development company for the facility,
although the agreement with the project’s
two other partners –local companies AMGA and
ASA from Genoa and Livorno, respectively–
give it management control.
This capacity will be used to feed the CCGTs currently operated by the
Company in Italy and those planned for the coming years. Construction is
scheduled to take around 24 months, with the terminal expected to come
on stream by july 2008.
This project guarantees competitive gas supplies for the Italian market
and increases the flexibility of ENDESA’s
fuel mix at its different sites.
Supply
This year, Endesa Europa and the Italian group, Merloni, have begun
selling electricity to the Italian retail market through MPE Energia, a
50/50 joint venture. Merloni brings to the JV a portfolio of more than
5,000 points of supply across all Italian regions, and up to 2 TWh of
sales volume.
Snet during the period. It signed an agreement with the French
multinational company Auchan to supply 400 GWh of power in 2006 and
other with French railway operator SNCF to supply 6,600 GWh in the
period 2007-2011.
Dividends
ENDESA’s investees in Europe have paid
dividends to the parent this year.
Endesa Italia paid shareholders Euro 176 million, of which Euro 140.8
million corresponded to Endesa Europa. In addition, an agreement was
reached at Snet’s General Shareholders’
Meeting to pay shareholders Euro 59.7 million in dividends. After the
Euro 21.2 million interim dividend paid on March 9, Snet paid out a
final dividend of Euro 38.5 million, of which Euro 25 million
corresponded to Endesa Europa.
Finally, at its meeting of May 31, the Board of Directors of Moroccan
utility Energie Electrique de Tahaddart approved the payment of Euro 6
million of dividends to shareholders, of which Euro 1.9 million
corresponded to Endesa Europa.
Sharp increase in output and sales
ENDESA’s total output in Europe in the first
nine months of the year amounted to 26,443 GWh, an increase of 8.3% on
the same period last year. Electricity sales rose 13.4% to 38,913 GWh.
BREAKDOWN OF ENDESA’S OUTPUT AND
SALES IN EUROPE
Output (GWh)
Sales (GWh)
9M06
9M05
% Chg
9M06
9M05
% Chg
Italy
19,420
17,329
12.1
25,025
23,153
8.1
France
5,857
5,927
(1.2)
12,722
10,007
27.1
Poland*
1,166
1,154
1.0
1,166
1,154
1.0
Total
26,443
24,410
8.3
38,913
34,314
13.4
(*) ENDESA is present in the generation business in Poland
through the Bialystock CHP, which is controlled by Snet.
EBIT: +26.8%
Endesa Europa posted EBITDA through September of Euro 890 million, up
26.8% versus 9M05, and EBIT of Euro 693 million, an increase of 34.6%.
EBITDA & EBIT IN EUROPE
EBITDA
(Euro million)
EBIT
(Euro million)
9M06
9M05
% Chg
9M06
9M05
% Chg
Endesa Italia
739
561
31.7
622
456
36.4
Snet
147
136
8.1
70
54
29.6
Trading
26
20
30.0
26
20
30.0
Holding & others
(22)
(15)
(46.7)
(25)
(15)
(66.7)
Total
890
702
26.8
693
515
34.6
Worth highlighting is the Euro 26 million contribution to EBIT from
trading operations, an increase of 30% on the same period last year.
ENDESA can conduct these operations risk-free thanks to its solid
generation base in Italy and France.
Endesa Italia continue to improve
Endesa Italia’s revenues totalled Euro 2,253
million in 9M06, an increase of 35.6% from last year.
This growth was mainly the result of a 7.6% increase in electricity sold
and a 31.7% increase in average electricity prices in the Italian market.
ENDESA ITALIA KEY DATA
Euro million
9M06
9M05
Change
% Chg
Revenues
2,253
1,661
592
35.6
Gross margin
854
683
171
25.0
EBITDA
739
561
178
31.7
EBIT
622
456
166
36.4
Endesa Italia generated a total of 19,309 GWh of electricity in 9M06, an
increase of 1,980 GWh or 11.4% vs. 9M05. Its market share in Italy at
the end of September stood at 8.5%.
Endesa Italia’s generation structure in the
nine-month period reflects a higher percentage of fuel-oil production
than last year (19.2% vs. 16.1%), as a result of the application of
extraordinary measures to reduce gas consumption through March in order
to guarantee supply.
Although Endesa Italia’s fuel costs
increased by Euro 240 million in 9M06, this was less than the increase
in revenues (Euro 592 million) due to higher electricity prices.
On February 23, the Italian government approved the National Allocation
Plan (NAP) for greenhouse gas emission rights, which was subsequently
ratified by the EU authorities. This NAP allocates Endesa Italia 33.9
million tonnes for the period 2005-2007.
On May 4, the Italian national CO2 emission
rights register was formally set up for the rights allocated in the NAP
and those acquired. In 9M06, Endesa Italia booked Euro 113 million of
revenues from the free allocation and use of emission rights and Euro
149 million of expenses for the cost of emissions. Accordingly, the net
cost of emission rights in the income statement was Euro 36 million,
corresponding to an estimated deficit of 2.8 million tonnes of CO2.
Finally, Endesa Italia restated the tax bases of its fixed assets to
their book value, in accordance with Italian legislation. Therefore, it
recorded Euro 148 million lower corporate tax charge (Euro 118 million
after minorities) corresponding to the tax savings provided for in this
norm.
Earnings growth at Snet continues to gather pace
Earnings at Snet improved further in the third quarter of 2006. EBITDA
in 9M06 rose 8.1% to Euro 147 million and EBIT by 29.6% to Euro 70
million vs. 9M05.
SNET KEY DATA
Euro million
9M06
9M05
Change
% Chg
Revenues
801
625
176
28.2
Gross margin
248
239
9
3.8
EBITDA
147
136
11
8.1
EBIT
70
54
16
29.6
Revenues in the period rose 28.2% to Euro 801 million, mostly driven by
the 24.4% growth in energy sales to 13,888 GWh.
Variables costs were Euro 167 million higher, basically as a result of
the Euro 187 million increase in energy purchases, although this was
offset by tighter control over transport and fuels costs, which were 9%
lower than in 9M05.
Finally, in 9M06, Snet completed the headcount reduction plan, resulting
in a 25% decrease in the total workforce; Snet had 1,373 employees on
staff when Endesa Europa took control of the company. These layoffs led
to a 10.5% reduction in personnel costs and came within the framework of
discussions with union representatives.
European debt: Euro 1,505 million
ENDESA’s business in Europe had net
financial debt at September 30, 2006 of Euro 1,505 million, Euro 219
million higher than at the end of 2005.
This debt derives from a one-off income tax payment in 2Q06 linked to
tax credits obtained in 2005 and 2006 and to the acquisition in the
third quarter of majority shareholdings in Centro Energia Teverola and
Centro Energia Ferrara, owners of the CCGTs, and assumption of their
debt.
Net financial results in 9M06 amounted to an expense of Euro 36 million,
a decrease of Euro 8 million from 9M05.
Cash flow from operating activities: Euro 531 million
Operating cash flow generated by this business in 9M06 totalled Euro 531
million, a 5.8% increase on the same period last year despite the
one-off tax payment mentioned previously.
Investments: Euro 304 million
Investments in 9M06 in the European business totalled Euro 304 million,
of which Euro 165 million were capex, Euro 73 million were accounted for
by Endesa Italia and Euro 92 million by Snet.
These amounts included the acquisition of 58.35% stakes in Centro
Energia Teverola and Centro Energia Ferrara for Euro 57 million and Euro
35 million, respectively. ENDESA began fully consolidating these
companies on September 1, 2006.
BUSINESS IN LATIN AMERICA
Strong growth in net income: +119.4%
Net income at ENDESA’s Latin American
business totalled Euro 408 million in 9M06, an increase of Euro 222
million, or 119.4%, on 9M05 and equivalent to 16.3% of ENDESA’s
total net income.
This sharp growth reflects favourable economic trends witnessed in the
region since 2005, marked by higher growth and more stable exchange
rates in ENDESA’s operating markets. ENDESA’s
subsidiaries leveraged the growth in generation output and demand
deriving from this improved environment, achieving all-time high unit
margins thanks to ongoing operational efficiency efforts, the efficient
structure of their generation mix and their broad and growing customer
base. Against this backdrop, the strategic logic behind the various
capacity additions and regasification facilities being developed or in
the planning stage is clear.
Highlights
Growth in volume sales in generation and distribution
As indicated, the improved economic environment in the countries where
ENDESA has subsidiaries led to sharp increases –all
above 3.8%- in demand in 3Q06. Particularly noteworthy were increases in
demand in Argentina (9.6%), Peru (7.4%) and Chile (5.9%).
Higher demand underpinned total electricity sales by these subsidiaries
of 43,175 GWh, up 5.2% vs. 9M05, with particularly significant increases
in Peru (7.4%) and Colombia (6%).
Regarding output, ENDESA generated 46,364 GWh in the region in 9M06, an
8.2% increase vs. 9M05, or 8.7% in like-for-like terms; i.e. stripping
out generation output from plants sold by Brazilian company Ampla in
2006. The largest increases were in Brazil (16.7%, after deducting this
output), Argentina (11.6%) and Colombia (8.2%).
OUTPUT AND SALES IN THE LATIN AMERICAN BUSINESS
Output (GWh)
Sales (GWh)
9M06
% Chg vs. 9M05
9M06
% Chg vs. 9M05
Chile
14,693
6.6
9,235
4.4
Argentina
13,444
11.6
11,022
5.0
Peru
5,271
4.1
3,605
7.4
Colombia
9,577
8.2
7,917
6.0
Brazil
3,379
8.0
11,396
4.9
TOTAL
46,364
8.2
43,175
5.2
Improvement in generation and distribution margins
Growth in demand, tighter reserve margins and favourable generation mix
at ENDESA’s subsidiaries caused the unit
margin of generation companies to increase by 21.8% in 9M06 vs. 9M05 to
US$ 25.1 per MWh produced.
Generation margins, measured in dollars, increased sharply, above all in
Chile (+62.5%) thanks to a greater contribution by hydro in the
generation mix and to higher prices; and in Argentina (+18.2%), thanks
to improved generation mix and higher prices due to the pass-through of
greater fuel costs to the wholesale electricity market (MEM).
Conversely, margins in Colombia shrunk on the back of lower wholesale
prices caused by the increase in rainfall compared to the same period
last year.
In distribution, operating margins were considerably boosted by improved
pass-through of generation costs in Brazil and operating efficiency
improvements at the companies, leading to a considerable improvement in
their operating indicators. The unit margin stood at US$ 35.9 per MWh
distributed, an increase of 17.8% vs. 9M05.
Reduction in distribution losses
Energy distribution losses were 11.3% in 9M06, 0.7 percentage points
below the level recorded in the same period last year.
Improvements were made in all countries, especially Brazil, where the
percentage of losses declined by 1 percentage point. These improvements
reflect the achievements made in technological innovation, as
illustrated by the development and rollout of the new Ampla grid in
Brazil.
Generation and transmission projects
During the period, Centrales Hidroeléctricas
de Aysén (51%-owned by Endesa Chile and 49%
by Colbún) was incorporated. The aim of the
new company is to study, finance, build and operate the Aysén
Project.
This project entails the construction starting in 2008 of four hydro
plants with total installed capacity of 2,355 MW, the last of which is
currently estimated to come on stream towards the end of 2018. It will
require total investment of US$ 3,600 million, of which US$ 1,500
million will be earmarked for the 2,000km high voltage line required to
transmit the energy generated and whose construction will be put out to
tender, and US$ 2,100 million will be allotted to the four hydro plants.
Therefore, in proportion to its stake in the project, Endesa Chile will
have to invest at least 51% of this, i.e. US$ 1,071 million.
Also in 9M06, this company continued work on the 377MW San Isidro II
CCGT and the 32MW Palmucho hydro plant, both in Chile.
On May 16, the first stone was placed on the regasification plant
included in the liquefied natural gas (LNG) project being carried out in
Quintero (Chile). ENDESA is involved in the project alongside British
Gas, Metrogas and ENAP. This plant will ensure fuel supply to the
capacity addition projects undertaken in the country.
Endesa Eco continued to work on the 9 MW Canela wind farm in Chile and
began construction of the 9MW Ojos de Agua mini hydro station. Both
projects were started in 1Q06.
In Peru, construction on the first CCGT at the Ventanilla site, owned by
Etevensa- was completed in July. Construction continues on the second
CCGT, slated to be completed this month (i.e. October). The start-up of
both CCGTs will bring an additional 172 MW of new capacity on stream and
make the company’s generation mix much more
competitive.
Meanwhile, in Colombia, Emgesa completed the acquisition of the 186 MW
Termocartagena thermal plant.
Finally, on July 11 construction officially began in Panama on the
transmission line of the SIEPAC project to interconnect the electricity
grids of six Central American countries. The network owner (Empresa
Propietaria de la Red, or EPR) is responsible for carrying out the
project. Partners include the six Central American countries involved,
Colombian company ISA and ENDESA (12.5% stake).
Optimisation of ownership structure
During the course of the period, ENDESA completed the ownership
restructuring underway in Brazil, Peru and Chile:
In Brazil, holding company Endesa Brasil owns all the assets ENDESA
holds directly and indirectly in this country. In July, International
Finance Corporation (IFC), a World Bank affiliate with 178 member
countries, acquired 2.7% of this holding company. The transaction
values Endesa Brasil’s equity at a total
of US$ 1,850 million, equivalent to an EV/EBITDA 2005 multiple of
6.65x.
In Peru, the merger and takeover of Etevensa by Edegel. This
transaction, which closed on June 1, results in a more balanced
overall generation mix (51% hydro and 49% thermal), which will, among
other things, reduce volatility of revenues as a result of variations
in rainfall.
In Chile, the Chilectra-Elesur merger, led to a lower tax charge, for
a total recognised amount of Euro 170 million (Euro 101 million after
minority interests).
Meanwhile, in May, the Boards of the Colombian companies Emgesa and
Betania agreed to begin analysing a potential merger. If the analysis is
favourable, the transaction would give rise to the largest generator in
Colombia, with installed capacity of 2,780 MW.
Regulatory update
Regulatory highlights in 9M06 in the Latin American countries where
ENDESA has operations:
The tariffs applied to Brazilian companies, Ampla and Coelce, were
modified, by 2.9% and 10.01%, respectively.
In January the Colombian electricity regulator passed a resolution
modifying the calculation to limit generation market share, providing
ENDESA’s subsidiaries with access to
higher market volume.
Regarding the bilateral agreement between Argentina and Brazil, the
Argentine Secretary for Energy issued a resolution in February
permitting companies with export contracts to renegotiate them to
encourage imports in order to meet demand.
Also in February, the Argentine Senate ratified the agreement between
UNIREN and Edesur establishing the framework for an integral tariff
review to be completed through October 2006. A presidential decree
ratifying this process and, among other things, increasing the DCV
(distribution cumulative value) by 28% retroactively from November
2005, is pending.
A trust has been set up to enable Argentine companies under the
Foninvemem agreement –awarded 1,600 MW of
CCGTS- to obtain necessary administrative and operating resources.
In June, a Brazilian court ruling lifted the suspension on retroactive
collection of amounts related to the 2005 tariff revision. Coelce
began charging these amounts on June 26.
In July, the Peruvian Congress passed an amendment to the Electricity
Concession Law, the main features of which are as follows:
-- Establishment of a mechanism for tenders at fixed prices over a
period of 10 years to encourage investment and contracting with
distributors, with guaranteed pass-through.
-- Establishment of a new centrally planned regulation, with
30-year concessions and guaranteed payment.
-- Greater involvement by generators, distributors, transmission
companies and deregulated customers in the domestic electricity
system operator.
-- The option of spot market purchases for deregulated demand of
distributors and large deregulated customers.
The new law helps to unlock the value of ENDESA’s
generation assets in Peru through rising prices and long-term contracts.
In the first half of October, the new regulation setting the capacity
payments in Colombia was published, putting an end to almost two years
of work to reach a consensus between the regulator and market agents.
We highlight the following points:
-- From December 2006 to at least November 2009, there will be a
period of transition during which pro rata charge will be paid
for energies certified by the regulator.
-- In the first half of 2007, energy auctions for up to 20 years
will be held in order to define the expansion required beyond
December 2009, when new projects will be put out to tender and
existing projects will become price takers.
EBITDA: growth of 25.7%
EBITDA in the Latin American business totalled Euro 1,663 million in
9M06, a 25.7% increase on 9M05. EBIT rose 35.3% to Euro 1,304 million.
EBITDA & EBIT IN LATIN AMERICA
Euro million
EBITDA
EBIT
9M06
9M05
% Chg
9M06
9M05
% Chg
Generation and transmission
898
736
22.0
709
548
29.4
Distribution
815
613
33.0
651
444
46.6
Others
(50)
(26)
NA
(56)
(28)
NA
TOTAL
1,663
1,323
25.7
1,304
964
35.3
The table below shows the breakdown of EBITDA and EBIT of ENDESA’s
fully consolidated subsidiaries by business line and country:
BREAKDOWN OF EBITDA AND EBIT IN LATAM BY BUSINESS LINE AND COUNTRY
Generation and transmission
Euro million
EBITDA
EBIT
9M06
9M05
% Chg
9M06
9M05
% Chg
Chile
435
250
74.0
362
171
111.7
Colombia
168
171
(1.8)
135
135
0.0
Brazil - Generation
92
97
(5.2)
78
83
(6.0)
Brazil - Transmission
(11)
34
NA
(25)
21
NA
Peru
111
114
(2.6)
80
87
(8.0)
Argentina - Generation
96
70
37.1
73
53
37.7
Argentina - Transmission
7
-
100.0
6
(2)
NA
TOTAL
898
736
22.0
709
548
29.4
Distribution
Euro million
EBITDA
EBIT
9M06
9M05
% Chg
9M06
9M05
% Chg
Chile
160
139
15.1
142
121
17.4
Colombia
213
177
20.3
165
119
38.7
Brazil
344
202
70.3
289
152
90.1
Peru
63
54
16.7
40
32
25.0
Argentina
35
41
(14.6)
15
20
(25.0)
TOTAL
815
613
33.0
651
444
46.6
Generation and transmission
Chile
Energy output in 9M06 rose 6.6% to 14,693 GWh. Moreover, generation mix
improved, with hydro generation accounting for a larger share. This
helped protect earnings from fuel prices increases, such as natural gas.
This, coupled with a favourable trend in the Chilean peso vis-à-vis
the euro and higher wholesale prices, generated a 74% increase in EBITDA
and a 111.7% increase in EBIT vs. 9M05, to Euro 435 million and Euro 362
million, respectively.
Colombia
Electricity generation output was 8.2% higher than in the same period
last year, nearly offsetting the adverse trend in prices as a result of
high level of rainfall through September this year. Hence, EBITDA was
just Euro 3 million lower than in 9M05, at Euro 168 million, while EBIT
was virtually flat, at Euro 135 million.
Brazil - Generation
ENDESA’s subsidiaries in Brazil generated
total output in the period of 3,379 GWh, 8% more than in 9M05, mostly
thanks to increased activity at Cachoeira Dourada. However, if we strip
out from the 2005 figures the power generated at the plants sold by
Ampla in 2Q06 (235 GWh), total output in the first nine months of 2006
would have risen by 16.7%.
The increase in generation output and favourable exchange rates
cushioned the impact of fuel consumption increase by Endesa Fortaleza
caused by natural gas supply issues, enabling both EBITDA and EBIT to
decline by just Euro 5 million, to Euro 92 million and Euro 78 million,
respectively.
Brazil - Transmission
The difficulties in exporting electricity from Argentina to Brazil due
to gas supply restrictions continued, undermining results at this
interconnection. EBITDA in 9M06 showed a loss of Euro 11 million, Euro
45 million less than in 9M05, while EBIT was a negative Euro 25 million,
Euro 46 million less.
Peru
Generation sales in 9M06 rose 2.3% vs. 9M05 to Euro 223 million, mainly
thanks to higher prices and output, which partly offset the Euro 40
million increase in fuel costs. EBITDA was Euro 111 million, 2.6% less
than in 9M05, while EBIT was Euro 80 million, Euro 7 million less.
Argentina
Although gas supply difficulties continued to trigger increases in fuel
costs (46.8%) due to the need to generate power using liquid fuels,
higher sales due to increased output (+11.6%), coupled with improvements
in prices, boosted margins. EBITDA in 9M06 rose 37.1% to Euro 96 million
and EBIT by 37.7% to Euro 73 million.
Distribution
Chile
Revenues rose 25.5% thanks to exchange rates, higher energy sales (4.4%)
and better unit price deriving from changes in tariff indexation. EBITDA
amounted to Euro 160 million and EBIT to Euro 142 million, 15.1% and
17.4% higher, respectively, than in 9M05.
Colombia
EBITDA at the Colombian distribution business was Euro 213 million,
20.3% higher than in 9M05, while EBIT totalled Euro 165 million, up
38.7%. The increases were driven by a 4.7% increase in revenues and by
other revenues from the new business undertaken by Codensa Hogar.
Brazil
Distribution sales in Brazil came to Euro 1,207 million in the
nine-month period, a 33.4% increase on 9M05. The increase was driven by
wider margins stemming from an enhanced pass-through of generation
prices to customers and, to a lesser extent, higher volume sales
(+4.9%). These factors, coupled with a sharp decline in energy losses,
led to increases in EBITDA and EBIT of 70.3% and 90.1%, respectively, to
Euro 344 million and Euro 289 million.
Peru
EBITDA from distribution in Peru amounted Euro 63 million in 9M06, up
16.7% on 9M05, due to higher sales (+5%), offsetting the increase in
costs. Meanwhile, EBIT advanced 25% to Euro 40 million.
Argentina
By September 30, the tariff increase had yet to be registered, since the
presidential decree required to ratify the renegotiation of tariffs with
Edesur had not been enacted. As a result, the 1.2% increase in revenues
from distribution was not enough to make up for the 6.8% rise in
procurement costs. This led to a 14.6% decline in EBITDA, to Euro 35
million, and a 25% drop in EBIT, to Euro 15 million this year.
Financial results: Euro 359 million
Financial results for the business in Latin America reflected a loss of
Euro 359 million in the first nine months of 2006, Euro 69 million more
than in 9M05.
Net exchange-rate gains were Euro 57 million lower, down from Euro 72
million in 9M05 to Euro 15 million.
Net interest expense totalled Euro 374 million, Euro 12 million or 3.3%
higher than in 9M05. This increase was mainly due to high expenses
deriving from readjustments to pension funds, the early repayment of
loans and the exchange rate effect on financial expenses. Net interest
expense totalled Euro 374 million, Euro 12 million or 3.3% higher than
in 9M05. The financial expenses in local currencies decreased compare to
the previous year as a consequence of lower average interest rates.
Net debt at ENDESA’s Latin American business
stood at Euro 5,780 million at September 30, 2006, a reduction of Euro
329 since the start of the year. This decrease is due, among other
factors, to the appreciation of the euro vis-à-vis
the currencies in which ENDESA’s Latin
American subsidiaries’ debt is denominated.
This accounted for Euro 349 million of the reduction.
In May, rating agency Fitch upgraded its ratings for Enersis and Endesa
Chile from BBB- to BBB, stable outlook, while in October, Moody’s
placed their Ba1 ratings under review for a possible upgrade.
Cash flow from operating activities: up 18.9%
ENDESA’s business in Latin America generated
Euro 911 million of cash flow in the first nine months of 2006, an
increase of 18.9% with respect to 9M05.
Investments: Euro 653 million
Investment in Latin America through September this year totalled Euro
653 million, of which Euro 601 million corresponded to capex.
CAPITAL EXPENDITURE IN LATIN AMERICA
Euro million
9M06
9M05
% Chg
Generation
240
122
96.7
Distribution and Transmission
348
243
43.2
Others
13
19
(31.6)
TOTAL
601
384
56.5
STATISTICAL APPENDIX
KEY FIGURES
Electricity Generation Output (GWh)
9M06
9M05
% Chg
Business in Spain and Portugal
68,222
69,769
(2.2)
Business in Europe
26,443
24,410
8.3
Business in Latin America
46,364
42,870
8.2
TOTAL
141,029
137,049
2.9
Electricity Generation Output in Spain and Portugal (GWh)
9M06
9M05
% Chg
Mainland
57,303
59,375
(3.5)
Nuclear
17,806
16,835
5.8
Coal
25,700
27,216
(5.6)
Hydro
5,541
6,085
(8.9)
Combined cycle - CCGT
5,605
5,641
(0.6)
Fuel oil
881
2,029
(56.6)
Renewables/CHP
1,770
1,569
12.8
Non-mainland
10,919
10,394
5.1
TOTAL
68,222
69,769
(2.2)
Electricity Generation Output in Europe (GWh)
9M06
9M05
% Chg
Coal
11,806
11,457
3.0
Hydro
1,816
1,820
(0.2)
Combined cycle - CCGT
9,084
8,318
9.2
Fuel oil
3,714
2,796
32.8
Wind
23
19
21.1
TOTAL
26,443
24,410
8.3
Electricity Generation Output in Latin America (GWh)
9M06
9M05
% Chg
Chile
14,693
13,778
6.6
Argentina
13,444
12,046
11.6
Peru
5,271
5,061
4.1
Colombia
9,577
8,855
8.2
Brazil
3,379
3,130
8.0
TOTAL
46,364
42,870
8.2
Electricity sales (GWh)
9M06
9M05
% Chg
Business in Spain and Portugal
82,236
75,381
9.1
Regulated market
53,434
47,939
11.5
Deregulated market
28,802
27,442
5.0
Business in Europe
38,913
34,314
13.4
Italy
25,025
23,153
8.1
France
12,722
10,007
27.1
Poland
1,166
1,154
1.0
Business in Latin America
43,175
41,033
5.2
Chile
9,235
8,847
4.4
Argentina
11,022
10,498
5.0
Peru
3,605
3,356
7.4
Colombia
7,917
7,469
6.0
Brazil
11,396
10,863
4.9
TOTAL
164,324
150,728
9.0
Gas sales (GWh)
9M06
9M05
% Chg
Regulated market
1,725
1,934
(10.8)
Deregulated market
16,871
13,355
26.3
TOTAL
18,596
15,289
21.6
Workforce
30/09/06
30/09/05
% Chg
Business in Spain and Portugal
12,700
12,730
(0.2)
Business in Europe
2,154
2,313
(6.9)
Business in Latin America
11,964
12,343
(3.1)
Other businesses
--
54
NA
TOTAL
26,818
27,440
(2.3)
FINANCIAL DATA
Key figures
9M06
9M05
% Chg
EPS (Euro)
2.37
1.47
61.2
CFPS (Euro)
3.13
2.77
13.3
BVPS (Euro)
10.80
9.90
9.1
Net financial debt (Euro million)
30-09-06
31-12-05
% Chg
Business in Spain and Portugal
13,731
11,461
19.8
Business in Europe
1,505
1,286
17.0
Endesa Italia
730
815
(10.4)
Other
775
471
64.5
Business in Latin America
5,780
6,109
(5.4)
Enersis
4,836
5,207
(7.1)
Other
944
902
4.7
Other businesses (1)
--
(575)
NA
TOTAL
21,016
18,281
15.0
Financial leverage (%)
128.8
112.0
NA
Net debt/Operating cash flow (times)
2.9
3.0
NA
Interest coverage by operating cash flow (times)
8.0
5.7
-
(1) At September 30, 2006, there was no debt assigned to “Other
businesses”, as it disappeared as such
with the sale of the 5.01% stake in Auna carried out in February
2006 and was allocated to the electricity business in Spain and
Portugal.
Ratings (25/10/2006)
Long term
Short term
Outlook
Standard & Poor’s
A
A-1
Creditwatch (-)
Moody’s
A3
P-2
Negative
Fitch
A+
F1
Creditwatch (-)
Main fixed-income issues
Spread over IRS (bp)
30/09/06
31/12/05
2.7Y Euro 700M 4.375% Mat. June 2009
8
5
5.8Y GBP 400M 6.125% Mat. July 2012
24
28
6.4Y Euro 700M 5.375% Mat. Feb 2013
18
18
Stock market data
30/09/06
31/12/05
% Chg
Market cap (Euro million)
35,521
23,525
51.0
Number of shares outstanding
1,058,752,117
1,058,752,117
--
Nominal share value (Euro)
1.2
1.2
--
Stock market data
9M06
9M05
% Chg
Trading volumes (shares)
Madrid stock exchange
2,327,950,930
2,116,538,073
10.0
NYSE
19,554,600
20,964,800
(6.7)
Average daily trading volume (shares)
Madrid stock exchange
12,188,225
11,023,635
10.6
NYSE
104,014
110,925
(6.2)
Share price
9M06 high
9M05 low
30/09/06
31/12/05
Madrid stock exchange (Euro)
35.00
21.70
33.55
22.22
NYSE (USD)
44.40
26.30
42.60
26.01
Dividends (Euro cents/share)
Payable against 2005 results
Interim dividend (02/01/06)
30.50
Final dividend (03/07/06)
209.50
Total DPS
240.00
Pay-out (%)
79.9
Dividend yield (%)
10.8
Information memo (forward-looking statements)
Investors are urged to read ENDESA’s
Solicitation/Recommendation Statement on Schedule 14D-9 when it is filed
with the U.S. Securities and Exchange Commission (the “SEC”),
as it will contain important information. The
Solicitation/Recommendation Statement and other public filings made from
time to time by ENDESA with the SEC are available without charge from
the SEC’s website at www.sec.gov
and at ENDESA's principal executive offices in Madrid, Spain.
This presentation contains certain “forward-looking
statements” regarding anticipated financial
and operating results and statistics and other future events. These
statements are not guarantees of future performance and are subject to
material risks, uncertainties, changes and other factors which may be
beyond ENDESA’s control or may be difficult
to predict.
Forward-looking statements include, but are not limited to, information
regarding: estimated future earnings; anticipated increases in wind and
CCGTs generation and market share; expected increases in demand for gas
and gas sourcing; management strategy and goals; estimated cost
reductions; tariffs and pricing structure; estimated capital
expenditures and other investments; expected asset disposals; estimated
increases in capacity and output and changes in capacity mix; repowering
of capacity and macroeconomic conditions. For example, the EBITDA and
dividends targets for 2004 to 2009 included in this presentation are
forward-looking statements and are based on certain assumptions which
may or may not prove correct. The principal assumptions underlying these
forecasts and targets relate to regulatory environment, exchange rates,
divestments, increases in production and installed capacity in the
various markets where ENDESA operates, increases in demand in these
markets, allocation of production among different technologies increased
costs associated with higher activity levels not exceeding certain
levels, the market price of electricity not falling below certain
levels, the cost of CCGT and the availability and cost of gas, fuel,
coal and emission rights necessary to operate our business at desired
levels.
The following important factors, in addition to those discussed
elsewhere in this presentation, could cause actual financial and
operating results and statistics to differ materially from those
expressed in our forward-looking statements.
Economic and Industry Conditions: materially adverse changes in economic
or industry conditions generally or in our markets; the effect of
existing regulations and regulatory changes; tariff reductions; the
impact of any fluctuations in interest rates; the impact of fluctuations
in exchange rates; natural disasters; the impact of more stringent
environmental regulations and the inherent environmental risks relating
to our business operations; the potential liabilities relating to our
nuclear facilities.
Transaction or Commercial Factors: any delays in or failure to obtain
necessary regulatory, antitrust and other approvals for our proposed
acquisitions or asset disposals, or any conditions imposed in connection
with such approvals; our ability to integrate acquired businesses
successfully; the challenges inherent in diverting management's focus
and resources from other strategic opportunities and from operational
matters during the process of integrating acquired businesses; the
outcome of any negotiations with partners and governments. Any delays in
or failure to obtain necessary regulatory approvals, including
environmental to construct new facilities, repowering or enhancement of
existing facilities; shortages or changes in the price of equipment,
materials or labour; opposition of political and ethnic groups; adverse
changes in the political and regulatory environment in the countries
where we and our related companies operate; adverse weather conditions,
which may delay the completion of power plants or substations, or
natural disasters, accidents or other unforeseen events; and the
inability to obtain financing at rates that are satisfactory to us.
Political/Governmental Factors: political conditions in Latin America;
changes in Spanish, European and foreign laws, regulations and taxes.
Operating Factors: technical difficulties; changes in operating
conditions and costs; the ability to implement cost reduction plans; the
ability to maintain a stable supply of coal, fuel and gas and the impact
of fluctuations on fuel and gas prices; acquisitions or restructurings;
the ability to implement an international and diversification strategy
successfully. Competitive Factors: the actions of competitors; changes
in competition and pricing environments; the entry of new competitors in
our markets.
Further details on the factors that may cause actual results and other
developments to differ significantly from the expectations implied or
explicitly contained in the presentation are given in the Risk Factors
section of Form 20-F for the first quarter of 2005 filed with the SEC
and in the Registration Document of ENDESA Stock filed with the CNMV.
No assurance can be given that the forward-looking statements in this
document will be realised. Except as may be required by applicable law,
neither ENDESA nor any of its affiliates intends to update these
forward-looking statements.
Results
JANUARY-SEPTEMBER 2006
Excellent results firmly underpinned by efficient business
management
-- Gross operating profit (EBITDA) rose 24.6% vs. 9M05 to Euro
5,479 million.
-- Operating profit (EBIT) advanced 32.3% to Euro 4,109 million.
Strong growth in all businesses
-- The Spanish and Portuguese business recorded net income of
Euro 1,503 million, up 43% over 9M05.
-- Net income from the business in Europe rose 50.5% to Euro 426
million.
-- In Latin America, net income jumped by 119.4% to Euro 408
million.
These results leave ENDESA on track to easily meet 2005-2009
Strategic Plan targets, which were revised up in July 2006
-- Forecasts for net income and EBITDA growth for full-year 2006
are in line with targets.
-- The company's proactive business management policy and its
healthy project portfolio ensure efficient growth over the
next few years.
Net income performance is in line with the company's target to pay
out Euro 9,900 million in dividends during 2005-2009
-- Results for the first nine months of 2006 confirm that the
Company will be in a position to propose a dividend payment of
at least Euro 1.6 per share against this year's earnings at
the General Shareholders' Meeting.
-- ENDESA's Board of Directors has agreed to pay a gross interim
dividend of Euro 0.50 per share against 2006 earnings. This
represents an increase of 63.9% on the interim dividend paid
against 2005 earnings.
KEY FACTS AND FIGURES FOR 9M06
SHARP NET INCOME GROWTH IN ALL BUSINESSES
-- ENDESA reports net income of Euro 2,508 million, an increase
of 61.2% vs. 9M05.
-- The business in Spain and Portugal posted net income of Euro
1,503 million in 9M06, an increase of 43%.
-- Net income from the business in Europe rose 50.5% to Euro 426
million.
-- Net income from the business in Latin America jumped 119.4% to
Euro 408 million.
STRONG INCREASES IN MAIN INCOME STATEMENT ITEMS
-- The gross margin in the first nine months of the year was Euro
7,819 million, 20.3% higher than in 9M05.
-- EBITDA rose 24.6% to Euro 5,479 million.
-- EBIT increased 32.3% to Euro 4,109 million
-- Cash flow from operating activities totalled Euro 3,318
million, 13.3% higher than in 9M05.
IMPROVED OUTPUT AND SHARP INCREASE IN ELECTRICITY SALES IN ALL
BUSINESSES
-- ENDESA's total generation output in the first nine months of
2006 amounted to 141,029 GWh, an increase of 2.9% on the 9M05.
-- Sales totalled 164,324 GWh, 9% more than in the first nine
months of 2005, with increases of 9.1% in the Spanish and
Portuguese business, 13.4% in Europe and 5.2% in Latin
America.
THESE RESULTS LEAVE THE COMPANY ON TRACK TO EASILY MEET TARGETS
SET FOR 2006 IN THE STRATEGIC PLAN
-- In the first nine months of the year the Company generated
79.1% and 86.5% of the full-year EBITDA and net income
targets, respectively.
-- The Board of Directors agreed to pay a gross interim dividend
against 2006 earnings of Euro 0.50 per share, 63.9% higher
than the interim dividend paid against 2005 earnings.
-- This dividend payment is in line with the goal of paying a
dividend of at least Euro 1.6 per share against 2006 earnings
and a total of Euro 9,900 million between 2005 and 2009.
BUSINESS IN SPAIN AND PORTUGAL
Strong increases in the main income statement items against a
backdrop of regulatory change
-- Net income from the business in Spain and Portugal increased
by 43% to Euro 1,503 million over 9M05 and accounted for 59.9%
of ENDESA's total net income.
-- EBITDA grew 22.9% to Euro 2,926 million and EBIT by 29.3% to
Euro 2,112 million.
-- The excellent performance by this business was achieved
despite having to record generation sales to the Company's
regulated customers at the provisional price of EUR 42.35 per
MWh pursuant to Royal Decree Law 3/2006, significantly below
market prices. The negative impact of this provisional price
on EBITDA and net income was Euro 254 million and Euro 165
million, respectively.
-- With the enactment in 1Q06 of the regulation for the island
and non-mainland electricity systems, in 9M06 ENDESA booked
Euro 197 million of higher compensation after tax for
generation in these systems between 2001 and 2005.
-- 9M06 figures also included a Euro 1,194 million asset related
to the revenue shortfall from regulated activities in the
period. Had this asset not been recorded, the impact of the
deficit on net income would have been Euro 776 million.
Competitive position reinforced by mainland generation mix
-- Through September this year, which featured a major drought,
ENDESA's hydro and nuclear generation output accounted for 42%
of the mainland generation mix, compared to 33.1% for the rest
of the sector.
-- ENDESA's mainland thermal plants achieved a 73% load factor in
9M06, well above the 61% average for the rest of the sector.
The load factor at the Company's coal plants was a noteworthy
79%.
-- The trend in ENDESA's mainland unit fuel costs in the first
nine months was positive, rising just 0.1% over 9M05, despite
market price increases and compared to an estimated 7.3% rise
for the rest of the sector.
Active management of CO2 emission costs
-- ENDESA has a broad portfolio of carbon credits derived from
its Clean Development Mechanisms (CDM) at highly competitive
prices.
-- ENDESA signed Emissions Reduction Purchase Agreements (ERPA)
for a total of 71.9 million tonnes of CO2, Letters of Intent
(LOI) for 25.1 million tonnes of additional volume and has
projects under analysis amounting to another 104.1 million
tonnes of CO2.
982 MW of new installed capacity in 9M06
-- ENDESA added 982 MW of new capacity to its generation
facilities in 9M06, representing 74.4% of new capacity planned
for the full year and indicating significant progress in the
New Capacity Plan.
-- New capacity includes the completion of the 400 MW Cristobal
Colon CCGT in Huelva, 424 MW in non-mainland systems installed
to meet growing demand in these markets, and 158 MW of new
renewables/CHP capacity.
-- Work on the 800M MW CCGT As Pontes plant (La Coruna) is
progressing according to schedule. This plant is scheduled to
be commissioned in 2007. Group 3, 367MW conversion to imported
coal.is also on track.
-- In Portugal, this October the Eolicas de Portugal consortium -
in which ENDESA has a 30% stake - was awarded the project to
develop 1,200 MW of wind capacity, the largest in the
Portuguese wind tender.
-- ENDESA, together with International Power, has been awarded a
connection point for two 400MW CCGTs at the Tejo site. The
operating license should be awarded before the end of this
year.
Strong growth in EBIT from CHP and renewables: +33.3%
-- Revenues from sales of renewable/CHP energy generated by
ENDESA's consolidated companies totalled Euro 195 million,
29.1% more than in the first nine months of 2005.
-- EBITDA from this business increased by 33.3% to Euro 132
million, and EBIT by 32.3% to Euro 86 million.
Service quality at record high levels; value unlocked at the
supply business
-- In 9M06 the cumulative average interruption duration index
(SAIDI) was 1 hour and 39 minutes, an improvement of 9% vs.
9M05.
-- These figures confirm the success of the operational
enhancements implemented and investments made in new
distribution infrastructure in recent years. They enable the
Company to consolidate its market position and leverage the
value of its broad customer base, which currently stands at
11,139,395 in the regulated market and 1,084,386 in the
deregulated market.
Sales by ENDESA in the deregulated market rose 5% to 28,802 GWh in
9M06, with an average sales price at EUR 73 per MWh. This activity
represents an important hedge against wholesale market prices
volatility, as well as providing the generation business with a
reasonable and guaranteed return over the medium and long term.
-- The largest investor of any Spanish utility
-- ENDESA invested Euro 1,725 million in Spain and Portugal in
9M06, of which Euro 1,549 million, or 89.8%, was capex. This
underscores its status as the largest investor among Spanish
utilities.
-- Euro 854 million of capex was spent on distribution
facilities.
Total market share of 11.9% in the natural gas market
-- ENDESA sold a total of 19,603 GWh in the Spanish natural gas
market in 9M06, 21.6% more than in 9M05. These sales, coupled
with gas consumption by its own plants, represent a market
share of 11.9%.
-- Gas sales revenues in the deregulated market in the first nine
months of 2006 totalled Euro 458 million, up 112% from 9M05,
while regulated gas distribution revenues were Euro 33
million, an increase of 3.1%. Combined, these two businesses
contributed a gross margin of Euro 109 million.
BUSINESS IN EUROPE
Growth in the main financial items underscores the strength of the
business
-- Net income from the business in Europe increased by 50.5% to
Euro 426 million in 9M06 and accounted for 17% of ENDESA's
total net income.
-- This figure includes Euro 118 million after minorities related
to the increase in value of this business caused by the
restatement of the tax base of Endesa Italia's fixed assets to
their book values, in accordance with Italian legislation.
-- EBITDA stood at Euro 890 million, up 26.8% versus 9M05, and
EBIT at Euro 693 million, an increase of 34.6%.
Excellent results underpinned by strong operating performance
-- ENDESA's total generation in Europe in the first nine months
of 2006 amounted to 26,443 GWh, an increase of 8.3% on the
year before.
-- Electricity sales were up 13.4% to 38,913 GWh.
Italy: strong growth in main financial indicators plus progress on
new capacity and regasification projects
-- EBITDA from Endesa Italia was Euro 739 million, 31.7% higher
than in 9M05, while EBIT reached at Euro 622 million, a 36.4%
increase.
-- Construction on the two 400MW CCGTs at the Scandale plant
(Calabria), in which Endesa Italia owns 50%, is proceeding
according to schedule, as is the preliminary work on the
offshore regasification terminal off Livorno, which is
scheduled to come on-stream at the end of 2008.
-- In September, Endesa Europa acquired 58.35% of Centro Energia
Teverola and Centro Energia Ferrara. Each of these companies
owns a 150 MW CCGT subject to a subsidised tariff.
-- In line with planned growth in renewable energies, the company
added 14 MW Iardino wind farm to its generation mix, and will
include 42 MW Montecute wind farm, completed on October 6, as
well as Vizzini and Trapani wind farms with a combined
capacity of 56 MW, scheduled to come on stream on November.
-- In the first nine months of the year, Endesa Italia sold
24,914 GWh of electricity, of which 11,700 GWh, or 47%, were
accounted for by direct sales and sales to large end
customers. Thus, the supply business goes a long way to
ensuring placement of the business' significant generation
capacity.
France: Good performance of Snet with significant new capacity
projects and new supply contracts
-- In 9M06, French generator Snet contributed Euro 147 million to
ENDESA's EBITDA, 8.1% more than in 9M05, and Euro 70 million
to EBIT, an increase of 29.6%.
-- Total electricity sales amounted to 13,888 GWh, an increase of
24.4% over 9M05.
-- Snet closed significant supply deals during the period. It
signed an agreement with the French multinational company
Auchan to supply 400 GWh of power in 2006 and another with the
French railway operator SNCF to supply 6,600 GWh in the period
2007-2011.
-- In the generation business, after receiving the pertinent
permits, Snet has begun building a 800 MW CCGT Emile Huchet
site. Meanwhile, the development of an additional 800 MW CCGT
in Lacq and another with capacity of over 400 MW, which could
be located its Lucy or Hornaing sites is being studied.
-- In addition, Snet has acquired the right to build a 10 MW firm
wind farm in Lehaucourt during the current year and has
committed to new wind projects in other regions such as Ambon,
Muzillac and Cernon, adding a combined capacity of nearing 65
MW.
BUSINESS IN LATIN AMERICA
Sharp increases in main financial figures, underscoring progress
by this business
-- ENDESA's Latin American operations posted a 119.4% increase in
9M06 net income to Euro 408 million, contributing 16.3% to the
Company's total net income.
-- EBITDA and EBIT rose 25.7% and 35.3% to Euro 1,663 million and
Euro 1,304 million, respectively.
-- Increases in EBITDA and EBIT were attained in both generation
and transmission business (+22% and +29.4%, respectively) and
in distribution (+33% and +46.6%, respectively), highlighting
the strong business momentum, underpinned by its operating
performance.
Increased margins in generation and distribution
-- The generation unit margin reached US$25.1 per MWh in 9M06, an
increase of 21.8% compared to 9M05, and the distribution unit
margin reached US$35.9 per MWh, an increase of 17.8%.
Sharp generation, distribution and sales pick-up and lower energy
losses across all countries
-- ENDESA's total generation in Latin America in the first nine
months of 2006 amounted to 46,364 GWh, a like-for-like
increase of 8.7% on the year before, while distribution
increased 5.2% to 43,175 GWh. The Company recorded significant
increases in both generation and distribution in all its
countries of operation.
-- Organic growth of the markets in which ENDESA operates drove
total revenues from its Latin American companies 22.6% higher
in 9M06.
-- ENDESA's total customer base in Latin America was 11.5 million
at September 30, 2006, i.e., 300,000 more than at the
beginning of the period.
-- Energy distribution losses were lower in all countries in
9M06, most notably in Brazil, where losses were down 0.7
percentage points as compare to 9M05.
New generation facilities
-- Capacity at ENDESA's Latin American companies so far this year
increased by 358 MW as a result of contribution of the
Termocartagena plant (Colombia) and completion of the first
CCGT at the Ventanilla plant (Peru).
-- In 3Q06, work continued on schedule on the construction of the
377 MW San Isidro II CCGT and of the 32 MW Palmucho hydro
facility, both in Chile.
-- In the same period, Endesa Chile incorporated Centrales
Hidroelectricas de Aysen, 51%-owned by ENDESA's subsidiary,
Endesa Chile, and 49% by Colbun. The purpose of this new
company is to analyse, finance, build and operate the Aysen
Project, which consists of four hydro plants with a total
capacity of 2,355 MW. Construction is currently scheduled to
begin in 2008.
Cash return target for 2009: 43% achieved
-- Cash returns from ENDESA's Latin American business to the
parent company in the first nine months of the year totalled
Euro 125 million.
-- This, coupled with the Euro 308 million achieved in 2005,
means that 43% of the target for 2009 in the Strategic Plan
has now been achieved.
Debt reduction
-- Net debt in the Latin American business declined by 5.4%, or
Euro 329 million, in 9M06 to Euro 5,780 million as of
September 30, 2006.
DISPOSALS
-- Pursuant to an agreement reached on December 2005, in 1Q06
ENDESA sold its 5.01% stake in telecoms operator Auna to
Deutsche Bank. This deal, which generated net capital gains of
Euro 171 million, marked a full disposal of the Company's
telecom business - one of the main goals of the Strategic
Plan.
-- In May, ENDESA sold its 49% stake in the Portuguese company
NQF Gas for Euro 59 million, booking a net capital gain of
Euro 21 million.
-- In the second quarter, the generation business of Brazilian
company, Ampla -whose core business is the distribution and
sale of electricity to over 2 million customers- was sold for
Euro 39 million, generating a gross capital gain of Euro 30
million and net capital gains after taxes and minorities of
Euro 12 million.
-- In the third quarter, ENDESA sold, through its subsidiary
Bolonia Real Estate, assets on the so-called "Levante Sector"
of Palma de Mallorca to the Neinver Group for Euro 240
million, generating a net capital gain of Euro 165 million.
SUSTAINABILITY
-- In September 2006, ENDESA was rated the leading electric
utility in Europe and the world for its commitment to
sustainable development, according to the Dow Jones
Sustainability World Index and Dow Jones Sustainability Stoxx
Index, respectively. These indices, regarded as global
benchmarks in the field of sustainability, select the leading
companies from across different industries that stand out for
their commitment to making sustainable development one of the
cornerstones of their business strategy.
-- ENDESA has been selected for inclusion in these indices for
the sixth year in a row. Some of the areas where ENDESA was
most highly rated this year include codes of conduct, customer
relations, environmental policy, climate change strategy,
workplace health and safety, and social initiatives.
DIVIDENDS
-- On July 3, ENDESA paid its final dividend against 2005
results. As approved at the General Shareholders' Meeting held
on February 25, the Company made a gross dividend payment of
Euro 2.095 per share, bringing total shareholder remuneration
against last year's results, including the gross interim
dividend of Euro 0.305 paid out on January 2, 2006, to Euro
2,541 million.
-- Results for the first nine months of 2006 confirm that the
Company will be in a position to propose at the General
Shareholders' Meeting the payment of a dividend of at least
Euro 1.6 per share against earnings this year, of which around
Euro 1.27 will be generated by net income from ordinary
activities and the remainder from capital gains arising from
the disposal of non-core assets.
-- To this end, the Board of Directors of ENDESA, in its meeting
on October 24, 2006, agreed to pay a gross interim dividend
against 2006 earnings of Euro 0.50 per share, representing a
63.9% increase on the interim dividend paid against 2005
earnings.
CONSOLIDATED RESULTS
Net income up 61.2%
ENDESA reported net income in 9M06 of Euro 2,508 million, a 61.2%
increase on 9M05.
This increase includes the net impact of the Euro 396 million of
capital gains obtained on asset sales made in the first nine months of
the year, of which Euro 171 million correspond to the sale of the
5.01% stake in Auna to Deutsche Bank and Euro 165 million from the
Palma de Mallorca real estate sell to Neinver Group.
Stripping out these capital gains from both periods, growth in net
income in 9M06 vs. 9M05 was 58.2%.
-0-
*T
NET INCOME IN 9M06
----------------------------------------------------------------------
% Chg vs. % of total NI % of total NI
Euro million 9M06 2005* 2006*
----------------------------------------------------------------------
Spain and
Portugal 1,503 43.0 69.2 64.3
----------------------------------------------------------------------
Europe 426 50.5 18.6 18.2
----------------------------------------------------------------------
Latin America 408 119.4 12.2 17.5
----------------------------------------------------------------------
Capital gains
from sale of
5.01% stake in
Auna 171 -- -- --
----------------------------------------------------------------------
TOTAL 2,508 61.2 100.0 100.0
----------------------------------------------------------------------
(*) Only net income from electricity businesses.
*T
We note that this sharp increase in net income, due essentially to
good operating performance of all the Company's business lines, has
been achieved despite a scenario which has been existing for the last
12 months triggered by various corporate operations directed at
ENDESA. This shows how the Company has been able to uphold the
excellence of its management team and roll out its Strategic Plan
within this special context.
Net income growth across all the Company's businesses
The business in Spain and Portugal posted net income of Euro 1,503
million in 9M06, an increase of 43% on 9M05.
This includes Euro 197 million of higher compensation, net of tax,
from the non-mainland generation deficit for the period 2001-2005
pursuant to Ministerial Orders passed on March 30, 2006.
In Europe, net income advanced 50.5% to Euro 426 million. This
figure includes Euro 118 million, net of minority interests, related
to a write-up in the valuation of this business as Endesa Italia
revalued the tax bases of its fixed assets to their book values, as
allowed by current legislation in Italy.
Finally, net income for Latin America was Euro 408 million, 119.4%
more than in 9M05. This figure includes Euro 101 million, net of
minority interests, from a tax credit carryforward derived from the
Elesur-Electra merger.
Total electricity sales up significantly: +9%
Both electricity output (+2.9%) and electricity sales (+9%) rose
in the first nine months vs. 9M05.
Increases were particularly high in the European and Latin
American businesses, where output rose by 8.3% and 8.2%, respectively,
amply offsetting the 2.2% drop in output in Spain.
Total electricity sales in the Spanish and Portuguese, European
and Latin American businesses rose by 9.1%, 13.4% and 5.2%,
respectively.
-0-
*T
ELECTRICITY OUTPUT AND SALES IN 9M06
----------------------------------------------------------------------
Output Sales
----------------------------------------------------------------------
GWh % Chg. vs. 9M05 GWh % Chg. vs. 9M05
----------------------------------------------------------------------
Spain and
Portugal 68,222 (2.2) 82,236 9.1
----------------------------------------------------------------------
Rest of Europe 26,443 8.3 38,913 13.4
----------------------------------------------------------------------
Latin America 46,364 8.2 43,175 5.2
----------------------------------------------------------------------
TOTAL 141,029 2.9 164,324 9.0
----------------------------------------------------------------------
*T
Appropriate output/sales balance
ENDESA met 85.8% of its total electricity sales in 9M06 from its
own output.
This balanced situation between production and demand should
considerably mitigate the risk of its electricity business and
provides ENDESA with a significant competitive advantage.
Revenue growth outstrips costs
The Company's total revenues in the first nine months of 2006
amounted to Euro 14,847 million, an increase of 17.4% on the year
before, outstripping growth in physical electricity sales.
Sales growth was greater by value than by volume because of
increases in electricity prices in countries were the Company operates
due to higher power generation costs.
The growth in sales in 9M06 covered the 16.9% increase in
purchases and service expenses (variable costs), which was caused by
increases in fuel costs and energy purchases.
Sharp growth in key income statement line items
As revenue growth offset the increase in costs, the company
reported significant rises in gross margin (+20.3%), EBITDA (+24.6%)
and EBIT (+32.3%).
-0-
*T
Gross margin EBITDA EBIT
---------------------------------------------------------------------
Euro % Chg vs. Euro % Chg vs. Euro % Chg vs.
million 9M05 million 9M05 million 9M05
---------------------------------------------------------------------
Spain and
Portugal 4,339 18.6 2,926 22.9 2,112 29.3
---------------------------------------------------------------------
Rest of
Europe 1,137 20.4 890 26.8 693 34.6
---------------------------------------------------------------------
Latin
America 2,343 23.8 1,663 25.7 1,304 35.3
---------------------------------------------------------------------
TOTAL 7,819 20.3 5,479 24.6 4,109 32.3
---------------------------------------------------------------------
*T
Net financial expenses: -9.6%
ENDESA reported net financial losses of Euro 720 million in 9M06,
a 3.7% improvement over 9M05.
Net financial losses were lower despite the fact that in 9M06 the
trends in the exchange rates in which the Group's debt is denominated
led to a Euro 50 million decrease in exchange-rate gains.
Net financial expense totalled Euro 736 million, down 9.6% on
9M05. This figure includes financial revenue of Euro 31 million
related to the portion not recorded as of December 31, 2005 of the
interest accrued on compensations derived from non-mainland generation
deficit calculated in accordance with Ministerial Orders passed on
March 30.
Increase in net debt caused by financing revenue deficit on
regulated activities in Spain does not impact net financial expenses.
Both the cumulative amount of the deficit financed and the amounts
pending collection as compensation for the non-mainland generation
deficit earn interest that offset the expenses.
Asset disposals
1Q06 marked the end of the period for Auna shareholders to
exercise their pre-emptive rights on the 5.01% stake ENDESA sold to
Deutsche Bank on December 30, 2005. After the end of this period, the
sale of these shares was formalised and all the conditions required
under International Financial Reporting Standards (IFRS) regarding
derecognition of the shares from ENDESA's balance sheet and
recognition of the related capital gain in its income statement have
been met.
Therefore, as indicated in ENDESA's consolidated financial
statements for the year ended December 31, 2005, in 9M06 the Company
recorded a capital gain of Euro 196 million (Euro 171 million after
tax) for the sale of the aforementioned investment. With this
disposal, the "Other businesses" line has been removed from ENDESA's
accounts, so for the rest of 2006, this capital gain will be the only
entry under this caption.
In addition, in 2Q06, ENDESA sold its 49% holding in NQF Gas for
Euro 59 million, booking a capital gain of Euro 27 million (Euro 21
million net of taxes) and sold off generation assets of Brazilian
operator, Ampla, for Euro 39 million, recording a gain of Euro 30
million (Euro 12 million after taxes and minorities).
Finally, in 3Q06, and as part of ENDESA's strategic goal of
maximising value of its real estate assets, the Company, through its
subsidiary Bolonia Real Estate sold assets through a competitive
process in the so-called "Levante Sector" of Palma de Mallorca to the
Neinver Group. The assets sold include planning rights for
approximately 180,000m2.
In addition, the Company made a financial investment in the Neiver
Group company, which will head up the land's development, taking a 45%
stake. The sole purpose of this investment is to participate, based on
its percentage ownership, in potential additional capital gains that
could arise from future development of the land in question. ENDESA
will not participate in the management of this company and its
investment risk is limited to the amount of capital contributed.
The total deal size is Euro 240 million, generating a gross
capital gain of Euro 185 million (Euro 165 million after-tax), net of
the costs of transferring the electric facilities that were located on
the land and the cost of the 45% equity stake taken in the development
company.
Cash flow from operating activities: +13.3%
Cash flow from operating activities in 9M06 was Euro 3,318
million, up 13.3% on 9M05.
-0-
*T
CASH FLOW FROM OPERATING ACTIVITIES
----------------------------------------------------------------------
Euro million % Chg vs. 9M05
----------------------------------------------------------------------
Spain and Portugal 1,876 12.4
----------------------------------------------------------------------
Rest of Europe 531 5.8
----------------------------------------------------------------------
Latin America 911 18.9
----------------------------------------------------------------------
TOTAL 3,318 13.3
----------------------------------------------------------------------
*T
Investment: Euro 2,682 million
ENDESA invested a total of Euro 2,682 million in 9M06, of which
Euro 2,396 million was capex and intangible assets while the remaining
Euro 286 million was invested in financial investments.
-0-
*T
INVESTMENTS
Euro million
Capex and
intangible assets Financial TOTAL
Spain and Portugal (1) 1,620 105 1,725
Rest of Europe 166 138 304
Latin America 610 43 653
TOTAL 2,396 286 2,682
(1) Additionally, a financial investment of Euro 1,194 million for
the revenue deficit from regulated activities in 9M06 and Euro 101
million from the restatement of the 2005 deficit was booked.
*T
Debt performance
ENDESA's net debt was Euro 21,016 million as of September 30,
2006, 15% higher than at year-end 2005.
-0-
*T
BREAKDOWN BY BUSINESS LINE OF ENDESA'S NET DEBT
---------------------------------------------------------------------
Euro million
---------------------------------------------------------------------
30/9/06 31/12/05 Change % Chg
---------------------------------------------------------------------
Business in Spain and Portugal 13,731 11,461 2,270 19.8
---------------------------------------------------------------------
Business in Europe 1,505 1,286 219 17.0
-Endesa Italia 730 815 (85) (10.4)
-Other 775 471 304 64.5
---------------------------------------------------------------------
Business in Latin America 5,780 6,109 (329) (5.4)
-Enersis Group 4,836 5,207 (371) (7.1)
-Other 944 902 42 4.7
---------------------------------------------------------------------
Other businesses (1) -- (575) 575 NA
---------------------------------------------------------------------
TOTAL 21,016 18,281 2,735 15.0
---------------------------------------------------------------------
(1) At September 30, 2006, there was no debt assigned to "Other
businesses", as this business line disappeared as such with the sale
of the 5.01% stake in Auna completed in February 2006. The remaining
debt balance was included in the electricity business in Spain and
Portugal.
*T
The increase in debt in Spain and Portugal is due to the need to
finance the tariff deficit in 2005 and the first nine months of 2006.
In 9M06, ENDESA paid Euro 1,417 in this regard. It also reflects the
Euro 1,341 million dividend payment made in July in connection with
the capital gains realised in 2005 and which led to a debt reduction
in that year. The distribution of this income to its shareholders was
approved at the General Shareholders' Meeting.
In Europe, the Euro 219 million increase in debt was caused by the
corporate income tax payment the Company had to make in the second
quarter. It also reflects the growth capex made during the year.
In Latin America, debt was reduced by Euro 329 million in the
first nine months of 2006.
When assessing ENDESA's debt level, it must be remembered that at
September 30, 2006, ENDESA had the recognised right to collect Euro
4,207 million in connection with several regulatory matters: Euro
2,904 million for financing the revenue deficit from regulated
activities, Euro 1,281 million in compensation for the non-mainland
generation deficit and Euro 22 million of stranded costs in Italy.
Stripping out the amounts from these regulatory items, ENDESA's net
debt at September 30, 2006 was Euro 16,809 million.
At the end of this month (October), ENDESA granted exclusive
securitization of the Euro 1,710 million collection rights
corresponding to the financing of the revenue deficit for regulated
activities carried out by ENDESA in 2005. The contract governing the
transfer of the collection rights will be formalised in November,
leaving room for a significant reduction in debt.
The average cost of ENDESA's total debt was 5.49% in 9M06, while
cost of debt corresponding to the ENERSIS Group was 9.27%. Stripping
out Enersis Group debt, the average cost of ENDESA's debt was 4.11%.
-0-
*T
STRUCTURE OF ENDESA'S NET DEBT
---------------------------------------------------------------------
ENDESA
and direct Enersis Total
subsidiaries Group ENDESA Group
---------------------------------------------------------------------
Euro % of Euro % of Euro % of
million total million total million total
---------------------------------------------------------------------
Euro 16,115 100 -- -- 16,115 77
---------------------------------------------------------------------
Dollar 65 - 2,594 54 2,659 13
---------------------------------------------------------------------
Other currencies -- - 2,242 46 2,242 10
---------------------------------------------------------------------
Total 16,180 100 4,836 100 21,016 100
---------------------------------------------------------------------
Fixed rate 8,345 52 3,950 82 12,295 59
---------------------------------------------------------------------
Hedged 1,815 11 99 2 1,914 9
---------------------------------------------------------------------
Variable 6,020 37 787 16 6,807 32
---------------------------------------------------------------------
TOTAL 16,180 100 4,836 100 21,016 100
---------------------------------------------------------------------
Avg. life (years) 5.0 5.3 5.1
---------------------------------------------------------------------
*T
The average life of the ENDESA Group's debt at September 30, 2006
was 5.1 years.
ENDESA enjoys a high degree of protection against interest-rate
risk, since 68% of its total debt is either fixed-rate or hedged. When
stripping out pending regulatory assets in Spain, which carry
floating-rate interest, this percentage rises to 79%.
As of September 30, 2006, ENDESA in Spain and its direct
subsidiaries, excluding the Enersis Group, had liquidity of Euro 6,159
million, of which Euro 5,756 million corresponded to unconditional
undrawn credit lines. These balances are sufficient to cover the debt
falling due over the next 20 months.
In addition, the Enersis Group had liquidity of Euro 1,317
million, of which Euro 492 million corresponded to unconditional
undrawn credit lines from two syndicated loans. This liquidity covers
debt maturities for the next 21 months.
Financial leverage stood at 128.8% at September 30, 2006, 6.2
percentage points below the level a year earlier.
As a result of Gas Natural's takeover bid for ENDESA launched in
September 2005, the ratings agencies Standard & Poor's and Fitch
Ratings decided to place ENDESA's credit rating under review for a
possible downgrade, while Moody's changed its rating outlook from
stable to negative.
In all three cases, changes were due to the negative impact the
transaction would have, were it to go ahead, on the new company's
financial position. As a result, as of October 25, 2006, ENDESA's
long-term debt ratings are: Standard & Poor's, A, under review for a
possible downgrade; Moody's, A3, negative outlook, and Fitch, A+,
under review for a possible downgrade.
STRATEGIC PLAN PROGRESS
Results achieved by ENDESA in the first nine months of 2006 ensure
that the targets of its Strategic Plan for 2005-2009, which were
revised upwards and released to the markets on July 25, will be met.
These targets are as follows:
-- EBITDA of Euro 6,930 million in 2006 and Euro 8,330 million in
2009.
-- Net income of Euro 2,900 million in 2006 and Euro 3,000
million in 2009.
-- Pay out to shareholders no less than Euro 9,900 million
against earnings for 2005-2009, of which Euro 7,600 million
will be generated by net income from ordinary activities and
the remaining Euro 2,300 million from the disposal of non-core
assets.
-- Financial leverage below 140%.
With regard to the EBITDA target, we would point out:
-- ENDESA reported EBITDA of Euro 5,479 million in 9M06, meeting
in nine months 79.1% of its target for the full year. This
target has been 78% met in Spain and Portugal, 80.9% in Europe
and 80% in Latin America.
-- The EBITDA figure represents an increase of 24.6% vs. 9M05,
compared to the 15.1% which would be required to meet the FY06
target.
-- On the other hand, EBITDA for the last 12 months i.e. October
2005 - October 2006, stands at Euro 7,100 million, higher than
the FY06 target.
This would suggest that the EBITDA target for 2006 will easily be
met.
The Company recorded net income of Euro 2,508 million in 9M06,
generating 86.5% of its FY06 target.
Results for the first nine months of 2006 confirm that the Company
will be in a position to propose at the General Shareholders' Meeting
the payment of a dividend of at least Euro 1.6 per share against
earnings this year, of which Euro 1.27 will be generated by net income
from ordinary activities and the remainder (i.e. no less than Euro
0.33) from capital gains arising from disposal of non-core assets.
If this dividend payment is approved at the Shareholders' Meeting,
ENDESA will have paid out to its shareholders a total of at least Euro
4,235 million in dividends against 2005 and 2006 earnings, i.e. 42.8%
of the Euro 9,900 million put aside for this concept in the period
2005-2009.
Lastly, ENDESA's leverage stood at 128.8% on September 30, 2006,
11.2 percentage points ahead of its Strategic Plan target.
In short, the results obtained through September 30, 2006 confirm
that commitments to shareholders and the market assumed by the Company
are being met ahead of schedule.
These results are due largely to the business management strategy
rolled out by ENDESA since the presentation of its Strategic Plan back
on October 2005, despite various corporate transactions launched in
the last 12 months
Maintaining these basic management guidelines in each business
line, coupled with the positive outlook on markets where the company
operates and with their respective regulatory frameworks, as well as
projects in place in each area to maximise organic growth, puts ENDESA
on sound footing to meet all its targets.
RESULTS BY BUSINESS LINE
BUSINESS IN SPAIN AND PORTUGAL
Net income up 43% to Euro 1,503 million
Net income from this business was Euro 1,503 million in 9M06, an
increase of 43% on 9M05 and equivalent to 59.9% to the Company's
overall bottom line.
EBITDA rose 22.9% to Euro 2,926 million and EBIT by 29.3% to Euro
2,112 million.
These outstanding results are underpinned by active business
management with the goal of leveraging the Company's solid
fundamentals and competitive advantages in an environment of
significant regulatory change throughout the period.
In terms of operating management, we highlight the maintenance of
an appropriate balance between output and sales, an enhanced
generation mix in the mainland, high load factors at its thermal
facilities compared to its peers, a slowdown in fuel price increases,
progress on the New Capacity Plan, record supply quality levels,
ongoing supply activities to hedge against trends in wholesale prices
and an active presence in the CDM market, which yielded enough
emission rights certificates to meet its commitments on emission
reductions in Spain and the rest of Europe.
On the regulatory front, the negative impact on 9M06 figures from
booking electricity sold to regulated customers in areas where ENDESA
acts as distributor at the provisional price of Euro 42.35 per MWh
established in Royal Decree Law 3/2006 was Euro 254 million. This
effect is only temporary, so the negative impact should be recovered
once final price is established based on objective and transparent
market criteria, as provided for in the same Royal Decree Law.
In 9M06, ENDESA recorded under revenues the amount corresponding
to compensation for the non-mainland generation historical deficit
calculated in accordance with the Ministerial Orders passed on March
30, 2006, which was above the amounts booked at December 31, 2005.
This concept amounted to Euro 227 million and was booked as revenues.
At 31 December 2005, these compensations earned Euro 31 million of
interest, recognised as financial revenue. The impact of these amounts
on ENDESA's net income is Euro 197 million.
Key operating highlights
ENDESA maintained its leading position in the Spanish electricity
market in the first nine months of the year.
The Company reached a 34.7% market share in ordinary regime
electricity generation, a 43.1% share in electricity distributed,
54.4% in sales to deregulated customers and 41.6% in total sales to
final customers.
Competitive advantages in generation relative to peers
In Spain, the Company produced a total of 68,222 GWh in the first
nine months of 2006, compared to total demand of 82,236 GWh. This
means it met 83% of its demand from its own output.
In addition, nuclear and hydro powered energy represented 42% of
the Company's mainland generation mix in 9M06, compared to 33.1% for
the rest of the sector. Furthermore, at 73%, the load factor at its
thermal facilities was also higher than at its competitors (61%). The
load factor at the Company's coal plants was a noteworthy 79%.
All this on top of a positive trend in ENDESA's mainland unit fuel
costs in the first nine months, which rose just 0.1% over 9M05,
compared to an estimated average 8.7% increase for the rest of the
sector.
982 MW of new installed capacity in 9M06
ENDESA added 982 MW of new capacity to its generation facilities
in 9M06, marking significant progress in the New Capacity Plan.
The breakdown of this new capacity is as follows:
-- The completion and connection to the network of the 400 MW
Cristobal Colon CCGT in Huelva. When the CCGT begins
commercial operations it will replace the capacity of the
plant's existing fuel and fuel-oil/gas groups.
-- New installed capacity on the mainland and non-mainland
systems of 424 MW, in line with growing demand in these
markets.
-- 158 MW in renewables/CHP.
In addition, construction of the 800MW CCGT and transformation of
the 367MW group 3 at the As Pontes site in La Coruna to imported coal
continued on schedule.
With regards to the business in Portugal, on October the Eolicas
de Portugal consortium - in which ENDESA has a 30% stake - was awarded
the project to develop 1,200 MW of wind capacity, the largest in the
Portuguese wind tender.
Also, ENDESA, together with International Power, has been awarded
a connection point for two 400MW CCGTs at the Tejo site. The operating
license should be awarded before the end of this year.
Market performance: an all-time record in supply quality and value
unlocked at the supply business
As already mentioned, in 9M06 ENDESA's total demand in Spain
measured through its sales was 82,236 GWh. This represents a 9.1%
increase on 9M05, compared to an average increase of 3.2% for the
overall Spanish electricity sector.
The number of customers serviced by ENDESA in the regulated market
reached at 11,139,395 million at September 30, 2006, i.e., 173,158
more than at the beginning of the period.
In 9M06, the cumulative interruption index in ENDESA's markets was
1 hour and 39 minutes, an improvement of 9% vs. 9M05.
These figures confirm the solid and positive trend in the
continuity of supply by ENDESA across all markets served in Spain,
reflecting the success of significant investments made in distribution
facilities in recent years and the efficiency enhancements
implemented, also in the distribution business, within the framework
of its Quality Plan.
In the deregulated market, ENDESA ended September with 1,084,386
customers, 12.7% more than the year earlier. The Company's position in
this market provides a hedge against the volatility of pool prices and
other regulatory and market risks, as well as providing the generation
business with a reasonable and guaranteed return over the medium and
long term.
Carbon credit purchases
ENDESA presently boasts a broad portfolio of carbon credits
derived from its Clean Development Mechanisms (CDM) at a highly
competitive average price.
Specifically, the Company has signed Emissions Reduction Purchase
Agreements (ERPA) for a total of 71.9 million tonnes of CO2, Letters
of Intent (LOI) for 25.1 million tonnes of additional volume and has
projects under analysis amounting to another 104.1 million tonnes of
CO2.
The emission rights acquired under these agreements will allow
ENDESA to meet its CO2 emission reduction commitments for its
operations in Spain, Portugal, France and Italy required by the
Directive on Emissions Trading.
With these, ENDESA is still the leading private purchaser of
carbon credits, via the "Endesa Climate Initiative", a pioneering
program in this arena though which it has obtained contracts
representing more than 7.5% of the total ERCs (emission rights
certificates) corresponding to all the projects currently registered
with the UN.
NAP 2008-2012: compatible with the ENDESA's competitive generation
portfolio
On July 12, 2006, the government unveiled details of its proposed
2008-2012 National Allocation Plan for emission rights. Based on
analysis conducted to date on the methodology set out, ENDESA believes
that the allocation that will be made, together with its portfolio of
carbon credits, guarantees that the Company's generation assets will
operate on a fully efficient and competitive basis and furthermore is
fully compatible with the targets contained in its Strategic Plan.
We would highlight that:
-- In terms of allocation of rights to coal plants, preference is
granted, in accordance with the provisions of the National
Mining Plan, to those using Spanish coal and plants that have
made technological modifications to comply with the Community
Directive on Large Combustion Plants (desulphurisation
scrapers, conversion to imported coal, etc.), which means that
all of ENDESA's coal plants would be applicable for this
criteria.
-- In relation to thermal plants in non-mainland systems, the
incremental costs that could arise from an emission rights
deficit would be fully recognised for purposes of remuneration
of generation activities, pursuant to the provisions of Royal
Decree 1,747/2003 and the Ministerial Orders dated March 30,
2006.
Regulatory update for 9M06
Real Decree Law 3/2006
Royal Decree Law 3/2006, enacted towards the end of February,
entailed material changes that affected power generation revenues in
the period.
-- Since March 3, 2006, sales to the wholesale generation market
that match purchases by a distributor belonging to the same
group for sale to the regulated market are settled at the
provisional price of Euro 42.35 per MWh. ENDESA's accounts
since that date have been drawn up based on this price.
However, the Royal Decree Law stipulates that the government
will set the definitive price based on objective and
transparent market prices. Therefore, if generation costs
remain at 9M06 levels during the rest of the year, the final
price will be significantly higher, meaning that ENDESA's
reported revenues and income will be higher than those
appearing in these accounts.
-- The amount finally recognised for each business group for
financing the deficit in regulated revenues in 2006 will be
deducted by the value of free CO2 emission rights received
during the period from January 1 and March 2, 2006.
As the norm for making this calculation has not been fully
defined, ENDESA has opted to be conservative, calculating the
proportional part of the period of freely allocated emission rights
received in 2006 and assessing the value taking the average market
price in the first two months of 2006. This methodology gives an
amount of Euro 121 million, recognised as a decrease in revenues from
generation sales and a decrease in the amount receivable to be
recouped from the tariff deficit.
-- Since March 3, 2006, revenues from power sales on the OMEL
organised market at the established price for the market are
reduced by the value of the freely allocated emission rights
related to those revenues.
Since some aspects of the new legislation are provisional, as
indicated, the accounting entries at September 30, 2006 related to its
application are likewise provisional until detailed norms are enacted
and the corresponding settlements are made.
The tariff deficit
The increase in electricity tariffs implemented in 2006, the
measures enacted by Royal Decree Law 3/2006 to reduce the deficit in
revenues from regulated revenues and the reduction in the amount
allocated to the nuclear moratorium have increased the system's
regulated revenues. However, these adjustments have been insufficient
to cover the system's entire costs, particularly generation costs.
This led to a deficit in revenues from regulated activities, estimated
at Euro 2,978 million, of which Euro 1,315 million corresponds to
ENDESA.
Of this amount, Euro 121 million corresponding to provisional
valuation of the free CO2 emission rights allocated to ENDESA in the
first two months of the year as established by Royal Decree 3/2006
were deducted from generation revenues and the remaining Euro 1,194
million were booked as a financial investment. This accounting
methodology is consistent with the right recognised by law to recoup
the amount, regardless of the fact that its formal recognition and the
exact manner in which it will be recovered will not be regulated until
the end of the fiscal year.
Had this Euro 1,194 million of recoverable revenue shortfall on
regulated activities not been booked as a financial asset, revenues,
EBITDA and EBIT would be lower by that exact amount and net income by
Euro 776 million.
Completion of the regulatory framework for non-mainland systems
On March 30, 2006 the Ministry of Industry, Tourism and Trade
approved the Ministerial Orders which fully develop Royal Decree
1747/2003 governing Spain's mainland and non-mainland systems. These
orders establish the methodology for calculating regulated
remuneration on generation in these systems and, accordingly, the
compensation to be received by the utilities operating in them.
Application of the orders gives rise to compensation of Euro 902
million to ENDESA for the 2001-2005 period over the provisional
amounts envisaged in the subsequent Royal Decree tariffs of each year.
To December 31, 2005, ENDESA's financial statements recognised
revenues for this concept of Euro 644 million, recording the remaining
Euro 258 million in 9M06. Of this amount, Euro 227 million were booked
as revenues and the remainder, i.e. Euro 31 million, as financial
revenues as they correspond to interest accrued.
With the regulatory framework in place, the mainland and
non-mainland generation business is guaranteed sufficient revenues
going forward to meet the costs of the business and allow for
appropriate fuel price hedges, while ensuring a reasonable return.
July 1, 2006 tariff revision
On June 30, the Spanish Cabinet passed Royal Decree Law 809/2006
revising the electricity tariff from July 1, 2006. This decree
establishes an average increase of 1.38% in the average tariff for the
sale of electricity that came into effect on January 1, 2006.
In the share-out of the increase between the various tariffs, the
bulk was among medium- and high-voltage customers, whose tariffs have
risen by 6%. Conversely, the tolls approved by Royal Decree Law
1556/2005 have not been modified.
The Royal Decree removes the cap on the annual tariff increase
established in Royal Decree 1432/2002 governing the tariff
methodology, which was set at 1.4% of the change in costs recorded
during the year and a further 0.6% increase due to revisions to
estimates made in the previous two years.
It also stipulates that from July 1, 2006, the amount
corresponding to the annual payment calculated for the straight-line
recovery over a period of 14 and a half years of the NPV of the
shortfall in revenues from regulated activities arising between
January 1, 2005 and December 31, 2005 (which stood at Euro 3,810
million at year-end 2005) be included in the tariff as an expense.
The amount at December 31 of each year is calculated by updating
the pending balance at that date of the previous year applying an
interest rate equivalent to the 3M Euribor and deducting the payments
of the current year.
The Royal Decree Law allows companies entitled to these
reimbursements to transfer to third parties and securitize collection
rights.
Prior to the enactment of Royal Decree 809/2006, Royal Decree
470/2006 was passed, which modified the percentage of the electricity
tariff allocated to the nuclear moratorium. This norm reduced the
percentage form 1.724% to 0.33%, thereby freeing up resources
available to the system. This reduction comes on top of the one
approved in the electricity tariff for 2006, which established the
percentage for the nuclear moratorium at 1.724% mentioned previously,
vs. the 3.04% applied in 2005.
Elimination of Competition Transition Costs (CTCs)
On June 23, the Spanish cabinet passed Royal Decree Law 7/2006,
adopting emergency measures for the energy sector. Among other
measures, this law repealed the sixth transitory provision of the
Electricity Industry Law 54/1997, of November 27, regarding stranded
costs (CTCs), thereby eliminating them.
The elimination of the CTC mechanism has no impact whatsoever on
ENDESA's financial statements, as the Company has no future CTCs
pending recovery, nor does it expect any future collections as, under
current circumstances, the estimated amounts will be recovered through
the market.
In addition, the Royal Decree Law empowers the government to set
premiums on domestic coal consumption outside the framework of the
CTCs, so their elimination does not affect the future collection of
these premiums by ENDESA.
Sharp growth in sales: +17.2%
Sales from the business in Spain and Portugal totalled Euro 7,235
million in the first nine months of 2006, up 17.2% on 9M05.
Growth was primarily due to increase in demand, rise in final
prices and volume sales to deregulated customers, to higher pool
prices in January and February, i.e. before Royal Decree Law 3/2006
came into effect, and to application of the Ministerial Orders
regulating the calculation of remuneration for mainland and
non-mainland generation.
The increase in sales was enough to offset the rise in variable
costs (+16%), mainly fuel (+13.5%) and energy purchases (+18.2%).
Revenues: up 17.4%
Revenues for the electricity business in Spain and Portugal
reached Euro 7,810 million in the first nine months of 2006, up 17.4%
on 9M05. Of this amount, sales accounted for Euro 7,235 million, 17.2%
higher than in 9M05.
-0-
*T
SPAIN AND PORTUGAL SALES
---------------------------------------------------------------------
Euro million
---------------------------------------------------------------------
9M06 9M05 Change % Chg
---------------------------------------------------------------------
Mainland generation under Ordinary
Regime 3,175 3,274 (99) (3.0)
---------------------------------------------------------------------
Sales to deregulated customers 1,334 1,098 236 21.5
---------------------------------------------------------------------
Other sales in the OMEL 1,841 2,176 (335) (15.4)
---------------------------------------------------------------------
Renewable/CHP generation 195 151 44 29.1
---------------------------------------------------------------------
Regulated revenues from distribution 1,363 1,197 166 13.9
---------------------------------------------------------------------
Non-mainland generation and supply* 1,614 975 639 65.5
---------------------------------------------------------------------
Supply to deregulated customers
outside Spain 224 171 53 31.0
---------------------------------------------------------------------
Regulated revenues from gas
distribution 33 32 1 3.1
---------------------------------------------------------------------
Unregulated gas supply 458 216 242 112.0
---------------------------------------------------------------------
Other sales and services rendered 173 159 14 8.8
---------------------------------------------------------------------
TOTAL 7,235 6,175 1,060 17.2
---------------------------------------------------------------------
* The figure for 9M06 includes Euro 227 million corresponding to
compensation for the non-mainland generation deficit calculated in
accordance with the Ministerial Orders passed on March 30, 2006,
which was above the amounts recorded at December 31, 2005.
*T
Mainland generation
ENDESA's mainland electricity output totalled 57,303 GWh in the
first nine months of the year, 3.5% less than in 9M05.
Of this amount, 55,533 GWh corresponded to electricity generated
under the ordinary regime (-3.9%) and 1,770 GWh under renewables/CHP
(+12.8%).
The fall in ordinary regime generation was mostly due to higher
hydro output by the system as a whole, to scheduled maintenance
downtimes of several thermal groups and ENDESA's prioritisation of
margins over market share.
ENDESA's thermal plants achieved an overall load factor of 73% in
9M06, significantly above the 61% average for the rest of the sector.
Registering a noteworthy load factor of 79%, ENDESA's coal plants
continued to play a key role in servicing Spanish electricity demand,
meeting 13.5% of mainland demand in 9M06.
The high load rate at these plants demonstrates their ability to
respond to grid requirements, proving that, in spite of the CCGT and
wind farm capacity additions, coal plants are still indispensable to
meet the country's electricity requirements.
-0-
*T
BREAKDOWN OF GENERATION SALES
GWh
Sales to supply through bilateral contracts 25,148
Sales to distribution from March 3, 2006 (Euro 42.35 per MWh) 16,526
Sales at pool price 13,859
TOTAL 55,533
*T
Sales to the ordinary regime totalled Euro 3,175 million through
September, Euro 99 million or 3% lower than in the same period last
year.
This amount includes sales made after March 3 to Endesa
Distribucion to supply regulated companies in ENDESA's distribution
territories, which were recognised at a provisional price of Euro
42.35 per MWh in accordance with Royal Decree Law 3/2006.
This provisional price is below the average pool price in 9M06
which was Euro 68.94 per MWh, 12.6% higher than in 9M05.
The negative impact on 9M06 figures from selling the 16,526 GWh
produced from March to September, i.e. the electricity sold to
regulated customers in the markets where ENDESA acts as a distributor,
at the provisional price of Euro 42.35 per MWh, pursuant to the Royal
Decree Law 3/2006, was Euro 254 million. This effect is temporary, so
the negative impact should be recovered once the final price is
established based on objective and transparent market criteria, as
provided for in the same Royal Decree Law.
Moreover, in accordance with Royal Decree Law 3/2006, the sales
figure is net of the Euro 121 million corresponding to the provisional
market value of certain CO2 emission rights allocated freely from the
settlement by OMEL.
ENDESA renewable/CHP generation: +12.8%
Renewable and CHP generation companies fully consolidated by
ENDESA produced 1,770 GWh in 9M06, 12.8% more than in 9M05. In
addition, ENDESA has holdings in other renewable/CHP companies, which
generated 2,894 GWh in the same period.
Revenues from sales of renewable/CHP energy generated by
consolidated companies totalled Euro 195 million, 29.1% more than in
9M05. This underpinned a 33.3% increase in EBITDA to Euro 132 million
and a 32.3% increase in EBIT to Euro 86 million.
Supply to deregulated customers
In the supply to deregulated customers business, we would
highlight that contrary to the decisions taken by other operators to
exit this segment in light of high pool prices and related regulatory
updates, ENDESA has opted to pursue a selective supply strategy.
This strategy, which targets higher value added customers, enables
ENDESA to leverage the advantages of its vertical integration in
generation-supply and its highly competitive generation mix, providing
the Company with an appropriate hedge against regulatory risk and
volatility in wholesale market prices. This policy will allow ENDESA
to achieve reasonable, guaranteed returns over the medium and long run
from the generation business, thus maximising shareholder returns.
This selective supply policy drove a 13.5% increase in the average
selling price to final customers in the deregulated market in 9M06 vs.
9M05.
ENDESA had 1,084,386 deregulated customers at September 30, 2006,
of which 1,019,208 corresponded to the Spanish mainland deregulated
market, 61,678 to the non-mainland systems and 3,500 to other European
deregulated markets.
ENDESA's sales to these customers totalled 28,802 GWh in the first
nine months of 2006, 5% more than in the same period of 2005. Of this
amount, 25,579 GWh were sold on the Spanish deregulated market, an
increase of 4.9%, and 3,223 GWh on other deregulated European markets,
up 5.4%.
Revenues from supply to deregulated customers in Spain (excluding
tolls paid to Endesa Distribucion) totalled Euro 1,440 million, a
22.2% increase on 9M05. Of this amount, Euro 1,334 million
corresponded to the mainland deregulated market and Euro 106 million
to the non-mainland market.
Revenues from supply to deregulated European markets other than
Spain rose 31% to Euro 224 million.
As for customer service, ENDESA's retention rate for customers
switching to the deregulated market was 99.2%, outperforming all its
competitors and reflecting a high degree of loyalty towards the
Company.
Distribution
ENDESA distributed 86,758 GWh of electricity in the Spanish market
through September, 3.6% more than in the first nine months of last
year.
Revenues from regulated distribution activities totalled Euro
1,363 million, up 13.9% on 9M05. This included Euro 43 million in
settlements from prior years, mostly from incentives for energy
losses. Stripping out this effect, revenues from regulated
distribution activities would have increased by 10.3%.
ENDESA supplied 53,434 GWh to customers on the regulated Spanish
market in the period, 11.5% more than in the first nine months of last
year.
Non-mainland generation
ENDESA's output in non-mainland systems rose 5.1% in 9M06 vs. 9M05
to 10,919 GWh. Sales were 65.5% higher, at Euro 1,614 million.
As indicated previously, these sales include Euro 227 million of
additional compensation above that recorded at December 31, 2005 for
deficits in the non-mainland systems in 2001-2005 as recognised in the
Ministerial Orders of March 30.
Gas distribution and supply: total market share of 11.9%
ENDESA sold a total of 19,603 GWh of natural gas in 9M06, 21.6%
more than in the same period last year.
Of this amount, 16,871 GWh were sold to customers in the
deregulated market, 26% more than in 9M05, and 2,732 GWh to regulated
customers through all the gas companies in Spain in which ENDESA has
stakes, an increase of 0.3% on the same period last year.
The 19,603 GWh sold in both the regulated and deregulated markets
and the amount consumed in ENDESA's own generation plants imply an
11.9% market share.
Revenues from gas sales in deregulated market rose 112% to Euro
458 million in 9M06 vs. 9M05. Revenues from regulated gas distribution
totalled Euro 33 million, an increase of 3.1% on 9M05. The two
businesses contributed a combined gross margin of Euro 109 million.
Other operating revenues
Other operating revenues in 9M06 came to Euro 575 million, Euro 99
million more than in 9M05.
This item includes Euro 391 million corresponding to the 9M06
portion of CO2 emission rights allocated to ENDESA within the scope of
the Spanish National Allocation Plan for emissions, which are recorded
under revenues.
This figure is Euro 45 million higher than in 9M05, mostly because
of higher value of the rights received in 2006. Higher revenue is
offset by higher expense recorded for use of the emission rights.
Operating expenses
The breakdown of operating expenses in the Spanish and Portuguese
business is provided below:
-0-
*T
OPERATING EXPENSE IN SPAIN AND PORTUGAL
---------------------------------------------------------------------
Euro million
---------------------------------------------------------------------
9M06 9M06 Change % Chg
---------------------------------------------------------------------
Purchases and services 3,471 2,992 479 16.0
---------------------------------------------------------------------
Power purchases 767 649 118 18.2
---------------------------------------------------------------------
Fuel consumption 1,695 1,493 202 13.5
---------------------------------------------------------------------
Power transmission expenses 272 176 96 54.5
---------------------------------------------------------------------
Other supplies and services 737 674 63 9.3
---------------------------------------------------------------------
Personnel expenses 758 673 85 12.6
---------------------------------------------------------------------
Other operating expenses 760 706 54 7.6
---------------------------------------------------------------------
Depreciation and amortisation 814 746 68 9.1
---------------------------------------------------------------------
TOTAL 5,803 5,117 686 13.4
---------------------------------------------------------------------
*T
Power purchases
Power purchases in the period rose 18.2% to Euro 767 million.
These mainly entail gas purchases to supply deregulated customers,
which rose as a result of increases in sales to these customers and in
gas prices.
Fuel consumption
Fuel consumption through September this year amounted to Euro
1,695 million, an increase of 13.5% on the same period in 2005.
This increase is due to a generalised increase in raw materials
prices on international markets. These higher costs, however, were
offset by the Company's proactive fuel procurement policy, which
resulted in below-market purchasing prices.
Compared to the estimated 8.7% increase in fuel costs at the rest
of the utilities in the mainland system, ENDESA's rose only by 0.1%.
This has considerably strengthened the Company's competitive position
with respect to price and generation mix.
Other supplies and services
Expenses under this item totalled Euro 737 million in 9M06, Euro
63 million more than in 9M05. This increase reflects the recognition
of Euro 473 million of expenses in connection with rights acquired to
cover the CO2 emissions made throughout the first nine months of the
year, which totalled 36.4 million tonnes: 27.6 million tonnes for the
mainland and 8.8 million for non-mainland production. Despite the
higher value assigned to the freely allocated emission rights in 2006
vs. 2005, this cost was Euro 4 million lower than in 9M05, due to the
lower volume of emissions recorded this year.
Net effect of revenues and expenses booked in 9M06 to cover CO2
emissions was Euro 82 million, corresponding to an estimated rights
deficit of 6.3 million tonnes.
The "Other supplies and services" item includes a Euro 51 million
reversal equivalent to the amount Extremadura regional government must
reimburse ENDESA in connection with the environmental impact tax on
its plants paid by the Company from 1998 to 2005 after the
Constitutional Court ruled this to be unconstitutional on June 13.
Personnel expenses
At September 30, 2006, the workforce in Spain and Portugal was
12,700 employees, 30 fewer than at September 30, 2005.
Personnel expenses rose in 9M06 12.6% vs. 9M05, to Euro 758
million.
These expenses include Euro 65 million corresponding to a
headcount reduction provision, mainly related to the deviation in the
provision caused by the performance of inflation (CPI), a new layoff
program in connection with the Mining Plan and to the provision for
the early layoff of specific workforce groups, which will help the
Company to achieve part of the cost reductions envisaged in the
Strategic Plan.
Net financial expenses: down 9%
ENDESA reported net financial expenses for the first nine months
of 2006 of Euro 325 million, 9.5% less than in 9M05.
Net financial expenses included Euro 31 million of revenue
corresponding to the interest accrued to December 31, 2005 on higher
compensations derived from non-mainland generation deficit calculated
in accordance with the Ministerial Orders passed on March 30, 2006,
and Euro 11 million of revenue corresponding to interest accrued to
September 30, 2006 for the environmental impact tax paid by ENDESA
from 1998 to 2005, which, as pointed out previously, must be
reimbursed to the Company by the Extremadura regional government.
When assessing financial results, the financial asset
corresponding to the tariff deficit and non-mainland compensation,
both of which bear financial interest, must be considered.
Net financial debt at the Spain and Portugal business at September
30, 2006 stood at Euro 13,731 million, vs. Euro 11,461 million at
December 31, 2005. This increase is due to the Euro 1,417 million paid
in 9M06 to finance the revenue shortfall from regulated activities, as
well as the Euro 1,341 million dividend payment made in July in
connection with capital gains realised in 2005, which had contributed
to reducing debt that year. It was determined at the General
Shareholders' Meeting to distribute these capital gains to
shareholders.
Equity-accounted income
Equity-accounted income in the business in Spain and Portugal
totalled Euro 53 million, a 26.2% increase vs. 9M05. This amount
includes, among others, the contribution from Nuclenor.
Cash flow from operating activities: Euro 1,876 million (+12.4%)
Cash flow from operating activities from the Spanish and
Portuguese business totalled Euro 1,876 million in 9M06, an increase
of 12.4% on the same period last year.
Investments: Euro 1,725 million
Investments in Spain and Portugal totalled Euro 1,725 million in
9M06. The breakdown is as follows:
-0-
*T
TOTAL INVESTMENT IN SPAIN AND PORTUGAL
---------------------------------------------------------------------
Euro million
---------------------------------------------------------------------
9M06 9M05 % Chg
---------------------------------------------------------------------
Capex 1,549 1,484 4.4
---------------------------------------------------------------------
Intangibles 71 66 7.6
---------------------------------------------------------------------
Financial 105 196 (46.4)
---------------------------------------------------------------------
Total investments 1,725 1,746 (1.2)
---------------------------------------------------------------------
---------------------------------------------------------------------
CAPEX IN SPAIN AND PORTUGAL
---------------------------------------------------------------------
Euro million
---------------------------------------------------------------------
9M06 9M05 % Chg
---------------------------------------------------------------------
Generation 652 544 19.9
---------------------------------------------------------------------
Ordinary regime 507 491 3.3
---------------------------------------------------------------------
Renewables/CHP 145 53 173.6
---------------------------------------------------------------------
Distribution 869 916 (5.1)
---------------------------------------------------------------------
Others 28 24 16.7
---------------------------------------------------------------------
Total 1,549 1,484 4.4
---------------------------------------------------------------------
*T
89.8% of total investment was spent on capex to develop or enhance
electricity generation and distribution facilities.
The breakdown of capex reflects the considerable effort the
Company has been making to improve service quality in Spain, with
investment in distribution facilities accounting for 56.1% of the
total. As already stated, these investments are underpinning the
improvement in the quality of customer service provided in the
regulated market in Spain.
The significant increase in capital expenditure to expand ENDESA's
generation capacity, including the construction of the Cristobol Colon
(400 MW) and As Pontes (800 MW) CCGTs and capacity increases in
renewables/CHP, is also noteworthy.
BUSINESS IN EUROPE
Net income of Euro 426 million (+50.5%)
Net income from the electricity business in Europe totalled Euro
426 million in the first nine months of 2006, an increase of 50.5%
from the same period last year.
This figure includes Euro 118 million after minorities due to an
increase in value of the business caused by the restatement of the tax
base of Endesa Italia's fixed assets to their book values, in
accordance with Italian law.
These results confirm the steady improvement in this business
area, firmly driven by positive performance of its operating
indicators and efficiency gains, and ENDESA's ability to leverage
growth opportunities in its markets by developing new CCGT and
renewable capacity, gas infrastructure and increasing sales to end
customers, thereby ensuring the long-term sale under favourable terms
of the power produced by its generators.
Growth projects
In 9M06, ENDESA's business in Europe focused on achieving its two
main strategic targets: consolidating its current competitive position
and seeking new growth opportunities.
New generation capacity
During the third quarter, Endesa Europa acquired 58.35% of Centro
Energia Teverola and Centro Energia Ferrara from Italian companies
Merloni Invest, MPE and Fineldo.
Each of these companies owns a 150 MW CCGT subject to a subsidized
tariff. The first is located in the Emilia Romana region in northern
Italy and the second in Campania, in the south. Foster Wheeler
Italiana owns 41.65% of each.
Meanwhile, Endesa Italia continued construction on two 400MW
Scandale CCGTs in Calabria according to schedule.
With respect to renewable energies growth, the 14 MW Iardino wind
farm was acquired during the third quarter by Endesa Europa from
Gamesa pursuant to the agreement signed between the two companies.
To be added to this capacity are the Montecute 42 MW wind farm,
completed on October 6 and which forms part of the Gamesa deal, as
well as the Vizzini and Trapani wind farms with a combined capacity of
56 MW.
All these projects mark a major step forward for Endesa Italia
towards achieving its target of having 400 MW of installed wind
capacity by 2010.
Meanwhile, during the third quarter the French generating company
Snet received authorisation by the local government in the French city
of Saint Avold to build a 800 MW CCGT at the Emile Huchet site. It
will entail an investment of around Euro 400 million, and it could
come on-stream sometime during the first half of 2009. The company is
also considering installing another two new CCGTs, one 800 MW at Lacq
and one 400 MW, either at Hornaing or Lucy sites.
Elsewhere, during the year the Company won the tender to build a
10MW Lehaucourt wind farm and has nearly 65 MW of new wind projects
committed to other sites, such as Ambon, Muzillac or Cernon.
These initiatives form part of the business plan to develop up to
a total of 2,000 MW of new capacity in CCGTs and 200 MW in
renewables/CHP.
Gas infrastructure
In the third quarter of the year, preliminary work continued on
the offshore regasification terminal to be built off the coast of
Livorno, Italy.
Estimated investment amounts to around Euro 400 million and
authorised regasification capacity is close to 4 billion cubic metres
(bcm) per annum, of which, under the terms of the agreements
negotiated, Endesa Europa will be entitled to approximately 50% of
this capacity.
The company owns 25.5% of the development company for the
facility, although the agreement with the project's two other partners
-local companies AMGA and ASA from Genoa and Livorno, respectively-
give it management control.
This capacity will be used to feed the CCGTs currently operated by
the Company in Italy and those planned for the coming years.
Construction is scheduled to take around 24 months, with the terminal
expected to come on stream by july 2008.
This project guarantees competitive gas supplies for the Italian
market and increases the flexibility of ENDESA's fuel mix at its
different sites.
Supply
This year, Endesa Europa and the Italian group, Merloni, have
begun selling electricity to the Italian retail market through MPE
Energia, a 50/50 joint venture. Merloni brings to the JV a portfolio
of more than 5,000 points of supply across all Italian regions, and up
to 2 TWh of sales volume.
Snet during the period. It signed an agreement with the French
multinational company Auchan to supply 400 GWh of power in 2006 and
other with French railway operator SNCF to supply 6,600 GWh in the
period 2007-2011.
Dividends
ENDESA's investees in Europe have paid dividends to the parent
this year.
Endesa Italia paid shareholders Euro 176 million, of which Euro
140.8 million corresponded to Endesa Europa. In addition, an agreement
was reached at Snet's General Shareholders' Meeting to pay
shareholders Euro 59.7 million in dividends. After the Euro 21.2
million interim dividend paid on March 9, Snet paid out a final
dividend of Euro 38.5 million, of which Euro 25 million corresponded
to Endesa Europa.
Finally, at its meeting of May 31, the Board of Directors of
Moroccan utility Energie Electrique de Tahaddart approved the payment
of Euro 6 million of dividends to shareholders, of which Euro 1.9
million corresponded to Endesa Europa.
Sharp increase in output and sales
ENDESA's total output in Europe in the first nine months of the
year amounted to 26,443 GWh, an increase of 8.3% on the same period
last year. Electricity sales rose 13.4% to 38,913 GWh.
-0-
*T
BREAKDOWN OF ENDESA'S OUTPUT AND SALES IN EUROPE
----------------------------------------------------------------------
Output (GWh) Sales (GWh)
----------------------------------------------------------------------
9M06 9M05 % Chg 9M06 9M05 % Chg
----------------------------------------------------------------------
Italy 19,420 17,329 12.1 25,025 23,153 8.1
----------------------------------------------------------------------
France 5,857 5,927 (1.2) 12,722 10,007 27.1
----------------------------------------------------------------------
Poland* 1,166 1,154 1.0 1,166 1,154 1.0
----------------------------------------------------------------------
Total 26,443 24,410 8.3 38,913 34,314 13.4
----------------------------------------------------------------------
(*) ENDESA is present in the generation business in Poland through the
Bialystock CHP, which is controlled by Snet.
*T
EBIT: +26.8%
Endesa Europa posted EBITDA through September of Euro 890 million,
up 26.8% versus 9M05, and EBIT of Euro 693 million, an increase of
34.6%.
-0-
*T
EBITDA & EBIT IN EUROPE
---------------------------------------------------------------------
EBITDA EBIT
(Euro million) (Euro million)
---------------------------------------------------------------------
9M06 9M05 % Chg 9M06 9M05 % Chg
---------------------------------------------------------------------
Endesa Italia 739 561 31.7 622 456 36.4
---------------------------------------------------------------------
Snet 147 136 8.1 70 54 29.6
---------------------------------------------------------------------
Trading 26 20 30.0 26 20 30.0
---------------------------------------------------------------------
Holding & others (22) (15) (46.7) (25) (15) (66.7)
---------------------------------------------------------------------
Total 890 702 26.8 693 515 34.6
---------------------------------------------------------------------
*T
Worth highlighting is the Euro 26 million contribution to EBIT
from trading operations, an increase of 30% on the same period last
year. ENDESA can conduct these operations risk-free thanks to its
solid generation base in Italy and France.
Endesa Italia continue to improve
Endesa Italia's revenues totalled Euro 2,253 million in 9M06, an
increase of 35.6% from last year.
This growth was mainly the result of a 7.6% increase in
electricity sold and a 31.7% increase in average electricity prices in
the Italian market.
-0-
*T
ENDESA ITALIA KEY DATA
---------------------------------------------------------------------
Euro million
---------------------------------------------------------------------
9M06 9M05 Change % Chg
---------------------------------------------------------------------
Revenues 2,253 1,661 592 35.6
---------------------------------------------------------------------
Gross margin 854 683 171 25.0
---------------------------------------------------------------------
EBITDA 739 561 178 31.7
---------------------------------------------------------------------
EBIT 622 456 166 36.4
---------------------------------------------------------------------
*T
Endesa Italia generated a total of 19,309 GWh of electricity in
9M06, an increase of 1,980 GWh or 11.4% vs. 9M05. Its market share in
Italy at the end of September stood at 8.5%.
Endesa Italia's generation structure in the nine-month period
reflects a higher percentage of fuel-oil production than last year
(19.2% vs. 16.1%), as a result of the application of extraordinary
measures to reduce gas consumption through March in order to guarantee
supply.
Although Endesa Italia's fuel costs increased by Euro 240 million
in 9M06, this was less than the increase in revenues (Euro 592
million) due to higher electricity prices.
On February 23, the Italian government approved the National
Allocation Plan (NAP) for greenhouse gas emission rights, which was
subsequently ratified by the EU authorities. This NAP allocates Endesa
Italia 33.9 million tonnes for the period 2005-2007.
On May 4, the Italian national CO2 emission rights register was
formally set up for the rights allocated in the NAP and those
acquired. In 9M06, Endesa Italia booked Euro 113 million of revenues
from the free allocation and use of emission rights and Euro 149
million of expenses for the cost of emissions. Accordingly, the net
cost of emission rights in the income statement was Euro 36 million,
corresponding to an estimated deficit of 2.8 million tonnes of CO2.
Finally, Endesa Italia restated the tax bases of its fixed assets
to their book value, in accordance with Italian legislation.
Therefore, it recorded Euro 148 million lower corporate tax charge
(Euro 118 million after minorities) corresponding to the tax savings
provided for in this norm.
Earnings growth at Snet continues to gather pace
Earnings at Snet improved further in the third quarter of 2006.
EBITDA in 9M06 rose 8.1% to Euro 147 million and EBIT by 29.6% to Euro
70 million vs. 9M05.
-0-
*T
SNET KEY DATA
---------------------------------------------------------------------
Euro million
---------------------------------------------------------------------
9M06 9M05 Change % Chg
---------------------------------------------------------------------
Revenues 801 625 176 28.2
---------------------------------------------------------------------
Gross margin 248 239 9 3.8
---------------------------------------------------------------------
EBITDA 147 136 11 8.1
---------------------------------------------------------------------
EBIT 70 54 16 29.6
---------------------------------------------------------------------
*T
Revenues in the period rose 28.2% to Euro 801 million, mostly
driven by the 24.4% growth in energy sales to 13,888 GWh.
Variables costs were Euro 167 million higher, basically as a
result of the Euro 187 million increase in energy purchases, although
this was offset by tighter control over transport and fuels costs,
which were 9% lower than in 9M05.
Finally, in 9M06, Snet completed the headcount reduction plan,
resulting in a 25% decrease in the total workforce; Snet had 1,373
employees on staff when Endesa Europa took control of the company.
These layoffs led to a 10.5% reduction in personnel costs and came
within the framework of discussions with union representatives.
European debt: Euro 1,505 million
ENDESA's business in Europe had net financial debt at September
30, 2006 of Euro 1,505 million, Euro 219 million higher than at the
end of 2005.
This debt derives from a one-off income tax payment in 2Q06 linked
to tax credits obtained in 2005 and 2006 and to the acquisition in the
third quarter of majority shareholdings in Centro Energia Teverola and
Centro Energia Ferrara, owners of the CCGTs, and assumption of their
debt.
Net financial results in 9M06 amounted to an expense of Euro 36
million, a decrease of Euro 8 million from 9M05.
Cash flow from operating activities: Euro 531 million
Operating cash flow generated by this business in 9M06 totalled
Euro 531 million, a 5.8% increase on the same period last year despite
the one-off tax payment mentioned previously.
Investments: Euro 304 million
Investments in 9M06 in the European business totalled Euro 304
million, of which Euro 165 million were capex, Euro 73 million were
accounted for by Endesa Italia and Euro 92 million by Snet.
These amounts included the acquisition of 58.35% stakes in Centro
Energia Teverola and Centro Energia Ferrara for Euro 57 million and
Euro 35 million, respectively. ENDESA began fully consolidating these
companies on September 1, 2006.
BUSINESS IN LATIN AMERICA
Strong growth in net income: +119.4%
Net income at ENDESA's Latin American business totalled Euro 408
million in 9M06, an increase of Euro 222 million, or 119.4%, on 9M05
and equivalent to 16.3% of ENDESA's total net income.
This sharp growth reflects favourable economic trends witnessed in
the region since 2005, marked by higher growth and more stable
exchange rates in ENDESA's operating markets. ENDESA's subsidiaries
leveraged the growth in generation output and demand deriving from
this improved environment, achieving all-time high unit margins thanks
to ongoing operational efficiency efforts, the efficient structure of
their generation mix and their broad and growing customer base.
Against this backdrop, the strategic logic behind the various capacity
additions and regasification facilities being developed or in the
planning stage is clear.
Highlights
Growth in volume sales in generation and distribution
As indicated, the improved economic environment in the countries
where ENDESA has subsidiaries led to sharp increases -all above 3.8%-
in demand in 3Q06. Particularly noteworthy were increases in demand in
Argentina (9.6%), Peru (7.4%) and Chile (5.9%).
Higher demand underpinned total electricity sales by these
subsidiaries of 43,175 GWh, up 5.2% vs. 9M05, with particularly
significant increases in Peru (7.4%) and Colombia (6%).
Regarding output, ENDESA generated 46,364 GWh in the region in
9M06, an 8.2% increase vs. 9M05, or 8.7% in like-for-like terms; i.e.
stripping out generation output from plants sold by Brazilian company
Ampla in 2006. The largest increases were in Brazil (16.7%, after
deducting this output), Argentina (11.6%) and Colombia (8.2%).
-0-
*T
OUTPUT AND SALES IN THE LATIN AMERICAN BUSINESS
---------------------------------------------------------------------
Output (GWh) Sales (GWh)
---------------------------------------------------------------------
9M06 % Chg vs. 9M05 9M06 % Chg vs. 9M05
---------------------------------------------------------------------
Chile 14,693 6.6 9,235 4.4
---------------------------------------------------------------------
Argentina 13,444 11.6 11,022 5.0
---------------------------------------------------------------------
Peru 5,271 4.1 3,605 7.4
---------------------------------------------------------------------
Colombia 9,577 8.2 7,917 6.0
---------------------------------------------------------------------
Brazil 3,379 8.0 11,396 4.9
---------------------------------------------------------------------
TOTAL 46,364 8.2 43,175 5.2
---------------------------------------------------------------------
*T
Improvement in generation and distribution margins
Growth in demand, tighter reserve margins and favourable
generation mix at ENDESA's subsidiaries caused the unit margin of
generation companies to increase by 21.8% in 9M06 vs. 9M05 to US$ 25.1
per MWh produced.
Generation margins, measured in dollars, increased sharply, above
all in Chile (+62.5%) thanks to a greater contribution by hydro in the
generation mix and to higher prices; and in Argentina (+18.2%), thanks
to improved generation mix and higher prices due to the pass-through
of greater fuel costs to the wholesale electricity market (MEM).
Conversely, margins in Colombia shrunk on the back of lower wholesale
prices caused by the increase in rainfall compared to the same period
last year.
In distribution, operating margins were considerably boosted by
improved pass-through of generation costs in Brazil and operating
efficiency improvements at the companies, leading to a considerable
improvement in their operating indicators. The unit margin stood at
US$ 35.9 per MWh distributed, an increase of 17.8% vs. 9M05.
Reduction in distribution losses
Energy distribution losses were 11.3% in 9M06, 0.7 percentage
points below the level recorded in the same period last year.
Improvements were made in all countries, especially Brazil, where
the percentage of losses declined by 1 percentage point. These
improvements reflect the achievements made in technological
innovation, as illustrated by the development and rollout of the new
Ampla grid in Brazil.
Generation and transmission projects
During the period, Centrales Hidroelectricas de Aysen (51%-owned
by Endesa Chile and 49% by Colbun) was incorporated. The aim of the
new company is to study, finance, build and operate the Aysen Project.
This project entails the construction starting in 2008 of four
hydro plants with total installed capacity of 2,355 MW, the last of
which is currently estimated to come on stream towards the end of
2018. It will require total investment of US$ 3,600 million, of which
US$ 1,500 million will be earmarked for the 2,000km high voltage line
required to transmit the energy generated and whose construction will
be put out to tender, and US$ 2,100 million will be allotted to the
four hydro plants. Therefore, in proportion to its stake in the
project, Endesa Chile will have to invest at least 51% of this, i.e.
US$ 1,071 million.
Also in 9M06, this company continued work on the 377MW San Isidro
II CCGT and the 32MW Palmucho hydro plant, both in Chile.
On May 16, the first stone was placed on the regasification plant
included in the liquefied natural gas (LNG) project being carried out
in Quintero (Chile). ENDESA is involved in the project alongside
British Gas, Metrogas and ENAP. This plant will ensure fuel supply to
the capacity addition projects undertaken in the country.
Endesa Eco continued to work on the 9 MW Canela wind farm in Chile
and began construction of the 9MW Ojos de Agua mini hydro station.
Both projects were started in 1Q06.
In Peru, construction on the first CCGT at the Ventanilla site,
owned by Etevensa- was completed in July. Construction continues on
the second CCGT, slated to be completed this month (i.e. October). The
start-up of both CCGTs will bring an additional 172 MW of new capacity
on stream and make the company's generation mix much more competitive.
Meanwhile, in Colombia, Emgesa completed the acquisition of the
186 MW Termocartagena thermal plant.
Finally, on July 11 construction officially began in Panama on the
transmission line of the SIEPAC project to interconnect the
electricity grids of six Central American countries. The network owner
(Empresa Propietaria de la Red, or EPR) is responsible for carrying
out the project. Partners include the six Central American countries
involved, Colombian company ISA and ENDESA (12.5% stake).
Optimisation of ownership structure
During the course of the period, ENDESA completed the ownership
restructuring underway in Brazil, Peru and Chile:
-- In Brazil, holding company Endesa Brasil owns all the assets
ENDESA holds directly and indirectly in this country. In July,
International Finance Corporation (IFC), a World Bank
affiliate with 178 member countries, acquired 2.7% of this
holding company. The transaction values Endesa Brasil's equity
at a total of US$ 1,850 million, equivalent to an EV/EBITDA
2005 multiple of 6.65x.
-- In Peru, the merger and takeover of Etevensa by Edegel. This
transaction, which closed on June 1, results in a more
balanced overall generation mix (51% hydro and 49% thermal),
which will, among other things, reduce volatility of revenues
as a result of variations in rainfall.
-- In Chile, the Chilectra-Elesur merger, led to a lower tax
charge, for a total recognised amount of Euro 170 million
(Euro 101 million after minority interests).
Meanwhile, in May, the Boards of the Colombian companies Emgesa
and Betania agreed to begin analysing a potential merger. If the
analysis is favourable, the transaction would give rise to the largest
generator in Colombia, with installed capacity of 2,780 MW.
Regulatory update
Regulatory highlights in 9M06 in the Latin American countries
where ENDESA has operations:
-- The tariffs applied to Brazilian companies, Ampla and Coelce,
were modified, by 2.9% and 10.01%, respectively.
-- In January the Colombian electricity regulator passed a
resolution modifying the calculation to limit generation
market share, providing ENDESA's subsidiaries with access to
higher market volume.
-- Regarding the bilateral agreement between Argentina and
Brazil, the Argentine Secretary for Energy issued a resolution
in February permitting companies with export contracts to
renegotiate them to encourage imports in order to meet demand.
-- Also in February, the Argentine Senate ratified the agreement
between UNIREN and Edesur establishing the framework for an
integral tariff review to be completed through October 2006. A
presidential decree ratifying this process and, among other
things, increasing the DCV (distribution cumulative value) by
28% retroactively from November 2005, is pending.
-- A trust has been set up to enable Argentine companies under
the Foninvemem agreement -awarded 1,600 MW of CCGTS- to obtain
necessary administrative and operating resources.
-- In June, a Brazilian court ruling lifted the suspension on
retroactive collection of amounts related to the 2005 tariff
revision. Coelce began charging these amounts on June 26.
-- In July, the Peruvian Congress passed an amendment to the
Electricity Concession Law, the main features of which are as
follows:
-0-
*T
-- Establishment of a mechanism for tenders at fixed prices over a
period of 10 years to encourage investment and contracting with
distributors, with guaranteed pass-through.
-- Establishment of a new centrally planned regulation, with
30-year concessions and guaranteed payment.
-- Greater involvement by generators, distributors, transmission
companies and deregulated customers in the domestic electricity
system operator.
-- The option of spot market purchases for deregulated demand of
distributors and large deregulated customers.
*T
The new law helps to unlock the value of ENDESA's generation
assets in Peru through rising prices and long-term contracts.
-- In the first half of October, the new regulation setting the
capacity payments in Colombia was published, putting an end to
almost two years of work to reach a consensus between the
regulator and market agents. We highlight the following
points:
-0-
*T
-- From December 2006 to at least November 2009, there will be a
period of transition during which pro rata charge will be paid
for energies certified by the regulator.
-- In the first half of 2007, energy auctions for up to 20 years
will be held in order to define the expansion required beyond
December 2009, when new projects will be put out to tender and
existing projects will become price takers.
*T
EBITDA: growth of 25.7%
EBITDA in the Latin American business totalled Euro 1,663 million
in 9M06, a 25.7% increase on 9M05. EBIT rose 35.3% to Euro 1,304
million.
-0-
*T
EBITDA & EBIT IN LATIN AMERICA
---------------------------------------------------------------------
Euro million EBITDA EBIT
---------------------------------------------------------------------
9M06 9M05 % Chg 9M06 9M05 % Chg
---------------------------------------------------------------------
Generation and
transmission 898 736 22.0 709 548 29.4
---------------------------------------------------------------------
Distribution 815 613 33.0 651 444 46.6
---------------------------------------------------------------------
Others (50) (26) NA (56) (28) NA
---------------------------------------------------------------------
TOTAL 1,663 1,323 25.7 1,304 964 35.3
---------------------------------------------------------------------
*T
The table below shows the breakdown of EBITDA and EBIT of ENDESA's
fully consolidated subsidiaries by business line and country:
-0-
*T
BREAKDOWN OF EBITDA AND EBIT IN LATAM BY BUSINESS LINE AND COUNTRY
---------------------------------------------------------------------
Generation and transmission
---------------------------------------------------------------------
Euro million EBITDA EBIT
---------------------------------------------------------------------
9M06 9M05 % Chg 9M06 9M05 % Chg
---------------------------------------------------------------------
Chile 435 250 74.0 362 171 111.7
---------------------------------------------------------------------
Colombia 168 171 (1.8) 135 135 0.0
---------------------------------------------------------------------
Brazil - Generation 92 97 (5.2) 78 83 (6.0)
---------------------------------------------------------------------
Brazil - Transmission (11) 34 NA (25) 21 NA
---------------------------------------------------------------------
Peru 111 114 (2.6) 80 87 (8.0)
---------------------------------------------------------------------
Argentina - Generation 96 70 37.1 73 53 37.7
---------------------------------------------------------------------
Argentina - Transmission 7 - 100.0 6 (2) NA
---------------------------------------------------------------------
TOTAL 898 736 22.0 709 548 29.4
---------------------------------------------------------------------
*T
-0-
*T
Distribution
---------------------------------------------------------------------
Euro million EBITDA EBIT
---------------------------------------------------------------------
9M06 9M05 % Chg 9M06 9M05 % Chg
---------------------------------------------------------------------
Chile 160 139 15.1 142 121 17.4
---------------------------------------------------------------------
Colombia 213 177 20.3 165 119 38.7
---------------------------------------------------------------------
Brazil 344 202 70.3 289 152 90.1
---------------------------------------------------------------------
Peru 63 54 16.7 40 32 25.0
---------------------------------------------------------------------
Argentina 35 41 (14.6) 15 20 (25.0)
---------------------------------------------------------------------
TOTAL 815 613 33.0 651 444 46.6
---------------------------------------------------------------------
*T
Generation and transmission
Chile
Energy output in 9M06 rose 6.6% to 14,693 GWh. Moreover,
generation mix improved, with hydro generation accounting for a larger
share. This helped protect earnings from fuel prices increases, such
as natural gas.
This, coupled with a favourable trend in the Chilean peso
vis-a-vis the euro and higher wholesale prices, generated a 74%
increase in EBITDA and a 111.7% increase in EBIT vs. 9M05, to Euro 435
million and Euro 362 million, respectively.
Colombia
Electricity generation output was 8.2% higher than in the same
period last year, nearly offsetting the adverse trend in prices as a
result of high level of rainfall through September this year. Hence,
EBITDA was just Euro 3 million lower than in 9M05, at Euro 168
million, while EBIT was virtually flat, at Euro 135 million.
Brazil - Generation
ENDESA's subsidiaries in Brazil generated total output in the
period of 3,379 GWh, 8% more than in 9M05, mostly thanks to increased
activity at Cachoeira Dourada. However, if we strip out from the 2005
figures the power generated at the plants sold by Ampla in 2Q06 (235
GWh), total output in the first nine months of 2006 would have risen
by 16.7%.
The increase in generation output and favourable exchange rates
cushioned the impact of fuel consumption increase by Endesa Fortaleza
caused by natural gas supply issues, enabling both EBITDA and EBIT to
decline by just Euro 5 million, to Euro 92 million and Euro 78
million, respectively.
Brazil - Transmission
The difficulties in exporting electricity from Argentina to Brazil
due to gas supply restrictions continued, undermining results at this
interconnection. EBITDA in 9M06 showed a loss of Euro 11 million, Euro
45 million less than in 9M05, while EBIT was a negative Euro 25
million, Euro 46 million less.
Peru
Generation sales in 9M06 rose 2.3% vs. 9M05 to Euro 223 million,
mainly thanks to higher prices and output, which partly offset the
Euro 40 million increase in fuel costs. EBITDA was Euro 111 million,
2.6% less than in 9M05, while EBIT was Euro 80 million, Euro 7 million
less.
Argentina
Although gas supply difficulties continued to trigger increases in
fuel costs (46.8%) due to the need to generate power using liquid
fuels, higher sales due to increased output (+11.6%), coupled with
improvements in prices, boosted margins. EBITDA in 9M06 rose 37.1% to
Euro 96 million and EBIT by 37.7% to Euro 73 million.
Distribution
Chile
Revenues rose 25.5% thanks to exchange rates, higher energy sales
(4.4%) and better unit price deriving from changes in tariff
indexation. EBITDA amounted to Euro 160 million and EBIT to Euro 142
million, 15.1% and 17.4% higher, respectively, than in 9M05.
Colombia
EBITDA at the Colombian distribution business was Euro 213
million, 20.3% higher than in 9M05, while EBIT totalled Euro 165
million, up 38.7%. The increases were driven by a 4.7% increase in
revenues and by other revenues from the new business undertaken by
Codensa Hogar.
Brazil
Distribution sales in Brazil came to Euro 1,207 million in the
nine-month period, a 33.4% increase on 9M05. The increase was driven
by wider margins stemming from an enhanced pass-through of generation
prices to customers and, to a lesser extent, higher volume sales
(+4.9%). These factors, coupled with a sharp decline in energy losses,
led to increases in EBITDA and EBIT of 70.3% and 90.1%, respectively,
to Euro 344 million and Euro 289 million.
Peru
EBITDA from distribution in Peru amounted Euro 63 million in 9M06,
up 16.7% on 9M05, due to higher sales (+5%), offsetting the increase
in costs. Meanwhile, EBIT advanced 25% to Euro 40 million.
Argentina
By September 30, the tariff increase had yet to be registered,
since the presidential decree required to ratify the renegotiation of
tariffs with Edesur had not been enacted. As a result, the 1.2%
increase in revenues from distribution was not enough to make up for
the 6.8% rise in procurement costs. This led to a 14.6% decline in
EBITDA, to Euro 35 million, and a 25% drop in EBIT, to Euro 15 million
this year.
Financial results: Euro 359 million
Financial results for the business in Latin America reflected a
loss of Euro 359 million in the first nine months of 2006, Euro 69
million more than in 9M05.
Net exchange-rate gains were Euro 57 million lower, down from Euro
72 million in 9M05 to Euro 15 million.
Net interest expense totalled Euro 374 million, Euro 12 million or
3.3% higher than in 9M05. This increase was mainly due to high
expenses deriving from readjustments to pension funds, the early
repayment of loans and the exchange rate effect on financial expenses.
Net interest expense totalled Euro 374 million, Euro 12 million or
3.3% higher than in 9M05. The financial expenses in local currencies
decreased compare to the previous year as a consequence of lower
average interest rates.
Net debt at ENDESA's Latin American business stood at Euro 5,780
million at September 30, 2006, a reduction of Euro 329 since the start
of the year. This decrease is due, among other factors, to the
appreciation of the euro vis-a-vis the currencies in which ENDESA's
Latin American subsidiaries' debt is denominated. This accounted for
Euro 349 million of the reduction.
In May, rating agency Fitch upgraded its ratings for Enersis and
Endesa Chile from BBB- to BBB, stable outlook, while in October,
Moody's placed their Ba1 ratings under review for a possible upgrade.
Cash flow from operating activities: up 18.9%
ENDESA's business in Latin America generated Euro 911 million of
cash flow in the first nine months of 2006, an increase of 18.9% with
respect to 9M05.
Investments: Euro 653 million
Investment in Latin America through September this year totalled
Euro 653 million, of which Euro 601 million corresponded to capex.
-0-
*T
CAPITAL EXPENDITURE IN LATIN AMERICA
---------------------------------------------------------------------
Euro million
---------------------------------------------------------------------
9M06 9M05 % Chg
---------------------------------------------------------------------
Generation 240 122 96.7
---------------------------------------------------------------------
Distribution and Transmission 348 243 43.2
---------------------------------------------------------------------
Others 13 19 (31.6)
---------------------------------------------------------------------
TOTAL 601 384 56.5
---------------------------------------------------------------------
*T
STATISTICAL APPENDIX
KEY FIGURES
-0-
*T
Electricity Generation Output (GWh) 9M06 9M05 % Chg
---------------------------------------------------------------------
Business in Spain and Portugal 68,222 69,769 (2.2)
---------------------------------------------------------------------
Business in Europe 26,443 24,410 8.3
---------------------------------------------------------------------
Business in Latin America 46,364 42,870 8.2
---------------------------------------------------------------------
TOTAL 141,029 137,049 2.9
---------------------------------------------------------------------
*T
-0-
*T
Electricity Generation Output in Spain and
Portugal (GWh) 9M06 9M05 % Chg
---------------------------------------------------------------------
Mainland 57,303 59,375 (3.5)
---------------------------------------------------------------------
Nuclear 17,806 16,835 5.8
---------------------------------------------------------------------
Coal 25,700 27,216 (5.6)
---------------------------------------------------------------------
Hydro 5,541 6,085 (8.9)
---------------------------------------------------------------------
Combined cycle - CCGT 5,605 5,641 (0.6)
---------------------------------------------------------------------
Fuel oil 881 2,029 (56.6)
---------------------------------------------------------------------
Renewables/CHP 1,770 1,569 12.8
---------------------------------------------------------------------
Non-mainland 10,919 10,394 5.1
---------------------------------------------------------------------
TOTAL 68,222 69,769 (2.2)
---------------------------------------------------------------------
*T
-0-
*T
Electricity Generation Output in Europe (GWh) 9M06 9M05 % Chg
---------------------------------------------------------------------
Coal 11,806 11,457 3.0
---------------------------------------------------------------------
Hydro 1,816 1,820 (0.2)
---------------------------------------------------------------------
Combined cycle - CCGT 9,084 8,318 9.2
---------------------------------------------------------------------
Fuel oil 3,714 2,796 32.8
---------------------------------------------------------------------
Wind 23 19 21.1
---------------------------------------------------------------------
TOTAL 26,443 24,410 8.3
---------------------------------------------------------------------
*T
-0-
*T
Electricity Generation Output in Latin
America (GWh) 9M06 9M05 % Chg
--------------------------------------------------------------------
Chile 14,693 13,778 6.6
--------------------------------------------------------------------
Argentina 13,444 12,046 11.6
--------------------------------------------------------------------
Peru 5,271 5,061 4.1
--------------------------------------------------------------------
Colombia 9,577 8,855 8.2
--------------------------------------------------------------------
Brazil 3,379 3,130 8.0
--------------------------------------------------------------------
TOTAL 46,364 42,870 8.2
--------------------------------------------------------------------
*T
-0-
*T
Electricity sales (GWh) 9M06 9M05 % Chg
---------------------------------------------------------------------
Business in Spain and Portugal 82,236 75,381 9.1
---------------------------------------------------------------------
Regulated market 53,434 47,939 11.5
---------------------------------------------------------------------
Deregulated market 28,802 27,442 5.0
---------------------------------------------------------------------
Business in Europe 38,913 34,314 13.4
---------------------------------------------------------------------
Italy 25,025 23,153 8.1
---------------------------------------------------------------------
France 12,722 10,007 27.1
---------------------------------------------------------------------
Poland 1,166 1,154 1.0
---------------------------------------------------------------------
Business in Latin America 43,175 41,033 5.2
---------------------------------------------------------------------
Chile 9,235 8,847 4.4
---------------------------------------------------------------------
Argentina 11,022 10,498 5.0
---------------------------------------------------------------------
Peru 3,605 3,356 7.4
---------------------------------------------------------------------
Colombia 7,917 7,469 6.0
---------------------------------------------------------------------
Brazil 11,396 10,863 4.9
---------------------------------------------------------------------
TOTAL 164,324 150,728 9.0
---------------------------------------------------------------------
*T
-0-
*T
Gas sales (GWh) 9M06 9M05 % Chg
---------------------------------------------------------------------
Regulated market 1,725 1,934 (10.8)
---------------------------------------------------------------------
Deregulated market 16,871 13,355 26.3
---------------------------------------------------------------------
TOTAL 18,596 15,289 21.6
---------------------------------------------------------------------
*T
-0-
*T
Workforce 30/09/06 30/09/05 % Chg
---------------------------------------------------------------------
Business in Spain and Portugal 12,700 12,730 (0.2)
---------------------------------------------------------------------
Business in Europe 2,154 2,313 (6.9)
---------------------------------------------------------------------
Business in Latin America 11,964 12,343 (3.1)
---------------------------------------------------------------------
Other businesses -- 54 NA
---------------------------------------------------------------------
TOTAL 26,818 27,440 (2.3)
---------------------------------------------------------------------
*T
FINANCIAL DATA
-0-
*T
Key figures 9M06 9M05 % Chg
---------------------------------------------------------------------
EPS (Euro) 2.37 1.47 61.2
---------------------------------------------------------------------
CFPS (Euro) 3.13 2.77 13.3
---------------------------------------------------------------------
BVPS (Euro) 10.80 9.90 9.1
---------------------------------------------------------------------
*T
-0-
*T
Net financial debt (Euro million) 30-09-06 31-12-05 % Chg
---------------------------------------------------------------------
Business in Spain and Portugal 13,731 11,461 19.8
---------------------------------------------------------------------
Business in Europe 1,505 1,286 17.0
---------------------------------------------------------------------
Endesa Italia 730 815 (10.4)
---------------------------------------------------------------------
Other 775 471 64.5
---------------------------------------------------------------------
Business in Latin America 5,780 6,109 (5.4)
---------------------------------------------------------------------
Enersis 4,836 5,207 (7.1)
---------------------------------------------------------------------
Other 944 902 4.7
---------------------------------------------------------------------
Other businesses (1) -- (575) NA
---------------------------------------------------------------------
TOTAL 21,016 18,281 15.0
---------------------------------------------------------------------
---------------------------------------------------------------------
Financial leverage (%) 128.8 112.0 NA
---------------------------------------------------------------------
Net debt/Operating cash flow (times) 2.9 3.0 NA
---------------------------------------------------------------------
Interest coverage by operating cash flow
(times) 8.0 5.7 -
---------------------------------------------------------------------
(1) At September 30, 2006, there was no debt assigned to "Other
businesses", as it disappeared as such with the sale of the 5.01%
stake in Auna carried out in February 2006 and was allocated to the
electricity business in Spain and Portugal.
*T
-0-
*T
Ratings (25/10/2006) Long term Short term Outlook
---------------------------------------------------------------------
Standard & Poor's A A-1 Creditwatch (-)
---------------------------------------------------------------------
Moody's A3 P-2 Negative
---------------------------------------------------------------------
Fitch A+ F1 Creditwatch (-)
---------------------------------------------------------------------
*T
-0-
*T
Main fixed-income issues Spread over IRS (bp)
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30/09/06 31/12/05
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2.7Y Euro 700M 4.375% Mat. June 2009 8 5
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5.8Y GBP 400M 6.125% Mat. July 2012 24 28
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6.4Y Euro 700M 5.375% Mat. Feb 2013 18 18
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*T
-0-
*T
Stock market data 30/09/06 31/12/05 % Chg
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Market cap (Euro million) 35,521 23,525 51.0
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Number of shares outstanding 1,058,752,117 1,058,752,117 --
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Nominal share value (Euro) 1.2 1.2 --
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*T
-0-
*T
Stock market data 9M06 9M05 % Chg
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Trading volumes (shares)
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Madrid stock exchange 2,327,950,930 2,116,538,073 10.0
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NYSE 19,554,600 20,964,800 (6.7)
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Average daily trading volume
(shares)
---------------------------------------------------------------------
Madrid stock exchange 12,188,225 11,023,635 10.6
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NYSE 104,014 110,925 (6.2)
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*T
-0-
*T
Share price 9M06 high 9M05 low 30/09/06 31/12/05
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Madrid stock exchange
(Euro) 35.00 21.70 33.55 22.22
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NYSE (USD) 44.40 26.30 42.60 26.01
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*T
-0-
*T
Dividends (Euro cents/share) Payable against 2005 results
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Interim dividend (02/01/06) 30.50
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Final dividend (03/07/06) 209.50
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Total DPS 240.00
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Pay-out (%) 79.9
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Dividend yield (%) 10.8
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*T
Information memo (forward-looking statements)
Investors are urged to read ENDESA's Solicitation/Recommendation
Statement on Schedule 14D-9 when it is filed with the U.S. Securities
and Exchange Commission (the "SEC"), as it will contain important
information. The Solicitation/Recommendation Statement and other
public filings made from time to time by ENDESA with the SEC are
available without charge from the SEC's website at www.sec.gov and at
ENDESA's principal executive offices in Madrid, Spain.
This presentation contains certain "forward-looking statements"
regarding anticipated financial and operating results and statistics
and other future events. These statements are not guarantees of future
performance and are subject to material risks, uncertainties, changes
and other factors which may be beyond ENDESA's control or may be
difficult to predict.
Forward-looking statements include, but are not limited to,
information regarding: estimated future earnings; anticipated
increases in wind and CCGTs generation and market share; expected
increases in demand for gas and gas sourcing; management strategy and
goals; estimated cost reductions; tariffs and pricing structure;
estimated capital expenditures and other investments; expected asset
disposals; estimated increases in capacity and output and changes in
capacity mix; repowering of capacity and macroeconomic conditions. For
example, the EBITDA and dividends targets for 2004 to 2009 included in
this presentation are forward-looking statements and are based on
certain assumptions which may or may not prove correct. The principal
assumptions underlying these forecasts and targets relate to
regulatory environment, exchange rates, divestments, increases in
production and installed capacity in the various markets where ENDESA
operates, increases in demand in these markets, allocation of
production among different technologies increased costs associated
with higher activity levels not exceeding certain levels, the market
price of electricity not falling below certain levels, the cost of
CCGT and the availability and cost of gas, fuel, coal and emission
rights necessary to operate our business at desired levels.
The following important factors, in addition to those discussed
elsewhere in this presentation, could cause actual financial and
operating results and statistics to differ materially from those
expressed in our forward-looking statements.
Economic and Industry Conditions: materially adverse changes in
economic or industry conditions generally or in our markets; the
effect of existing regulations and regulatory changes; tariff
reductions; the impact of any fluctuations in interest rates; the
impact of fluctuations in exchange rates; natural disasters; the
impact of more stringent environmental regulations and the inherent
environmental risks relating to our business operations; the potential
liabilities relating to our nuclear facilities.
Transaction or Commercial Factors: any delays in or failure to
obtain necessary regulatory, antitrust and other approvals for our
proposed acquisitions or asset disposals, or any conditions imposed in
connection with such approvals; our ability to integrate acquired
businesses successfully; the challenges inherent in diverting
management's focus and resources from other strategic opportunities
and from operational matters during the process of integrating
acquired businesses; the outcome of any negotiations with partners and
governments. Any delays in or failure to obtain necessary regulatory
approvals, including environmental to construct new facilities,
repowering or enhancement of existing facilities; shortages or changes
in the price of equipment, materials or labour; opposition of
political and ethnic groups; adverse changes in the political and
regulatory environment in the countries where we and our related
companies operate; adverse weather conditions, which may delay the
completion of power plants or substations, or natural disasters,
accidents or other unforeseen events; and the inability to obtain
financing at rates that are satisfactory to us.
Political/Governmental Factors: political conditions in Latin
America; changes in Spanish, European and foreign laws, regulations
and taxes.
Operating Factors: technical difficulties; changes in operating
conditions and costs; the ability to implement cost reduction plans;
the ability to maintain a stable supply of coal, fuel and gas and the
impact of fluctuations on fuel and gas prices; acquisitions or
restructurings; the ability to implement an international and
diversification strategy successfully. Competitive Factors: the
actions of competitors; changes in competition and pricing
environments; the entry of new competitors in our markets.
Further details on the factors that may cause actual results and
other developments to differ significantly from the expectations
implied or explicitly contained in the presentation are given in the
Risk Factors section of Form 20-F for the first quarter of 2005 filed
with the SEC and in the Registration Document of ENDESA Stock filed
with the CNMV.
No assurance can be given that the forward-looking statements in
this document will be realised. Except as may be required by
applicable law, neither ENDESA nor any of its affiliates intends to
update these forward-looking statements.