The economic crisis that has reigned in recent years in many western countries appears to have passed through its most acute phase. Some countries, like the United States, have started down the road to recovery more decisively, while others, such as the euro-area countries, are individually regaining economic stability but are also struggling to emerge from the crisis at the same speed. Then there are the emerging economies where the Group is present, such as those in Latin America, which are continuing to grow.
The trend in primary energy demand clearly reflects these dynamics. In the euro area, the fragile and slow recovery has not yet triggered a rise in consumption, which remains at its level of nearly two decades ago. Also weighing on the performance of the electricity industry in some countries, such as Italy and Spain, which are of great importance for Enel, are regulatory policies that have often looked to utilities as a source of funding for state budgets. The situation is different in eastern Europe and in Latin America, where development and economic growth continue to sustain the demand for electricity and gas, making new investment profitable. The growth of the renewable energy sector remains stable at the global level.
The conditions I have described represent a cross-section of a complex reality that Enel has tackled by exploiting its geographic diversification, a well-balanced mix of generation technologies, management action to reduce costs and the optimization of investments and the generation of cash flow, all accompanied by the expansion of the Group, especially in emerging markets and in renewable energy.
The results of the past year have now reached and in some cases exceeded the targets announced to investors and have permitted us to confirm the good returns offered by our stock.
The gross operating margin rose by 7.6% compared with 2012, reaching €17,011 million, despite revenue falling from €84,949 million in 2012 to €80,535 million in 2013.
At the end of 2013, net financial debt had fallen to €39,862 million, a decrease of €3,086 million from the €42,948 million registered at the end of 2012 and about €16 billion lower than its peak in 2007. The results of current operations and non-recurring transactions completed during the year, including asset disposals, more than offset the cash requirements of investments and the payments of dividends, interest and taxes, enabling us to maintain a strong balance sheet. Enel generated free cash flow in the last f ew years, including 2013, of €3 billion.
For the future, we will face new market dynamics that are emerging under the pressure of four macro trends: the spread of new technologies, the growing contribution of the emerging markets to the world economy, the proactive role of customers and new approaches of institutions and governments in their energy and environmental policies.
The priorities on which we will concentrate are:
- redefining our strategy in response to the new business model and focusing:
- on restructuring conventional generation in Italy and Spain and selective growth in that segment in growth markets;
- on strengthening our leadership in renewable energy, with the creation of new capacity in high-potential markets and the development of new technologies on the path towards grid parity;
- on maintaining our leadership in efficiency, service quality and the smart technologies of our distribution grid;
- on delivering high-value-added services for our customers;
- maximizing cash flows, in both mature and emerging markets, through continuous improvements in operating efficiency, a selective investment plan and stringent control over working capital;
- completing the debt reduction plan, optimizing our asset portfolio and increasing the economic interest of the Group through minority buyouts and corporate reorganization.
These priorities are marked by a constant drive towards innovation, the only way to maintain and renew our leadership on a lasting basis, and by a strong focus on the sustainability of our operations, as a prerequisite for adding value over time to the benefit of our stakeholders. Buoyed by the results we have achieved and aware of the tools we have to meet the challenges that lie ahead, we will continue to work to achieve these value targets in the markets of significance to our shareholders.
The contribution of the operating divisions to Group performance is briefly described below.
Generation, Energy Management and Sales Italy
In 2013, macroeconomic conditions in Italy and the rest of Europe led to a further decline in electricity demand, which amounted to 317.1 TWh (-3.4% on the previous year). This situation, together with the increasing share of output generated from renewable sources, has tightened competition and increased the demand for balancing services for the system.
Generation by the thermal power plants of the Division declined by 13.9% from 2012. Due to the considerable water availability during the year, hydroelectric generation recorded a 27.4% increase.
Overall, the energy generated by the Division in Italy amounted to 59.6 TWh in 2013 (-5% on the previous year).
The gross operating margin of the Generation and Energy Management area amounted to €1,176 million in 2013, an increase of 7.8% compared with 2012, with a significant contribution coming from the services market, made possible by the availability and flexibility of our plant assets. In the gas segment, a revision of withdrawal commitments allowed us to rebalance volumes, thereby permitting us to avoid extra costs for lower-than-agreed withdrawals. The continuation of actions to improve the operating efficiency, reliability and safety of our plants also enabled significant cost savings compared with 2012.
The Sales area in 2013 continued to focus its attention on the most valuable segments of the mass market. In a highly competitive retail market, characterized by increasingly knowledgeable customers, the strategy we have adopted seeks to innovate our product range through the development of a wide range of turnkey solutions for more responsible and efficient energy use, the so-called “New Downstream”, shifting consumption to the most efficient supplier of electricity.
Enel Energia was once again the leading Italian operator in the energy market, with about 5.1 million electricity customers and 3.3 million natural gas customers at the end of 2013. Similarly, Enel Servizio Elettrico remained the leading operator in the enhanced protection market, with 22.4 million customers at December 31, 2013 (down 1.2 million compared with 2012 due to the gradual liberalization of the market).
The improvement in the quality of customer service perceived by customers enabled the two companies to hold first and second place in the ranking prepared by the Authority for Electricity and Gas (the Authority) of the best contact centers in the industry for the third year in a row. This performance was achieved through the rationalization of systems and integrated management of customers, without neglecting a constant focus on internal efficiency.
Quality is a distinguishing factor in developing the New Downstream segment. The new product offering, launched as a pilot project under the Enel Green Solution brand, has enabled Enel customers to improve the efficiency of their homes.
Our strategy and the actions of management are reflected in a gross operating margin of €866 million, an increase of 42.2% compared with 2012 and 54% compar ed with 2011.
Infrastructure and Networks Italy
The strong operational and financial performance of the Infrastructure and Networks Division in 2013 confirms Enel’s leadership in electricity distribution, with a total of 31.7 million customers served and 230 TWh of power distributed. Last year, the Division had revenues of €7,698 million and a gross operating margin of €4,008 million, an incr ease of 10.6% compared with 2012.
The great commitment to operational excellence produced a further improvement in the service quality, easily outperforming the targets set by the Authority. The number of interruptions per customer declined from 3.7 in 2012 to 3.3 in 2013, while the total duration of outages per customer improved sharply, reaching an average of 41 minutes, compared with 46 in 2012.
In 2013, Enel connected about 105 thousand renewable generation plants to the grid (1,800 MW). The total number of plants connected to our network has reached 540 thousand, with a capacity of 25,500 MW.
In Italy, the automated remote management system for electronic meters executed more than 7 million contract transactions and more than 400 million remote readings. In Spain, the installation of electronic meters continued with the installation of more than 4 million units, with a goal of serving about 13 million customers in the coming years.
In the field of smart grids, Enel confirmed its European leadership, chairing the “European Distribution System Operators (EDSO) for Smart Grids” association, through which it develops the implementation plans for pilot projects. During 2013, several projects were initiated with financing under the 7th Framework Programme of the European Commission, seeking to introduce smart grid and smart city technologies, including the evolvDSO, ADVANCED and Grid4EU projects.
Innovative projects also continued in Italy, such as the smart grid project in Isernia – with support from the Authority – and the projects of the Interregional Operational Plan for the southern regions funded by the Ministry for Economic Development.
In the smart cities field, Enel has launched projects in Italy, in L’Aquila, and at the international level, in Santiago, Chile, initiatives that join the other projects of the Enel Group around the world (Malaga, Barcelona and Búzios in Latin America).
An important contribution to the development of electric mobility was the signing of a number of agreements in 2013 with local and regional governments (Rome, Bari and the Region of Umbria) and private companies (BMW). Enel’s charging infrastructure for electric vehicles now exceeds 1,200 points.
The Public Lighting business area (Enel Sole) improved on the already positive results of the previous year and, thanks to developments in the Archilede® project and the extension of the CONSIP tender, has consolidated its leadership position in Italy and grew in Spain. In particular, thanks to the CONSIP “Servizio Luce 2“ agreement, some 200 thousand lighting points were taken under management in 2013, with total revenues of over €265 million. Last year also saw the consolidation of Enel Sole’s presence in Spain, as the company – together with Endesa Ingeniería – was awarded three long-term integrated management contracts (in Abarán, Rincón de la Victoria and Móra d’Ebre, for a total of more than 10 thousand lighting points).
Iberia and Latin America
In 2013, the Iberia and Latin America Division posted a gross operating margin of €6,746 million, a decrease of 6.7% compared with 2012. The decline was attributable to a fall of 18.7% in the margin achieved in Spain and Portugal, mainly as a result of regulatory and fiscal measures adopted in 2012 and 2013 by the Spanish government. However, the decline was partly offset by an improvement of 8.2% in the margin in Latin America and an increase in operating efficiency.
Investments in Spain and Portugal declined, to about €849 million, while they increased in Latin America, reaching €1,332 million.
Net financial debt also improved, largely as a result of the capital increase by the minority shareholders of Enersis, who paid the increase with €1,796 million in cash. The operation, which was successfully completed in March 2013, will help expand operations in the region with new investments, through both organic growth and the acquisition of non-controlling interests.
In Spain, the €396 million in costs from the application of regulatory measures approved in 2012 were joined by the effects of other fiscal and regulatory measures approved during 2013, with an additional negative impact of €933 million on the gross operating margin.
Despite the adverse effect of the additional measures, the gross operating margin in the Iberian peninsula only fell by €750 million compared with 2012, to €3,253 million. This was achieved thanks to the implementation of a targeted commercial strategy, with the launch and the strengthening of our value-added products and services, energy efficiency policies and the reduction of fixed costs.
Other positive factors include increased hydroelectric generation and better margins in energy trading operations.
Unlike Spain (where the electricity demand in the peninsular area fell by 2.2% between 2012 and 2013), the Latin American countries in which the Division operates are characterized by rapid growth in electricity demand: Peru (+6.6%), Chile (+4.2% in the SIC, +3.8% in the SING), Argentina (+3.6%), Brazil (+3.4%) and Colombia (+2.4%).
The distribution companies of the Division handled 61,512 GWh of power, with increases in Brazil (+4.4%), Chile (+4.4%), Peru (+2.7%), Argentina (+1.3%) and Colombia (+1.0%).
The gross operating margin of Latin American operations came to €3,493 million, an increase of 8.2% despite the adverse impact of drought in the region and the depreciation of local currencies against the euro (which led to a reduction of €350 million). Excluding this effect, the gross operating margin would have increased by 18%, confirming the region’s position as an important platform for growth.
This rise in profitability was due, among other things, to the payment by the Argentine government of a portion of costs not transferred to rates from 2007 to September 2013 (€381 million) and to an improvement of the generation business in Chile.
In 2013, the International Division posted revenues of €7,737 million and a gross operating margin of €1,405 million, reaching the targets set out in the business plan despite the deterioration in the business environment. The past year was characterized by numerous critical issues in the countries in which the Division operates, with a decline in demand and electricity prices, increased competition in retail markets and increased regulatory pressure from governments. On the operational side, output amounted to 63.2 TWh, a slight decrease compared with 2012. The effect of this decline on the income statement was offset by the effective operational management of assets and the maximization of institutional and regulatory factors. Finally, retail sales totaled 45.7 TWh, a decrease from the previous year due to the combined effect of developments in sourcing in France and the decline in demand in Romania and Russia.
In Slovakia, the Division achieved a gross operating margin of €708 million. The availability of nuclear facilities increased further, with an average load factor of 92.3%, making Slovenské elektrárne the world’s leading operator of VVER plants. Also in the nuclear field, work is continuing on construction of new units at the Mochovce plant. Once completed, and following the changes introduced to ensure compliance with new safety requirements determined with stress tests, the plant will be one of the most advanced systems among those currently in operation in Europe.
In Russia, Enel OGK-5 posted a gross operating margin of €399 million, an increase over the previous year thanks to higher prices and the initiatives taken to streamline and rationalize the cost structure, despite the decline in output attributable to the slowdown in demand and the concomitant entry into the market of our competitors’ new, more efficient units. The sales company RusEnergoSbyt, in which Enel holds a stake of 49.5%, has continued to diversify its commercial portfolio, achieving a gross operating margin for 2013 (pro-rated for the interest held by Enel) of about €112 million.
In Romania, the three distribution companies continued their activities to modernize grids and improve service quality, bringing their performance parameters close to the benchmarks typical of the most advanced countries. This achievement was made possible by the implementation of infrastructure and management initiatives based on the best practices adopted within the Enel Group. Including the performance of the electricity sales companies, the country posted a gross operating margin of €289 million, an increase of 25% over the previous year.
In France, the termination of the agreement with EDF on the Flamanville 3 project, which gave Enel anticipated capacity to sell on the market, prompted Enel France to focus on reorganizing its commercial portfolio. The gradual reduction of that anticipated capacity to zero, to be completed by 2015, made it necessary to review the sourcing of power and reduce overhead costs in order to protect margins in an environment of declining market prices and rising sourcing costs. This laid the foundations for a more flexible structure, one able to exploit any opportunities that could arise in the current process of market liberalization.
Renewable Energy Division
In 2013, the Renewable Energy Division continued to pursue its strategy of rapid growth, focused on emerging markets with abundant natural resources, strong growth in electricity demand and stable social and economic systems. At the same time, the Division continued to consolidate its presence in European markets.
Net installed capacity at the end of 2013 amounted to 8.9 GW, an increase of 0.9 GW compared with 2012 (+11.0 %). Net Group electricity generation amounted to 29.5 TWh in 2013, an increase of 4.3 TWh (up 17.3%) on 2012, due primarily to the increase in installed capacity.
The changes in capacity and output are reflected in an increase in the main financial aggregates. Division revenues amounted in 2013 to €2,827 million, an increase of 4.9% compared with 2012. The rise was mainly due to higher revenues from the sale of electricity, including incentives, thanks to increased production. The gross operating margin totaled €1,788 million, up 9.0% from the €1,641 million posted in 2012.
The Division developed major projects during the year.
In the United States, an agreement was reached with GE Capital to raise the Division’s stake in the Chisholm View (235 MW) and Prairie Rose (200 MW) wind farms to 75%. In the geothermal sector, the Cove Fort plant in the state of Utah (25 MW) entered service, while the wind segment saw the start of construction of the Origin facility (150 MW) in Oklahoma.
In Latin America, and in particular Brazil in the states of Bahia, Pernambuco and Rio Grande do Norte, construction began on three new wind farms with a total installed capacity of 192 MW. In Chile, the Division completed and connected its first two wind farms to the grid: the Talinay plant, in the Coquimbo region (90 MW) and the Valle de los Vientos plant, in the region of Antofagasta (90 MW). In Mexico, construction began on two new wind farms totaling 202 MW.
The Division also consolidated its presence in Europe during the year.
In Romania and Greece, photovoltaic plants with 77 MW of capacity were built and connected to the grid. In Greece, ESSE, an equally held joint venture with Sharp, placed 15 MW of photovoltaic capacity into service.
The Division strengthened its presence in Italy, thanks to the entry into service of two new photovoltaic plants at Serre Persano, in the province of Salerno, with a total installed capacity of 21 MW. In Sardinia, a project to convert a former Eridania sugar refinery into a 50 MW power plant was begun: the initiative is part of a broader plan to develop the locally sourced biomass generation industry in Italy.
Finally, in South Africa, as part of the renewable energy tender organized by the government, the Division was awarded the right to enter into electricity supply contracts with the South African utility Eskom for a total of 513 MW, including 314 MW of photovoltaic projects and 199 MW of wind projects. The photovoltaic systems will use thin-film solar panels produced by the 3SUN factory in Catania, the equally held joint venture between Enel Green Power, Sharp and STMicroelectronics.
The plant is expected to enter service in 2016. This important achievement places Enel Green Power among the leading renewable energy players in South Africa and also opens the way to possible future development opportunities for the Enel Group.
The year 2013 was marked by the sale of Enel’s stake in SeverEnergia, one of the largest gas fields in Russia, to Itera (Rosneft Group) for a total of $1.8 billion. This sale, which produced a gain of about €1 billion, and the concomitant signing of a long-term contract for the supply of gas to the power plants of Enel OGK-5 on particularly advantageous terms, confirmed the value and competitive advantage that a selective, focused presence in the upstream gas segment brings to the Group as a whole.
Enel’s activities are continuing in Algeria, where the Isarene project is being developed, with the start of production expected by the end of 2017. The field is estimated to have a plateau of about 3.5 billion cubic meters. In addition, the second exploration period of the South East Illizi project will follow the two discoveries made in the first exploration period.
Excellent results have been obtained also in Italy, where Enel has completed a seismic survey and so far identified a total of four exploration prospects that will be drilled over the next two years and expanded its portfolio with the submission of new applications for exploration permits.
Engineering and Research
During 2013, the Engineering and Research Division was involved in the refurbishment of the conventional and nuclear power plants of the Group and in supervision of the safety and performance of the nuclear assets of Endesa and Slovenské elektrárne.
The Research unit, in particular, continued to pursue the Group’s strategic research programs. In Italy, the renovation of the port facilities at the Brindisi power plant was completed. Construction of a covered coal storage facility at the same site park is under way.
In Sicily, at Porto Empedocle, work began on the partial conversion of the existing power plant from fuel oil to gas turbine systems. The construction of a regasification terminal within the port area also began.
In Russia, at the Reftinskaya power station, the largest plant in the world for the dry transportation and storage of ash (DARS) was completed, as were environmental improvements and revamping of the first 10 units of the power plant. The envir onmental upgrading of other units is also under way.
In Spain a feasibility study for the environmental upgrading and extension of the useful life of the Litoral coal-fired plant was carried out. In South America, the Division partnered with Endesa on a feasibility study for new coal-fired plants.
With regard to the Nuclear area, the monitoring activities of the Nuclear Safety Oversight unit were strengthened through greater integration with the operating units of the Group’s nuclear facilities and by sharing best practices with other leading nuclear operators.
At the nuclear power plants in Slovakia and Spain, engineering activities were begun to support the implementation of improvement measures identified during the stress testing. Finally, the team engaged in the engineering and construction of units 3 and 4 at the Mochovce nuclear power plant was strengthened further.
In the field of renewables generation, the Research unit was involved in the study and experimentation of new technologies and solutions to improve the integration into the grid of the electricity produced by distributed generators. Supplementing this effort, work continued on developing new generation storage systems, aimed at optimizing investment and electricity flows on the grid.
Finally, development work continued on creating energy efficiency solutions and value-added services for remote users, industrial districts and residential customers.
The Group’s strategic priorities in the period covered by the 2014-2018 Business Plan respond to the expected structural evolution in the world’s macroeconomic conditions and in the energy industry. More specifically, the former will continue to move ahead at two speeds: on the one hand the European countries, which are emerging slowly from the crisis; on the other, the emerging economies, especially those in Latin America, where electricity demand is still expanding rapidly.
In this context, Enel expects the following main trends to drive the evolution of these scenarios: (i) the emerging markets will continue to fuel global growth; (ii) technological innovation will be one of the key factors driving trends in the energy sector; (iii) end users will be increasingly well-informed about technology and environmental matters; and (iv) regulatory systems will sharpen their focus on environmental issues and system costs.
In the business plan, the Group confirms the increasingly important role of the emerging markets, with an investment policy targeted at consolidating its position and simplifying its corporate structure. Renewables will expand substantially, with careful selection of high-return investment opportunities. Another area of action will be the retail market, energy efficiency and, more generally, valueadded services, a segment with robust growth potential. In this area, as in the smart grid field, Enel intends to strengthen its leadership position, leveraging the key driver, technological innovation, and a geographically and technologically well-diversified asset portfolio which forms the foundation of the Group’s future development.
Reducing debt and generating cash flows will also remain a top priority for the Group. And maximization of cash flows is precisely the goal of the plan for optimizing operating costs launched in 2013, which has already led to the identification of major opportunities for efficiency gains, with results that have easily exceeded expectations. These opportunities will continue to be pursued in the coming years, with a special focus on businesses in the mature markets.
The Chief Executive Officer