Endesa Sa Madrid

Hello, good morning, everybody, and welcome to the nine-month 2024 results presentation, which will be hosted by the CEO, Jose Bogas, and the CFO, Marco Palermo. Following the presentation, we will have the usual Q&A session, open to those connected on the call and on the web. We kindly ask you to limit your question to the financial and operational performance during the period, and to wait until the 19th of November for the strategic plan update. Thank you, and now let me hand over to Jose Bogas.

Okay, thank you. Thank you, Mara, and good morning to everybody. Let me, first of all, just to express my condolence to all the families affected by the storms yesterday and tonight, mainly in Valencia and Albacete. Having said that, let's start with the highlights of the period. During this nine months of 2024, we recorded a strong financial performance underpinned by a strong delivery across all businesses. EBITDA grew at 16% versus nine months 2023, reaching 3.9 billion euros, while net income increased by 33% to 1.4%. FFO showed a positive evolution during the period, reaching 2.7 billion euros, with a strong improvement of the cash in the third quarter. This good performance has allowed FFO over net debt ratio to stand at healthy levels. All this confirms that we are in a comfortable position to achieve the upper end of the target set for the full year. On slide number four, a brief explanation of the performance of main operational indicators. Emission-free output on the mainland is increased to 88% of the total after expanding renewable capacity to more than 10 gigawatts. The intensification of competition in a context of sustained low prices has led to a reduction in the customer base, although in the third quarter we have seen a change in trends. I would add that our investment in distribution, where we have allocated 50% of CAPES, have resulted in the good quality indicators that we see on a sustained basis. Slide 5 illustrates market dynamic evolution year on year. Average electricity prices in the first nine months of 2024 were 42 percent down versus last year, despite showing a remarkable rebound in the third quarter due to the seasonality of the demand in the summer month and a pickup in the CO2 and gas prices. Moreover, pool price volatility remains high despite a more stable commodity price scenario due to higher hydro and photovoltaic contribution. It should be noted that solar photovoltaic production keeps setting new records in Iberia, while hydro availability increased significantly, especially quarter on quarter. In the same way, mainland electricity demand has continued to show signs of a recovery in the last quarter, which led to a year-to-date demand growth of 1.5% once adjusted by water and calendar effects. Demand in Endesa's area decreased by minus 1% or minus 0.2% in adjusted terms. The decline in energy-intensive industrial consumption, in particular in the paper and metal industries, was mostly offset by higher activity in the service sector and residential consumption. Finally, 2024 forwards in the remainder of the year are trading activities at around 80 euros per megawatt hour with terms into around 60 euros per megawatt hour expected average price for 2024. Energy forwards for the next two years are trading at 70 and 65 euros per megawatt respectively on the recovery path from the first quarter levels. On slide number six, a few more details of the generation mix evolution. 78% of our mainland capacity is based on CO2-free technologies. As a result, 88% of our production has been CO2-free, an increase of 9% year-on-year. It is also worth highlighting the important contribution of renewable energy during this period, with a 36% output increase. This improvement was the result of higher solar capacity and a significant boost in hydro production thanks to higher rainfall and a strong reservoir level which has brought about a 69% output rise year on year. On slide number seven, as you know, last July we announced the incorporation of a partner, Mazda, to a portfolio of solar assets as a part of the deployment of a partnership business model representing two gigawatts of photovoltaic solar assets from 48 plants in operation. For Endesa, the operation retains full control of a strategic asset within our integrated business strategy, adding value through a 15 years power purchase agreement, PPA, for 100% of the output. This is strategically significant as it allows the company to maintain control over critical assets while securing a long-term agreement for energy procurement at a competitive cost, providing financial proceeds to maintain future growth. Now on slide number eight, we detail the main drivers of the liberalized power sales performance. The different actions and commercial campaigns allowed us to stabilize our portfolio at 6.7 million customers, same figures as in first half and above the average level of the last five years. As we expected, the decline in our customer portfolio observed in the second quarter is considerably in the third quarter. The action plan implemented by the company to retain the most valuable customer together with the expected evolution of last quarter prices make us confident to stabilize the portfolio in the coming months. Deep diving into the performance of our integrated strategy on slide number nine. Unitary free power margin recorded a strong performance, reaching 57 euros per megawatt hour. This is the result of a stable margin at 3 billion euros in absolute terms, but lower liberalized sales. the margin resilience was mainly due to the following factor. The first one, lower generation margins where the expected normalization in thermal activity is mitigated by a better performance of the inframarginal margins. Second, positive results achieved in the management of the soil position returning to more moderate levels due to lower volumes. And third, sound improvement of supply margin to around 18 euros per megawatt hour, which proves the resilience of our strategy. Progressing in our hedging strategy, we have already secured almost all of our 2024 and 2025 output, and 70% for 2026. The energy price reference for the last two years is around 65 euros per megawatt hour. Turning to slide number 10 on gas business, total gas sales were 15% down due to a significant drop in industrial customer demand and the sharp decrease in CCGT's load factor, resulting from the increase in renewable output during the period. Gas unitary margins increased from around minus 4 euros per megawatt hour recorded last year to a more normalized level of around 2 euros per megawatt hour, in line with our full-year forecast. Our hedge volumes give us comfort in meeting the 2024 margin target and providing a high degree of protection going forward. And now I will hand over to Marco, who will detail the financial results.

Thank you, Pepe, and good morning, everybody. As we had anticipated, financial results had an excellent performance, notably in the third quarter, in terms of both EBITDA and net income. EBITDA reached €3.9 billion, up 16% on the first nine months of 2024, while net income was €1.4 billion, 33% higher than previous year. Finally, a strong cash generation in the period with a remarkable performance also in this third quarter. We now turn to the analysis of the eBTDA evolution key drivers. I'm now on slide 13. In distribution, 7% eBTDA increase, as we will explain later on. The integrated business of generation and supply increased by €0.4 billion on the back of the strong performance of customers eBTDA, both in power and gas. the larger contribution from the renewable business. And on the other hand, conventional generation remains flat. The main factors behind this flat evolution are the normalization of the thermal activity and the lower short position contribution that are offset by better gas margin. the structure and adjustment segment, which reflects the 1.2 levy impact in both years, remains flat. Moving into deeper analysis, we are on slide 14. Generation and supply BTDA is up 20% versus 2023, reaching 2.6 billion euro. Looking at the moving parts of the period, gas business, which represent the bulk of this increase, recovers from last year's extraordinary negative situation, as already detailed. Free power margin is mostly in line with last year, as Pepe just commented on. Finally, our ongoing focus on efficiencies drove fixed cost improvement. On slide 15 now, grid's EBITDA stood at 1.5 billion euro, up by 7% versus previous year, driven by a gross margin increase, mainly explained by the positive outcome of the final remuneration for the year 2020, and the fixed cost and other improvement thanks to the provision reversal associated to the sale of the optic fiber network and achieved efficiencies. Moving now to the analysis below ABTDA, I'm on slide 16. DNA increased mainly due to the investment effort carried out in renewables, distribution, and retail. Net financial results decreased mostly on the back of lower average gross debt, but in a context of higher interest rates. And finally, tax rate reached 27% affected by the non-deductibility of the 1.2% temporary energy tax booked in Q1. As a consequence of the above, net income EBITDA rate improved 5 percentage points versus previous year. Moving to the next slide related to the cash generation, FFO reached €2.7 billion, the main moving parts being, first, negative working capital of around €0.6 billion, mostly affected by the payment of the Qatar arbitration in Q1. And second, a favourable evolution of income tax outflows, while net financial expenses were slightly above last year. Excluding the mentioned extraordinary gas arbitration paid this year, and taking into account the last year we cashed in around €0.4 billion from non-mainland regulatory working capital accumulated backlog, FFO would have increased by €0.8 billion, proving the sound cash generation throughout the period. On slide 18 now, net financial debt remained flat versus the full year 2023, standing at €10.4 billion. The strong cash flow generation of the period was enough to compensate our investment needs as well as the dividend payment. Moreover, gross financial debt slightly decreased over last year, while cost of debt rose to 3.6%. Finally, our strong commitment to a strict financial discipline has resulted in robust credit metrics. Good examples are the 2.4 times leverage or the 44% FFO on net debt ratio. And now I hand over to Pepe for the closing remarks.

Thank you, Marco. The strong set of results achieved in the first nine months of the year are once again clear evidence of the importance of our integrated strategy. This result also translated into a robust cash generation being instrumental in maintaining healthy credit metrics. On the back of these figures, and also taking into account the recent ruling on the social bonus to be booked in the fourth quarter, we expect to conclude the year at the top end of the announced guidance. Thank you for your attention, and let's now move to the Q&A.

The telephone Q&A session starts now. If you wish to ask a question, please press star five on your telephone keypad. If you change your mind, please press star five again on your telephone keypad. Please ensure your phone is not muted.

Okay, thank you, Pepe. Thank you, Marco. Alberto Gandolfi from Goldman Sachs. Please, Alberto, go ahead.

Thank you. Thank you, Maren. Good morning. Thank you for taking my questions. I'll stick to three, but I'll be brief. The first question is on capital allocation. I'm not going to be overly explicit because there is going to be a CMD in November, but just to see your priorities, We have not seen a proposal for a low return in power grid. We don't know if you can step up capex. So I guess the question is, how do you balance the very strong long-term opportunities for growth in Spain with this vacuum, regulatory vacuum? We have seen the press talking about you potentially bidding for hydro assets in Spain. So what I was trying to ask you here is how do you bridge these next 12, 18 months whereby we're not going to have maybe much regulatory clarity? Are you open to acquisitions? Are you open to a share buyback? How do you rank the use of capital between organic growth, external growth, and return of capital to shareholders? The second question is on data centers. You've been very vocal, very open. Recently, you disclosed that you awarded nearly 3 gigawatts of connection to data center developers. I wanted to ask you, can you give us an update on that? Who did you award these connections to? Is it to intermediaries or is it directly to tech companies that are going to build directly data centers? And how much do you expect for Spain as a whole by 2030? So not just you, the whole country. I'm trying to gauge the power demand implications from it. Last question. I think you were very clear already, Pepe. You said that the €2 MWh should be seen now as a normalized level for the gas unitary margin. Can I ask you, can you confirm that how much of this is hedged for next year, the year after perhaps? This has been a very volatile driver of your P&L, so I was trying to understand if there's any clarity that reduces the value at risk of this item. Thank you for taking my questions.

Okay, thank you very much, Alberto, for the question. First of all, with regard to the capital allocation, I would say that we should understand that, and I think I said that in the last threshold presentation, we are in the best sector in the best moment. So we are facing a lot of opportunities in the future. The first thing that I think is that... We should have a strong balance sheet just to go ahead with all these opportunities. But we should take care, as you have said, about where to allocate the capital. Well, first of all, you have asked me about M&A. Well, I would say that current market context could bring some M&A opportunities, as long as always they fit into our equity story and create value for our shareholders. In that sense, we are trying just to do that. Again, you know the operation that we did with Masdar, looking for having retained control while maximizing our productivity and returns on invested capital. It is a reversal operation. movement, but always looking just to have a strong fire to go ahead with the future. In terms of regulation, I would say the same. I think that mainly distribution, but also in the island, there are many opportunities that will be based on the right fair remuneration of these activities. But I am absolutely sure, if you look about the National Energy and Climate Plan of Spain, they are absolutely focused on electrification and networks. That means with a huge increase versus the previous plan, the plan of 2020, that means that the government would do all the things just to get this plan. And it is clear that we need just to have a fair regulation. So we will... trying to think about the long-term expectation. There are a lot of them, and we will select the more valuable for our shareholders. Talking about the data centers, you're right. We said that we have today approved a connection of about three gigawatts. That is the figure that we have today. That means there are... something around 50, I would say 50 more or less sites. So that means that there are not very big one, but the one that we have approved. We have a direct conversation with the final user of these data centers. And also, we have been talking with Intermediate just to look for this. How much data centers would be in the year 2030? I don't know. But what I will say is that in our expectations, we will see more than 15 terawatt hours in the year 2030 coming from these data centers. Just to explain the normalized gas unitary margin, I would ask Marco just to

Thank you, Pepe, and good morning, Alberto. Question number three, so on gas margin. I guess that with the amount of sales that we are seeing right now that is somehow lower than previous year, so ranging probably for the full year approximately 60, 70 terawatt hour, I guess that with this, the margin that we do expect on a normalized base is not yet the one that we are seeing right now. So the two Europe megatower that we are seeing right now is not yet the stabilized gas margin. So we see something higher than that.

Thank you, Alberto. We have now Pedro Alves from CaixaBank.

Hi. Good morning. Thank you for taking my question. The first one on the hedges in our sales for 2026, which have increased from roughly 60 percent to 70 percent in terms of your inframarginal production. So likely benefiting from this power price uplift on the forwards curve. So what's the level of the hedged price right now for 2026? And where do you expect to land by the year end? And secondly, if you can comment on the outlook for supply margins, which seem sequentially stronger than the previous quarter. So what's your outlook for the coming quarters? Thank you.

Good morning, Pedro. Thank you for your questions. So regarding the hedge of 2026, of course, we are still in the process of doing our job. So we will expect by year end just to rise this number progressively, I would say. with what you have seen till now. Question number two regarding the supply and regarding, I guess, basically the churn rate. What we're seeing on the market is a situation with still very high competition. So the churn rate still remains very high. But on the other hand, the competition, again, It's on the channels. It's not so much on price, frankly. Despite all this, so despite basically conditions as well as we have seen in the first six months of the year, in the third quarter, we have been able just to stabilize our customer base. So, I mean, and that's what we think will, what the situation we think will stay till the year end. Thank you.

Okay, next analysis, Manuel Palomo from Exxon BNP.

Hello, good morning, everyone. Sorry, but my first question will insist on the last one. It's a follow-up. It's on the loss of gas and electricity clients. It has been significant year to date. I know that we are already on the 30th of October, so I guess that you could have now maybe a better view. Any thoughts on what will be the evolution towards the year end? Should we assume that from now on it's going to be stable, or that we could assume that there could be additional losses in the number of clients? And also, I would be interested to know what is the type of customers that you're losing? Are you taking any measure in order to tackle the loss of clients? Second question is a follow-up on another question that was asked before, which is about the gas margins. uh there's been a significant improvement we are already at around two euro megawatt hour gas margin but for the full year 2026 guidance was at 70 if i recall well so do you think uh there's still a chance that that you achieve it or maybe a situation has It's got a bit worse. And lastly, it's a clarification. In the slide number nine, you are giving the hedge a marginal output. Given that, you will continue to add megawatts in the coming years, I guess, at both PV and wind mainly. And could you share with us what is the total volume of inframarginal production that you expect by 2026, just to know what is the amount of open hours that you have at this point? Thank you very much.

Okay, Manuel, thank you very much for the question. I will try just to give you some color about the first one and then Marco could go deeper in this question and also to answer the second and third question. The loss of customers. You are right. And you know, first of all, we are worried about that. But I will try just to explain our position here. First of all, the scenario, the scenario that we have had, mainly in the second quarter of this year, with reduced electricity and gas prices versus the year 2023, something around 50%, more or less, more or less. In that context, what we have seen is increased activity of mainly small supply companies. These kind of companies, in my opinion, I am not sure if I am right or not, But in my opinion, try to sell based on forward prices and try to buy based on a spot market. So when we have these very low prices, they are more aggressive than in other times in which prices are higher. On the other hand, there are the oil and gas companies that combines offers of power and fuel discounts. I don't know if this is right or not. For sure it's a very good thing for the oil and gas companies, but they have a strong position that I don't want to commend, but that is what happened. Then the small supply companies and also the oil and gas companies are the ones trying to capture more customers. But I should say that this competition is not so much based on price discounts, but more aggressive, I would say, push commercial campaigns. So therefore, supply margins remains at attractive level, I would say. On the other hand, the customers that have left our customer base are those with the highest churn rate and the lowest value added for us. taking all into account what we say is we are not happy just because of the loss of the customers. But we have stabilized these losses. We are expecting more stable customer base in the future, in the fourth quarter and in the next year. We are maintaining even more, increasing, increasing the margin that we have in the supply market. Well, we are dealing with a problem that we have seen in the past many times. The result of all what we have done really gives us more value than the ones that we had previously. Well, I will give the floor to Marco.

Hi, Emanuela. So question number two, gas margin 2026. So the formal answer is that we will actualize guidelines. The less formal answer is that given the level of edging that we have for 2026, I would say that we look comfortably to margins in 2026. Then question number three, total volume of inframarginal production in 2026. What we are seeing now is approximately 45 terawatt hour as a production in that year. Thank you.

Thank you, Manuel. Next question comes from Jorge Guimaraes from JB Capital.

Hi, good morning. I have two questions. The first one is related with the news about M&A. There was some news in Spanish press that you could be interested in acquiring hydro assets from Axion Energía. So my first question is, and given the price tag that was mentioned around 1 billion euros, how would you make great value after paying that price for these assets? That would be the first one. The second one is a bit of a detailed question, if you can give us some visibility about the internal PPA pricing in the deal with Masdaq. And the final one is a bit of a follow-up on the margin question, if you can give us some visibility about the supply margin for 2025. Thank you very much.

Okay, Jorge. Let me say, as I have answered before, in the current market situation or context, there are some M&A opportunities. As I have said, we will go ahead this as long as these opportunities fit into our equity story and create value for our shareholders. So that is, in the generation business, our focus is on wind and hydro, that is clear, wind and hydro asset. And as always, I would like just to underline this, provided the price is attractive, not in other cases. And Marco, if you want to answer.

Thank you, Pepe. And good morning, Jorge. So question number two regarding the PPA price of Mazda. Of course, we can't disclose. What I can say is that, as we commented before, this is a price that is, of course, lower than our LCOE. And our LCOE is more in the 40s than in the 30s. So, I mean... That's what I can elaborate on that. And third question regarding the supply margin in 2025. Well, I would assume that is something, you know, stable when you look at what we had in the first nine months of 2024. Thank you.

We move now to JP Morgan. Javier Garrido, please go ahead.

Yeah, good morning, everyone. I would like to ask about the 24 guidance, which if I understood correctly, you said in the call that you expect to reach the top end of the net income guidance range, including the Supreme Court ruling on the social tariffs. So I really, really struggle to reconcile that with the performance here today. So I just wanted to double check first. that you're still expecting 1.3 to 1.4 billion euros of EBITDA in Q4, in line with the guidance you provided for the different quarters in Q1. And second, with 1.3 to 1.4 billion euros EBITDA, why you should be only getting to 1.7 billion euros of net income for the full year. You can Let us know if there is any negative exceptional. You are assuming there is anything special in the fourth quarter. Otherwise, if the $1.7 billion guidance is simply a very conservative number. Thank you.

Well, I will try to. Thank you, first of all, Javier, for the question. I would like to give you, again, some color, and then Marco will go deeper in it. Well, first of all, you are a traditional analyst and always what you have heard about us is that we are confident that is what we say we are confident to reach in this case we have been more pushing saying that we are confident to reach to reach the upper end of the full year EBITDA full year net net income You never know. We are not expecting any special thing in the last quarter. But we prefer just to be cautious and to be confident and to say that is a typical sentence, to be comfortable about reaching our objective. But, Marco, could you elaborate a little bit more?

I guess that actually you commented on what I wanted to say. But thank you for the question, Javier.

Well, next question comes from Rob Pullain from Morgan Stanley.

Thank you. Good morning, everyone. I have one question, and I'm going to go a bit wild. So may I ask, given the so-called nuclear renaissance in the U.S., and especially the Constellation Microsoft contract on Three Mile Island, May I ask, what is the likelihood that Endesa could participate in this theme? Whilst your nuclear plants are earmarked for closure starting in 2027, is there a scenario whereby even if the regulator and the Spanish system doesn't want this technology, that Endesa could run some nuclear capacity on a private contract, such as with a U.S. tech company? Thank you very much in advance for your thoughts.

Okay, thank you for the question. As you know, we have a plan defined by the government of Spain regarding to the shutdown of the different unit of nuclear power plants. So that is what we have today. And that means that we are going to shut down the first one. Almaraz in the year 2027, and the last one in the year 2035. So that is what we had. Many times I have said that from an intellectual point of view, I am against this shutdown, this close of the nuclear power plant, because I think, first of all, that the life of this plant has been demonstrated. taking into account what happened in the U.S. that could be higher than the 45 years that we have today here in Spain, reaching 60 or even 80 years. We have or there are many reasons why to maintain these nuclear power plants. Having said that, we will do whatever what the government is paying and the energy policy is paying will mark for the future. So, that is clear for us. From an intellectual point of view, we will continue trying to convince the government and others about the continuity of this, just because we really believe it is a good thing for Spain. But we will do whatever the strategy or energy policy of the government will ask us.

Okay, thank you. We go now with the last question that comes from Javier Suarez from Mediabanca.

Hi, good morning, and thank you for the presentation. Two follow-up questions on the regulatory update on distribution. So the question is much more on the intangible than the tangible. So the intangible is that can you update us on any conversation with the current administration to accelerate investment? I'm saying this because there is a sense of urgency that comes from an additional demand in the system that doesn't seem to come with the same regulatory sense of urgency. So would you expect that the regulatory document that should be unveiled in December will provide the sector and there's a no visibility to start and accelerate CapEx on the distribution network? And maybe a second question that is related to the first one is that in your scenario, when do you think that we are going to see additional demand from artificial intelligence-related technologies or new data centers? Is that something imminent, i.e., that you expect to see in the next couple of years, and that goes beyond in your part of the town in your business plan? Thank you.

Thank you, Javier. Regarding to the regulation, the distribution, I agree with you that it is urgent and we need some visibility. Having said that, we have had some, I was going to say many, some conversation with the regulator about these I am very confident about what the regulator is going to do because they are aware absolutely about the need of reinforce the network. So I am confident based on our conversation and I would like us to thank the regulator this conversation that give us of comfortability, we will see what happens at the end. But I am confident. On the other hand, it's not only to be confident, it's just to give a signal, a clear signal. So we are asking just to have something or more visibility or formal visibility, let's say that, as soon as possible. And with regard to the increase in demand due to the data centers, I would say that our expectation without data centers is an increase of 15 terawatt hour in the year 2023, more or less. On top of that, we will have another 15 terawatt hours That would be coming from the data center. That would be our expectation for the future. If my colleagues don't correct me, because when I have said the 15 terabyte hour, they have seen me with a strange face. No, it is right. We are, no, no, no, okay. They agree with me. 15 plus 15.

Marco. Okay, just on the regulatory framework, I guess that Pepe commented everything. Just here to remind that when we apply the European framework to the current market condition, I mean, we end up with a range that is a remuneration that is between 7.3 and 8.7. So on the additional demand, I guess that... you know, also that Pepe elaborated. What I want to remind here is that we have been considering space on the grid, on the network for the last, I would say, three, four years to data centers totaling approximately, I would say, probably at the end of the year, it would be close to three gigabit for our grid. So, I mean, not all of this could probably come online and end up having real data sensors behind it, but something should start to kick in probably, I would say, next year or the following. So there has been some work that has been done during the last few years. So, I mean, this should be somehow a progression that sooner or later should start to kick in. Thank you.

Okay, and now this was the last question from the conference call. Thank you very much, everybody, for your participation. And just remind you that the IR team is always available for any further questions. Have a nice day.