Farmers to the sky, sailors to the waves and companies with activities regulated to the Official State Gazette (BOE). Endesa, owned by the Italian group Enel (70%) since 2009is very attentive to the official newspaper because more than 40% of its operating profit (ebitda) depends on what the regulator – the National Markets and Competition Commission (CNMC) in accordance with the Government’s guidelines – decides to pay to distribution networks from 2025 to 2031.

Endesa disputes with Iberdrola for first place on the podium of electricity distributors – both supply around 10 million customers -, it sells more electricity than it generates and is more exposed to the network business than its competitors. Hence the look. Network remuneration is one of the sensitive points of the electricity company. Analysts, who are betting on a year-end with better results than the weak 2023, plagued by unforeseen events – negative reports, falling prices and more financial costs – point out some more delicate points, among them, the revision of the dividend, the impact of the extraordinary tax on energy companies and the nuclear shutdown schedule. The company that José Bogas has run for 10 years – he has been with the company for 42 years – plans to present quarterly results this October. In November it will review its strategic plan for the period 2025-2027.

To understand where Endesa is and where it is going, we have to remember where it comes from. The large public energy group, completely privatized in 1998, passed into Italian hands – Enel – 15 years ago. The Italian group took over the electricity company’s businesses in Latin America and comfortably recovered the purchase price – 40,000 million. Endesa, behind in its renewable commitment, was constrained to the Iberian market. The investment bank Jefferies photographs the reality of the electricity company in a recent report: “It lacks the diversification that is observed in almost all of its European peers. This focus on a single country has made Endesa more vulnerable to economic and regulatory headwinds at the national level.” “[Endesa] It is not independent and does not have a very defined strategy,” summarizes Álvaro Blasco (ATL Capital).

But not everything is negative. Jefferies believes the regulatory future looks good. Or, what is the same, he believes that the regulator will raise the remuneration of recent years – 5.58% – to get closer to the claims of the companies distributors—between 7% and 8%—. “It will benefit from regulatory changes in Spain, with more than 40% of its enterprise value (EV or capitalization plus debt) linked to its network business and a solid balance sheet,” the firm notes. In euros, an increase in remuneration towards 7% would increase gross profit by 200 million in 2026.

The certainty that it will have a tailwind rests on the decarbonization plans approved by Spain. The country needs more electricity—more demand—and that means more investment in networks and incentives for investment. For the last five years, power companies have kept regulated assets flat. They have invested only to cover their amortization. Experts believe that the Government is going to open its hand. For more than a decade, the regulatory limit on annual investments in distribution and transmission networks has been set at 0.13% of GDP, and eliminating the limit is a logical step to comply with the National Integrated Climate Energy Plan (PNIEC). ) and the incorporation of 4.6 GW per year of wind and solar capacity until 2030.

Endesa is in the race. The electricity company produces less than what it sells and, although this may be an advantage in the short term – price volatility allows it to buy cheap energy and sell it more expensive in the coming months – the company tries to take a position to cover the committed supply contracts. The context is not comfortable. Electricity demand is improving – the estimated increase so far this year is around 1.4% – but it is still weak. There is plenty of energy and this circumstance will continue to affect prices in the coming years. As will the planned closure of 7.3 GW of nuclear capacity in Spain until 2035, a plan that Endesa wants to review, according to its CEO, José Bogas. For Endesa – a shareholder in the Almaraz, Ascó, Vandellòs, Garoña and Trillo plants – the nuclear blackout has two sides: positive because it will raise electricity prices and negative because the company will have to replace the closed capacity. What is eaten is what is served, but one more push towards renewables. Endesa has 10.1 GW of installed renewable capacity (solar and wind energy), which means that 40% of its production is clean.

The nuclear blackout and the possible consolidation of the extraordinary tax on energy groups —208 million in 2023— are two of the great challenges that Endesa faces, points out Fernando Lafuente, Alantra analyst. Lafuente is optimistic about the company’s financial performance for the current year, with forecasts for operating profit, ebitda, of between 4.9 billion and 5.2 billion. “It could reach or even exceed the proposed objectives,” he points out. Barclays shares the analysis and adds more positive ingredients: falling financial costs and controlled debt – it forecasts 11.1 billion at the end of the year.

Dividends

Endesa is comfortable in its league, the Iberian market. It has already adjusted the dividend policy to accommodate the impact of 530 million euros that the International Court of Arbitration forced it to pay Qatar Energy last year for the adjustment of gas prices in contracts signed before the crisis. It updated its policy for the period 2024-2026 and maintained a 70% pay out (percentage of profit distributed to shareholders) for the three-year period, although placing the floor in the remuneration to its shareholders at one euro per share, with the forecast of being able to reach 1.5 euros in 2026. The market expects more.

“The dividend was attractive,” explains Blasco, “but 5% profitability is also given by other securities, such as banks.” “There should be a more flexible and clear approach, similar to that of other major companies in the sector, that allows sustainable growth and visibility,” says Lafuente. More and better cast. For the last part of the year, Barclays forecasts a positive impact on business margins (retail and generation). And there is an interesting jingle in the box due to the agreements to sell photovoltaics to the Masdar fund in Abu Dhabi for more than 1.2 billion.