Morningstar | Endesa's 2019-21 Business Plan's Macro Assumptions Are Too Optimistic
Endesa is an integrated utility operating in power production, distribution, and supply in the Iberian Peninsula.Regulated businesses account for more than 60% of the group’s EBITDA. The bulk of these consist of distribution networks in Spain whose regulated return is set to 6.5% through the end of the current regulatory period in 2019. As of 2020, the regulatory return should decrease to 5.5% on the shift to a WACC-based remuneration scheme, in line other European countries' regulation. The liberalised generation and supply division accounts for one third of the group's EBITDA. Production mix is competitive, as production from nuclear and hydro plants weighs 50% of total production. Acquisition of Enel Green Power Espana in 2016 reflects the group's focus on development of renewables which should improve generation's margins. Despite this competitive mix, the group has exposure to gas, coal and CO2 prices as thermal plants' production will still account for one third of production's volumes after the closure of 2.1 GW of coal plants by 2021. Altogether, we see the group's 2020-21 earnings targets as too high since they are underpinned by coal, gas, and CO2 price assumptions below current forwards and Morningstar's forecasts.In its 2019-21 business plan, Endesa incresased its investments on renewables expansion. Upon the plan completion in 2021, we forecast that the group's leverage will increase from 1.7 in 2018 to 1.8, which is manageable and well below the sector's average. On the flip side, the group canceled its one-year dividend floor and reduced its payout ratio to 80% in 2021, which caught investors off guard and reflects deteriorating stewardship in our view.Endesa is engaged in the production, transmission, distribution, and supply of electricity, through hydroelectric, fossil fuel, and nuclear generation. Co. is also engaged in the mining of coal for use in its fossil-fuel electric plants; mining research; land restoration, and environmental monitoring and control.
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