Enel Reuters: ENEI.MI Bloomberg: ENEL IM Exchange: MIL Ticker: ENEI. Key issues to track in Global Markets Research. Company.

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1 Company Global Markets Research Europe Italy Utilities Electricity 22 December 2009 Enel Reuters: ENEI.MI Bloomberg: ENEL IM Exchange: MIL Ticker: ENEI Key issues to track in 2010 Virginia Sanz De Madrid Grosse Research Analyst (++34) Gilles Errico Research Analyst (+39) Key themes for 2010 With a macro environment that is improving only mildly, the market is concerned that Enel's management could lower guidance next March. This note summarizes the key themes for 2010 that would allow management to meet its strategic and financial targets after the acquisition of Endesa. We believe that the restructuring story will continue, that profitability will be protected by risk management and the implementation of synergies while the delivery of disposals should be a major catalyst for the investment case. Dividend yield is 6.5%, above sector average. Profitability in consolidated markets Latest data on electricity demand shows that the macro environment is not yet improving in Italy and Spain, yet the company has pursued aggressive forward selling strategy to protect its generation business. Another 40% of its EBITDA comes from regulated activities with stable and predictable cash flows. Therefore, we believe that Enel should be able to meet its E16bn EBITDA target for Growth opportunities in emerging markets and renewables The company recently confirmed its strong commitment to develop the LatAm business with E5bn of capex to consolidate its leadership. It also targets to optimise the complex corporate structure The implementation of synergies will further increase profitability. Another growing area is renewables where its potential was boosted by recent acquisitions of projects and pipeline. Cash flow generation, dividends and disposals We think cash flow management and a stricter financial discipline should generate almost E2bn FCF, ex disposals making the E0.26 DPS sustainable (see p. 5). This top-end of peers yield is the most attractive angle of the investment case. Enel targets E7bn of disposals in We expect sale of HV grid in Spain in H1; recently the CEO reiterated that an IPO of Enel Green Power could materialize in the summer. Thus, debt could fall to E45 by 2010 yearend. Delivery of disposals, which the market continues to view skeptically, and securitization of the tariff deficit would be the stock s main catalyst and would restore investor confidence. We confirm our TP of E4.7. Risks relates to ability to complete the disposals We value Enel using sum-of-the-parts where generation is valued using DCF with LT power prices of E 75/MWh for Italy, E 58/MWh for Spain and E 61/MWh for Slovakia. Distribution is valued at RAB in Italy and using a 7.5x EBITDA multiple in Spain. EGP is valued on a regional EV/installed MW basis: LatAm is valued at market. Total target EV is E 122bn (implied 7.6x 2010 EBITDA). Downside risks mostly relate to a failure to deliver on the disposal and tariff deficit securitization. Forecasts and ratios Year End Dec A 2009E 2010E 2011E P/E (DB EPS) (x) EV/EBITDA (x) Yield (%) Source: Deutsche Bank estimates, company data Strategy Update Buy Price at 22 Dec 2009 (EUR) 4.08 Price Target (EUR) week range (EUR) Price/price relative /06 6/07 12/07 6/08 12/08 6/09 Enel DJ (.STOXXE) (Rebased) Performance (%) 1m 3m 12m Absolute DJ (.STOXXE) Stock & option liquidity data Market cap (EUR)(m) 38,342.2 Shares outstanding (m) 9,403 Free float (%) 100 Option volume (und. shrs., 1M avg.) 3,304,748 Implied & Realized Volatility (3M) 100% 80% 60% 40% 20% 0% Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Realized Vol Implied Vol (ATM) Implied Volatility (3M, ATM) vs. Peers EL LY *S EN IBE R 40.1% 35.8% 28.1% 23.2% 22.6% 21.6% *Weighted-avg. of index components Data as of 18-Aug-09 /London All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of DBSI in the United States at no cost. Customers can access IR at or by calling DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 106/05/2009

2 Model updated:05 November 2009 Running the numbers Europe Italy Electricity Enel Reuters: ENEI.MI Buy Bloomberg: ENEL IM Price (22 Dec 09) EUR 4.08 Target price EUR week Range EUR Market Cap (m) EURm 38,342 USDm 54,568 Company Profile Enel is Italy's largest power company and Europe's fourthlargest listed utility, established in 22 countries around the world. Enel produces and sells electricity and gas in Europe, North and Latin America. Enel has 84,970 MW of generating capacity and serves more than 50 million power and gas customers. Price Performance Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Margin Trends Enel DJ (.STOXXE) (Rebased) E 10E 11E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 10E 11E Sales growth (LHS) E 10E 11E Net debt/equity (LHS) Virginia Sanz De Madrid Grosse virginia.sanz-de-madrid@db.com Fiscal year end 31-Dec E 2010E 2011E Financial Summary DB EPS (EUR) Reported EPS (EUR) DPS (EUR) BVPS (EUR) Weighted average shares (m) 6,192 6,192 6,192 9,403 9,403 9,403 Average market cap (EURm) 43,835 49,710 39,053 38,342 38,342 38,342 Enterprise value (EURm) 67, , , , , ,839 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) 2.0 nm Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (EURm) Sales revenue 38,513 43,673 61,184 65,980 63,937 65,734 Gross profit 9,282 12,517 15,606 17,213 17,453 18,438 EBITDA 8,019 10,023 14,318 15,899 16,113 17,070 Depreciation 2,154 2,575 4,442 5,006 5,381 5,555 Amortisation EBIT 5,556 6,990 9,541 10,564 10,418 11,215 Net interest income(expense) ,390-2,956-2,404-2,593-2,799 Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax 5,168 6,088 6,379 8,208 7,873 8,464 Income tax expense 2,067 2, ,069 2,680 2,980 Minorities ,057 1,107 1,157 Other post-tax income/(expense) Net profit 3,036 3,977 5,293 5,083 4,087 4,328 DB adjustments (including dilution) ,826-1, DB Net profit 3,036 3,521 3,467 4,067 4,087 4,328 Cash Flow (EURm) Cash flow from operations 3,818-2,835 11,179 11,665 11,739 11,737 Net Capex -2,963-5,230-6,307-6,361-6,930-6,430 Free cash flow 855-8,065 4,873 5,304 4,809 5,307 Equity raised/(bought back) , Dividends paid -3,959-3,180-3,034-2,736-2,440-2,546 Net inc/(dec) in borrowings Other investing/financing cash flows ,991 7,576 8, Net cash flow -3,156-63,500 9,415 19,399 2,569 2,761 Change in working capital 783-3, Balance Sheet (EURm) Cash and other liquid assets 823 2,976 2,973 2,724 2,724 2,724 Tangible fixed assets 34,846 55,471 63,109 79,467 80,916 81,691 Goodwill/intangible assets 2,982 28,177 20,686 20,458 20,244 20,043 Associates/investments 460 2,845 2,845 2,845 2,845 2,845 Other assets 15,389 34,279 28,243 30,314 29,606 30,137 Total assets 54, , , , , ,441 Interest bearing debt 13,603 60,492 52,940 55,043 54,108 53,110 Other liabilities 21,872 39,466 38,395 46,899 44,602 42,805 Total liabilities 35,475 99,958 91, ,942 98,710 95,915 Shareholders' equity 18,460 19,632 22,127 28,731 31,433 34,227 Minorities 565 4,158 4,394 5,135 6,192 7,298 Total shareholders' equity 19,025 23,790 26,521 33,866 37,625 41,526 Net debt 12,780 57,516 49,967 52,319 51,384 50,386 Key Company Metrics Sales growth (%) DB EPS growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) nm nm nm nm nm nm ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates Page 2 /London

3 Key themes for 2010 We identify three key themes in the Enel investment story that we think will likely be the focus for Implementing Synergies and proactive risk management: Enel will likely continue its defensive strategy in its core markets thanks to a very good regulated asset base, the implementation of synergies and good risk management approach. Emerging Markets and renewables as the growth drivers: The company has good growth prospects in Latin America that have been detailed recently during the Investor day. Enel Green Power strategy should be explained further in the company s strategic review in 1Q Attractive and Sustainable Dividend Yield: Enel has a solid cash flow generation that will allow the company to distribute a 6.5% dividend yield. The completion of the disposals should increase confidence in Enel s capability to confirm the attractive payout. 1/ Defensive in the key markets, leveraging on synergies If we focus on EBITDA breakdown in Enel s core markets Spain and Italy, half of the business is regulated while the company has a very good forward selling strategy that helps maximizing profitability in a tough scenario for generators. This is also true in Spain where Endesa is protecting its margin nicely and in our view will be one of the key players to benefit from any potential recovery. Figure 1: Enel s EBITDA breakdown 2010 (DB est) International activities 7% Iberia and Latam 45% Enel Green Power 8% G&EM 17% Italian Market division 2% Infrastructure and Network 21% Source: Deutsche Bank In generation activity in Italy the company has already sold forward 95% of 2010 output locking-in very good prices (c. 75 E/MWh), while 2011 looks more exposed to electricity price dynamics as only 15-20% of the output is already secured. Yet, forward prices in Italy remain well above any other country in Europe; we calculate that the spreads that Enel is locking in for 2011 are in line with those for 2010 (18-19E/MWh for CCGT and above 30E/MWh for coal). This is a consequence of the fact that the current gas market weakness does not affect Italian power prices significantly despite electricity capacity being mainly gas-fired. /London Page 3

4 In our view the lack of a gas spot market and the very limited flexibility of the system (due to the absence of spare import capacity and storage merchant capacity) do not set the conditions for credible competition in the market and reducing prices. The effect of excess gas and in general excess power capacity is more relevant in Spain. Endesa is actively working to reduce its thermal unitary cost, thanks to well priced supply sourcing. This will partially offset the decrease in margin that we forecast for % of forward sales are secured at prices in the region of 50E/MWh (10-13 E/MWh above actual spot prices). In Slovakia, where prices and electricity demand were more affected by the economic downturn we believe that the pick-up in economic activity should drive prices and volumes into Figure 2: Enel Group - forward sales in 2010 (% of total output) 2010E Italy 95% Spain 60% Latam 60-70% Slovakia 100% Enel Group >70% Source: Deutsche Bank, Company data Figure 3: Enel forward sales vs. forward prices (E/MWh) Figure 4: ELE forward sales vs. forward prices (E/MWh) Italian forward prices 2010 Enel forward sales Spanish forward prices 2010 Endesa forward sales Source: Deutsche Bank, Reuters Source: Deutsche Bank, Reuters 2/ Latin America and EGP the growing angle of the company In December, Endesa organized an educational investor day to explain the potential growth prospects in the Latin American business and their present positioning. While the company did not provide guidance or details on the business plan as it will be presented at the beginning of 2010, we believe that the message was to reassure the market about its commitment to Latin America as a key area to be in and to invest in further. Key points from the investor day were: Latin America is and will remain a key asset for Endesa; the company firmly ruled out any potential exit from the regions where it is currently operating with strong positioning. Page 4 /London

5 The company will continue to implement its strategy of developing an integrated platform with 45% of the EBITDA coming from regulated activities and strong leadership in each market where they compete. As a result of this strategy, the company is the leading player in Chile, Colombia, Peru and Argentina, while its presence in Brazil is still very limited. In this context, we believe that the company would consider increasing capex over time in the region so as to play a more relevant role. Or, if that is not the case, to potentially sell off its Brazilian business. Regulation in LatAm is very clear and the company has already gone through all the major regulatory reviews in 2009 so that stability is also ensured. As a consequence, the company focus will be to extract the maximum value from the existing assets and implement synergies to boost profitability. One of the typical questions from investors is whether there is room to rationalize minority stakes in Latin America. The answer is not easy as any corporate restructuring would have to take into consideration three aspects: 1) minorities generally come from partnerships that Endesa has developed with local companies who, on the basis of their local knowledge and connections, constitute a valuable asset; 2) taxation is another reason as Endesa is constantly looking for optimizing tax rates; 3) Endesa is strongly committed to maintaining Latin American assets as a separate entity that will fund its business without inter-company loans and without recourse to the parent company. This should clearly lower the risk profile of the Group. Relating to Enel Green Power we highlight that the company recently announced a number of transactions for the acquisition of a project pipeline both in Europe and US. The latest transactions were the acquisition of minority stake in Maicor wind srl in Italy and Geronimo Wind in US. These transactions, though of very limited size, showed that the company strategy is to leverage off of a larger platform that could offer the chance to select projects with the highest return. EGP growth prospects would probably be the condition for the successful placement of a minority stake to investors or to the market. 3/ Disposals and tariff deficit securitization will be the catalysts One of the concerns around the Enel investment case is its still rather high leverage and its capability of delivering on announced disposals. We believe that the current dividend policy (60% payout on recurrent Net Income) that offers a 6.5% yield (above sector average of 5.5%) is sustainable as according to our model the free cash flow generation after dividend payment should allow it to reduce its net debt to EBITDA ratio from 3.3x in 2009to 2.7x in Yet we understand that the delivery of disposals is the major trigger to the investment story as it would restore confidence about management s capability in achieving its financial targets and to meet its dividend policy. We think that management will try to advance quickly in its debt reduction ambitions through its E10bn disposal plan of which only E3bn have been completed so far. Catalysts will be: HV grid in Spain. We expect the sale of the HV grid in Spain to be finalized in H1 2010, as June is the deadline imposed by the regulator for the deal to happen. We remind readers that Enel expects to receive c.e1bn from those assets, though the scope of assets to be sold is still under discussion. Minority stake in Enel Green Power. We see a lack of appetite for renewable assets at very high multiples, given the difficulties that some of the players are facing in signing contracts /London Page 5

6 and financing new capacity growth. We believe that Enel Green Power would not be valued at multiples similar to the rest of the sector because it has lower growth targets and a more consolidated assets base. We doubt that the company would finalize the disposal of a minority stake of Enel Green Power in Q On the other hand, we believe that an IPO could happen later in the year if financial markets remain stable. According to management, June or September might be successful time frame. Tariff deficit. The securitization process is advancing and all the paper work is done now. The securitization should happen within the first four months of 2010 and could represent close to E 6bn for Endesa, as it will also receive money for the Island Deficit. WE recommend to Buy Enel based on the following arguments: Enel offers a 6.5% dividend yield vs. sector average of 5.5%. We feel this dividend is completely sustainable; we have assumed 10% lower prices next year and flat demand to get to our EBITDA: We have factored in a slightly higher capex number than in 2009 and no disposals. In such a scenario, Enel is still generating E 2bn of FCF after dividend payments, and that is the estimated average for next three years. Our second argument is that the stock is cheap versus our European utilities universe. Enel trades at 6.7x EV/EBITDA vs. sector at 7.7x, and then at the P/E level, Enel trades at 9.3x vs. sector at 12.0x, all multiples being for Last, it is a turnaround story: Enel did buy Endesa at a rather high valuation, but now they are benefiting from emerging exposure to LatAm, where growth is well above European growth rates, and also benefits from implementing E 1bn worth of synergies into 2012E. Because of this acquisition, Enel geared up strongly. They now have E 54bn in debt, which represents a 61% gearing and 3.3x Debt/EBITDA. Enel management have confirmed that their debt should drop from E 54bn now to E 45bn end of 2010, almost 20% reduction. This is to be achieved mostly via E 7bn in disposals next year. And this is the catalyst to this story. Of the E 7bn, only E 1bn seems easily achievable, being regulated assets in Spain. The rest mostly relates to selling part of their renewables firm, Enel Green Power, via a stake disposal and an IPO. The market is extremely skeptical as regards to their succeeding in doing so. If they finally deliver, it would be a considerable catalyst both to the financial improvement of their B/S and management perception. As we have said previously, disposals are NOT factored into our model. Tariff deficit securitization is another catalyst. With the securitization of the tariff deficit that we expect in the first half of 2010, Endesa should cash in c.e6bn (including the Island deficit) that should increase confidence in the de-gearing targets announced by the management. Risks Downside risks to our buy case would be Unsuccessful completion of the planned disposals that would force Enel to further reduce capex or cut its dividend; Macro variables such as interest rates rising strongly or a slowdown of the recovery in emerging markets economies Regulatory risk in its main markets (Italy, Spain, Slovakia and Russia) Page 6 /London

7 Appendix 1 Important Disclosures Additional information available upon request Disclosure checklist Company Ticker Recent price* Disclosure Enel ENEI.MI 4.08 (EUR) 22 Dec 09 2,6,7,8,14,17 *Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 2. Deutsche Bank and/or its affiliate(s) makes a market in securities issued by this company. 6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by US law. 7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 8. Deutsche Bank and/or its affiliate(s) expects to receive, or intends to seek, compensation for investment banking services from this company in the next three months. 14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year. Important Disclosures Required by Non-U.S. Regulators Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes. 2. Deutsche Bank and/or its affiliate(s) makes a market in securities issued by this company. 6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by US law. 7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 17. Deutsche Bank and or/its affiliate(s) has a significant Non-Equity financial interest (this can include Bonds, Convertible Bonds, Credit Derivatives and Traded Loans) where the aggregate net exposure to the following issuer(s), or issuer(s) group, is more than 25m Euros. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Virginia Sanz De Madrid Grosse /London Page 7

8 Historical recommendations and target price: Enel (ENEI.MI) (as of 12/22/2009) Previous Recommendations Security Price Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations Buy Hold Sell Not Rated Suspended Rating 2.00 *New Recommendation Structure as of September 9, Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Date 1. 5/2/2007: No Recommendation, Target Price Change EUR /8/2009: Upgrade to Buy, Target Price Change EUR /10/2008: Buy, Target Price Change EUR /11/2009: Buy, Target Price Change EUR /12/2008: Downgrade to Sell, Target Price Change EUR4.00 Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus projected dividend yield ), we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of - 10% or worse over a 12-month period % 46% 37% 31% 3% 32% Buy Hold Sell Companies Covered Cos. w/ Banking Relationship European Universe Page 8 /London

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