Enel S.p.A. (ENEL.MI) Q3 2026 Earnings Call Transcript

Operator: Good evening to all the people connected. Welcome to the 9 Months '26 results presentation. Enel's CFO, Stefano De Angelis, will present the economic and financial results for the period. We ask those connected to the webcast to send questions only via e-mail at investor.relations@enel.com. Before we start, let me remind you that media is listening both the presentation and the Q&A session. Thank you. And now let me hand over to the CFO.

Stéfano De Angelis: Thank you, Omar, and welcome, everybody. Over the past 9 months, we have confirmed our consistent growth trajectory with earnings per share marking an 8% growth year-on-year, supported by a resilient business performance, enhanced by the execution of the new investment plan and the continued improvement of the existing asset return. Our investment reached EUR 10.6 billion, a record compared to our peers, including greenfield development, brownfield and shares buyback at subsidiary level with a 30% increase compared to last year. The improved risk profile and the higher visibility on investment returns is backed by 2 ratios. 75% of spending was allocated in Europe and the United States, while business-wise, Grids account for 70% on total. Our restructured international operations delivered another quarter of remarkable results, supporting the profitability of the group in the volatile market context. Our friends from the rating agencies define this as diversification. Lastly, our disciplined investment deployment is shaping a visible future trajectory, and we continue to drive our growth path, thanks to 2.5 gigawatts currently under construction already to be built and 1.5 gigawatts of brownfield assets already addressed that started to contribute to our results and will be fully visible from Q1 2027. Let me now dive into the recent development of our capital allocation across both greenfield and brownfield investments. Overall, investments are up by EUR 2.3 billion compared to last year, and this includes a 19% increase in greenfield, a 16% increase in brownfield and the EUR 1.3 billion shares buyback executed by Endesa and Enel Americas this year. Networks remain our main focus, recording a 15% increase year-on-year and accounting for around 70% of the total EUR 8.2 billion investments. This allowed a strong expansion of our regulated asset base, up by EUR 4.7 billion year-on-year, further improving our visibility going forward. In Renewables, we are continuing to apply the principles highlighted during the Capital Market Day, disciplined allocation on greenfield, selecting projects with secure earnings profile, supported by either PPAs or a solid customer base. Lastly, on consumer, the fair pricing of our fixed offer portfolio has reshaped the customer base in Italy, resulting in a 200-basis points reduction in the level of the churn, which is now at 14.7%. This implies that the average customer's lifetime reached 7 years, a duration which is equal or even higher than the PPA in Europe. Just to remember that in 2023, beginning of 2024, the average life of our residential customer base in Italy was something more than 3 years. Now I'm moving to Page 4. We are well on track to reach planned target on brownfield acquisitions. Already, we expect to reach this target in 2027, delivering 100% of the earnings per share contribution set in February at the Capital Market Day. Since the beginning of the year, we have signed agreements to expand our asset base. These transactions will add 1.5 gigawatts of renewable capacity and on the retail side, 350,000 customers. We have completed almost all of the signed deals, mainly in the U.S., where the group will reach more than 13 gigawatts of installed renewable capacity by the end of 2026 following the recently completed and announced acquisitions. The share buyback I mentioned before, executed at subsidiary level, are a minorities buyout investment as they allow us to reduce the earnings dilution. Over the past 2 years, we have invested EUR 2 billion in our subsidiaries, and this investment will generate around EUR 200 million of additional group net income in 2027 and 2028. I'm referring to the group net income post-minorities. The deal was executed at appealing results with net income on CapEx ratio standing at around 10% on average, demonstrating the profitability of the investment mix. I will now move on the next page 5 where we talk about the performances, the economic performances. In this quarter, I again discussed the performance separately from the trading and wholesale segment. This is to reflect our shift towards an energy management model reshaped to support our core business, optimizing the profile of the different sourcing with sales focused on the retail B2C and small business customers with offer at fixed prices. This approach has clearly enhanced earnings quality with EBITDA from Grids and integrated business increasing by EUR 1.4 billion year-on-year. As a result, our EBITDA mix is now almost entirely derived from regulated activities and generation and supply where the most of our generation is matched with our best customers. Strong operating performance, combined with the managerial action implemented, drove earnings per share to a year-on-year ratio of 8%, bringing the result in terms of euro per share to EUR 0.61 for the 9-month period. Let's now move on to Page 6, where we show you the performance of Grids. The EBITDA reached EUR 7.3 billion, increasing 12% versus the same period of 2026 (sic) [ 2025 ] and accounting for 41% of the total group EBITDA. Looking at the evolution by geography. In Italy, investments are up by EUR 200 million, driving the RAB expansion boosted also by improved capital mix and RAB-in/RAB-out ratio. Worth to remind that the outcome of the WACC review is expected by year-end. Spain was up by 26%, driven by a structural improvement of the regulatory framework and previous year regulatory settlements. In this context, Spain is starting to show the first evidence of a long-term cycle of higher CapEx, higher RAB and higher returns. The huge amount of investment deployed in Grids boosted the value of our RAB, as I was saying before, which has now reached more than EUR 15 billion, increasing the resiliency and visibility of our EBITDA also for the coming periods. Worth to mention that Europe weighs more than 70% of both EBITDA and RAB. On Page 7, I will comment the generation supply EBITDA results, and I will split the comments by geography. In Latin America, the growth has been supported by the positive hydro resources in Colombia, partially offset by the increased level of curtailment and lower resource availability in Brazil and Chile. On this, it's worth to highlight that geographical diversification supports our results as well as El Nino affect one region and La Nina may affect another. Iberia recorded a high double-digit growth year-on-year, thanks to the introduction along the year of a reshaped sourcing model, the same that we already defined by last year in Italy, helping retail volumes with renewables and nuclear production based on a best-to-best flexible matching of the generation and supply profiles. This allowed to more than offset the weaker wind and hydro availability recorded in Q3. Italy was down 5% year-on-year, as record high demand and low hydro resources availability. We are next to the 2022 negative record, something better, but far from the 2024 record high. Today, at September, we are down approximately 2 terawatts compared to 2025, and this affected both renewables and retail margins. In retail, we have detailed the volumes sold in order to underline the new portfolio strategy. As you can see in the figure in the graph in the slide, the decline aims to reduce the top and large indexed contracts, yielding a very low profitability while focusing on integrated B2C and small, medium business fixed price offers that is matched with our renewables generation. Worth to highlight that the hedging strategy implemented reduces wholesale price volatility impacts and secures medium, long-term returns. At the same time, restrains short-term speculative trading. Lastly, in the other countries' perimeter, we recorded a positive performance, thanks to the portfolio streamlining executed in the last 3 years. In particular, U.S. marked a positive trend, also thanks to higher output and improved PPA price. Now let's have a look at the net income and earnings per share. On Page 8, we see that EPS growth is supported by both a sound industrial operational business delivery and, as I said before, the execution of our share buyback programs, both at Enel SpA and subsidiary level. The remarkable 8% EPS increase in the 9 months is half associated with the EBITDA expansion deeply analyzed in the recent slide I have commented, 2 percentage points driven by the net income EBITDA conversion as a consequence of the improved capital allocation strategy and the reshaped historical asset portfolio. In fact, below EBITDA and especially on D&A and cost of debt, we have clear evidence of the quality of the returns on invested capital. An example is Endesa in which we observed a dramatic improved conversion, having, at the same time, a reduced amount of investment in asset development. So it's important to match these 2 evidences. Lastly, the other 2 percentage points deriving from Enel's share buyback execution plus Enel SpA because, as I said before, the subsidiary is included into the CapEx. So it's part of the group's net income growth. Looking at the net income, it came at EUR 6 billion with a solid 6% growth year-on-year, improving from the 3% of the first half results, thanks to the EBITDA trend improvement and the bad debt evolution. On taxes, worth to remind that IRAP impact is included in the reported numbers. Regarding this item, let me clarify that even including the expected IRAP additionality into the ordinary figure, the earnings per share will end at EUR 0.74 per share. I'll now focus on cash flow. The group cash generation continues to support the expected deleverage the group. As highlighted during the Capital Market Day, we are funding current and future accelerated growth also through the use of our financial flexibility. Keep in mind that roughly EUR 20 billion of sourcing represented in the Capital Market Day as additional net debt by the end of 2028. As of today, if we consider the expected and historical fourth quarter positive net cash flow, we will end the fiscal year having used less than 1/3 of this budget. But at the same time, we are at the top end of the guidance range with EUR 0.74, having already covered the most of the buyback programs with a total outflow of EUR 4.2 billion, including programs at subsidiary level and the first outflow of the brownfield acquisition plan that we expect to be EUR 1.5 billion by the year-end of 2026. Notwithstanding this financial flexibility that has been used and the exogenous dynamics impacting net debt, namely the impact of ForEx and the Energy Decree, our balance sheet remains strong with leverage standing at 2.8x net debt to EBITDA below the sector average. At year-end, we expect to maintain this solid ratio and to land at an FFO to net debt ratio higher than 22%. Now I go to the closing remarks, finally. And for what concerns the closing remarks, the messages in this slide are simple and clear, but I want to avoid any doubt. So I think that it's useful to post 2 comments. The first is that the translation of don't affect managerial action and plans means that there is already a file on the CEO desk with the specific initiatives to offset the 2027 incremental tax burden in Italy, I refer to the 5% of the IRAP additionality. The second point is that the exact size of the new energy bill, the Energy Decree, that still has to be declined to specific rules and technicalities by ARERA. And this action plan will be unveiled next February when, with our CEO, we will update you about our industrial plan. But let me tell you that we unveil much more than this topic. So thank you for your attention, and let's now open the Q&A session.

Operator: Thank you, Stefano. Let's open the Q&A session. We received a lot of questions for the call. We have summarized by topic. Most of the questions are on the recent news flow in Italy. Could you please sum up all the measures to be implemented in Italy, including the cap on gas and those included in the budget law. Considering all the measures, what could be the overall impact on your numbers?

Stéfano De Angelis: The new Energy Decree includes 2 completely different updates. The first one is related to the incremental tax burden related to IRAP, and this was part of the financial law, the financial budget law in Italy that have updated the Energy Decree. So this budget law extends the additional IRAP until 2029. This is the first point. The previous one was until 2027 -- 2026 and 2027 and introduces a different additionality starting from 2027, while there is no changes for 2026, where we continue to pay the 2% additional IRAP already foreseen. So for 2027, the new additional tax rate, as I said before, is 5%, meaning 3 percentage points higher than the initial provision. And for 2028 and 2029, the measure points to increase an increase of 3 percentage points. To sum up compared to the previous decree, we expect to have 3 percentage points higher burden applied to 2027, 2028 and 2029 with the difference that in 2027, we already have a 2% additionality totaling 5%. It seems complicated, but unfortunately, it's quite easy. We have to pay more taxes. For what concern, the measure introduced to reduce the energy bills for final customers as expected ETS offset mechanism has been removed due to the noncompliance with the EU regulation and has been substituted by a measure to mitigate the spot prices with the subsidy to the thermal generation applied only if the TTF is higher than about EUR 59 per megawatt hour that is the reference. This mechanism is similar to the gas tope, the gas tope as they called applied in Spain in 2022. The reimbursement paid by the renewable generators to the gas-driven generation has been limited to EUR 15 per megawatt. So this is a cap in the gas cap. So the reimbursement could be paid along the 18 months by the renewable generators that have to cover the fixed price portion of the consumption in Italy is capped at EUR 15 per megawatt. It is important because this could not be billions of euros and also including any working capital potential impact on the system. Therefore, to be clear, until TTF reaches around EUR 60 per megawatt hour, there will be no impact. Hence, any potential downside depends on the evolution of the gas price. So it is worth to highlight that the 2 measures comparing the previous -- what we have in front of us when we were at the Capital Market Day on February, and this one have the same goal that is to partially decouple gas and renewable generation. But the ETS offset would have impacted energy price independently from the spot market condition, while the new measure turns on only when the TTF market price reaches about EUR 59 per megawatt. This is an important difference as it will translate into a power price cap that to make the basic calculation considering the price generated by thermal plant, it's 2x the gas per megawatt hour price. So it means 120 plus 37% of ETS that today is around something more than EUR 40. So it means approximately EUR 160 for the generation for the price fixed by gas that in Italy means last year average 75% of the PUN fixing. Again, as I told in the presentation, even if the goal is clear, the framework and the specific rules to be applied will be regulated by ARERA. So we will update the market looking forward. But the framework is clear. So again, I think the most important thing, this is a cap, so it starts from a scenario that is something in the range of EUR 150, EUR 140 if we have to apply the percentage of price fixing of the gas. So it's a measure that works in situation where the market is high, let me say, looking in the next 18 months starting from 1st of January 2027. A long answer, but a complex question.

Operator: Thank you, Stefano, for the clarification. Let's move to WACC. WACC in Italy for distribution should be revised, which is the impact compared to 2026, 2028 plan assumption?

Stéfano De Angelis: But we have to split the plan because in 2027, we are expecting the final decision from ARERA also considering the present situation of the energy sector. But the trigger should be activated. The risk that to have, let me say, 40 basis points is now no more on the table because the inflation rate used brings to a potential reduction of 30 basis points. It's about EUR 25 million per 10 basis points. What is important on the other side that you see the inflation rate growing, and this will have an impact not directly and immediately on the WACC, but on the adjustment of the tariff and the RAB for inflation. In 2028, we have the new regulatory cycle. So the WACC will be redefined, and it will take into account also the movement of the interest rate of the last 6 months.

Operator: Thank you, Stefano. You mentioned the regulatory review in 2028. We have a question about that. So the new regulatory framework for networks in Italy will start in 2028. What is the expected time line for the consultation process? In your view, could be the new framework less supportive than the current one?

Stéfano De Angelis: For sure, no, because the goal is the same, and we do not see in ARERA any change in terms of approach to the network resilience and quality needed by the Italian system. For what regards the ROSS, that is the big change that we have, we do not expect any significant change. The new percentage in terms of CapEx on OpEx is already working. So it's not part of the new regulation because we have already starting from this year to have a different percentage of admitted CapEx on TOTEX. So again, we expect minor changes. The extraordinary CapEx plan that you know is under discussion also for the extension is already set with ARERA. So again, we may expect something that is more focused on efficiency that is not at the center of the discussion today, meaning that today, there is an investment, a strong investment needed maybe that tomorrow, looking forward, there will be more focus on the OpEx remuneration that in Italy it's not bad, but let me say, it's not the state-of-the-art worldwide.

Operator: Thank you, Stefano. Now let's move to another hot topic, data center. Demand for connection increased. Should we expect an update on this front?

Stéfano De Angelis: Data center is a complicated topic because you have 2 different players on both sides. We -- as you know, I tell you immediately one thing. We will include the data center in our next business plan because now for us, it's clear the route and the pathway. The discussions are going forward. The problem is that we have changed our, let me say, perimeter because we started to work on the permitting for the data center because sometimes our permitting is, let me say, have a short time to power, as we said, and the permitting of the data center, the technical one have some delay because some players that work in the United States have some difficulties in managing the Italian regional bureaucracy. So what we are doing in order to extract more value from our assets is to include into the package that we offer to the developer and to the data center operator also part of the permitting related to the data center because in the last 2 years, we have, let me say, a good experience and a good acknowledgment of what we are talking about here. Because, again, we are working with some -- in some of our sites and with some of the developers jointly for the permitting related to the data center. Clear, this update will be brought on the February Capital Market Day, as I said before, where we expect to unveil not just the efficiencies to cover the taxes.

Operator: Thank you. Let's move to artificial intelligence. How do you consider the use of AI? Is a risk or an opportunity?

Stéfano De Angelis: We said at the Capital Market Day and in the meeting, we have with the investors recently, and transformation is increasingly driven by artificial intelligence with initiative already covering 50% of the business processes that is more than we have announced at the Capital Market Day that was targeting full coverage on 2030 and probably we will accelerate also this target. The adoption is focused on high-value use cases across customer operations, digital sales and network management. Again, in workforce productivity, we have to manage also the unions because this is part of the difficulties you have because there is always the issue of you control too much the work. But again, it's an amazing capabilities that the AI offer also in the workforce management. But for us, the greatest impact is related to cost optimization and customer loyalty through a top-class customer service quality. In terms of potential risk for more effective marketing capability that I understood that is a worry from the investors because I received from an investor the same question, are you worried about, I have bad news for the sponsor and for the new players because to play the flexibility that could be supported by the AI, you need to have a flexible offer in sourcing. And the problem is that if until you sell electrons based on calendar contracts, it's very difficult to be effective because differently, to know how much is the consumption, how much is in February, in April, this is not something you need AI. So it's a basic capability that all the players and the competitors offer in the market. So energy at the moment, could create a differential in terms of offer and pricing just using the flexibility. But in order to use the flexibility, you need to have the platforms. And then you need to have the energy -- the flexible energy generation. It's very difficult to have. Also, we have difficulties in flexibility, for example, in hydro when you have a run-of-river hydro, it's not flexible. So it's a complex topic, and this is part of our transformational plan that, again, we will unveil in February.

Operator: Thank you, Stefano. We received questions regarding share buyback. A portion of Enel share buyback is still to be launched. Any detail on timing, even considering the current level of share price?

Stéfano De Angelis: At the moment, we are very happy with the results achieved at both Enel SpA and subsidiaries' level. In this specific moment, our priorities consider that we already spent more than EUR 4 billion into share buyback is to allocate capital to expand and improve our asset base. We see there to take more opportunities than in buying back our shares or the shares of Endesa or Enel Americas. We continue to monitor the market because we are always interested in creating value with the flexibility. As you know that part of the flexibility and we still have available approved buyback programs in Enel SpA and also at Endesa level. But again, we are very happy with the results achieved as of today.

Operator: Thank you. Stefano, now let's move to net debt. In the 9 months, net debt reached EUR 66 billion. Could you please provide some color on the evolution at year-end?

Stéfano De Angelis: As I mentioned in the presentation, in order to avoid this question, but it's clear that it's an important topic. I put the target for Serena to help with in relation with you of the end of year 2026. But as you know, in the fourth quarter, we will deliver as always, a seasonal spike in the free cash flow, net free cash flow, not only the FFO, and this will be through a rebound of the working capital. So consequently, we expect to land to an FFO, I'll give you also the number, so Serena is more happy of EUR 14.5 billion -- around EUR 14.5 billion adjusted. In terms of net debt, this cash flow rebound will allow us to reduce the net financial position compared to September. I don't take responsibility about the FX, clearly. So the leverage will be -- you can make your calculation, the guidance and the target. So we will stay around 2.8x. That is a very good ratio compared to our peers and for the sector.

Operator: Thank you, Stefano. Let's move to the EPS. Could you please guide us on the evolution of the last quarter?

Stéfano De Angelis: But in this case, again, you have the guidance, you have the results in September. So it's easy to make the calculation. Keeping in mind that in the fourth quarter, we have a seasonal impact in the commercial cost for the Christmas campaign, the close of the year targets of everybody and also in provisions. So look at what happened last year, more or less, we expect to stay at the same level of net income at group level for the fourth quarter.

Operator: Thank you. We covered all -- no, there is one more. Interest rate environment points to higher cost of debt going forward. Have you already covered your financing needs? How could financial expenses evolve versus expectation?

Stéfano De Angelis: But the refinancing need is public. So you know that we have more or less EUR 7 billion in 2026, and I'm including the hybrid portion. Mathematically, at the present market conditions, we could have a higher expected cost for 2027, but this applies in an inertial scenario, you know that we don't love to be inertial. So what we are doing in order to offset this inertial incremental cost of debt, we are planning to use the flexibility related to the variable portion of debt through which today, we may offset more than 100 basis points the cost of debt at fixed rate with a duration of 7 years. It is worth to highlight that at the end of 2027, the incremental debt related to the brownfield acquisition was already expected to bear a 5.5% interest rate. So you know that we are naturally prudent. So having in mind that we have acquisition in the U.S., we already put in euro [ 5.5 ]. So let me say, we are mostly covered for the incremental debt because before we were talking about, I know that it is complex, because we have refinancing and then incremental debt. So incremental debt, we are covered, let me say, more or less at the present rates that was already included. Then we have, let me say, an inertial negative impact that we expect more or less to offset using our low variable rates share in terms of gross debt. So net-net, the impact related to rates, I expect to be negligible or something that is for sure, less than EUR 100 million. Then there is, again, don't forget, also Serena, that we have to spend more, we are spending more. So the interest -- the cost of debt will increase because sometimes I have problems understanding what you have in your model, I'm referring to the analysts. So -- and remember that there is also other financial debt that also for me is quite complicated but listen to the IR because they can drive you through the complicated matter that is other financial costs, hyperinflation in Argentina, et cetera, et cetera. But trust in me, the cost will grow as projected into the plan because we were prudent and we include the additional debt at a rate of 5.5% compared to the 4-point-something percent of our cost of debt today, that means excluding Colombia and Brazil, 3.5%, 3.6%.

Operator: Okay. Thank you. There are no more questions. So Q&A session is over. We cover all the main topics. But if something is missing, the IR team is available for follow-ups after the call. Thank you, everybody.

Stéfano De Angelis: Thank you, and bye-bye.