REG-International Endesa Final Results <Origin Href="QuoteRef">ELE.MC</Origin> - Part 3

Endesa SAAnnouncement

24/02/2017 09:06

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considered key factors to produce a smooth successful
transition in terms of prices and supply security, with no new investment in
production involving fossil fuels and a gradual shutdown of the current
system.
      
 *Improvement of energy efficiency: through an efficiency and electrification
plan to introduce incentives to adopt energy efficiency measures in
association with electrification.
      
 *Deployment of smart electricity grids: through automation and digitalisation
of the grid as a key factor to optimise investment in electricity and
operation of the system, which will require a deployment plan with a
remuneration plan attached.
    
6.2. Strategic pillars

In due consideration of the tendencies described, ENDESA's industrial plan is
fully aligned with the new challenges and with the new energy paradigm, which
will drive forward sustainable growth. It will therefore be based on the
following strategic pillars:

a) Decarbonisation of ENDESA's electricity production mix by 2050.

b) Boosting the position with regard to smart electricity grids to cater for
the expected growth.

c) Focus on excellent customer service.

d) Continuous commitment to improving the efficiency of all lines of business.

Also, on a transversal plane to the courses of action stipulated, ENDESA will
use digitalisation as the main driver of transformation to meet the Strategic
Plan's targets.

a) Decarbonisation of ENDESA's electricity production mix by 2050.

ENDESA has an ambitious plan to gradually reduce emissions to meet the final
zero-emissions target by the year 2050. In this context, it is also
considering major renewable energy targets using ENEL Green Power España,
S.L.U. (EGPE) as an efficient sustainable renewable energy platform.

The courses of action planned to develop a renewable energy platform include
investment to extend the lifespan of wind power facilities, capturing
synergies by optimising the portfolio of ENEL Green Power España, S.L.U.
(EGPE) and homing in on further growth opportunities.

Specifically, ENDESA plans to add approximately 300 MW within the next 3 years
on top of the 1,705 GW added in 2016 following the purchase of 60% of ENEL
Green Power España, S.L.U. (EGPE) (see Section 2.1. Acquisition of ENEL Green
Power España, S.L.U. (EGPE) of the Consolidated Management Report), and, in
the longer term, ENDESA will also invest in the organic growth of these
technologies.

With regard to the conventional generation portfolio, this is deemed to be a
key factor in guaranteeing a secure supply during the period of transition
towards decarbonisation of the electricity production mix, and the following
objectives and key courses of action are being considered:

      
 *Nuclear technology: guaranteeing the long-term operation of nuclear plants
safely and efficiently in terms of costs, by continuous measures to improve
the plants.
      
 *Coal-fired electricity plants: adaptation to best environmental practices
through investment in relation to IED (Industrial Emissions Directive) and
BREF (Best available techniques –BAT-) at imported coal plants. No
investment is planned under current market conditions for Spanish coal plants.
      
 *Non-mainland territories production facilities: maintaining a secure supply in
due adherence to environmental regulations.
    
b) Boosting the position with regard to smart electricity grids to cater for
the expected growth.

The future extension of the electricity network will be driven by
electrification of demand and the incorporation of renewable energies.

ENDESA has identified the following initiatives to the prepare electricity
network for the future:

      
 *Digitalisation projects mainly focusing on smart meters, which will be fully
implemented before the regulatory deadline of year-end 2018, automation of the
network by fitting remote-control devices to reduce downtime, carry out
technology modernisation projects and improve communications ("Simon"
project).
      
 *Extension of the electricity network with an investment plan focusing on
development and improvement of the structure.
      
 *Modernisation and improvement of the electricity network through investment in
substitutions.
    
ENDESA also intends to continue working on initiatives to boost efficiency,
loss reduction plans and anti-fraud measures, in order to secure maximum value
for the current remuneration model.

Finally, ENDESA intends to carry out innovation projects in the electricity
network to develop a wide range of new services (Growsmarter project, project
Flexiciency, project ZeEUS, project Monica, project La Graciosa, among others)
(see Section 8. Research, Development and Innovation Activities (R&D+i) in
this Consolidated Management Report).

c) Focus on excellent customer service.

ENDESA will focus on sustainable leadership and growth of the retail market:

      
 *Electricity: consolidation of its position on the Spanish market, development
of sophisticated flexible products, and growth in Portugal in the
Business-to-Consumer (B2C) and Business-to-Business (B2B) segments.
      
 *Gas: consolidation of its current position on the Spanish market with new
sales channels and products, growth in Portugal (Business-to-Consumer (B2C)
and Business-to-Business (B2B)) and also in France (Business-to-Business).
    
The following plans have been made to this end:

      
 *Making use of robust management of the integrated margin of production and
supply business in the deregulated market.
      
 *Maximizing the value of customer portfolios on the basis of experience, and
contemplating the definition of a full range of action plans to segment the
customer base and secure loyalty.
      
 *Boost development of digital channels as the driver of service quality and new
ways of working alongside customers.
      
 *Growth of value-added products and services in the global supply business, on
the strength of the experience attained.
      
 *Innovation and development of new products as a growth level, mainly focused
on electrical mobility, distributed generation and smart homes.
    
d) Continuous commitment to improving the efficiency of all lines of business.

ENDESA is heavily committed to a constant search for efficiency, and deploys
efficiency plans in all its lines of business, seeking to reduce costs:

      
 *In terms of Generation, unit costs will be brought down by deploying exchange
practices and continuous improvement of all technologies, renegotiating
operation and maintenance contracts, optimising management of fuels and
introducing efficiency measures by applying digital plans to the assets base.
In the specific case of renewable energies, plans have been made to secure
cost synergies through the integration of control centres, unification of
bidding processes and dispatch systems, among other measures.
      
 *As regards Distribution, optimising staff, equipment and convergence systems
and investing in technology and digitalisation to boost efficiency will help
bring down costs.
      
 *In terms of Supply, a review of the main processes and digitalisation
initiatives will improve costs.
    
In this regard, ENDESA's digitalisation plan will act as the main driver of
efficiency plans in the company's Business Lines:

      
 *In Generation, through digital transformation of industrial assets for the
purposes of maintenance, security and operation.
      
 *In Distribution, through comprehensive application of smart meters, automation
of the grid, deployment of remote-control devices and technology innovation.
      
 *In terms of Supply, using digital platforms to interact with customers and the
benefits of digitalisation to boost efficiency, service quality and
development of new channels and services.
    
Finally, all the objectives set out in ENDESA's Strategic Plan are fully in
line with the new energy paradigm and the sustainable development commitments
in its Sustainability Plan (see Section 8. Sustainability Plan in this
Consolidated Management Report):

      
 *Decarbonisation of the energy mix by the year 2050, with a plan to reduce
emissions and strengthen the position of renewable energies.
      
 *Fostering digitalisation of both the grid and customers by means of solutions
geared towards automation, supply quality, electrification and energy
efficiency for demand.
      
 *Cooperation with public authorities in terms of providing access to
electricity for vulnerable customers.
      
 *Commitment to education and social and economic development, mainly through
the role played by the ENDESA Foundation.
    
6.3. Main financial indicators

The industrial plan approved by the Board of ENDESA, S.A. on 7 November 2016
contemplates an investment target, net of subsidies and assets assigned by
customers, in the amount of Euros 4.7 billion between 2016 and 2019, broken
down into maintenance investment (56%) and investment in growth (44%).

The breakdown of the investment plan by lines of business is as follows:

      
 *Generation (53%) with mainland investment (30%), non-mainland investment (12%)
and renewables (11%). Most of this focuses on recurring maintenance investment
and selective environmental investment in imported coal-fired plants to comply
with EU emissions legislation. Non-mainland investment contemplates
maintenance, environmental protection and selective capacity substitutions.
Investment in renewables will concentrate on developing new capacities.
      
 *Distribution investment (38%) will focus on maintenance and growth investment
to deploy smart meters, and development of the Quality Plan to expand grid
automation.
      
 *Supply (9%), with investment to develop the projects described.
    
ENDESA will also take stock of selective opportunities for inorganic
investment in renewable energies, small European distribution companies and
distribution concessions in Portugal, in addition to potential acquisitions of
customer gas and electricity portfolios, and value-added products and
services.

On the basis of the strategic pillars described above, in due consideration of
estimates of economic indicators, market and regulatory trends in the years
ahead, ENDESA has drawn up a business plan including, among other parameters,
forecasts of economic indicators for the Group's consolidated results. ENDESA
expects its gross operating profit (EBITDA)(1) to increase from Euros 3.4
billion in 2016 to Euros 3.7 billion by 2019.

Notwithstanding the foregoing, prospective information cannot be considered a
guarantee of the Company's future performance in that plans and forecasts are
subject to risks and uncertainties, which could result in ENDESA's future
performance not matching the initial forecasts (see Section 7. Main risks and
uncertainties in connection with ENDESA's business in this Consolidated
Management Report).

7. Main risks and uncertainties in connection with ENDESA's business.

7.1. Risk control and management policy

The Risk Management and Control Policy involves guiding and directing
strategic, organisational and operating activities to enable the Board of
Directors identify precisely the acceptable risk level, with a view to the
managers of the various Business Lines maximising Company’s profit, maintain
or increase its assets and equity and the certainty of this occurring above
certain levels and prevent future events from undermining the Company’s
profit targets.

The Risk Management and Control Policy defines ENDESA’s risk control system
as an inter-linked network of legislation, processes, controls and IT systems,
in which global risk is defined as the risk resulting from consolidation of
all risks to which it is exposed, taking into account the mitigating effects
between the various risk exposures and risk categories, enabling the risk
exposure of the Group's business areas and units to be consolidated and
evaluated, and the corresponding management information to be drawn up for
decision-making on risk and appropriate use of capital.

The body responsible for implementing the Risk Management and Control Policy
is the ENDESA S.A. Risk Committee, which relies on the internal procedures of
the various business and corporate areas and is supervised by the Audit and
Compliance Committee of the Board of Directors of ENDESA, S.A. It consists of
the parties responsible for each of the Company's Business Lines and Corporate
Areas, and the following functions are assigned to it:

      
 *Regularly provide the ENDESA, S.A. Board of Directors with an integrated view
of current and foreseeable risk exposure.
      
 *Ensure that senior management participates in strategic risk management and
control decisions.
      
 *Guarantee the coordination between the risk management units and those units
responsible for their control, and compliance with the Risk Management and
Control Policy and its associated internal procedures.
      
 *Ensure the correct working of the Risk Control System and, in particular, that
all major risks are identified, managed and adequately quantified.
      
 *Actively participate in the preparation of risk strategy and in the major
decisions about how to manage it.
      
 *Ensure that the risk control and management systems adequately mitigate risks
within the Risk Management and Control Policy framework.
    
The general guidelines for the Risk Management and Control Policy are
developed and supplemented by other corporate and specific risk policies for
each Business Line, as well as the limits established for optimum risk
management.

The risk management and control model is based partly on the ongoing study of
the risk profile, current best practices in the electricity sector or
benchmark practices in risk management, criteria for standardising
measurements and the separation of risk managers and risk controllers. It is
also based on ensuring that the risk assumed is proportional to the resources
required to operate the businesses, optimising their risk-return ratio, as
determined by the Board of ENDESA, S.A.

The risk management cycle is the set of activities involved in identifying,
measuring, controlling and managing the various risks incurred and its aim is
to adequately control and manage those risks:

      
 *Identification: the purpose of identifying risks is to maintain a prioritised
and updated repository of all the risks assumed by the corporation through
coordinated and efficient participation at all levels of the Company.
      
 *Measurement: the purpose of measuring parameters is to allow risks to be
aggregated and compared is to quantify overall exposure to risk, including all
of ENDESA’s positions.
      
 *Control: the purpose of risk control is to guarantee that the risks assumed by
ENDESA are appropriate to the objectives set, ultimately, by the ENDESA, S.A.
Board of Directors.
      
 *Management: the purpose of risk management is to implement actions aimed at
adjusting risk levels at each level of ENDESA to the risk tolerance and
predisposition established.
    
This process sets out to secure an overview of risk to assess and prioritise
all risks. It covers the main financial and non-financial risks to which
ENDESA is exposed, both endogenous (due to internal factors) and exogenous
(due to external factors), set out on an annual map featuring the main risks,
characterised and quantified, and establishing regular reviews.

Moreover, due to the increased interest in the control and management of the
risk that companies are exposed to and given the complexity that identifying
it from a comprehensive point of view is acquiring, the participation of
employees is important at all levels of this process. A risk mailbox has now
been created for employees to help identify market risks and come up with
suggestions for measures to mitigate them, thereby completing the existing
top-down risk management and control systems and mailboxes and specific
procedures to send in communications in connection with breaches of ethical
behaviour, criminal risks and employment risks.

To boost these initiatives, the ENDESA, S.A. Board of Directors also improved
a Tax Risk Management and Control Policy to guide and direct strategic,
organisational and operating activities to enable the Board to identify
precisely the acceptable tax risk level, to help tax managers meet the
policy's fiscal objectives. The Tax Risk Management and Control Policy is the
specific documentary manifestation of tax control in the Fiscal Strategy
approved by the Board of Directors of ENDESA, S.A.

Information regarding ENDESA’s risk management and the use of derivative
financial instruments is provided in Notes 18.3 and 19 to the Consolidated
Financial Statements for the year ended 31 December 2016.

The Annual Corporate Governance Report is attached to this Consolidated
Management Report as Appendix I, and describes ENDESA's risk management and
control systems.

7.2. Main risks and uncertainties.

ENDESA’s activities are carried out in an environment where outside factors
may affect the performance of its operations and its earnings. The main risks
to which ENDESA's operations are exposed are as follows:

7.2.1. Business and Sector-related Risks

ENDESA’s activities are subject to extensive regulation, and regulatory
changes could have an adverse impact on its business activities, results,
financial position and cash flows

ENDESA's subsidiaries are subject to broad regulations on tariffs and on other
aspects of their activities in Spain and Portugal, regulations which, in many
ways, determine the manner in which ENDESA carries out its business and the
revenue it receives from its products and services.

ENDESA is subject to a complex group of laws and other regulations applied by
both public and private agencies, including the Spanish Markets and
Competition Commission (CNMC). The introduction of new legislation or
standards, or the amendment of those already in effect could have a negative
impact on ENDESA’s business, results, financial situation and cash flows.

In the past, regulatory changes and the different interpretations thereof by
the related authorities have had a substantially adverse effect on ENDESA's
business activities, results, financial position and cash flows and the same
could occur in the future. Furthermore, they could demand ENDESA make
significant investments in order to comply with the new legal requirements.
ENDESA cannot predict the effects the new regulatory measures will have on its
results, its financial position or its cash flows and, therefore, these
circumstances could adversely affect ENDESA's business activities, results,
financial position and cash flows.

Information regarding sectoral regulation may be found in Section 3.
Regulatory Framework in this Consolidated Management Report, and also in Note
4 to the Consolidated Financial Statements for the year ended 31 December
2016.

In addition, the European Union has established an operating framework for the
various Member States, which include, inter alia, objectives related to
emissions, efficiency and renewable energies.

The introduction of new requirements, or amendments to existing ones, could
adversely affect ENDESA’s business activities, results, financial positions
and cash flows if it cannot adapt and manage correctly the environment arising
from them.

Information on likely trends in the new economic and industrial model and
ENDESA's industrial plan may be found in Section 6.1 Energy Paradigm and
Section 6.2 Strategic Pillars of this Consolidated Management Report.

ENDESA's activities are subject to wide-reaching environmental regulations and
its inability to comply with current environmental regulations or requirements
or any changes to the environmental regulations or requirements applicable
could adversely affect its business activities, results, financial position
and cash flows

ENDESA is subject to environmental regulations which affect both the normal
course of its operations, as well as its operations and development of its
projects, leading to increased risks and costs. This regulatory framework
requires licences, permits and other administrative authorisations be obtained
in advance, as well as fulfilment of all the requirements provided for in such
licences, permits and regulations. As in any regulated company, ENDESA cannot
guarantee that:

      
 *The laws or regulation will not be amended or interpreted in such a way as to
increase the expenses necessary to comply with such laws or as to affect
ENDESA's operations, facilities or plants;
      
 *Public opposition will not lead to delays or changes in the projects that are
proposed; and
      
 *The authorities will grant the environmental permits required to develop new
projects.
    
In addition, ENDESA is exposed to environmental risks inherent to its
business, including those risks relating to the management of the waste,
spills and emissions of the electricity production facilities, particularly
nuclear power plants. ENDESA may be held responsible for environmental
damages, for harm to employees or third parties, or for other types of damages
associated with its energy generation, supply and distribution facilities, as
well as port terminal activities.

Although the plants are prepared to comply with the prevailing environmental
requirements, ENDESA cannot guarantee that it will be able to comply with the
requirements imposed or that it will be able to avoid fines, administrative or
other sanctions, or any other penalties and expenses related to compliance
matters, including those related to the management of waste, spills and
emissions from the electricity production units. Failure to comply with this
regulation may give rise to significant liabilities, as well as fines,
damages, sanctions and expenses, including, where applicable, facility
closures. Government authorities may also impose charges or taxes on the
parties responsible in order to guarantee obligations are repaid. In the event
ENDESA were accused of failing to comply with environmental regulations, its
business activities, results, financial position and cash flows could be
affected adversely.

In this connection, ENDESA has taken out the following insurance policies:

      
 *An environmental liability insurance policy which covers, up to a maximum of
euros 100 million, claims arising from contamination.
      
 *A third-party liability insurance policy which covers claims relating to
damage to third parties or their property up to a maximum of Euros 200 million
and an additional Euros 800 million for hydroelectric plants.
      
 *In relation to risks arising from operating nuclear power plants, the storage
and handling of low-level radioactive materials and the eventual dismantling
of its nuclear power plants, an insurance policy up to Euros 700 million to
cover any liabilities related to nuclear power plants up to the liability
limit established by Spanish legislation.
    
The nuclear power plants are also insured against damage to their
installations (including stocks of fuel) and machinery breakdowns, with
maximum coverage of USD 1,500 million (approximately euros 1,355 million) for
each generator Group.

On 28 May 2011, the Spanish government published Law 12/2011, of 27 May, on
civil liability for nuclear damages or damages produced by radioactive
materials, which raises operator liability to euros 1.200 million and allows
coverage of this liability to be ensured in several ways. The entry into force
of this regulation is in turn subject to entry into force of the Protocol of
12 February 2004, amending the Convention on Civil Liability for Nuclear
Damage (Paris Convention), and the Protocol of 12 February 2004, amending the
Convention which complements the latter (Brussels Convention) which, at the
date on which this Consolidated Management Report was drawn up, was pending
ratification by some European Union member states.

However, it is possible ENDESA may face third-party damage claims. If ENDESA
were to be held liable for damages generated by its facilities for amounts
greater than its insurance policy cover or for damages which exceed the scope
of the insurance policy's cover, its business activities, financial position
or operating results could be adversely affected.

ENDESA is subject to compliance with the legislation and regulations on
emissions of pollutants and on the storage and treatments of waste from fuel
from nuclear power plants. It is possible that the Company will be subject to
even stricter environmental regulations in the future. In the past, the
approval of new regulations has required, and could require in the future,
significant capital investment expenditures in order to comply with legal
requirements. ENDESA cannot predict the increase in capital investments or the
increase in operating costs or other expenses it may have to incur in order to
comply with all environmental requirements and regulations. Nor can it predict
if the aforementioned costs may be transferred to third parties. Thus, the
costs associated with compliance with the regulations applicable could
adversely affect ENDESA's business activities, results, financial position and
cash flows.

Information concerning ENDESA's environmental management systems may be found
in Section 10. Environmental Protection in this Consolidated Management
Report.

Past or future infringements of competition and antitrust laws could adversely
affect ENDESA's business activities, results, financial position and cash
flows

ENDESA is subject to competition and antitrust laws in the markets in which it
operates. Infringements of and failure to comply with the aforementioned laws
and other applicable regulations, especially in Spain, ENDESA's main market,
could give rise to legal actions against ENDESA.

ENDESA has been, is and could be the object of legal investigations and
proceedings regarding competition and antitrust matters. Investigations
regarding the infringement of competition and antitrust laws usually last
several years and may be subject to strict rules which prevent the disclosure
of information. Furthermore, infringements of these regulations may give rise
to substantial fines and other types of sanctions which could adversely affect
ENDESA's business activities, results, financial position and cash flows.

ENDESA's growth strategy has traditionally included, and continues to include,
purchase transactions which are subject to various competition and antitrust
laws. These regulations may affect ENDESA's ability to carry out strategic
transactions.

ENDESA's business is largely dependent on the constant supply of large amounts
of fuel to generate electricity; on the supply of electricity and natural gas
used for its own consumption and supply; and on the supply of other
commodities, the prices of which are subject to market forces which may affect
the price and the amount of energy sold by ENDESA

ENDESA is exposed to market price and availability risks in relation to the
purchase of the fuel (including gas and coal) used to generate electricity,
for procuring gas and supply activities.

In this connection, fuel price fluctuations in international markets may
affect the contribution margin. The prices of the offers of the various
technologies are therefore established through the internationalisation, among
others, of fuel CO(2) quoted prices. Therefore, in the event of fluctuation in
fuel prices and carbon dioxide (CO(2)), generation technologies will attempt
to reflect such fluctuations in their wholesale market prices. At the same
time, the order of economic merit of each generation technology when
establishing the market price, will depend on its relative costs, which
include those of fuel and CO(2) emission rights, among others.

Similarly, the price of oil influences the price of electricity through the
natural gas supply contracts, the majority of which are indexed to oil.

The Company is also exposed to the prices of CO(2)emission rights, Certified
Emission Reductions (CERs) and Emission Reduction Units (ERUs). The price of
carbon dioxide (CO(2)) emission rights, Certified Emission Reductions (CERs)
and Emission Reduction Units (ERUs) influences the cost of production at
coal-fired and combined-cycle plants.

ENDESA has signed certain natural gas supply contracts which include binding
"take or pay" clauses which compel it to either acquire the fuel it has agreed
to contractually or to pay if it does not acquire such fuel. The terms of
these contracts have been established based on certain assumptions regarding
future electricity and gas demand. Any significant deviation from the
assumptions used could give rise to an obligation to purchase more fuel than
necessary or to sell excess fuel on the market at current prices. Over the
last 3 years, ENDESA has managed its supply and demand, considerably expanding
its international customer base in order to ensure its purchase commitments
are balanced against the volume of its own consumption and customer sales.
Furthermore, ENDESA has entered into electricity and natural gas contracts
based on certain assumptions regarding future market prices for electricity
and natural gas. ENDESA sells more electricity than it generates and,
therefore, it is obliged to acquire electricity on the spot market in order to
meet its supply obligations.

Any significant deviation when the aforementioned supply contracts are signed
could give rise to an obligation to purchase electricity or natural gas at
prices which are higher than those included in the contracts. In the event
there is a market price adjustment with respect to the estimates made, a
deviation in ENDESA's obligations with regard to its fuel needs, or a
regulatory change which affects prices as a whole and how they have been
established, and if its risk management strategies are inadequate in the face
of such changes, ENDESA's business activities, results, financial position and
cash flows could be affected adversely.

Information regarding fuel stock purchase commitments may be found in Section
4.6.Contractual Obligations and Off-Balance Sheet Operations in this
Consolidated Management Report and also in Note 11.2 to the Consolidated
Financial Statements for the year ended 31 December 2016.

ENDESA's business could be adversely affected in the event it is unable to
sustain its relationships with suppliers, customers and consumer and user
rights organisations, or if the entities with which ENDESA maintains these
relationships cease to exist

ENDESA's current relations with its main suppliers in the sector are essential
for the development and growth of its business, and will continue to be so in
the future. Furthermore, certain of these relationships are and will continue
to be managed by ENEL, S.p.A.

ENDESA's dependence on these relationships could affect its ability to
negotiate contracts with these parties under favourable conditions. Although
ENDESA's supplier portfolio is sufficiently diverse and it does not have a
concentration of suppliers, if any of these relationships is severed or
terminated, ENDESA cannot guarantee the replacement of any significant service
supplier or provider within an appropriate time frame. If ENDESA is unable to
negotiate contracts with its suppliers under favourable terms, if such
suppliers are unable to comply with their obligations or if their relationship
with ENDESA is severed, and ENDESA is unable to find an appropriate
replacement, its business activities, results, financial position and cash
flows could be affected adversely.

In the electricity supply business, ENDESA maintains relationships with a
large number of customers. Even if ENDESA were to lose individual customers it
would not have a significant impact on its business as a whole, the inability
to maintain stable relationships with key customers could adversely affect
ENDESA's business activities, results, financial position and cash flows.

Furthermore, ENDESA cannot guarantee that it will maintain solid relationships
and ongoing communication with consumers and users and with the associations
which represent them and, therefore, any change in these relationships could
entail negative publicity and a significant loss of customers, which could
adversely affect ENDESA's business activities, results, financial position and
cash flows.

Note 19.6 to the Consolidated Financial Statements for the year ended 31
December 2016 provides information on the concentration of customers and
suppliers.

ENDESA’s activities could be affected by rainfall patterns and climate and
weather conditions.

ENDESA depends on the levels of precipitation in the geographical areas where
its hydroelectric generation facilities are located. A year with low rainfall
leads to a decline in hydroelectric output, in turn increasing the output of
thermal power plants (with a greater cost) and, therefore, an increase in the
price of electricity and costs of buying energy. In a wet year, the opposite
effects occur.

Therefore, if there are droughts or other circumstances which adversely affect
hydroelectric generation, ENDESA's business activities, results, financial
position and cash flows could be adversely affected. Likewise, the Company
actively manages its production mix when faced with changes in hydrological
conditions. For example, in the event hydrological conditions are
unfavourable, electricity generation will, to a large extent, come from other
types of facilities and ENDESA's operating expenses arising from these
activities will increase. ENDESA's inability to manage changes in hydrological
conditions could adversely affect its business activities, results, financial
position and cash flows.

Weather-related conditions and, in particular, seasons, have a significant
impact on electricity demand. Electricity consumption levels reach their peak
in summer and winter. The impact seasonal changes have on demand is reflected
mainly in residential customer categories (with consumption of less than
50 MWh/year) and small businesses (with consumption between 50 MWh/year and
2 GWh/year). Seasonal changes in demand are attributed to various
weather-related factors such as the climate, the amount of natural light, and
the use of light, heating and air conditioning. Since ENDESA has high fixed
costs, changes in demand due to weather conditions can have a major effect on
the business's profitability.

The impact of seasonal variations on industrial electricity demand (with
consumption of over 2 GWh/year) is less pronounced than in domestic and
commercial industries, mainly due to the fact that there are various types of
industrial activities which, due to their unique nature, have differing
seasonal peaks. Furthermore, the effect of climate-related factors is more
varied in these industries. Accordingly, ENDESA must make certain projections
and estimates regarding climate conditions when negotiating its contracts and
a significant divergence in the precipitation levels and other weather
conditions envisaged could adversely affect ENDESA's business activities,
results, financial position and cash flows.

ENDESA is also subject to the risk of fluctuations in global demand.

Likewise, adverse weather conditions could impact the regular supply of energy
due to damages to the network, with the resulting interruption in services
which could compel ENDESA to compensate its customers due to delays or
disruptions in the supply of energy. The occurrence of any of the foregoing
circumstances could adversely affect its business activities, results,
financial position and cash flows.

ENDESA is exposed to risks associated with the construction of new electricity
generation and supply facilities

The construction of power generation and supply facilities can be
time-consuming and highly complex. This means that investment needs to be
planned well in advance of the estimated start-up date of the facility and,
therefore, the Group may need to adapt its decisions to changes in the market
conditions. This may entail significant additional costs not originally
planned that may affect the return on these types of projects.

In connection with the development of such facilities, ENDESA generally has to
obtain the related administrative authorisations and permits, acquire land
purchase or lease agreements, sign equipment procurement and construction
contracts, operation and maintenance agreements, fuel supply and transport
agreements, off-take arrangements and obtain sufficient financing to meet its
capital and debt requirements.

Factors that may affect ENDESA's ability to construct new facilities include:

      
 *Delays in obtaining regulatory approvals, including environmental permits;
      
 *Shortages or changes in the price of equipment, materials or labour;
      
 *Opposition from local groups, political groups or other stakeholders;
      
 *Adverse changes in the political environment and environmental regulations;
      
 *Adverse weather conditions, natural catastrophes, accidents and other
unforeseen events that could delay the completion of power plants or
substations;
      
 *Proper compliance by suppliers with the contracts entered into; and
      
 *Inability to obtain financing under conditions that are satisfactory to
ENDESA.
    
Any of these factors may cause delays in completion or commencement of the
Group's construction projects and may increase the cost of planned projects.
In addition, if ENDESA is unable to complete these projects, any costs
incurred in connection with such projects may not be recoverable.

If ENDESA faces problems related to the development and construction of new
facilities, its business activities, results, financial position and cash
flows may be adversely affected.

In addition, ENDESA makes investments to maintain and, where necessary, extend
the technical life of its electricity power plants. The execution of these
investments is dependent on market and regulatory conditions. If the necessary
conditions enabling the viability of the plants do not exist, ENDESA may have
to cease production at the installation and, where appropriate, and begin the
task of dismantling them. These closures would involve a reduction in
installed capacity and output that support customer energy sales and,
therefore, could adversely affect ENDESA's business activities, results,
financial position and cash flows.

Information concerning ENDESA's investment plan may be found in Section 6.3.
Main Financial Indicators in this Consolidated Management Report.

7.2.2. Risks associated with the countries in which ENDESA operates.

ENDESA's business could be affected by adverse economic or political
conditions in Spain, Portugal, the Eurozone and in international markets

Adverse economic conditions could have a negative impact on energy demand and
the ability of ENDESA's consumers to fulfil their payment obligations. In
times of economic recession, as experienced by Spain and Portugal in recent
years, electricity demand usually falls off, adversely affecting the Company's
results.

The economic conditions in Spain and Portugal in recent years have adversely
affected electricity demand and, therefore, ENDESA's operating results. The
Company cannot predict how the economic cycle in Spain, Portugal and the
Eurozone will evolve in the short term, nor can it predict whether economic
conditions will worsen or deteriorate.

If the economic situation in Spain, Portugal or other Eurozone economies
deteriorates, it could adversely affect energy consumption and, consequently,
ENDESA's business activities, financial position, operating results and cash
flows would be negatively affected.

In addition, the financial conditions in the international markets represent a
challenge for ENDESA's economic situation due to the potential impact on its
business of, on the one hand, the government debt level, declining growth
rates and possible downgrading of government bond ratings at the international
level – and, in particular, in Eurozone countries – and, on the other
hand, the new monetary expansion measures expected in the credit market.
Changes in any of these factors could condition ENDESA's access to capital
markets and the conditions under which it obtains financing, consequently
affecting its business activities, results, financial position and cash flows.

In addition to any economic problems, which could arise at the international
level, ENDESA faces a situation of uncertainty at political level, in Europe
and internationally, which could adversely affect the Company's economic and
financial position. Specifically, it is considered that the impact of
“Brexit” on ENDESA is negligible.

ENDESA cannot guarantee that the international or Eurozone economic situation
will not deteriorate, or that an event of a political nature will not have a
significant impact on the markets, thus affecting its economic situation. All
of these factors could adversely affect ENDESA's business activities,
financial position, operating results and cash flows.

7.2.3. Risks associated with Operations carried out by ENDESA

ENDESA's activities may be affected by operating risks and other significant
risks

In the course of ENDESA's business activities, direct or indirect losses could
arise from inadequate internal processes, technological failures, human error
or certain external events, such as accidents at facilities, workplace
conflicts and natural disasters. These risks and dangers could cause
explosions, floods or other circumstances which could cause the total loss of
the energy generation and distribution facilities; damages to or the
deterioration or destruction of ENDESA's facilities, or even environmental
damages; delays in electricity generation and complete disruption of the
activity; or could cause personal damages or deaths. The occurrence of any of
these circumstances could adversely affect its business activities, results,
financial position and cash flows.

The loss of essential workers or ENDESA's inability to recruit, employ and
train qualified staff could adversely affect ENDESA's business activities,
results, financial position and cash flows

In order for ENDESA to be able to continue to maintain its position in the
industry, it must recruit, train and retain the staff necessary to provide the
experience required within the framework of ENDESA's intellectual capital
needs. The success of ENDESA's business depends on the continuity of the
services provided by Company management and by other key employees with
demonstrated experience, reputation and influence in the electricity industry,
thanks to establishing beneficial and long-lasting relationships in the market
over the years. The qualified labour market is highly competitive and ENDESA
may not be able to successfully hire additional qualified staff or to replace
outgoing staff with sufficiently qualified or effective employees.

ENDESA's inability to retain or recruit essential staff could adversely affect
its business activities, results, financial position and cash flows.

Information on attracting and retaining talent, training, leadership and
development of employees may be found in Section 11. Human Resources in this
Consolidated Management Report.

ENDESA's insurance cover and guarantees may not be adequate or may not cover
all of the damages

ENDESA's business is exposed to the risks inherent to the markets in which it
operates. Despite the fact that ENDESA attempts to obtain adequate insurance
cover in relation to the main risks associated with its business – including
damages to the Company itself, general civil liability, environmental and
nuclear power plant liability – it is possible that insurance cover may not
be available on the market under commercially reasonable terms. Likewise, the
amounts for which ENDESA is insured may not be sufficient to cover the
incurred losses in their entirety.

In the event of a partial or total loss of ENDESA's facilities or other
assets, or a disruption to its activities, the funds ENDESA receives from its
insurance may not be sufficient to cover the complete repair or replacement of
the assets or losses incurred. Furthermore, in the event of a total or partial
loss of ENDESA's facilities or other assets, part of the equipment may not be
easily replaced, given its high value or its specific nature, or may not be
easily or immediately available.

Similarly, the cover of guarantees in relation to the aforementioned equipment
or the limits to ENDESA's ability to replace the equipment could disrupt or
hinder its operations or significantly delay the course of its ordinary
operations. Consequently, all of the above could adversely affect ENDESA's
business activities, results, financial position and cash flows.

Likewise, ENDESA's insurance contracts are subject to constant review by its
insurers. It is therefore possible that ENDESA may be unable to maintain its
insurance contracts under conditions similar to those currently in place in
order to meet possible increases to premiums or to covers which become
inaccessible. If ENDESA is unable to transfer a possible premium increase to
its customers, these additional costs may adversely affect its business
activities, results, financial position, and cash flows.

ENDESA manages its activities with information technology that uses the
highest security and contingency standards according to the state of the art,
such that it guarantees operating efficiencies, as well as the continuity of
the businesses, systems and processes which contribute to attaining its
corporate objectives

The business aggregates with regard to technical complexity, volume,
granularity, functionality and varying situations handled by ENDESA's systems
make their uses essential and represent a strategic distinguishing element
with respect to industry companies. Specifically, ENDESA's main computer
systems handle the following business processes:

      
 *Sales systems: marketing processes, demand forecasts, profitability, sales,
customer service, claim management, hiring and the basic revenue cycle
(validation of meter reading, invoicing, collection management and debt
processing).
      
 *Technical distribution systems: processes for managing the grid, meter-reading
management, handling of new supplies, network planning, field work management,
management of meter-reading equipment with advanced remote management and
energy management capabilities.
      
 *Economic and financial systems: economic management, accounting, financial
consolidation and balance sheet processes.
    
Moreover, ENDESA is in the midst of a process of digital transformation, which
will raise its exposure to potential cyber attacks that might endanger the
security of its systems and its customer databases, which in turn might impair
the Company's performance and undermine its customers' trust.

Management of ENDESA's business activity through these systems is key in order
to perform its activity efficiently and achieve its corporate objectives.
However, the existence of these processes, methodologies, tools and protocols
based on international standards and appropriately audited, and the
development of a cyber security strategy that relies on a management framework
and is aligned with international standards and government initiatives, does
not imply that ENDESA is exempt from technical incidents which could adversely
affect the continuity of ENDESA's business operations, the quality of its
contractual relationship with its customers, its results, its financial
position and its cash flows.

7.2.4. Financial Risks associated with ENDESA's Business

Note 19 to the Consolidated Financial Statements for the year ended 31
December 2016 lists the risk management and control mechanisms.

ENDESA is exposed to interest rate risk.

Borrowings at floating interest rates are mainly tied to Euribor. Changes in
interest rates in relation to debt not covered or that is adequately covered
may be adversely affect ENDESA's business activities, results, financial
position and cash flows.

Information on interest rate risk is provided in Note 19.1 of the Notes to the
Consolidated Financial Statements for the year ended 31 December 2016.

ENDESA is exposed to foreign currency risk

ENDESA is exposed to foreign currency risk, mainly in relation to the payments
it must make in international markets to acquire energy-related commodities,
especially natural gas and international coal, where the prices of these
commodities are usually denominated in US dollars.

Therefore, this means that the fluctuations in the foreign exchange rate could
adversely affect ENDESA's business activities, results, financial position and
cash flows.

Information on foreign currency risk is provided in Note 19.2 of the Notes to
the Consolidated Financial Statements for the year ended 31 December 2016.

ENDESA is exposed to credit risk

In its commercial and financial activities, ENDESA is exposed to the risk that
its counterparty may be unable to meet all or some of its obligations, both
payment obligations arising from goods already delivered and services already
rendered, as well as payment obligations related to expected cash flows, in
accordance with the financial derivative contracts entered into, cash deposits
or financial assets. In particular, ENDESA assumes the risk that the consumer
may not be able to fulfil its payment obligations for the supply of energy,
including all transmission and distribution costs.

ENDESA cannot guarantee that it will not incur losses as a result of the
non-payment of commercial or financial receivables and, therefore, the failure
of one or various significant counterparties to fulfil their obligations could
adversely affect ENDESA's business activities, results, financial position and
cash flows.

Information on credit risk is provided in Note 19.5 of the Notes to the
Consolidated Financial Statements for the year ended 31 December 2016.

ENDESA's business depends on its ability to obtain the funds necessary to
refinance its debt and finance its capital expenses

ENDESA is confident that it will be able to generate funds internally
(self-financing), access bank financing through long-term credit facilities,
access short-term capital markets as a source of liquidity and access the
long-term debt market in order to finance its organic growth programme and
other capital requirements, including its commitments arising from the
on-going maintenance of its current facilities. Furthermore, ENDESA
occasionally needs to refinance its existing debt. This debt includes
long-term credit facilities, obtained from both banks as well as companies of
the Group headed by ENEL, and financial investments.

If ENDESA is unable to access capital under reasonable conditions, refinance
its debt, settle its capital expenses and implement its strategy, the Company
could be adversely affected. The capital and turmoil in the capital market, a
possible reduction in ENDESA's creditworthiness or possible restrictions on
financing conditions imposed on the credit facilities in the event financial
ratios deteriorate, could increase the Company's finance costs or adversely
affect its ability to access the capital markets.

A lack of financing could force ENDESA to dispose of or sell its assets to
offset the liquidity shortfall in order to pay the amounts owed and this sale
could occur under circumstances which prevent ENDESA from obtaining the best
price for said assets. Therefore, if ENDESA is unable to access financing
under acceptable conditions, ENDESA's business activities, results, financial
position and cash flows could be adversely affected.

Information concerning ENDESA's financial function may be found in Section
4.1. Financial Management in this Consolidated Management Report.

On the other hand, the conditions in which ENDESA accesses the capital markets
or other means of financing, whether within the Company or on the credit
market, are highly dependent upon the credit rating of the ENEL Group, of
which ENDESA is part. ENDESA's capacity to access the markets and financing
could therefore be adversely affected, in part, by the credit and financial
position of ENEL, to the extent that it could determine the availability of
intercompany financing for ENDESA or the conditions under which the Company
accesses the capital market

In this connection, the deterioration of ENEL's credit rating and,
consequently, that of ENDESA, could limit ENDESA's ability to access the
capital markets or any other means of financing (or refinancing) from third
parties or increase the cost of these transactions which could adversely
affect ENDESA's business activities, results, financial position and cash
flows.

Information concerning ENDESA's rating may be found in Section 4.3. Credit
Rating Management in this Consolidated Management Report.

7.2.5. Tax Risks

Technical tax risk

This is the possible risk that the tax authorities may demand more
contributions from the taxpayer than expected in relation to tax returns or
returns not presented, or in addition to the returns presented or unpaid tax,
due to different interpretations of laws or regulations or new regulations
that may be introduced retroactively, in connection with tax payable,
late-interest penalties, fines or any other item entailing tax debt. This risk
is associated both with compliance with current regulations and changes in
their interpretation.

The information relating to the tax periods open for review is detailed in
Note 3ñ of the notes to the Consolidated Financial Statements for the year
ended 31 December 2016.

Any change to the tax legislation applicable or to its interpretation could
affect ENDESA's tax obligations, entailing fines, extra costs or increases in
its obligations which could adversely affect its business activities, outlook,
operational results, financial position and cash flows.

Reputational risk arising from tax matters

This is the risk that the main audience's perception, assessment or opinion of
the company may be seriously affected due to the company's own actions, events
that are wrongly or unfairly attributed to it, or due to events of similar
nature that affect the entire sector and are projected on the company.

ENDESA could be held liable for income tax and value added tax (VAT) charges
corresponding to the tax group of which it forms part or has formed part.

Since 2010, ENDESA has filed consolidated tax returns for income tax purposes,
as part of consolidated tax group no. 572/10, the parent of which is ENEL,
S.p.A. and ENEL Iberoamérica, S.L.U. The representative in Spain. Likewise,
since January 2010, ENDESA has formed part of the Spanish consolidated VAT
group no. 45/10, the parent of which is also ENEL Iberoamérica, S.L.U. Until
2009, ENDESA filed consolidated tax returns as the Parent under group no.
42/1998 for income tax and under group no. 145/08 for VAT.

Also, ENEL Green Power España, S.L.U. (EGPE), a wholly-owned ENDESA
subsidiary, has been fully consolidated between 2010 and 2016 as part of the
Group number 574/10 of which ENEL Green Power España, S.L.U. (EGPE) is the
Parent.

In accordance with the regime for filing consolidated tax returns for purposes
of income tax and VAT for company groups, all of the Group companies which
file consolidated tax returns are jointly responsible for paying the Group's
tax charge. This includes certain sanctions arising from failure to comply
with specific obligations imposed under the VAT regime for company groups.

As a result of this, ENDESA is jointly responsible for paying the tax charge
of the other members of the consolidated tax Groups to which it belongs or has
belonged for all tax periods still open for review. ENEL Green Power España,
S.L.U. (EGPE) is also responsible for this with respect to the other members
of the tax consolidation group of which it has formed part.

Even though ENDESA or, where applicable, ENEL Green Power España, S.L.U.
(EGPE), has the right to recourse against the other members of the
corresponding consolidated tax group, it could be held jointly liable if any
outstanding tax charge were to arise which had not been duly settled by
another member of the consolidated tax groups of which ENDESA or, where
applicable, ENEL Green Power España, S.L.U. (EGPE), forms or has formed part.
Any material tax liability could adversely affect ENDESA's business
activities, results, financial position and cash flows.

7.2.6. Other Risks.

The ENEL Group controls the majority of ENDESA's share capital and voting
rights and the interests of the ENEL Group could conflict with the interests
of ENDESA.

At 31 December 2016 the ENEL Group, through ENEL Iberoamérica, S.L.U., held
70.101% of ENDESA's share capital and voting rights, enabling it to appoint
the majority of ENDESA's Board members and, therefore, to control management
of the business and its management policies.

In addition, certain of the relationships that ENDESA currently maintains with
its principal international suppliers and providers in the sector are, and
will continue to be, managed by ENEL, S.p.A.

The ENEL Group's interests may differ from the interests of ENDESA or those of
its shareholders. Furthermore, both the ENEL Group and ENDESA compete in the
European electricity market. It not possible to ensure that the interests of
the ENEL Group will coincide with the interests of ENDESA's other shareholders
or that the ENEL Group will act in support of ENDESA's interests.

Information on balances and transactions with related parties is provided in
Note 34 to the Consolidated Financial Statements for the year ended 31
December 2016.

ENDESA is involved in court and arbitration proceedings

ENDESA is party to various ongoing legal proceedings related to its business
activities, including tax, regulatory and antitrust disputes. It is also
subject to ongoing or possible tax audits. In general, ENDESA is exposed to
third-party claims from all jurisdictions (criminal, civil, commercial, labour
and economic-administrative) and in national and international arbitration
proceedings.

Although ENDESA considers that the appropriate provisions have been made for
any legal contingencies, it has not made provisions for all amounts claimed in
each and every one of the proceedings. In particular, it has not made
provisions in cases in which it is impossible to quantify the possible
negative outcome nor in cases in which the Company considers such negative
outcome unlikely. No guarantee can be made that ENDESA has allocated adequate
provisions for contingencies, that it will be successful in the proceedings in
which it expects a positive outcome, or that an unfavourable decision will not
adversely affect ENDESA's business activities, results, financial position and
cash flows. Furthermore, the Company cannot ensure that it will not be the
object of new legal proceedings in the future, which, if the outcome were
unfavourable, would not have an adverse effect on its business activities,
operating results, financial position or cash flows.

Information on litigation and arbitration is provided in Note 16.3 to the
Consolidated Financial Statements for the year ended 31 December 2016.

ENDESA is exposed to image and reputation impairment risk

ENDESA is exposed to the opinion and perception projected to different
interest groups. This perception could deteriorate as a result of events
produced by the Company or third parties over which it has little or no
control. Should this occur, this could lead to economic detriment for the
Company due, among other factors, to increased requirements 

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