Enel to pare back renewables spending, boost grid investment in coming years

Enel SpA lifted the curtain on new CEO Flavio Cattaneo's strategic priorities during the company's capital markets day Nov. 22, revealing a streamlined renewables investment plan and a stronger focus on grid networks.

The Italy-headquartered utility is increasing its spending in its regulated grid business, with a focus on countries with favorable regulatory environments.

Overall, annual capital expenditure for the 2024-2026 period will drop to an average of €11.9 billion, compared to average yearly spending of €13.7 billion in the past three years. Gross capex to 2026 of €35.8 billion is €1.6 billion lower than the spending plan Enel laid out for 2023 to 2025.

In renewables, Enel wants to pare back greenfield development while limiting spending outside of core markets, Cattaneo told analysts during the event.

Enel's generation segment, which includes renewables, will see a €5 billion spending reduction between 2024 and 2026 compared to the prior three years, while grid investments will rise by €4 billion.

Still, Enel pledged to add 13.4 GW of new renewables capacity by 2026, bringing its installed capacity to 73 GW and raising the share of carbon-free power production to 86%, from 74% today.

"In the next three years, we will adopt a more selective approach toward investments in order to maximize profitability while minimizing risks," Cattaneo said.

The streamlined capex plan, while not revolutionary, is sensible, according to JP Morgan analysts. "We believe this shift will be welcomed by investors and, particularly, by rating agencies and should help underpin a higher dividend in the long run in our view," they said in a Nov. 22 note.

Geographic focus, asset disposals continue

Geographically, Enel's focus on core markets will see 49% of gross capex directed to Italy, something that analysts had predicted during the transition from previous CEO Francesco Starace.

"This change in the mood, especially toward the investments in renewable energy, is an explicit nod to the Italian government's calls for the adoption of a pragmatic approach toward the financial exposure to international markets and the needs to reduce risks," according to Francesco Sassi, a research fellow specializing in energy geopolitics at consultancy Ricerche Industriali ed Energetiche. The Italian state owns a 23.6% stake in Enel.

With its strategic update, Enel has aligned its short-term strategy with energy policy convictions of the current and previous Italian governments, both of which "inclined to prioritize energy security over energy transition in the aftermath of the global energy crisis and Russia's invasion of Ukraine," Sassi said in a Nov. 22 email.

Iberia, where Enel operates via its subsidiary Endesa SA, will see 25% of capex, with 19% going into Latin America and 7% to the US, where renewables development is supported by incentives under the Inflation Reduction Act.

The geographical split continues the utility's ambition to focus on just six countries — Italy, Spain, Brazil, Chile, Colombia and the US — and pursue a €21 billion disposal plan that is already well underway.

This year alone, Enel completed disposals in Romania, Argentina, Australia and Chile. Another €5.4 billion of deals are set to close, including in Peru, Greece and the US, while advanced negotiations are underway for a further €3.3 billion worth of assets, Enel said.

Also on Nov. 22, Enel announced the sale of its power generation assets in Peru, totaling about 2.4 GW, to Niagara Energy S.A.C., a Peruvian company controlled by investment fund Actis LLP, for about €1.3 billion. Enel said the transaction would reduce the company's overall debt by about €1.6 billion, mostly in 2024. The deal is expected to close in the second quarter of 2024.

Cattaneo will also focus on cash generation and implementing efficiencies in a bid to strengthen Enel's balance sheet and boost shareholder returns.

"Financial discipline will be the cornerstone of our strategy," Cattaneo said. Compared to 2022, Enel plans to reduce costs by €1.2 billion in 2026, chiefly through efficiencies, reconsidering insourcing versus outsourcing and improvements in technology.

Enel recently upgraded its 2023 earnings guidance and now also expects higher EBITDA in 2024, providing a new range of €22.1 billion to €22.8 billion, up from €21.4 billion to €22.0 billion in its last strategic update. By 2026, EBITDA is now guided to come in between €23.6 billion and €24.3 billion.

Analysts at Jefferies said the update provided clarity on the near-term outlook, with the new strategy set to yield a more efficient and resilient business. "Overall positive," they said in a note.

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