Strategy and Analysis

Enel is an integrated Group on the electricity and gas value chain. Its lines of business vary from country to country, ranging from the supply of raw materials and the generation of electricity to the distribution and sale of electricity and gas.

An extract from Chief Executive Officer Fulvio Conti’s letter to our shareholders and other stakeholders published in the 2009 Annual Report.

“With the completion of its international expansion and the integration of the companies acquired, Enel is now a leader in the markets where it operates, with an efficient technological and geographical mix, a significant presence in the field of renewable energy, and the ability to pursue excellence through, among other things, innovation.
In 2009, Enel increased its gross operating margin by 12% with respect to the previous year, while the Group net income rose about 2% to 5.4 billion euro, the highest level ever achieved in the history of the Group, in spite of the difficult times for the world economy.

Enel also made its financial position even sounder through a capital increase, bond issues, and an improvement in its operating cash flow. On the basis of these solid foundations, we approved a plan to develop the Group’s great potential, with increasing earnings and greater value creation for our shareholders.

The plan is based on the following strategic priorities:

• maintaining our leading position in the markets where we are already present;
• continuing to integrate and consolidate the companies acquired;
• pursuing operating excellence;
• developing renewable and nuclear energy, as well as promoting technological innovation.

The Company will also continue to pursue financial stability through the careful management of operating cash flow and initiatives to leverage several assets in our portfolio with the aim of further reducing the level of our debt. ...

The size of the Group and the validity of the strategies adopted have enabled Enel to maintain its performance in spite of the unfavorable macroeconomic situation and constitute a solid foundation for pursuing our objectives, as well as an opportunity to take advantage in a timely fashion of any acceleration of the economic recovery.
These foundations will allow Enel to continue its projects aimed at establishing its leadership in the areas where it is present, benefiting from the optimal diversification, both technological and geographical, of its plants, as well as from a competitive cost structure.
In addition, the Group will continue to invest in research and the development of renewable energy sources, pursuing technological excellence without neglecting its concern for environmental issues. Our plans for the return of nuclear power to Italy will also move forward in line with developments in the legislative framework.
Further benefits, in terms of both cost containment and improved cash flow, are expected from the operating excellence programs in progress and the synergy that will be achieved from increasing integration with Endesa.
The contribution of these programs and all the other efforts being made will enable the Company to achieve the targets announced for 2010. In particular, the planned extraordinary transactions to optimize our portfolio and the generation of operating cash flow will enable us to reduce our debt, with a consequent improvement in the financial position of the Group.
In this regard, we have begun the reorganization the Renewable Energy Division, the benefits of which will also be leveraged by the sale of a minority interest in Enel Green Power.”
The main risks and uncertainties the Group faces are connected with the following matters:

• Market liberalization and regulatory changes;
• CO₂ emissions;
• Commodity prices and supply continuity;
• Credit and liquidity risk;
• Rating risk;
• Exchange- and interest-rate risk;
• Other risks.

For these matters, see the 2009 Annual Report, pp. 138 to 140.
Enel and the financial markets In spite of the deep recession that characterized 2009, the global economy improved in the second half of the year. Boosted by the expansionary policies enacted by the major economies, the economic recovery began in the summer and continued during the rest of the year.
Enel shares ended 2009 at 4.048 euro (+1.53% with respect to January 1, 2009).
On November 26, 2009, the Company paid an interim dividend of 10 eurocents on its 2009 net income. Added to the amount already distributed on June 25, 2009, this raised the total paid during the year to 39 eurocents per share. As of December 31, 2009, the Ministry of the Economy and Finance owned 13.9% of Enel’s shares, Cassa Depositi e Prestiti 17.4%, institutional investors 38.1%, and individual investors 30.6%.

Enel and market fundamentals
In 2009, the prices of energy commodities gradually recovered from the minimums recorded towards the end of 2008. This was due more to the confidence of the players in the recovery of the world economy than to the actual strengthening of market fundamentals. The most acute phase of the crisis was over by the second half of 2009, with commodity prices recording a recovery with respect to the first few months of the year. The price of Brent crude oil ended 2009 at 77 U.S. dollars a barrel (against 40 U.S. dollars a barrel in February), returning to its 2007 level. As far as exchange rates are concerned, the euro ended 2009 at 1.44 U.S. dollars, thanks to the recovery recorded in the second half of the year, which was brought about by the return of investment in the higher-risk markets (1.45 euro/U.S. dollar in the second half against 1.33 in the first half).

Enel and the countries in which It operates
In 2009, the international economy was characterized by a deep recession – the most serious one since the end of the Second World War – which began at the end of 2007 following the financial shock that took place in the summer of the same year. The most acute phase occurred in the first half of 2009. Thanks to the effects of monetary and fiscal policies implemented by governments throughout the world, the second quarter of 2009 marked the beginning of an upswing from the trough of the business cycle, and in the third quarter almost all economies recorded a turnabout.
Consequently, the governments of many of the countries in which Enel operates enacted various kinds of support for their citizens against the crisis, including measures to contain energy prices.
In Italy, law n. 2/2009 – the so-called “Anti-crisis” law – converted decree law n. 185/08 of November 29, 2008, introducing new provisions on the wholesale electricity market and final rates. In particular, article 3 of the law provides for the AEEG to adopt measures to adjust electricity and natural-gas prices to the decrease in the price of oil.
In Spain, Royal Decree Law n. 6/2009 introduced a social measure, the so-called “bono social”, which provides for discounts on the bills of certain categories of customers, to be completely financed by the producers, with Endesa’s share amounting to 36.77%.
In Russia, because of the crisis, for 2010 the government provided for a limited increase in the regulated rates of end customers (7.6% for industrial customers, 10% for residential customers).
In Argentina, in August 2009, the government re-introduced subsidies for end consumers of electricity for four months, in order to interrupt temporarily the effects of the rate increases of between 30% and 300% introduced in November 2008 for customers consuming more than 1,000 kWh every two months. The measure ceased to have effect in October 2009.

For a more detailed disclosure of what happened in the countries of Enel’s boundary during reporting year 2009, see the chapter dedicated to the “Reference Scenario” in the 2009 Annual Report (pp. 39 to 85).

The following parts of the 2009 Annual Report contain in-depth observations on the situation in which Enel operates: the letter to shareholders and other stakeholders (page 10), the summary of results (page 19), significant events in 2009 (page 25), the Reference Scenario (page 39), main risks and uncertainties (page 138), and contingent liabilities and assets (page 266).
They are available in the Investor Relations section of Enel’s institutional web site (http://www.enel.com/en-GB/investor/ financial_reports/annual/)