Endesa CFO on driving transition

When Luca Passa was hired in 2018 as CFO of Endesa, Spain’s largest utility group with 11m customers, he had several immediate challenges to address. Not least was the fact that the Italian had to quickly become proficient in Spanish as board and most other meetings were conducted in the language.

He also had to help drive a digital transformation programme alongside an ongoing transition to a sustainable footing- the latter initiative part of a broader move by parent Enel, the Italian utility giant.

But Passa was well placed to help implement the change at Endesa, given his previous role as head of investor relations at Enel, which had begun its sustainability drive in 2015. Enel is a majority owner of Endesa, which is listed on the Spanish stock market with a market cap of nearly €24bn by mid-April.

He describes the huge cultural challenge of shifting the company away from coal, given it was launched in 1944 as Empresa Nacional de Electricidad, to use the country’s coal fields for electricity generation. Only one percent of Endesa’s revenue came from its coal generation business and the share of electricity from this fossil fuel in the total electricity produced by Endesa was only 2.5 percent in 2020.

“Endesa was very much linked to coal-fired power generation in Spain, so it was a very polluting generation. Now we are shutting down coal facilities and promoting renewable energy generation. We are developing assets in wind, solar, and managing hydro to meet the targets for Endesa’s carbon mix,” says Passa.

“For a company that has been linked to coal for so long, the cultural change has been pretty intense. When we announced in 2019 the shutdown of all coal facilities, we had to win arguments internally and externally,” he adds.

Another cultural challenge was developing a new collective agreement with the majority of Endesa’s 10,000 strong workforce that are unionised. It took two years to reach a collective agreement over benefits with one of the three unions representing the majority  group’s employees while two other unions were in disagrement. “The tough negotiations reflect the high expectation of workers’ welfare in a country with heavy unions presence” says Passa.

Not only was Endesa being reset for a more sustainable future, Passa also had to contend with a slowdown in growth in the four years previous to his arrival. The group that is focused mainly on the Iberian Peninsula but also had smaller operations in France, Morocco, and Germany had seen underinvestment in that period.

Passa was responsible, along with CEO José Bogas who had been in the top role since 2014, for driving a strategy of greater capital expenditure (capex) to drive growth. “In 2014 the company was investing €900 million of capex per year. With the business plan we have just presented, we are investing €2.6 billion per year,” says Passa.

He is confident that the plan, which is heavily invested in renewables, will take advantage of the strong natural features in Spain- especially solar, and a political climate favouring transition to sustainable energy.

Although Passa says that Spain has in recent years pushed for some of the most aggressive renewables installation and CO2 emission targets in Europe, that was initially challenging to corporates, there have been some positive effects.

“When you have 10-year visibility it is much easier to plan investments. Renewables installations are growing exponentially and we have a lot of non-Iberian companies coming to Spain, because they see value in these developments”, says Passa.

In March Endesa acquired a portfolio of 11 planned solar projects in Spain totalling 519 MW (megawatts) from local developer Arena Power for €350 million.

Objective approach

Taking on such a broad set of challenges might seem a tall order, but not something that daunted Passa, who spent the first 17 years of his career in investment banking.

At the London offices of Cantor Fitzgerald, Lehman Brothers and then over a decade at Morgan Stanley, he worked across broking, trading, in both equities and debt capital, as well as M&A.

Passa’s tenure in banking reached its zenith when he was advising global clients as a managing director at Morgan Stanley, but took a different path when he joined Italian shipbuilder Fincantieri as head of investor relations in 2014. The company had been a client at Morgan Stanley and he had been the lead banker on its public listing on the London stock exchange.

The move offered the chance to bring objective advice from an external perspective to an internal role. “In investment banking, you are trained to think as objectively as possible because you need to please every stakeholder of a company, whether its shareholders or parties involved in the company from a social perspective,” he says.

Passa says that objectivity is vitally important to counter the natural bias that often exists in corporate culture. “For example, in many companies there will be an assumption that you are doing the best within the sector or sphere you operate in”.

“I want to be contrarian to this bias, by trying to put forward objective thinking, based on data,” he says.

The following year Passa joined Enel as it was launching a transition that would not only result in it moving to a sustainable footing but also deliver a value creation programme that has resulted in becoming Italy’s biggest company by market value.

He faced the challenge of running IR for a group with 14 listed subsidiaries with “very limited coordination when I arrived”.

“I had to put that in place. When I arrived, there were also three large corporate transactions that we were doing involving shareholder votes,” he adds.

Passa says the profound changes that took place at Enel following the arrival of CEO Francesco Starace in 2014 meant “crafting a different story for the group”. It’s a process he has continued since arriving at Endesa, where the dramatic swich to renewables needs to be conveyed in value enhancing terms to the market.

At the Spanish utility, where he is leading a team of 400 finance staff in core finance duties but also insurance, tax, investor relations, a digital transformation programme has been developed using cloud technology.

A major benefit of the initiative has been a speeding up of the accounting closing process. “Previously it took us nine days to close. Now we have a system that allows us to close in less than five days,” says Passa. “We are also implementing this year a predictive type of system that will allow us to know two to three weeks in advance, when we will close our fianncials,” he adds.

Another initiative launched by Passa was to track lots of business KPIs on a weekly basis to understand the evolution of every area of the group’s activities. “It’s given us a grasp of what is happening in the business in real time,” he says.

When coronavirus hit at the start of last year, Endesa was able to move the majority of its staff to remote working by mid-March. Although Passa admits the process was not without complications, the ability to keep functioning effectively through the pandemic whilst keeping staff safe was critical. “If we were not migrated to cloud technology and had the system linked in this way, it would have been impossible to manage the company,” he adds.

In February, Endesa delivered 2020 full year results that showed that net ordinary income of €2.13bn, was 36  per cent higher than in 2019.

Smart thinking

Endesa is employing algorithms, AI (artificial intelligence) and machine learning technologies to gain more detailed understanding of levels of consumer demand. “The investment in digitization in the last three to four years, allows us to have a better understanding of our customers so we can now do targeted campaigns,” says Passa.

It means that customers can get an immediate understanding of what their subscription-based energy tariff, based on energy consumption of the last five to seven years would be, by tapping in their address details.

The approach reflects Passa’ experience of how tech companies have successfully delivered on audience expectations. “We make them a specific offer, which is a monthly flat tariff, ie independent of the volumes the customer will consume in the future. It’s giving them the experience they’re getting from Netflix, Spotify or other type of platforms,” he says.

In addition, communication with customers has been finessed through powerful bots and AI harnessed to phone services to quickly react to consumer needs, “These are technologies gleaned from the finance sector which implemented them three to four years ago,” adds Passa.

This approach adheres to the social aspect of the ESG (environmental, social and governance) targets Endesa is committed to. “The more you understand how your customers operate, the better you’re going to serve them,” says Passa.

Looking forward, Passa says Endesa’s finance team is focused on developing new forms of modelling and forecasting to better understand the potential financial evolution of the business in the context of climate change. “We are elaborating our climate scenarios, re TFCD (Task Force on Climate-related Financial Disclosures) disclosure on the impact of these scenarios, we started in our 2020 accounts.

“This is something that will drive business for the next 10 years. Then our long-term target is to be carbon neutral by 2050. To get there, the effect on our business model is going to be huge, but we are working to get there earlier.

“We also put forward our 2030 vision in terms of investments, in which we think that we’re going to invest €25 billion of capex in this period, 80 percent of which will be on renewables and distribution,” says Passa.

Large investment projects are aided by predictive technology. “The utility sector made a quantum leap in the last 15 years. Back then we were building a gas plant without knowing what was going to be the energy sale price at the end of construction which generally took 10 years.

“Now you can build a solar farm that takes six months knowing the price at which you’re going to be selling energy. So the amount of information that we are relying on in order to make our investment decision is completely different,” says Passa.

Endesa has committed a significant element of its financing to align with the UN’s SDGs (social development goals), particularly in climate improvement. “We closed 2020 with 45 percent of debt with this kind of a feature, excluding the Enel intercompany financing where the figure is around 76 percent,” he adds.

Passa says Endesa will continue on a roadmap of even greater sustainable financing and investment. “We’re moving towards a more sustainable business that will perform better than others in the future,” he adds.

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