Enel SpA (ENEL) Chief Executive Officer Fulvio Conti plans to battle three years of stagnant profits at Italy’s biggest utility by shifting to faster-growing markets in Latin America and Eastern Europe.
“We are adapting our strategy to adverse conditions and the percentage of earnings from Italy and Spain versus our growth markets will be 50-50 by 2017,” Conti said in an interview in Rome.
Enel, based in Rome, gets 60 percent of earnings before interest, tax, depreciation and amortization from Italy and Spain and the rest from Latin America, Eastern Europe and renewable energy businesses. Power demand will increase 4.9 percent this year in Latin America and 1.6 percent in Russia, compared with a 2 percent slump in Spain and a 0.1 percent decline in Italy, according to Enel data.
Weak power demand and higher taxes in Italy and Spain, which are both in recession, are putting a strain on Enel’s earnings. The company forecast a decline in adjusted net profit this year to 3 billion euros from 3.5 billion euros ($3.9 billion) a year ago and doesn’t expect profit to recover until 2015.
“He’s in a bind and left with few weapons to fight back,” said Stefano Girola, a fund manager at Banca Albertini Syz & Co. in Milan. “Emerging markets offer hope of profits but need investments to produce. Where can he get that money if core markets languish?”
Enel, which gained its Latin American markets when it bought Spain’s Endesa SA (ELE) in 2009, is present in Chile, Argentina, Brazil, Peru and Colombia. Other international operations include a controlling stake in Slovak utility Slovenske Elektrarne, a distribution network in Romania, natural gas fields in Russia through SeverEnergia, and a controlling stake in Russian utility Enel OGK-5.
Conti said Enel is well positioned in Eastern Europe, particularly on the Russian market, and is confident Latin America will offer good opportunities for development.
“Markets like Peru, Colombia and Brazil have huge potential electricity demand,” Conti said. “Chile for example will need another 14 gigawatts in the next 10 years to promote further development of their mining industry in the North and industrial development in the Center and South.”
Investments outside Italy and Spain will increase 2.5 percent to 16.1 billion euros by 2017, according to the company’s strategic plan. That’s out of a total 27 billion euros of investments in the period.
“Cost savings, efficiency, asset sales and borrowings will all contribute to our plans for these growth markets,” Conti said. The company is also focusing on renewables with new projects planned in South Africa and Turkey.
Conti’s job is made more difficult by 42.9 billion euros of net debt at the end of 2012, which make Enel Europe’s most indebted energy company. He has promised to bring the number down to 37 billion euros by 2014 through 6 billion euros in asset sales. While he declined to indicate what will be sold, Conti said most of the sales will likely be completed in the next two years.
The company is also planning 4 billion euros of cost reductions in Italy and Spain including job cuts and capacity closings, and will borrow 5 billion euros in hybrid bonds.
Moody’s Investors Service said March 15 it viewed Enel’s disposals and capital strengthening measures positively. “If executed as planned, they should result in a deleveraging of the company, which in turn should lead to an improvement of its credit metrics by 2014,” the rating company said. Still, conditions in the company’s core markets “remain very challenging, which could slow Enel’s financial recovery.”
Enel fell 0.7 percent to 2.6 euros as of 10:12 a.m. today in Milan trading. Shares have fallen 11 percent in the last six months, cutting the company’s market value to 24.9 billion euros. That compares with a 7.9 percent decline in the Stoxx 600 Utilities Index in the same period.
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