Edison SpA, Italy’s second-largest power producer, is weighing a capital increase of more than 1 billion euros ($1.32 billion) to strengthen its balance sheet as unprofitable gas-supply contracts threaten to further erode earnings, said people with direct knowledge of the situation.
Edison’s earnings before interest, taxes, depreciation and amortization next year may be 30 percent to 50 percent below analysts’ consensus expectation of about 1.35 billion euros, depending on the outcome of talks with suppliers including Russia’s OAO Gazprom, said the people, who declined to be identified because the information isn’t public.
A capital increase was discussed by Edison’s board earlier this month and a decision about whether to proceed hasn’t been made, said the people. Such a move is one option being considered by investment bankers to strengthen Edison’s balance sheet, the people said. Edison’s largest shareholders are Paris- based Electricite de France SA and Italian utility A2A SpA.
Edison said in a statement today that a capital increase hasn’t been considered by any “company organs.” Documents showing the discussion of a capital increase are expected to be available by the board’s next meeting in January, one of the people said.
Shares of Edison slumped 7.3 percent, the steepest decline since March 2009, to close at .86 euros in Milan.
“A capital increase would be useful given the high costs the company has to sustain,” said Massimiliano Romano, head of research at Concentric Italy in Milan. “But obviously the market won’t like it.”
Edison is losing money on supply contracts because it’s paying more for natural gas imports than it can sell the fuel for. The company, carrying net debt of almost 4 billion euros at the end of the third quarter, said in October the contracts will negatively impact 2010 Ebitda by 300 million euros. Edison’s credit rating was cut one level to BBB by Standard & Poor’s last month.
Falling energy demand in Italy may force Milan-based Edison to write down the value of its 50 percent stake in Italian utility Edipower to about 2.2 billion euros from 3.6 billion euros, the people said. It may have to write down the value of Egyptian offshore gas field Abu Qir by about a third, these people said.
Edison bought a multi-year concession to develop and explore the Abu Qir field for more than 1 billion euros in January 2009. The company was never able to secure a buyer for a stake in the field as planned, one of the people said.
A rights offering would require shareholders to buy more stock or risk diluting their stakes. EDF controls about 50 percent of Edison. A2A, Italy’s largest municipal utility, owns 51 percent of the holding company Delmi Spa, which jointly owns Transalpina di Energia Srl with EDF. Transalpina has 61.2 percent of Edison. Carlo Tassara SpA, the holding company of financier Romain Zaleski, owns a stake of about 10 percent.
EDF and A2A have differed in the past over A2A’s request to play a bigger role managing Edison, as well as the company’s effort to create a nuclear venture to rival one between EDF and Enel SpA. A2A said in June that it hired investment bank Mediobanca SpA to advise it on options for Edison.
A capital increase could be a way to resolve the current ownership situation, said Alessandro Frigerio, a fund manager at RMJ Sgr in Milan.
“I doubt A2A can afford a capital increase so it could be a means to an end for EDF,” he said in an e-mailed statement.
EDF’s stake supports Edison’s debt rating, which would be one level lower without the French company’s backing, S&P said last month. A2A, meanwhile, is trying to cut its own debt, which totaled 4.7 billion euros at the end of last year.
A2A issued a press release following Edison’s denial saying it asked the market regulator to investigate today’s decline in its shares, which retreated 3.6 percent to 1.04 euros. EDF spokeswoman Carole Trivi declined to comment.
The companies control Edison through an agreement that expires in September 2011 and must be renewed six months in advance. Edison’s Chief Executive Officer Umberto Quadrino said in October that Edison’s stock price was “a problem” as the companies sought to reach an accord on control.
Shares of Edison jumped 15 percent last week after EDF CEO Henri Proglio reiterated his commitment to Italy and EDF agreed to sell a stake in a German power company for 4.7 billion euros. That prompted speculation the company would use the proceeds to buy the rest of Edison, which has a market value of about 4.6 billion euros.