Edison Is Said to Consider $1.3 Billion Capital Increase as Profit Drops
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, people with direct knowledge of the situation said.
Edison’s earnings before interest, taxes, depreciation and amortization next year may be 30 percent below analysts’ consensus expectation of about 1.35 billion euros, or 50 percent below 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.
Edison said in a statement that it wasn’t considering a capital increase. Edison’s largest shareholders are Electricite de France SA and Italian utility A2A SpA. EDF spokeswoman Carole Trivi declined to comment. A call to A2A’s press office wasn’t returned.
“If they do a capital increase it would be useful to know whether it is for financial reasons or if it could be a way for one of the partners to increase their stake,” said Tatjana Eifrig, an analyst at Banca Finnat Euramerica in Rome.
Investment bankers are studying various options to strengthen the company’s balance sheet, including a capital increase, the people said.
Falling energy demand may also force Milan-based Edison to write down the value of its stake in Italian utility Edipower by about 40 percent and Egyptian offshore gas field Abu Qir by about a third, the people said.
“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 notch to BBB by Standard & Poor’s last month.
Shares of Edison slumped as much as 6.3 percent, the steepest intraday decline in seven months. The stock was 4.1 percent lower at 0.89 euros as of 12:37 p.m. in Milan. A2A retreated 3.2 percent to 1.04 euros and EDF declined 0.6 percent to 31.77 euros in Paris.
Edison, which uses gas in power generation and supplies it directly to customers, may have to write down the book value of its 50 percent stake in Italian power generator Edipower to about 2.2 billion euros from 3.6 billion euros, the people said.
In Italy, demand for energy has been declining amid an economic slump while Edison is paying more for natural gas than it can sell it for due to procurement contracts signed when oil prices were higher.
“The group’s financial metrics have deteriorated materially as a result of pressures on earnings and cash flows in light of challenging market conditions in Italy,” S&P said in a Nov. 2 report. The ratings company also cited the acquisition in January 2009 of a multi-year concession to develop and explore the Abu Qir field for more than 1 billion euros and a failure to renegotiate gas contracts.
Edison had expected to conclude the sale of a stake in the Egypt’s Abu Qir field earlier this year, Edison Chief Executive Officer Umberto Quadrino said in October 2009. The company was never able to secure a buyer for the stake, a person with knowledge of the matter said.
Edison said in October its debt would be close to 3.6 billion euros at the end of the year. Moody’s downgraded the long-term senior unsecured ratings of Edison to Baa3 in October.
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 on options for Edison.
Alessandro Frigerio, a fund manager at RMJ Sgr in Milan, said a capital increase could be a way to resolve the current ownership situation.
“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 in Edison supports the company’s debt rating, which would be one level lower without the French company’s backing, S&P said. A2A, meanwhile, is trying to cut its own debt, which totaled 4.7 billion euros at the end of last year, through asset sales.
The companies control Edison through an agreement that expires in September 2011 and must be renewed six months in advance. Edison’s 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 Chief Executive Officer 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 4.7 billion euros.
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