Edison to weigh capital increase of more than 1 billion euros as profit drops
OTTAWA: 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, and may be 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.
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. Edison's largest shareholders are Electricite de France SA and Italian utility A2A SpA. 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 5.4 percent lower at 0.88 euros as of 9:22 a.m. in Milan. A2A retreated 3.1 percent to 1.045 euros and EDF declined 1.4 percent to 31.52 euros in Paris.
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. Investment bankers are studying various options to strengthen the company's balance sheet, including a capital increase, they said.
An Edison spokesman couldn't immediately comment when contacted by mobile telephone. EDF spokeswoman Carole Trivi wasn't immediately available for comment in Paris. A call to the A2A press office wasn't immediately returned.
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 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 longterm 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. -Bloomberg