Bloomberg News

Enel Forced to Review Dividends, Investments to Meet Targets

October 13, 2011

(Closes shares in the fifth paragraph.)

Oct. 13 (Bloomberg) -- Enel SpA, Italy’s biggest power company, said it will be forced to review dividends and spending to meet debt reduction targets after the government increased taxes on energy companies.

“We’ll be forced to act in order to maintain our debt reduction goal, which is of primary importance to us, and to preserve our rating,” Chief Executive Officer Fulvio Conti said in an interview in Rome. “The impact of increased taxation on dividends and investment flow will be assessed and reviewed in our next strategic plan” in March.

Enel became Europe’s most-indebted power company after buying Spain’s Endesa SA in 2007 and has pledged to cut debt to 36.5 billion euros ($50 billion) in 2015 from a current 46.1 billion euros. That task became harder in August after Silvio Berlusconi’s government raised a tax on power producers’ profits by 4 percentage points to improve the country’s finances.

The government imposed the levy, known as the Robin Hood tax, as part of a package of austerity measures that aimed to shore up investor confidence after government bond yields surged to euro-area records on concern Italy might fall victim to the region’s debt crisis. The cost of insuring Enel’s debt has risen 34 percent since the tax increase was announced.

Shares closed down 3.1 percent at 3.48 euros in Milan today after falling as much as 5.2 percent in earlier trading, the biggest intraday drop in a month. The company has a market value of 32.7 billion euros.

Highest Yield

Enel, which sells electricity to 61 million clients in 40 countries, has the highest dividend yield among Europe’s 25 largest utilities, according to data compiled by Bloomberg.

Conti said the dividend will remain “generous.” A company spokesman said today that while the company plans to keep the payout ratio at 60 percent of profits, the tax increase may reduce the pool available for dividends. That could be offset by reduced investments, he said, adding that any decisions will be made known in March. Enel said in September the tax increase would add about 400 million euros a year to costs between 2011 and 2013.

“The government is forcing us not to transfer the costs to clients and so they’re reducing our ability to invest and pay dividends,” Conti said. While he said the company would likely “drop some smaller investments,” he declined to estimate how much the dividend could be cut.

Enel said in March it planned to invest 31 billion euros in the next five years on grids and digital meters, renewable energy, and power plants in Russia, Slovakia and Latin America. The company proposed a dividend of 0.28 euros a share, a current yield of 7.8 percent. The biggest beneficiary of payments is the Italian state, which owns 31 percent of the utility.

‘Correct Strategy’

“Conti is right to keep his eye on debt reduction because that’s what the market wants, his strategy is correct and one can see that he’s had experience as a CFO,” said Patrizio Pazzaglia, head of financial investments at Bank Insinger de Beaufort NV in Rome, which holds Enel shares. “Enel’s dividend is very attractive and would likely stay that way even with a small reduction.”

Following downgrades of Italy by Fitch Ratings, Standard & Poor’s and Moody’s Investors Service, many Italian state-owned or controlled companies also received rating cuts. While Moody’s did cut its credit rating on Enel, S&P affirmed the company’s A- /A-2 credit rating on Sept. 21, assessing its link with Italian sovereign debt “as limited.”

Stable Rating

A stable rating is valued by companies because it limits the cost of funding. Credit default swaps to insure Enel debt for five years stand at 272 basis points, up from 202 basis points on Aug. 8. That means it costs $272,000 a year to protect $10 million of debt against default for five years. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

Enel had forecast a 32 percent increase in profit in the next five years to 2015 with net ordinary income reaching 5.8 billion euros. Conti said it was too early to quantify the precise impact of the tax on earnings, adding that geographic diversification would help the company overcome the economic difficulties in Europe.

“The company is showing strong resilience and 2011 numbers will be good,” Conti said. “We’ll continue to extract good cash flow and continue to seek efficiency by cutting costs.”

--With assistance from Francesca Cinelli in Milan and Andrew Davis in Rome. Editors: Will Kennedy, Stephen Cunningham

To contact the reporter on this story: Alessandra Migliaccio in Rome at amigliaccio@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net


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