* Regulatory changes wipe 1.01 billion euros from results
* Chairman Galan sees 2.5-2.6 bln euro net profit in 2013
* Analysts estimate 10 percent cut to dividend
* Shares fall 2.5 percent, backtrack from near 2-yr high
(Adds analyst comment, industry background, scrip dividend
By Tracy Rucinski
MADRID, Oct 23 Iberdrola SA warned on
Wednesday that the costs of regulatory changes were hurting its
earnings and straining its dividend payouts, making the Spanish
utility the latest European energy firm to fall victim of tough
Like other Spanish utilities such as Endesa,
Iberdrola has been hit by government measures to solve a 26
billion euro ($35.8 billion) shortfall in Spain's power system
stemming from the difference between state-regulated costs and
The company, a world leader in wind turbines, said cuts to
renewables subsidies and a tax on generation in Spain, plus
costs related to a regulator-mandated energy efficiency scheme
in Britain and price cuts in Brazil had wiped 1.01 billion euros
from its core profit in the first nine months of the year.
The impact of the regulatory changes could come as a shock
as Iberdrola had moved away from the volatile business of power
generation to seek lower but steady earnings abroad in regulated
businesses like grids and wind power.
Iberdrola stock, which hit a near two-year high last week,
fell as much as 2.5 percent, as the European utilities index
fell 1.1 percent. Thomson Reuters data shows Iberdrola
stock up 20 percent through the past 12 months while Germany's
RWE for instance fell 24 percent.
Facing further earnings declines this year and next,
Iberdrola said it would have to raise its payout ratio to
between 65 and 75 percent of earnings from 60 percent to
maintain its dividend. Yet given the decline in profits, that
increase may not be enough to maintain the level of its
Some analysts said the revised dividend policy was likely to
overshadow the stock.
"Iberdrola will continue to face challenging earnings
momentum, given the pending reform on renewables, and this
together with the new dividend profile will weigh on the share
price in the short term," Barclays analysts said in a note.
Iberdrola Executive Chairman Ignacio Galan said net profit
was likely to fall to about 2.5 billion euros or 2.6 billion in
the current year from 2.8 billion in 2012. And next year could
see a further decline, due to further regulatory hits to its
domestic wind power business and unfavourable exchange rates.
European utilities are going through the toughest market
conditions in decades, as power demand falls because of the
eurozone crisis and the EU's energy efficiency drive. Meanwhile,
the green energy boom is creating overcapacity and unpredictable
policy changes like Germany's nuclear phase-out have upset
long-term investment plans.
Some utilities have stopped investing in continental Europe
and are seeking growth in emerging markets and more stable
regulatory environments like the United States and Britain.
French peer GDF Suez has led the way in investing
in power generation abroad, while Iberdrola has focused on
foreign grids. Following takeovers of U.S. Energy East and
Scottish Power, it gets nearly half of its profit from networks.
The group also faces regulatory hurdles in Brazil, where
President Dilma Rousseff is looking to cut power rates again, a
year after a forced tariff reduction.
Iberdrola said the 1.01 billion euro impact from regulation
on underlying profits was offset by a 770 million euro gain from
higher electricity production, cost savings and contributions
from new assets that came into operation during the period.
Those factors translated into a 4.1 percent fall in core
earnings to 5.54 billion euros in the nine months through
September, in line with a Reuters poll.
Net profit fell 3 percent to 2.27 billion euros, while net
debt fell by 3.3 billion euros - putting the firm on track to
meet a 26 billion euro debt target for 2013, Galan said.
Analysts say the earnings warning casts doubt on the firm's
commitment to maintain profits and an average 0.30 euro per
share dividend until 2014.
"The new ratio and forecasts imply a dividend cut of around
10 percent, depending on future disposals or regulatory
impacts," said analyst Alvaro Navarro at brokerage Intermoney.
To maintain an 0.30 euro per share dividend, Espirito Santo
said Iberdrola would have to pay out 79 percent of its earnings
in 2013, 73 percent in 2014 and 82.5 percent in 2015.
JP Morgan forecast a 0.26 euro per share dividend on the
group's 2013 earnings, implying a dividend yield of 5.8 percent,
still above European utility peers that are yielding around 4.5
percent, but with significantly lower pay-out ratios.
($1 = 0.7260 euros)
(Additional reporting by Geert De Clercq; Editing by Fiona
Ortiz and David Holmes)