01—Abstract
Summary
Summary of the 10-K filed April 17, 2001. Cited figures are marked; the original filing is the authoritative source.
Edison International (EIX) reported a 2000 net loss of $1.94 billiona, or $5.84 per share, driven by a $2.5 billion after-tax ($4.2 billion pre-tax) write-off at its utility subsidiary Southern California Edison (SCE) of regulatory assets, including the transition cost balancing account (TCBA).
The write-off followed the California Public Utilities Commission's March 27, 2001 decisions, which retroactively restated balancing accounts and left SCE unable to conclude that its undercollections were probable of recovery. Excluding the write-off, EIX's 2000 basic EPS was $1.74b versus $1.79 in 1999. Nonutility businesses (Edison Mission Energy, Edison Capital) remained profitable, while the parent and SCE faced a severe liquidity crisis.
SCE's liquidity has effectively collapsed. As of March 31, 2001, SCE had $2.7 billionc of unpaid, overdue obligations against roughly $2.0 billion of cash reserves, has suspended certain debt and purchased-power payments, and has lost access to the capital markets. Credit ratings were cut to substantially below investment grade in January 2001, SCE's common dividends are barred because retained earnings are in deficit, and the parent has fully drawn its credit lines.
Creditors have sued, and some have threatened an involuntary bankruptcy petition. PG&E's April 6, 2001 Chapter 11 filing adds to sector stress. The main path to resolution is a April 9, 2001 Memorandum of Understanding with the California Department of Water Resources and the Governor.
Its key terms include the sale of SCE's transmission assets for about $2.76 billiond, securitization of roughly $3.5 billion in undercollections, cost-based ratemaking for SCE's retained generation through 2010, and an 11.6% authorized return on equity. Implementation requires new legislation, CPUC and FERC orders, and definitive agreements, with an August 15, 2001 deadline. Management explicitly states that success is not assured and that bankruptcy remains a possibility, so the investment case depends heavily on regulatory and legislative outcomes.
02—Key points
Key Highlights
- 2000 net loss of $1.94 billion ($5.84 per share), driven by a $2.5 billion after-tax ($4.2 billion pre-tax) SCE write-off of regulatory assets, including the $2.9 billion TCBA undercollection.
- Excluding the write-off, basic EPS was $1.74 in 2000 versus $1.79 in 1999; EME earned 38c per share and Edison Capital earned 41c.
- SCE had $2.7 billion of overdue obligations as of March 31, 2001, against about $2.0 billion of cash reserves, and suspended certain debt and purchased-power payments.
- Credit ratings were lowered to substantially below investment grade in January 2001; parent and SCE credit lines are fully drawn and commercial paper access is closed.
- The April 9, 2001 MOU with the State of California proposes a $2.76 billion transmission asset sale, securitization of about $3.5 billion in undercollections, and cost-based ratemaking through 2010, but it requires legislation and CPUC/FERC action by August 15, 2001.
- SCE's common dividends are suspended and it cannot pay dividends while its retained earnings are in deficit; preferred dividends are in arrears ($6 million).
- Shareholder class actions (Stubblefield and King) allege securities fraud over TRA accounting, and more than 17 qualifying facility suits seek at least $420 million in payments.
03—Questions
Frequently Asked Questions
Why did Edison International report a large net loss in 2000?
SCE wrote off about $4.2 billion pre-tax ($2.5 billion after tax) of regulatory assets as of December 31, 2000. The write-off includes the $2.9 billion TCBA undercollection and related generation-related regulatory assets. Management concluded these assets were no longer probable of recovery because the CPUC's March 27, 2001 decisions, which were issued after year-end, did not provide an adequate recovery mechanism.
Is Southern California Edison at risk of bankruptcy?
The filing says SCE is seeking to avoid bankruptcy. It has $2.7 billion in overdue obligations, roughly $700 million more than its cash reserves, and some creditors have threatened an involuntary petition. Management says the MOU, if implemented, would restore creditworthiness, but it cannot assure that the required legislation, CPUC orders, and definitive agreements will be completed, and execution of the MOU does not eliminate the possibility of bankruptcy.
What is the MOU and what would it do for investors?
The April 9, 2001 MOU among SCE, Edison International, and the California Department of Water Resources sets out a plan to sell SCE's transmission assets for about $2.76 billion, securitize roughly $3.5 billion of undercollected power costs, keep SCE's generation under cost-based rates through 2010, and hold the authorized ROE at 11.6%. If implemented, the regulatory assets written off could be reinstated with a corresponding increase in earnings. It can be terminated if legislation and definitive agreements are not in place by August 15, 2001.
How are the non-utility businesses performing?
Edison Mission Energy and Edison Capital were profitable in 2000. EME, an independent power producer with about 22,759 MW of share capacity, earned $125 million and Edison Capital earned $135 million. However, these subsidiaries are constrained because the parent can no longer provide equity support. EME adopted 'ring-fencing' provisions to remain investment grade on a standalone basis, and Edison Capital is not pursuing new investments.
Will Edison International pay dividends to shareholders?
No dividend was declared for the December 2000 or March 2001 quarters. SCE cannot pay common dividends to its parent while its retained earnings are in deficit and preferred dividends remain in arrears, and under California law it cannot pay dividends while the deficit remains. Investors should not expect dividend payments until the regulatory and financial situation is resolved.
04—Continue