01—Abstract
Summary
Summary of the 10-K filed March 31, 2003. Cited figures are marked; the original filing is the authoritative source.
Edison International's 2002 10-K reveals a holding company whose financial health is sharply divided between a stable, regulated utility and a distressed nonutility power business.
Consolidated 2002 net income was $1.077 billiona ($3.31 basic EPS), but this was driven largely by a $480 million after-tax credit from the CPUC's URG decision at SCE. Core earnings were $655 million, with SCE contributing $748 million, while EME, Edison Capital, and MEHC were weak. SCE's core earnings rose 83% on higher PBR-related revenue and a larger rate base, and the utility is working through the $3.6 billion PROACT regulatory asset, now $574 million at year-end and expected to be recovered by mid-2003.
The central risk is at MEHC and EME. Credit ratings were downgraded to below investment grade, and the company's auditors included a going-concern paragraph for MEHC tied to $911 millionb of Edison Mission Midwest Holdings debt maturing in December 2003. Cash-trap provisions now block distributions from the Illinois plants to EME, and EME's Exelon contract reductions expose it to much greater merchant price risk starting in 2003.
A failure to refinance could trigger cross-defaults and potentially Chapter 11 filings at the subsidiary level. Parent-level liquidity also depends on subsidiary dividends, and dividend payments on common stock are restricted while SCE's PROACT balance remains outstanding.
Investors therefore face a bifurcated credit picture. SCE's regulated cash flows and pending CPUC decisions (2003 GRC, line-maintenance penalty, holding-company proceeding) are the main source of value support, while the outcome of EME and MEHC refinancing efforts and the pending California Supreme Court ruling on the PROACT settlement will determine much of the remaining equity risk.
02—Key points
Key Highlights
- Consolidated 2002 net income of $1.077 billion ($3.31 basic EPS) included a $480 million after-tax credit from the CPUC's URG decision; core EPS was $2.02 versus $1.30 in 2001.
- SCE core earnings rose to $748 million (up 83%) on PBR revenue, a larger rate base, and lower interest expense; the PROACT regulatory asset fell to $574 million at year-end 2002 and is expected to be recovered by mid-2003.
- MEHC and EME were downgraded to below investment grade by Moody's and S&P; MEHC's auditors issued a going-concern paragraph tied to $911 million of Edison Mission Midwest Holdings debt due December 2003.
- Cash-trap provisions bar distributions from the Illinois plants to EME, and Exelon's 2003–2004 capacity releases (2,684 MW coal plus 1,864 MW Collins/peakers) substantially increase EME's merchant exposure.
- Edison Capital wrote off $34 million after tax on United Airlines aircraft and faces up to $48 million of additional loss exposure on American Airlines leases; Storm Lake (Enron Wind) is in default-notice status.
- SCE faces several pending CPUC matters, including the 2003 GRC, a proposed $97 million line-maintenance penalty, the holding-company first-priority proceeding, and a California Supreme Court review of the PROACT settlement.
- Edison International's parent-only liquidity depends on subsidiary dividends and tax-allocation payments; dividends on common stock are restricted until PROACT recovery or January 1, 2005, and parent interest payments on quarterly income debt were deferred in 2001.
03—Questions
Frequently Asked Questions
Why did EIX's 2002 earnings rise so much, and how much of that is sustainable?
Reported 2002 EPS of $3.31 includes $1.47 per share from the one-time $480 million after-tax URG decision credit, which restored previously written-off regulatory assets. Core EPS was $2.02, up from $1.30 in 2001. Core growth came mainly from SCE's performance-based rate-making revenue and lower interest expense, so the core figure is more representative of recurring earnings, though EME and Edison Capital declined.
What is the biggest near-term refinancing risk?
Edison Mission Midwest Holdings must repay, extend, or refinance $911 million in December 2003, and the company stated it is not expected to have sufficient cash to do so. A failure would trigger an event of default, accelerate $808 million of additional debt, cross-default to Midwest Generation and EME, and could force a Chapter 11 filing at one or more entities. The Illinois plants' distributions are currently trapped by credit-rating-based covenants, which limits internal sources of repayment.
When will SCE resume paying common dividends to Edison International?
SCE's settlement agreement with the CPUC bars common dividends until the earlier of full PROACT recovery or January 1, 2005. If PROACT is not fully recovered by December 31, 2003, SCE may apply to the CPUC for consent to resume dividends earlier, and the CPUC may not unreasonably withhold consent. Management expects PROACT recovery by mid-2003, but the timing depends on several factors, including the pending California Supreme Court decision on the settlement.
What legal or regulatory outcomes could materially affect the stock?
Key items include the California Supreme Court's review of the PROACT settlement, which could vacate the stipulated judgment if it violated state law; the CPUC's decision on the $97 million penalty recommendation for line-maintenance practices; the 2003 General Rate Case decision expected in Q3 2003; and the CPUC holding-company proceeding, which could challenge first-priority capital obligations. Potential FERC refunds from market manipulation are also possible, though they would reduce PROACT before benefiting ratepayers.
04—Continue