01—Abstract
Summary
Summary of the 10-K filed March 15, 2004. Cited figures are marked; the original filing is the authoritative source.
Edison International (EIX) reported 2003 consolidated net income of $821 milliona, or $2.52 per basic share, down from $1.1 billion ($3.31) in 2002, which had included a one-time $480 million regulatory gain.
Earnings from continuing operations were $779 millionb ($2.39 per share) versus $1.1 billion in 2002. Core earnings, excluding the 2002 one-time item, rose to $779 million from $655 million, driven mainly by resolution of regulatory proceedings at Southern California Edison (SCE), which contributed $872 million, and higher U.S. wholesale power prices at Edison Mission Energy (EME). Offsetting these gains were $304 million in asset impairment charges at EME, mostly for Midwest Generation's small peaking plants in Illinois, and weak results at EME's Illinois plants as Exelon contracts roll off.
The balance sheet remains under strain at the holding-company and nonutility level. MEHC's auditors and EME's auditors both included going-concern explanatory paragraphs, tied to $693 millionc of debt at Edison Mission Midwest Holdings due December 2004. EME also disclosed a planned Collins Station lease termination that could produce an approximately $1 billion pre-tax (about $620 million after-tax) loss, which would cut EME's net worth from $1.9 billion to about $1.3 billion.
The parent's 2004 cash needs include $572 milliond of 6-7/8% notes due September 2004. Management is focused on a four-step EME restructuring plan, including asset sales of international operations. At SCE, the utility, capital spending is ramping to a planned $1.9 billion in 2004, with a 2004 general rate case request of $251 million pending.
The proposed decision would grant only $15 million, a key regulatory risk. SCE's credit ratings were raised to investment grade in Q4 2003, and the company resumed common dividends of $0.20 per quarter, with the first $65 million payment made in January 2004. Investors should weigh the improving utility earnings against the substantial going-concern and refinancing risk at EME.
02—Key points
Key Highlights
- 2003 consolidated net income was $821 million ($2.52 per basic share), down from $1.1 billion ($3.31) in 2002, which included a one-time $480 million SCE regulatory gain; core earnings rose to $779 million from $655 million.
- SCE contributed $872 million of 2003 earnings from continuing operations, up $124 million, mainly from resolution of several regulatory proceedings, and SCE regained investment-grade credit ratings in Q4 2003.
- EME recorded $304 million in asset impairment charges in 2003, including $245 million on eight Illinois peaking plants, and its earnings from continuing operations fell to $28 million from $82 million.
- Going-concern paragraphs in the MEHC and EME audit opinions relate to $693 million of Edison Mission Midwest Holdings debt due December 2004, which the company is not expected to repay from internal cash.
- A planned Collins Station lease termination could generate a pre-tax loss of about $1 billion ($620 million after tax), reducing EME's net worth from $1.9 billion to about $1.3 billion.
- The parent company resumed a $0.20 quarterly common dividend, but it faces $572 million of 6-7/8% notes due September 2004 and relies on subsidiary dividends and tax-allocation payments.
- SCE plans up to $1.9 billion of 2004 capital spending, and a pending general rate case would award only $15 million of a $251 million request under the proposed decision, a key risk to future earnings.
03—Questions
Frequently Asked Questions
Why did Edison International's earnings fall in 2003 when core earnings improved?
The 2002 results included a one-time $480 million gain from SCE's utility-retained generation regulatory decision, which inflated that year's earnings to $1.1 billion ($3.31 per share). Excluding that item, core earnings rose to $779 million from $655 million, led by SCE's regulatory resolutions. The 2003 result was also reduced by $304 million of EME asset impairments and a $9 million accounting-change charge.
What are the main going-concern risks disclosed in the filing?
Edison Mission Midwest Holdings must repay or refinance $693 million of debt due December 15, 2004, and it is not expected to have enough cash to do so. A failure to refinance could trigger cross-defaults under EME's financing and Midwest Generation's leases, and could force MEHC or EME into Chapter 11. The auditors of both MEHC and EME included going-concern explanatory paragraphs for this reason.
How much could the Collins Station lease termination cost EME?
If Midwest Generation completes the Collins Station lease termination and then abandons or sells the plant, EME expects a pre-tax loss of about $1 billion, roughly $620 million after tax. That would lower EME's net worth from about $1.9 billion to about $1.3 billion. EME plans to replace its corporate credit facility and modify a net worth covenant to avoid defaults, and it does not expect a material liquidity impact if the termination occurs.
What is the outlook for SCE's earnings and capital spending?
SCE plans to spend up to $1.9 billion in 2004, up from $1.2 billion in 2003, and up to $9 billion over five years, funded partly by retained earnings and debt. Its 2003 general rate case request of $251 million in additional base revenue faces a proposed decision granting only $15 million; if adopted without modification, management estimates an annual EPS impact of about 15 cents. The CPUC was scheduled to vote on March 16, 2004.
04—Continue