===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2000
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
----------------- -----------------------
Commission File Number 1-9936
EDISON INTERNATIONAL
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4137452
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2244 Walnut Grove Avenue
(P.O. Box 800)
Rosemead, California
(Address of principal 91770
executive offices) (Zip Code)
(626) 302-2222
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Class Outstanding at May 9, 2000
- -------------------------------------------------------------------------------
Common Stock, no par value 332,296,306
EDISON INTERNATIONAL
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Consolidated Financial Statements:
Consolidated Statements of Income -- Three Months
Ended March 31, 2000, and 1999 1
Consolidated Statements of Comprehensive Income--
Three Months Ended March 31, 2000, and 1999 1
Consolidated Balance Sheets-- March 31, 2000,
and December 31, 1999 2
Consolidated Statements of Cash Flows -- Three Months
Ended March 31, 2000, and 1999 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
Part II. Other Information:
Item 1. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
EDISON INTERNATIONAL
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
In thousands, except per-share amounts
3 Months Ended
March 31,
- --------------------------------------------------------- ---------------------------------------------
2000 1999
- -------------------------------------------------------------------------------------------------------
(Unaudited)
Electric utility $ 1,829,691 $ 1,684,837
Nonutility power generation 750,753 269,810
Financial services and other 142,876 141,253
- -------------------------------------------------------------------------------------------------------
Total operating revenue 2,723,320 2,095,900
- -------------------------------------------------------------------------------------------------------
Fuel 331,590 114,438
Purchased power-- contracts 428,174 609,906
Purchased power-- PX/ISO-- net 75,961 116,956
Provisions for regulatory adjustment clauses-- net 102,954 (279,636)
Other operation and maintenance 727,559 668,079
Depreciation, decommissioning and amortization 494,265 423,981
Property and other taxes 40,076 39,155
Net gain on sale of utility plant (6,224) (2,200)
- -------------------------------------------------------------------------------------------------------
Total operating expenses 2,194,355 1,690,679
- -------------------------------------------------------------------------------------------------------
Operating income 528,965 405,221
- -------------------------------------------------------------------------------------------------------
Interest and dividend income 25,239 20,371
Other nonoperating deductions-- net (28) (4,172)
- -------------------------------------------------------------------------------------------------------
Total other income-- net 25,211 16,199
- -------------------------------------------------------------------------------------------------------
Income before fixed charges and taxes 554,176 421,420
- -------------------------------------------------------------------------------------------------------
Interest and amortization on long-term debt 255,707 151,821
Other interest expense-- net 67,978 22,934
Dividends on preferred securities 25,241 3,233
Dividends on utility preferred stock 5,648 6,199
- -------------------------------------------------------------------------------------------------------
Total fixed charges 354,574 184,187
- -------------------------------------------------------------------------------------------------------
Minority interest 897 962
- -------------------------------------------------------------------------------------------------------
Income before taxes 198,705 236,271
Income taxes 89,164 93,060
- -------------------------------------------------------------------------------------------------------
Net income $ 109,541 $ 143,211
- -------------------------------------------------------------------------------------------------------
Weighted-average shares of common stock outstanding 344,922 348,327
Basic earnings per share $ 0.32 $ 0.41
Diluted earnings per share $ 0.32 $ 0.41
Dividends declared per common share $ 0.28 $ 0.27
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In thousands
3 Months Ended
March 31,
- -----------------------------------------------------------------------------------------------------------------
2000 1999
- -----------------------------------------------------------------------------------------------------------------
(Unaudited)
Net income $ 109,541 $ 143,211
Cumulative translation adjustments-- net (47,082) (12,638)
Unrealized gain (loss) on securities-- net (6,827) (9,146)
Reclassification adjustment for gains included in net income -- (17,371)
- -----------------------------------------------------------------------------------------------------------------
Comprehensive income $ 55,632 $ 104,056
- -----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
1
EDISON INTERNATIONAL
CONSOLIDATED BALANCE SHEETS
In thousands
March 31, December 31,
2000 1999
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Cash and equivalents $ 917,474 $ 507,581
Receivables, including unbilled revenue, less allowances of
$34,794 and $34,164 for uncollectible accounts at respective dates 1,336,599 1,378,422
Fuel inventory 297,540 241,216
Materials and supplies, at average cost 196,957 199,302
Accumulated deferred income taxes-- net 127,811 190,508
Prepayments and other current assets 95,126 152,635
- --------------------------------------------------------------------------------------------------------------------
Total current assets 2,971,507 2,669,664
- --------------------------------------------------------------------------------------------------------------------
Nonutility property-- less accumulated provision for
depreciation of $526,971 and $445,945 at respective dates 12,107,088 12,352,095
Nuclear decommissioning trusts 2,580,656 2,508,904
Investments in partnerships and unconsolidated subsidiaries 2,598,723 2,504,691
Investments in leveraged leases 1,934,489 1,884,603
Other investments 162,217 180,594
- --------------------------------------------------------------------------------------------------------------------
Total investments and other assets 19,383,173 19,430,887
- --------------------------------------------------------------------------------------------------------------------
Utility plant at original cost:
Transmission and distribution 12,558,206 12,439,059
Generation 1,736,204 1,717,676
Accumulated provision for depreciation and decommissioning (7,705,363) (7,520,036)
Construction work in progress 664,606 562,651
Nuclear fuel, at amortized cost 117,571 132,197
- --------------------------------------------------------------------------------------------------------------------
Total utility plant 7,371,224 7,331,547
- --------------------------------------------------------------------------------------------------------------------
Unamortized nuclear investment-- net 1,167,340 1,365,848
Income tax-related deferred charges 1,305,704 1,272,947
Regulatory balancing accounts-- net 1,806,882 1,714,973
Unamortized debt issuance and reacquisition expense 333,740 339,806
Other deferred charges 2,122,071 2,103,716
- --------------------------------------------------------------------------------------------------------------------
Total deferred charges 6,735,737 6,797,290
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 36,461,641 $ 36,229,388
- --------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
2
EDISON INTERNATIONAL
CONSOLIDATED BALANCE SHEETS
In thousands, except share amounts
March 31, December 31,
2000 1999
- -----------------------------------------------------------------------------------------------------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt $ 2,921,735 $ 2,553,376
Current portion of long-term debt 832,310 962,041
Accounts payable 506,082 625,347
Accrued taxes 478,256 406,770
Accrued interest 180,321 188,773
Dividends payable 108,663 100,598
Regulatory balancing accounts-- net 196,201 75,693
Deferred unbilled revenue and other current liabilities 2,104,937 1,929,589
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 7,328,505 6,842,187
- ----------------------------------------------------------------------------------------------------------
Long-term debt 13,570,390 13,391,636
- ----------------------------------------------------------------------------------------------------------
Accumulated deferred income taxes-- net 5,732,831 5,756,824
Accumulated deferred investment tax credits 214,380 224,636
Customer advances and other deferred credits 1,780,918 2,094,225
Power purchase contracts 538,588 563,459
Other long-term liabilities 611,953 477,313
- ----------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 8,878,670 9,116,457
- ----------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 1 and 2)
Minority interest 10,354 8,778
- ----------------------------------------------------------------------------------------------------------
Preferred stock of utility:
Not subject to mandatory redemption 128,755 128,755
Subject to mandatory redemption 255,700 255,700
Company-obligated mandatorily redeemable securities
of subsidiaries holding solely parent company debentures 948,490 948,238
Other preferred securities 316,414 326,894
- ----------------------------------------------------------------------------------------------------------
Total preferred securities of subsidiaries 1,649,359 1,659,587
- ----------------------------------------------------------------------------------------------------------
Common stock (338,059,806 and 347,207,106 shares
outstanding at respective dates) 2,035,271 2,090,212
Accumulated other comprehensive income:
Cumulative translation adjustments-- net (36,634) 10,448
Unrealized gain in equity securities-- net 24,365 31,192
Retained earnings 3,001,361 3,078,891
- ----------------------------------------------------------------------------------------------------------
Total common shareholders' equity 5,024,363 5,210,743
- ----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 36,461,641 $ 36,229,388
- ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
3
EDISON INTERNATIONAL
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
3 Months Ended
March 31,
- ------------------------------------------------------------------------------------------------------------
2000 1999
- ------------------------------------------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 109,541 $ 143,211
Adjustments for non-cash items:
Depreciation, decommissioning and amortization 494,265 423,981
Other amortization 43,038 20,689
Deferred income taxes and investment tax credits 3,756 144,279
Equity in income from partnerships and
unconsolidated subsidiaries (37,153) (64,441)
Income from leveraged leases (49,952) (57,564)
Other long-term liabilities 13,098 52,523
Regulatory balancing account-- long-term (91,909) (329,097)
Net loss (gain) on sale of utility generating plants 19 (1,124)
Other-- net (90,615) (13,492)
Changes in working capital:
Receivables (1,266) 53,194
Regulatory balancing accounts 120,508 3,688
Fuel inventory, materials and supplies 7,964 (4,252)
Prepayments and other current assets (4,629) 47,642
Accrued interest and taxes 67,532 (34,770)
Accounts payable and other current liabilities (15,445) 57,173
Distributions from partnerships and unconsolidated subsidiaries 39,031 29,099
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 607,783 470,739
- ------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term debt issued 2,308,153 234,878
Long-term debt repaid (2,092,890) (43,705)
Common stock issued 134 --
Common stock repurchased (146,582) (92,023)
Rate reduction notes repaid (60,952) (70,531)
Short-term debt issued-- net 351,622 1,704,841
Dividends paid (93,746) (91,513)
Other-- net (14,362) (8,836)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 251,377 1,633,111
- ------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and plant (331,032) (263,649)
Purchase of nonutility generating plants -- (1,800,355)
Proceeds from sale of assets -- 13,819
Funding of nuclear decommissioning trusts (23,182) (37,126)
Investments in partnerships and unconsolidated subsidiaries (106,635) (6,241)
Unrealized loss on securities-- net (6,827) (26,517)
Investment in leveraged leases 12,763 466
Other-- net 5,646 42,832
- ------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (449,267) (2,076,771)
- ------------------------------------------------------------------------------------------------------------
Net increase in cash and equivalents 409,893 27,079
Cash and equivalents, beginning of period 507,581 583,556
- ------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of period $ 917,474 $ 610,635
- ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
EDISON INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management's Statement
In the opinion of management, all adjustments have been made that are necessary
to present a fair statement of the financial position and results of operations
for the periods covered by this report.
Edison International's significant accounting policies were described in Note 1
of "Notes to Consolidated Financial Statements" included in its 1999 Annual
Report on Form 10-K filed with the Securities and Exchange Commission. Edison
International follows the same accounting policies for interim reporting
purposes. This quarterly report should be read in conjunction with Edison
International's 1999 Annual Report and Form 10-K filed with the Securities and
Exchange Commission (SEC).
Certain prior-period amounts were reclassified to conform to the March 31, 2000,
financial statement presentation.
Note 1. Regulatory Matters
FERC Transmission Rate Case
Southern California Edison Company (SCE) filed its first Federal Energy
Regulatory Commission (FERC) transmission rate case in March 1997. The filing
proposed a transmission revenue requirement of $211 million. In March 1999, a
proposed FERC decision was issued recommending a return on equity of 9.68%
[compared to SCE's current California Public Utilities Commission (CPUC) rate
for distribution of 11.6%] and a lower revenue requirement. SCE filed comments
opposing the proposed decision in May 1999. In response to a FERC ruling, on
November 1, 1999, SCE filed additional evidence regarding return on equity. A
final FERC decision is expected by mid-2000. SCE does not expect the final
decision to have a material effect on its results of operations or financial
position.
Generating Plant Divestiture
In October 1999, SCE filed an application with the CPUC to approve an auction
process to sell its 56% interest in the Mohave Generating Station. On April 6,
2000, the CPUC approved the auction process. On May 10, 2000, SCE agreed to sell
its interest in Mohave to The AES Corporation for over $533 million. The
transaction is subject to approval by the CPUC and the FERC. The sale is
expected to close by November 2000.
On April 27, 2000, SCE agreed to sell its 16% interest in Palo Verde Nuclear
Generating Station and its 48% interest in Four Corners Generating Station to
Pinnacle West Energy for a total price of $550 million. The sale of assets at
Palo Verde will be accompanied by an assignment of SCE's interest in the related
decommissioning fund. Palo Verde is located in Arizona and Four Corners is
located in New Mexico. The transaction, which is subject to the approval of the
CPUC, the Nuclear Regulatory Commission and other state and federal entities, is
expected to close by mid-2001. For a certain period of time, competing offers
may be solicited and any superior offers received are subject to matching rights
by Pinnacle West Energy.
Hydroelectric Market Value Filing
In December 1999, SCE filed an application with the CPUC establishing a market
value for its hydroelectric generation-related assets at approximately $1.0
billion (almost twice the assets' book value) and proposing to retain and
operate the hydroelectric assets under a performance-based and revenue-sharing
mechanism. The application had broad-based support from labor, ratepayer and
environmental groups. If approved by the CPUC, SCE would be allowed to recover
an authorized, inflation-index operations and maintenance allowance, as well as
a reasonable return on capital investment. A revenue-sharing arrangement would
be activated if revenue from the sale of hydroelectricity exceeds or falls
short of the authorized revenue requirement. SCE would then refund 90% of the
excess revenue to ratepayers or recover 90% of any shortfalls from ratepayers. A
final CPUC decision is expected by the end of 2000.
5
EDISON INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Contingencies
In addition to the matters disclosed in these notes, Edison International is
involved in other legal, tax and regulatory proceedings before various courts
and governmental agencies regarding matters arising in the ordinary course of
business. Edison International believes the outcome of these proceedings will
not materially affect its results of operations or liquidity.
Environmental Protection
Edison International is subject to numerous environmental laws and regulations,
which require it to incur substantial costs to operate existing facilities,
construct and operate new facilities, and mitigate or remove the effect of past
operations on the environment.
Edison International records its environmental liabilities when site assessments
and/or remedial actions are probable and a range of reasonably likely cleanup
costs can be estimated. Edison International reviews its sites and measures the
liability quarterly, by assessing a range of reasonably likely costs for each
identified site using currently available information, including existing
technology, presently enacted laws and regulations, experience gained at similar
sites, and the probable level of involvement and financial condition of other
potentially responsible parties. These estimates include costs for site
investigations, remediation, operations and maintenance, monitoring and site
closure. Unless there is a probable amount, Edison International records the
lower end of this reasonably likely range of costs (classified as other
long-term liabilities at undiscounted amounts).
Edison International's recorded estimated minimum liability to remediate its 46
identified sites is $159 million. The ultimate costs to clean up Edison
International's identified sites may vary from its recorded liability due to
numerous uncertainties inherent in the estimation process, such as: the extent
and nature of contamination; the scarcity of reliable data for identified sites;
the varying costs of alternative cleanup methods; developments resulting from
investigatory studies; the possibility of identifying additional sites; and the
time periods over which site remediation is expected to occur. Edison
International believes that, due to these uncertainties, it is reasonably
possible that cleanup costs could exceed its recorded liability by up to $281
million. The upper limit of this range of costs was estimated using assumptions
least favorable to Edison International among a range of reasonably possible
outcomes. In 1998, SCE sold all of its gas- and oil-fueled generation plants and
has retained some liability associated with the divested properties.
The CPUC allows SCE to recover environmental-cleanup costs at 42 of its sites,
representing $88 million of its recorded liability, through an incentive
mechanism (SCE may request to include additional sites). Under this mechanism,
SCE will recover 90% of cleanup costs through customer rates; and shareholders
fund the remaining 10%, with the opportunity to recover these costs from
insurance carriers and other third parties. SCE has successfully settled
insurance claims with all responsible carriers. Costs incurred at SCE's
remaining sites are expected to be recovered through customer rates. SCE has
recorded a regulatory asset of $122 million for its estimated minimum
environmental-cleanup costs expected to be recovered through customer rates.
Edison International's identified sites include several sites for which there is
a lack of currently available information, including the nature and magnitude of
contamination, and the extent, if any, that Edison International may be held
responsible for contributing to any costs incurred for remediating these sites.
Thus, no reasonable estimate of cleanup costs can now be made for these sites.
Edison International expects to clean up its identified sites over a period of
up to 30 years. Remediation costs in each of the next several years are expected
to range from $5 million to $15 million. Recorded costs for the twelve-month
period ended March 31, 2000 were $8 million.
6
EDISON INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based on currently available information, Edison International believes it is
unlikely that it will incur amounts in excess of the upper limit of the
estimated range and, based upon the CPUC's regulatory treatment of
environmental-cleanup costs, Edison International believes that costs ultimately
recorded will not materially affect its results of operations or financial
position. There can be no assurance, however, that future developments,
including additional information about existing sites or the identification of
new sites, will not require material revisions to such estimates.
Nuclear Insurance
Federal law limits public liability claims from a nuclear incident to $9.5
billion. SCE and other owners of the San Onofre and Palo Verde nuclear plants
have purchased the maximum private primary insurance available ($200 million).
The balance is covered by the industry's retrospective rating plan that uses
deferred premium charges to every reactor licensee if a nuclear incident at any
licensed reactor in the U.S. results in claims and/or costs which exceed the
primary insurance at that plant site. Federal regulations require this secondary
level of financial protection. The Nuclear Regulatory Commission exempted San
Onofre Unit 1 from this secondary level, effective June 1994. The maximum
deferred premium for each nuclear incident is $88 million per reactor, but not
more than $10 million per reactor may be charged in any one year for each
incident. Based on its ownership interests, SCE could be required to pay a
maximum of $175 million per nuclear incident. However, it would have to pay no
more than $20 million per incident in any one year. Such amounts include a 5%
surcharge if additional funds are needed to satisfy public liability claims and
are subject to adjustment for inflation. If the public liability limit above is
insufficient, federal regulations may impose further revenue-raising measures to
pay claims, including a possible additional assessment on all licensed reactor
operators.
Property damage insurance covers losses up to $500 million, including
decontamination costs, at San Onofre and Palo Verde. Decontamination liability
and property damage coverage exceeding the primary $500 million also has been
purchased in amounts greater than federal requirements. Additional insurance
covers part of replacement power expenses during an accident-related nuclear
unit outage. These policies are issued primarily by mutual insurance companies
owned by utilities with nuclear facilities. If losses at any nuclear facility
covered by the arrangement were to exceed the accumulated funds for these
insurance programs, SCE could be assessed retrospective premium adjustments of
up to $19 million per year. Insurance premiums are charged to operating expense.
Spent Nuclear Fuel
Under federal law, the Department of Energy (DOE) is responsible for the
selection and development of a facility for disposal of spent nuclear fuel and
high-level radioactive waste. Such a facility was to be in operation by January
1998. However, the DOE did not meet its obligation. It is not certain when the
DOE will begin accepting spent nuclear fuel from San Onofre or from other
nuclear power plants.
SCE has primary responsibility for the interim storage of its spent nuclear fuel
at San Onofre. Current capability to store spent fuel is estimated to be
adequate through 2005. Meeting spent-fuel storage requirements beyond that
period would require additional on-site storage capability, the costs for which
have not been determined. Extended delays by the DOE could lead to consideration
of costly alternatives involving siting and environmental issues. SCE has paid
the DOE the required one-time fee applicable to nuclear generation at San Onofre
through April 6, 1983, (approximately $24 million, plus interest). SCE is also
paying the required quarterly fee equal to one mill per kilowatt-hour of
nuclear-generated electricity sold after April 6, 1983.
Palo Verde on-site spent fuel storage capacity will accommodate needs until 2003
for Unit 2, and until 2004 for Units 1 and 3. Arizona Public Service Company,
operating agent for Palo Verde, is constructing an interim fuel storage facility
that is expected to be completed in 2002.
7
EDISON INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCE and other owners of nuclear power plants may be able to recover interim
storage costs arising from DOE delays in the acceptance of utility spent nuclear
fuel by pursuing relief under the terms of the contracts, as directed by the
courts, or through other court actions.
Note 3. Business Segments
Edison International's reportable business segments include its electric utility
operation segment (SCE), an unregulated power generation segment (Edison Mission
Energy), and a capital and financial services provider segment (Edison
Capital).
Segment information for the three months ended March 31, 2000, and 1999, was:
3 Months Ended
March 31,
- -------------------------------------------------------------------------
In millions 2000 1999
- -------------------------------------------------------------------------
Operating Revenue:
Electric utility $ 1,830 $ 1,685
Unregulated power generation 751 270
Capital & financial services 66 83
Corporate and other* 76 58
- -------------------------------------------------------------------------
Consolidated Edison International $ 2,723 $ 2,096
- -------------------------------------------------------------------------
Net Income:
Electric utility $ 113 $ 76
Unregulated power generation (12) 44
Capital & financial services 28 25
Corporate and other* (19) (2)
- -------------------------------------------------------------------------
Consolidated Edison International $ 110 $ 143
- -------------------------------------------------------------------------
* Includes amounts from nonutility subsidiaries not significant as a
reportable segment.
Total segment assets as March 31, 2000, were: electric utility, $17.7 billion;
unregulated power generation, $16 billion; capital and financial services, $3
billion.
Note 4. Acquisitions
On March 15, 2000, EME completed its acquisition of Edison Mission Wind Power
Italy B.V., formerly known as Italian Vento Power Corp. Energy 5 B.V. Edison
Mission Wind owns a 50% interest in a series of wind-generated power projects in
operation or under development in Italy. Assuming all of the projects under
development are completed, currently scheduled for 2002, the total capacity of
these projects will be 283 MW. The purchase price of the acquisition was $45
million with equity contribution obligations of up to $17 million, depending on
the number of projects that are ultimately developed.
Note 5. Accounting Changes
Effective January 1, 2000, EME changed its accounting method for major
maintenance to record such expenses as incurred. Previously, EME recorded major
maintenance costs on an accrue in advance method. EME voluntarily made the
change in accounting due to recent guidance provided by the Securities and
Exchange Commission. The cumulative effect of the change in accounting method
was an $18 million after-tax benefit.
8
EDISON INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 1, 1999, Edison International implemented a new accounting rule that
requires costs related to start-up activities to be expensed as incurred.
Although this new accounting rule did not materially affect Edison
International's results of operations or financial position, EME wrote off $14
million on previously capitalized start-up costs in first quarter 1999.
Note 6. Employee Compensation and Benefit Plans
As disclosed in Edison International's 1999 Annual Report on Form 10-K, Edison
International's Board of Directors and its Compensation and Executive Personnel
Committee have been considering an exchange offer for outstanding affiliate
options issued by EME and Edison Capital. Such an exchange offer was reviewed
and approved by the Board of Directors at its meetings in January and February
2000, subject to final approval by the Compensation and Executive Personnel
Committee of the offer terms and documentation. The Compensation and Executive
Personnel Committee and the Board of Directors have subsequently concluded that,
in view of unexpected events adversely impacting the earnings from merchant
plants in the United Kingdom and the price of Edison International stock, it is
not advisable to make an exchange offer to the holders of EME's affiliate stock
options at this time. Accordingly, the Compensation and Executive Personnel
Committee, the Board of Directors and management are now concentrating on
developing methods to be used in valuing EME's 1999 merchant plant acquisitions
for purposes of affiliate option exercise windows and on other matters relating
to future exercise windows (including other steps necessary to value the EME
project portfolio at December 31, 1999). The Compensation and Executive
Personnel Committee is still considering whether to proceed with the exchange
offer for outstanding Edison Capital affiliate options. Upon resolution of the
matters noted above, any adjustments which may be required to the accrued
incentive liability will be recorded at that time.
9
EDISON INTERNATIONAL
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
First Quarter 2000 vs. First Quarter 1999
Earnings
Edison International's basic earnings per share were 32(cent) for first quarter
2000, compared to 41(cent) for first quarter 1999. Southern California Edison's
(SCE) first quarter 2000 earnings were 33(cent) per share, compared with
22(cent) for the same period last year. The quarterly increase for SCE was
primarily due to a planned refueling outage in 1999 at the San Onofre Nuclear
Generating Station and higher kilowatt-hour sales in 2000. Edison Mission Energy
(EME) lost 3(cent) for the quarter, compared to earnings of 13(cent) for the
prior-year period. The decrease was primarily attributable to losses from the
generating assets acquired from Commonwealth Edison (Illinois plants) in
December 1999, higher interest expense and a higher effective tax rate. The
decrease was partially offset by earnings from new acquisitions, the Ferrybridge
and Fiddler's Ferry plants in the United Kingdom (U.K.), and the Homer City
plant, which did not have comparable first quarter 1999 earnings. The earnings
from the winter peaking plants in the U.K. were insufficient to offset the
expected seasonal net loss from the summer peaking plants in Illinois. The
Ferrybridge and Fiddler's Ferry plants' earnings were adversely impacted by
lower energy prices during the first quarter of 2000 due to unseasonably warm
weather and regulatory uncertainty regarding planned changes in the electricity
trading arrangements. Edison Capital's earnings were 11(cent), unchanged from
the same period last year. Edison Enterprises and the parent company were
responsible for a 9(cent) loss in first quarter 2000, compared to a 5(cent) loss
in first quarter 1999. The decrease in earnings was primarily due to higher
interest expense at the parent company, partially offset by improved operating
performance and lower general and administrative expenses at Edison Enterprises.
Operating Revenue
As a result of industry restructuring, customers have an option to buy power
from SCE or directly from the California Power Exchange (PX), thus becoming
direct access customers. Most direct access customers continue to be billed by
SCE, but are also given a credit for the generation portion of their bills.
Electric utility revenue increased during the first quarter of 2000, compared
with the same period in 1999, as retail sales volume increased 8%. Over 92% of
electric utility revenue was from retail sales. Retail rates are regulated by
the California Public Utilities Commission (CPUC) and wholesale rates are
regulated by the Federal Energy Regulatory Commission (FERC).
Due to warmer weather during the summer months, electric operating revenue
during the third quarter of each year is significantly higher than other
quarters.
Nonutility power generation revenue increased in 2000, primarily due to
increases at EME related to the Ferrybridge and Fiddler's Ferry generating
facilities, the Illinois plants and the Homer City plant.
Due to warmer weather during the summer months, nonutility power generation
revenue from Homer City and the Illinois plants is usually higher during the
third quarter of each year. In addition, EME's third quarter revenue from energy
projects is materially higher than other quarters of the year due to a
significant number of EME's domestic energy projects located on the western
coast of the United States, which generally have power sales contracts that
provide for higher payments during summer months. First Hydro and Ferrybridge
and Fiddler's Ferry provide for higher nonutility power generation revenue
during the winter months.
10
Operating Expenses
Fuel expense increased in 2000, primarily due to increased expenses at EME
related to the Ferrybridge and Fiddler's Ferry generating facilities, the
Illinois plants and the Homer City plant.
Purchased-power expense -- contracts decreased for the three months ended March
31, 2000, compared to the year-earlier period, primarily due to SCE entering
into settlements to end its contractual obligations with certain nonutility
generators (known as qualifying facilities, or QFs) and the terms in some of the
QF contracts reverting to lower prices. Prior to April 1998, SCE was required
under federal law and CPUC orders to enter into contracts to purchase power from
QFs at CPUC-mandated prices even though energy and capacity prices under many of
these contracts are generally higher than other sources. For the twelve months
ended March 31, 2000, SCE paid about $1.3 billion (including energy and capacity
payments) more for these power purchases than the cost of power available from
other sources. SCE is continuing to purchase power under existing contracts from
certain QFs and from other utilities. Power purchases from QFs and other
utilities are sold through the PX.
Since April 1, 1998, SCE has been required to sell all of its generated power
through the PX, schedule delivery of the power through the California
Independent System Operator (ISO) and acquire all of its power from the PX to
distribute to its retail customers. These transactions with the PX and ISO are
reported net. For the quarter ended March 31, 2000, PX/ISO purchased-power
expense decreased 35%, mainly due to the realization of hydroelectric-related
ISO revenue which had been previously deferred awaiting regulatory approval.
Provisions for regulatory adjustment clauses increased for the three months
ended March 31, 2000, compared to the year-earlier period. The quarterly
increase reflects overcollections related to the difference between
generation-related revenue and generation-related costs, as well as
overcollections related to the administration of public-purpose funds.
Other operation and maintenance expenses increased in 2000, primarily reflecting
increased plant operating expenses at EME due to the Illinois plants, the
Ferrybridge and Fiddler's Ferry generating facilities, and the Homer City plant.
This increase was partially offset by a decrease in mandated transmission
service (known as must-run reliability services) expense at SCE which was caused
by SCE being contractually obligated for fewer must-run units in 2000, compared
to 1999.
Depreciation, decommissioning and amortization expense increased in 2000, mainly
due to EME's 1999 acquisitions of the Illinois plants (in December) and the
Ferrybridge and Fiddler's Ferry generating facilities (in July).
Other Income
Interest and dividend income increased in 2000, primarily due to increases in
interest earned on higher balancing account undercollections at SCE.
Other nonoperating deductions decreased in 2000, primarily due to the gain on
sale of an equity investment at Edison International's insurance subsidiary in
first quarter 2000, as well as the absence of EME's write-off of start-up costs
in first quarter 1999. These deduction decreases were almost completely offset
by a nonoperating income decrease at SCE due to gains on sales of equity
investments in first quarter 1999.
Fixed Charges and Taxes
Interest and amortization on long-term debt increased in 2000, reflecting
additional long-term debt at EME to finance its acquisition of the Homer City
plant, the Ferrybridge and Fiddler's Ferry generating facilities, and the
Illinois plants. Increased long-term debt at Edison International (parent
company) also contributed to the increased interest expense.
11
Other interest expense increased in 2000, mostly due to additional debt
financing for EME's 1999 acquisitions of the Illinois plants, the Ferrybridge
and Fiddler's Ferry generating facilities and the Homer City plant. Higher
overall short-term debt balances at both SCE and Edison International, the
parent company, also contributed to the increase in first quarter 2000.
Dividends on preferred securities increased in 2000, reflecting the additional
issuance of preferred securities at EME during 1999, and the issuance of
quarterly income securities at Edison International, the parent company, in July
and October 1999. Proceeds from the issuances were used primarily to finance
EME's 1999 acquisitions of a 40% interest in Contact Energy Ltd., the Fiddler's
Ferry and Ferrybridge generating facilities, and the Illinois plants.
Income taxes decreased slightly in 2000, as decreases at EME and Edison
International (parent) were almost completely offset by an increase at SCE.
EME's decrease reflects lower first quarter 2000 earnings (see additional
discussion in Market Risk Exposures - EME Issues) while the decrease at Edison
International (parent) was the result of significantly lower pre-tax income. The
increase at SCE was mainly due to higher pre-tax income.
Financial Condition
Edison International's liquidity is primarily affected by debt maturities,
dividend payments, capital expenditures, and investments in partnerships and
unconsolidated subsidiaries. Capital resources include cash from operations and
external financings.
Edison International's Board of Directors has authorized the repurchase of up to
$2.8 billion of its outstanding shares of common stock. In the first quarter of
2000, Edison International repurchased more than 9 million shares (approximately
$150 million) of its common stock. These repurchases were the first to occur
since first quarter 1999. Edison International has now repurchased approximately
110 million shares ($2.6 billion) between January 1, 1995, and March 31, 2000,
funded by dividends from its subsidiaries. On March 16, 2000, Edison
International increased its annual common stock dividend from $1.08 to $1.12, a
3.7% increase. Edison International's dividend payout ratio for the twelve-month
period ended March 31, 2000, was 64%.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $608 million in the first
quarter of 2000, compared to $471 million in the first quarter of 1999. For the
first quarter of 2000, Edison International's cash flow coverage of dividends
was 6.5 times, compared to 5.1 times for the year-earlier period.
Cash Flows from Financing Activities
At March 31, 2000, Edison International and its subsidiaries had $898 million of
borrowing capacity available under lines of credit totaling $2.6 billion. SCE
had total lines of credit of $1.25 billion, with $1 million available for
short-term debt and $515 million available for the long-term refinancing of its
variable-rate pollution-control bonds. The parent company had total lines of
credit of $590 million, with $8 million available. The nonutility subsidiaries
had total lines of credit of $800 million, with $374 million available to
finance general cash requirements. These unsecured lines of credit are at
negotiated or bank index rates with various expiration dates.
Both EME's short-term and long-term debt are used for general corporate purposes
as well as acquisitions. SCE's short-term debt is used to finance fuel
inventories and general cash requirements. SCE's long-term debt is used mainly
to finance capital expenditures. SCE's external financings are influenced by
market conditions and other factors, including limitations imposed by its
articles of incorporation and trust indenture. As of March 31, 2000, SCE could
issue approximately $11.6 billion of additional first and refunding
mortgage bonds and $2.8 billion of preferred stock at current interest and
dividend rates.
12
EME has firm commitments of $220 million to make equity and other contributions
for the ISAB project in Italy, the EcoElectrica project in Puerto Rico, the Tri
Energy project in Thailand and the Italian wind projects. EME also has
contingent obligations to make additional contributions of $123 million,
primarily for equity support guarantees related to the Paiton project in
Indonesia.
EME may incur additional obligations to make equity and other contributions to
projects in the future. EME believes it will have sufficient liquidity to meet
these equity requirements from cash provided by operating activities, proceeds
from the repayment of loans to energy projects and funds available from EME's
revolving line of credit.
Edison Capital has firm commitments of $331 million to fund affordable housing,
and energy and infrastructure investments.
California law prohibits SCE from incurring or guaranteeing debt for its
nonutility affiliates. Additionally, the CPUC regulates SCE's capital structure,
limiting the dividends it may pay Edison International. At March 31, 2000, SCE
had the capacity to pay $81 million in additional dividends and continue to
maintain its authorized capital structure. These restrictions are not expected
to affect Edison International's ability to meet its cash obligations.
In December 1997, $2.5 billion of rate reduction notes were issued on behalf of
SCE by SCE Funding LLC, a special purpose entity. These notes were issued to
finance the 10% rate reduction mandated by state law. The proceeds of the rate
reduction notes were used by SCE Funding LLC to purchase from SCE an enforceable
right known as transition property. Transition property is a current property
right created by the restructuring legislation and a financing order of the CPUC
and consists generally of the right to be paid a specified amount from
non-bypassable rates charged to residential and small commercial customers. The
rate reduction notes are being repaid over 10 years through these non-bypassable
residential and small commercial customer rates which constitute the transition
property purchased by SCE Funding LLC. The remaining series of outstanding rate
reduction notes have scheduled maturities beginning in 2001 and ending in 2007,
with interest rates ranging from 6.17% to 6.42%. The notes are secured by the
transition property and are not secured by, or payable from, assets of SCE or
Edison International. SCE used the proceeds from the sale of the transition
property to retire debt and equity securities.
Although, as required by generally accepted accounting principles, SCE Funding
LLC is consolidated with SCE and the rate reduction notes are shown as long-term
debt in the consolidated financial statements, SCE Funding LLC is legally
separate from SCE. The assets of SCE Funding LLC are not available to creditors
of SCE or Edison International, and the transition property is legally not an
asset of SCE or Edison International.
Cash Flows from Investing Activities
Cash flows from investing activities are affected by additions to property and
plant, purchases and sales of assets, the nonutility companies' investments in
partnerships and unconsolidated subsidiaries, and funding of nuclear
decommissioning trusts. Decommissioning costs are recovered in rates. SCE
estimates that it will spend approximately $8.6 billion through 2060 to
decommission its nuclear facilities. This estimate is based on SCE's
current-dollar decommissioning costs ($2.1 billion), escalated at rates ranging
from 0.3% to 10.0% (depending on the cost element) annually. These costs are
expected to be funded from independent decommissioning trusts which receive SCE
contributions of approximately $25 million per year.
Cash used for the nonutility subsidiaries' investing activities was $172 million
for the three-month period ended March 31, 2000, compared to $1.8 billion for
the same period in 1999. The decrease in 2000 reflects EME's acquisition of the
Homer City plant in first quarter 1999.
13
Projected Capital Requirements
Edison International's projected construction expenditures for the next five
years are: 2000 - $1.4 billion; 2001 - $1.2 billion; 2002 - $1.1 billion; 2003 -
$1.0 billion; and 2004 - $908 million.
Long-term debt maturities and sinking fund requirements for the five
twelve-month periods following March 31, 2000, are: 2001 - $809 million; 2002 -
$1.2 billion; 2003 - $777 million; 2004 - $670 million; and 2005 - $719 million.
Preferred stock redemption requirements for the five twelve-month periods
following March 31, 2000, are: 2001 and 2002 - zero; 2003 - $109 million; 2004 -
$9 million; and 2005 - $9 million.
Market Risk Exposures
Edison International's primary market risk exposures arise from fluctuations in
energy prices, interest rates and foreign exchange rates. Edison International's
risk management policy allows the use of derivative financial instruments to
manage its financial exposures, but prohibits the use of these instruments for
speculative or trading purposes.
SCE Issues
As a result of the rate freeze established in the restructuring legislation,
SCE's transition costs are recovered as the residual component of rates once the
costs for distribution, transmission, public purpose programs, nuclear
decommissioning and the cost of supplying power to its customers through the PX
and ISO have already been recovered. Accordingly, more revenue will be available
to cover transition costs when market prices in the PX and ISO are low than when
PX and ISO prices are high. The PX and ISO market prices to date have generally
been consistent, although some irregular price spikes have occurred. The ISO has
responded to price spikes in the market for reliability services (referred to as
ancillary services) by imposing a price cap on the market for such services
until certain actions have been completed to improve the functioning of those
markets. Similarly, the ISO currently maintains a cap on its market for
imbalance energy until adequate measures to improve the efficient operation of
the market have been implemented. The caps in these markets mitigate the risk of
costly price spikes that would reduce the revenue available to SCE to pay
transition costs. The price cap instituted by the ISO in the summer of 1998 was
$250/MWh. In October 1999, that cap was raised to $750/MWh and will remain at
that level through November 15, 2000. SCE has entered into gas call options to
mitigate high natural gas prices, since increases in natural gas prices tend to
raise the price of electricity.
In July 1999, SCE began participating in forward purchases through a PX block
forward market. In the PX block forward market, SCE can purchase monthly blocks
of energy or ancillary services for six days a week (excluding Sundays and
holidays) for 8 to 16 hours a day. These purchases can be made up to 12 months
in advance of the delivery date. The CPUC originally limited SCE's use of the PX
block forward market to a maximum of approximately 2,000 MW in any month. The PX
requested and was granted authority from the FERC to sell other forward products
including a peak product, six days a week, for eight hours a day. SCE requested
rate-making treatment from the CPUC for its use of these additional products,
and requested an expansion of the limits from all forward PX products up to
5,200 MW in summer months. These requests were granted in March 2000. SCE
requested permission from the CPUC to begin a demand responsiveness program that
would allow customers to be paid to curtail their load during times of very high
prices. The CPUC approved SCE's request for this program in April 2000.
EME Issues
Changes in interest rates, electricity pool pricing and fluctuations in foreign
currency exchange rates can have a significant impact on EME's results of
operations. EME has mitigated a portion of the risk of interest rate
fluctuations by arranging for fixed rate or variable rate financing with
interest rate swaps or other hedging mechanisms for a number of its project
financings. Interest expense includes $5 million for the three month period
ended March 31, 2000, and $6 million for the same period in 1999, as a result of
14
EME Issues
interest rate swap and collar agreements. Several of EME's interest rate swap
and collar agreements mature prior to their underlying debt.
EME hedges a portion of the electric output of its plants in order to lock in
desirable outcomes. EME also manages the margin between electric prices and fuel
prices when deemed appropriate. EME uses forward contracts, swaps, futures or
option contracts to achieve these objectives.
Projects in the U.K. sell their electric energy and capacity through a
centralized electricity pool, which establishes a half-hourly clearing price, or
pool price, for electric energy. The pool price is extremely volatile, and can
vary by a factor of 10 or more over the course of a few hours due to large
differentials in demand according to the time of day. First Hydro and
Ferrybridge and Fiddler's Ferry mitigate a portion of the market risk of the
pool by entering into contracts for differences (electricity rate swap
agreements), related to either the selling or purchasing price of power, where a
contract specifies a price at which the electricity will be traded, and the
parties to the agreements make payments, calculated on the difference between
the price in the contract and the pool price for the element of power under
contract. These contracts are sold in various structures. These contracts act as
a means of stabilizing production revenue or purchasing costs by removing an
element of their net exposure to pool price volatility. A proposal to replace
the current structure of the pool and the forward-contracts market to require
firm physical delivery has been made by the Director General of Electricity
supply, at the request of the Minister for Science, Energy and Industry in the
U.K. The Minister has recommended that the proposal be implemented by October
2000. This proposal has placed a significant downward pressure on forward
contract prices. Legislation in the form of a Utilities Bill, published on
January 20, 2000, is being introduced to allow for the implementation of new
trading arrangements and the necessary amendments to generators' licenses. A
warmer than average winter, the entry of new operations into the generation
market, the introduction of the new electricity trading arrangements coupled
with uncertainties surrounding the new Utilities Bill and a proposed "good
behavior" clause, discussed below, have depressed anticipated prices for winter
2000/2001. As a result of these events, EME expects lower than anticipated
revenue from its Ferrybridge and Fiddler's Ferry plants.
The Utilities Bill, which includes several consumer and environmental protection
measures, is scheduled to become law by July 2000. While the U.K. government
recognizes the need to strike a balance between consumer and shareholder
interests, the proposals have far-reaching implications for the utilities
sector.
In December 1999, the U.K. Director General of Electricity Supply gave notice of
an intention to introduce a new condition into the licenses of a number of
generators to curb the perceived exercise of market power in the determination
of wholesale electricity prices. The majority of the major generators have
accepted the new clauses, including EME, which has sought and received specific
assurances from the Regulator on the definition of market abuse and the way the
clauses will be interpreted in the future.
Electric power generated at Homer City is sold under bilateral arrangements with
domestic utilities and power marketers under short-term contracts (two years or
less) or to the Pennsylvania-New Jersey-Maryland Power Pool (PJM) or the New
York Independent System Operator (NYISO). The PJM pool has a market that
establishes an hourly clearing price. Homer City is located in the PJM pool area
and is physically connected to high-voltage transmission lines serving both the
PJM and NYISO markets. Power can also be transmitted to the mid-western United
States.
Commonwealth Edison (ComEd) entered into purchase power agreements in which
ComEd will purchase capacity and have the right to purchase energy generated by
the Illinois plants. The agreements, which began in December 1999, and have a
term of up to five years, provide for capacity and energy payments. ComEd will
be obligated to make a capacity payment for the units under contract and an
energy payment for the electricity produced by these units. The capacity payment
will provide the Illinois plants revenue for fixed charges, and the energy
payment will compensate the Illinois plants for variable costs of production. If
ComEd does not fully dispatch the units under contract, the Illinois plants may
sell, subject to certain conditions, the excess energy at market prices to
neighboring utilities, municipalities, third party electric retailers, large
consumers and power marketers on a spot basis.
15
Loy Yang B sells its electrical energy through a centralized electricity pool,
which provides for a system of generator bidding, central dispatch and a
settlements system based on a clearing market for each half-hour of every day.
The National Electricity Market Management Company, operator and administrator
of the pool, determines a system marginal price each half-hour. To mitigate the
exposure to price volatility of the electricity traded in the pool, Loy Yang B
has entered into a number of financial hedges. From May 8, 1997, to December 31,
2000, 53% to 64% of the plant output sold is hedged under vesting contracts,
with the remainder of the plant capacity hedged under the State Government of
Victoria, Australia (State) hedge described below. Vesting contracts were put
into place by the State, between each generator and each distributor, prior to
the privatization of electric power distributors in order to provide more
predictable pricing for those electricity customers that were unable to choose
their electricity retailer. Vesting contracts set base strike prices at which
the electricity will be traded, and the parties to the agreement make payments,
calculated based on the difference between the price in the contract and the
half-hourly pool clearing price for the element of power under contract. These
contracts are sold in various structures. These contracts are accounted for as
electricity rate swap agreements. The State hedge is a long-term contractual
arrangement based upon a fixed price commencing May 8, 1997, and terminating
October 31, 2016. The State guarantees the State Electricity Commission of
Victoria's obligations under the State hedge.
EME's electric revenue increased by $37 million for the three months ended March
31, 2000, compared to an increase of $22 million for the same period in 1999, as
a result of electricity rate swap agreements and other hedging activities.
As EME continues to expand into foreign markets, fluctuations in foreign
currency exchange rates can affect the amount of its equity contributions to,
distributions from and results of operations of its foreign projects. At times,
EME has hedged a portion of its exposure to fluctuations in foreign exchange
rates where it deems appropriate through financial derivatives, offsetting
obligations denominated in foreign currencies, and indexing underlying project
agreements to U.S. dollars or other indices reasonably expected to correlate
with foreign exchange movements. Statistical forecasting techniques are used to
help assess foreign exchange risk and the probabilities of various outcomes.
There can be no assurance, however, that fluctuations in exchange rates will be
fully offset by hedges or that currency movements and the relationship between
macro-economic variables will behave in a manner that is consistent with
historical or forecasted relationships.
Paiton Project
A wholly owned subsidiary of EME owns a 40% interest in the Paiton project, a
1,230-MW coal-fired power plant in Indonesia. The tariff is higher in the early
years and steps down over time. The tariff for the Paiton project includes
infrastructure to be used in common by other units at the Paiton complex. The
plant's output is fully contracted with the state-owned electricity company for
payment in Indonesian Rupiah, with the portion of such payments intended to
cover non-Rupiah project costs (including returns to investors) indexed to the
Indonesian Rupiah/U.S. dollar exchange rate established at the time of the power
purchase agreement in February 1994. The state-owned electricity company's
payment obligations are supported by the Indonesian government. The project
received substantial finance and insurance support from the Export-Import Bank
of the United States, The Export-Import Bank of Japan, the U.S. Overseas Private
Investment Corporation and the Ministry of International Trade and Industry of
Japan. The projected rate of growth of the Indonesian economy and the exchange
rate of Indonesian Rupiah into U.S. dollars have deteriorated significantly
since the Paiton project was contracted, approved and financed. The Paiton
project's senior debt ratings have been reduced from investment grade to
speculative grade based on the rating agencies' perceived increased risk that
the state-owned electricity company might not be able to honor the electricity
sales contract with Paiton. The Indonesian government has arranged to reschedule
sovereign debt owed to foreign governments and has entered into discussions
about rescheduling sovereign debt owed to private lenders. Certain events have
occurred (including those discussed in the subsequent paragraph) which, with the
passage of time or upon notice, may mature into defaults of the project's debt
agreement. In October 1999, the project entered into an interim
16
agreement with its lenders, in which the lenders waived such defaults until July
31, 2000. However, such waiver may expire on an earlier date if additional
defaults (other than those specifically waived) or certain other specified
events occur.
One of the Paiton units began commercial operation in May 1999 and the other
unit in July 1999. Because of the economic downturn, the state-owned electricity
company is experiencing low electricity demand and has therefore ordered no
power from the Paiton plant; however, under the terms of the power purchase
agreement, the state-owned electricity company is required to continue to pay
for capacity and fixed operating costs once each unit and the plant achieve
commercial operation. An invoice for these charges for May 1999 has been
submitted and a partial payment, based on an arbitrary exchange rate that does
not comply with the terms of the power purchase agreement, was received.
Additional invoices for capacity charges and fixed operating costs have been
submitted; no payment has been received.
On February 21, 2000, Paiton and the state-owned electricity company executed an
Interim Agreement in which the power purchase agreement will be administered
pending a long-term restructure of the power purchase agreement. Among other
things, the Interim Agreement provides for dispatch of the project, fixed
monthly capacity payments to Paiton by the state-owned electricity company, and
the standstill of any further legal proceedings by either party during the term
of the Interim Agreement. The first two capacity payments totaling $15 million
have been received. The Agreement runs through December 31, 2000, and may be
extended by mutual agreement. The state-owned electricity company and Paiton
have agreed that negotiations on a long-term restructuring of the tariff will
begin in May 2000. Any material modifications of the contract could also require
a renegotiation of the Paiton project's debt agreement. The impact of any such
renegotiations with the state-owned electricity company, the Indonesian
government or the project's creditors on EME's expected return on its investment
in Paiton is uncertain at this time; however, EME believes that it will
ultimately recover its investment in the project.
EME's Acquisitions
On March 15, 2000, EME completed its acquisition of Edison Mission Wind Power
Italy B.V., formerly known as Italian Vento Power Corp. Energy 5 B.V. Edison
Mission Wind owns a 50% interest in a series of wind-generated power projects in
operation or under development in Italy. Assuming all of the projects under
development are completed, currently scheduled for 2002, the total capacity of
these projects will be 283 MW. The purchase price of the acquisition was $45
million, with equity contribution obligations of up to $17 million, depending on
the number of projects that are ultimately developed.
SCE's Regulatory Environment
SCE currently operates in a highly regulated environment in which it has an
obligation to deliver electric service to customers in return for an exclusive
franchise within its service territory. This regulatory environment continues to
change as California moves toward a more competitive climate. SCE continues to
recover its stranded costs associated with generation-related assets through the
CTC. The 1996 restructuring legislation (Statute) included provisions to finance
a portion of the stranded costs that residential and small commercial customers
would have paid between 1998 and 2001, which allowed SCE to reduce rates by at
least 10% to these customers, effective January 1, 1998. The Statute mandated
other rates to remain frozen at June 1996 levels (system average of 10.1(cent)
per kilowatt-hour), including those for large commercial and industrial
customers, and included provisions for continued funding for energy
conservation, low-income programs and renewable resources. Despite the rate
freeze, SCE expects to be able to recover its revenue requirement during the
transition period.
17
Revenue and Cost-Recovery Mechanisms
Revenue is determined by various mechanisms depending on the utility operation.
Revenue related to distribution operations is being determined through a
performance-based rate-making (PBR) mechanism and the distribution assets have
the opportunity to earn a CPUC-authorized 9.49% return. The distribution PBR
will extend through December 2001. Key elements of the distribution PBR include:
distribution rates indexed for inflation based on the Consumer Price Index less
a productivity factor; adjustments for cost changes that are not within SCE's
control; a cost-of-capital trigger mechanism based on changes in a bond index;
standards for customer satisfaction; service reliability and safety; and a net
revenue-sharing mechanism that determines how customers and shareholders will
share gains and losses from distribution operations. Transmission revenue is
being determined through FERC-authorized rates that are subject to refund.
SCE's transition costs are being recovered through a non-bypassable CTC. This
charge applies to all customers who were using or began using utility services
on or after the CPUC's December 1995 restructuring decision date. SCE's
transition costs arise from QF contracts, which are the direct result of prior
legislative and regulatory mandates, costs pertaining to certain generating
assets (including the 1998 sale of SCE's generating plants) and regulatory
commitments consisting of costs incurred (whose recovery has been deferred by
the CPUC) to provide service to customers. Such commitments include the recovery
of income tax benefits previously flowed through to customers, postretirement
benefit transition costs, accelerated recovery of San Onofre Units 2 and 3 and
the Palo Verde units, and certain other costs. Transition costs related to
power-purchase contracts are being recovered through the terms of the contracts
while most of the remaining transition costs will be recovered through 2001.
During 1998, SCE sold all of its gas- and oil-fueled generation plants for $1.2
billion, over $500 million more than the combined book value. Net proceeds of
the sales were used to reduce stranded costs, which otherwise were expected to
be collected through the CTC mechanism. If events occur during the restructuring
process that result in all or a portion of the transition costs being improbable
of recovery, SCE could have write-offs associated with these costs if they are
not recovered through another regulatory mechanism.
Revenue from generation-related operations is being determined through the
market and the CTC mechanism, which now includes the nuclear rate-making
agreements. The portion of revenue related to fossil and hydroelectric
generation operations that is made uneconomic by electric industry restructuring
is recovered through the CTC mechanism. The portion that is economic is
recovered through the market. SCE's costs associated with its hydroelectric
plants are being recovered through a performance-based mechanism. The mechanism
sets the hydroelectric revenue requirement and establishes a formula for
extending it through the duration of the electric industry restructuring
transition period, or until market valuation of the hydroelectric facilities,
whichever occurs first. The mechanism provides that power sales revenue from
hydroelectric facilities in excess of the hydroelectric revenue requirement be
credited against the costs to transition to a competitive market. In 2000,
fossil and hydroelectric generation assets have the opportunity to earn a 7.22%
return. SCE has filed an application with the CPUC regarding the market
valuation of its hydroelectric facilities. See additional discussions below
regarding hydroelectric valuation, Mohave Generating Station auction and pending
Four Corners Generating Station sale.
SCE is recovering its investment in its nuclear facilities on an accelerated
basis in exchange for a lower authorized rate of return. SCE's nuclear assets
are earning an annual rate of return of 7.35%. In addition, the San Onofre plan
authorizes a fixed rate of approximately 4(cent) per kilowatt-hour generated for
operating costs including incremental capital costs, and nuclear fuel and
nuclear fuel financing costs. The San Onofre plan commenced in April 1996, and
ends in December 2001 for the accelerated recovery portion and in December 2003
for the incentive-pricing portion. Palo Verde's operating costs, including
incremental capital costs, and nuclear fuel and nuclear fuel financing costs,
are subject to balancing account treatment. The Palo Verde plan commenced in
January 1997 and ends in December 2001. Beginning January 1, 1998, both the San
Onofre and Palo Verde rate-making plans became part of the CTC mechanism. SCE
has entered into an agreement to sell its investment in Palo Verde (see
discussion below).
18
In March 1997, SCE filed its first FERC transmission rate case. In March 1999, a
proposed FERC decision was issued which recommended a reduced rate of return on
equity of 9.68% (compared to SCE's current CPUC rate for distribution of 11.6%)
and a reduced return on transmission assets of 8.41% (compared to the current
rate of 9.43% being earned on transmission assets). SCE filed comments opposing
the proposed decision in May 1999. In response to a FERC ruling, in November
1999, SCE filed additional evidence regarding return on equity. A final FERC
decision is expected by mid-2000. SCE does not expect the final decision to have
a material effect on its results of operations or financial position.
In October 1999, SCE filed an application with the CPUC to approve an auction
process to sell its 56% interest in the Mohave Generating Station. On April 6,
2000, the CPUC approved the auction process. On May 10, 2000, SCE agreed to sell
its interest in Mohave to The AES Corporation for over $533 million. The
transaction is subject to approval by the CPUC and the FERC. The sale is
expected to close by November 2000.
In December 1999, SCE filed an application with the CPUC establishing a market
value for its hydroelectric generation-related assets at approximately $1.0
billion (almost twice the assets' book value) and proposing to retain and
operate the hydroelectric assets under a performance-based and revenue-sharing
mechanism. The application had broad-based support from labor, ratepayer and
environmental groups. If approved by the CPUC, SCE would be allowed to recover
an authorized, inflation-index operations and maintenance allowance, as well as
a reasonable return on capital investment. A revenue-sharing arrangement would
be activated if revenue from the sale of hydroelectricity exceeds or falls short
of the authorized revenue requirement. SCE would then refund 90% of the excess
revenue to ratepayers or recover 90% of any shortfalls from ratepayers. A final
CPUC decision is expected by the end of 2000.
On January 7, 2000, SCE filed an application with the CPUC proposing rates that
would go into effect when the current rate freeze ends on March 31, 2002, or
earlier, depending on the pace of CTC recovery. The proposal seeks CPUC approval
of a rate redesign that will result in reduced rates for most customers when SCE
completes the first phase of recovery of its transition costs. The proposed new
rates are expected to reduce SCE's system average rates by about 17% from
current frozen rate levels, based on certain assumptions about competitive
energy prices. In addition, SCE's filing proposes to redesign and establish
separate transmission and distribution rates to better reflect the actual costs
to deliver electricity and serve customers. This pricing approach is consistent
with CPUC policies requiring California's major utilities to move toward
cost-based transmission and distribution rates.
On April 27, 2000, SCE agreed to sell its 16% interest in Palo Verde and its 48%
interest in Four Corners Generating Station to Pinnacle West Energy for a total
price of $550 million. The sale of assets at Palo Verde will be accompanied by
an assignment of SCE's interest in the related decommissioning fund. The
transaction, which is subject to the approval of the CPUC, Nuclear Regulatory
Commission and other state and federal entities, is expected to close by
mid-2001. For a certain period of time, competing offers may be solicited and
any superior offers received are subject to matching rights by Pinnacle West
Energy.
Accounting for Utility Generation-Related Assets
As the CPUC's electric industry restructuring plan continues as described above,
SCE is allowed to recover its transition costs through non-bypassable charges to
its distribution customers (although its investment in certain generation assets
is subject to a lower authorized rate of return). In 1997, SCE discontinued
application of accounting principles for rate-regulated enterprises for its
generation assets based on new accounting guidance. The new guidance did not
require SCE to write off any of its generation-related assets, including related
regulatory assets because the restructuring plan referred to above makes
probable their recovery through a non-bypassable charge to distribution
customers. The regulatory assets are comprised of accelerated income tax
benefits previously flowed through to customers, purchased power contract
termination payments and unamortized losses on reacquired debt. The new
accounting guidance also permits the recording of new generation-related
regulatory assets during the transition period that are probable of recovery
through the CTC mechanism.
19
During the second quarter of 1998, additional guidance was developed related to
the application of asset impairment standards to these assets. Using this
guidance, SCE reduced its remaining nuclear plant investment by $2.6 billion (as
of June 30, 1998) and recorded a regulatory asset on its balance sheet for the
same amount. For this impairment assessment, the fair value of the investment
was calculated by discounting expected future net cash flows. This
reclassification had no effect on SCE's results of operations.
If during the transition period events were to occur that made the recovery of
these generation-related regulatory assets no longer probable, SCE would be
required to write off the remaining balance of such assets (approximately $2.5
billion, after tax, at March 31, 2000) as a one-time, non-cash charge against
earnings. At this time, SCE cannot predict what other revisions will ultimately
be made during the restructuring process in subsequent proceedings or the
effect, after the transition period, that competition will have on its results
of operations or financial position.
Environmental Protection
Edison International is subject to numerous environmental laws and regulations,
which require it to incur substantial costs to operate existing facilities,
construct and operate new facilities, and mitigate or remove the effect of past
operations on the environment.
As further discussed in Note 2 to the Consolidated Financial Statements, Edison
International records its environmental liabilities when site assessments and/or
remedial actions are probable and a range of reasonably likely cleanup costs can
be estimated. Edison International's recorded estimated minimum liability to
remediate its 46 identified sites is $159 million. One of SCE's sites, a former
pole-treating facility, is considered a federal Superfund site and represents
40% of its recorded liability. Edison International believes that, due to
uncertainties inherent in the estimation process, it is reasonably possible that
cleanup costs could exceed its recorded liability by up to $281 million. In
1998, SCE sold all of its gas- and oil-fueled power plants but has retained some
liability associated with the divested properties.
The CPUC allows SCE to recover environmental-cleanup costs at 42 of its sites,
representing $88 million of its recorded liability, through an incentive
mechanism, which is discussed in Note 2. SCE has recorded a regulatory asset of
$122 million for its estimated minimum environmental-cleanup costs expected to
be recovered through customer rates.
Edison International's identified sites include several sites for which there is
a lack of currently available information. As a result, no reasonable estimate
of cleanup costs can be made for these sites. Edison International expects to
clean up its identified sites over a period of up to 30 years. Remediation costs
in each of the next several years are expected to range from $5 million to $15
million. Recorded costs for the twelve months ended March 31, 2000, were $8
million.
Based on currently available information, Edison International believes it is
unlikely that it will incur amounts in excess of the upper limit of the
estimated range and, based upon the CPUC's regulatory treatment of
environmental-cleanup costs, Edison International believes that costs ultimately
recorded will not materially affect its results of operations or financial
position. There can be no assurance, however, that future developments,
including additional information about existing sites or the identification of
new sites, will not require material revisions to such estimates.
The 1990 Federal Clean Air Act requires power producers to have emissions
allowances to emit sulfur dioxide. Power companies receive emissions allowances
from the federal government and may bank or sell excess allowances. SCE expects
to have excess allowances under Phase II of the Clean Air Act (2000 and later).
A study was undertaken to determine the specific impact of air contaminant
emissions from the Mohave Generating Station on visibility in Grand Canyon
National Park. The final report on this study, which was issued in March 1999,
found negligible correlation between measured Mohave station tracer
concentrations and visibility impairment. The absence of any obvious
relationship cannot rule out Mohave station contributions to haze in Grand
Canyon National Park, but strongly suggests that other
20
sources were primarily responsible for the haze. In June 1999, the Environmental
Protection Agency (EPA) issued an advanced notice of proposed rulemaking
regarding assessment of visibility impairment at the Grand Canyon. SCE filed
comments on the proposed rulemaking in November 1999. In 1998, several
environmental groups filed suit against the co-owners of the Mohave station
regarding alleged violations of emissions limits. In order to accelerate
resolution of key environmental issues regarding the plant, the parties filed,
in concurrence with SCE and the other station owners, a consent decree, which
was approved by the court in December 1999. In a letter to SCE, the EPA has
expressed its belief that the controls provided in the consent decree will
likely resolve the potential Clean Air Act visibility concerns. The EPA is
considering incorporating the decree into the visibility provisions of its
Federal Implementation Plan for Nevada.
Edison International's projected environmental capital expenditures are $1.5
billion for the 2000-2004 period, mainly for undergrounding certain transmission
and distribution lines at SCE and upgrading environmental controls at EME.
San Onofre Steam Generator Tubes
The San Onofre Units 2 and 3 steam generators have performed relatively well
through the first 16 years of operation. The steam generator design allows for
the removal of up to 10% of the tubes before the rated capacity of the unit must
be reduced. Increased tube degradation was found during routine inspections in
1997. To date, 7.5% of Unit 2's tubes and 5.4% of Unit 3's tubes have been
removed from service. A decreasing (favorable) trend in degradation has been
observed in more recent inspections.
Accounting Changes
Effective January 1, 2000, EME changed its accounting method for major
maintenance to record such expenses as incurred. Previously, EME recorded major
maintenance costs on an accrue in advance method. EME voluntarily made the
change in accounting due to recent guidance provided by the Securities and
Exchange Commission. The cumulative effect of the change in accounting method
was an $18 million after-tax benefit.
On January 1, 1999, Edison International implemented a new accounting rule that
requires costs related to start-up activities to be expensed as incurred.
Although this new accounting rule did not materially affect Edison
International's results of operations or financial position, EME wrote off $14
million in previously capitalized start-up costs in first quarter 1999.
In June 1998, a new accounting standard for derivative instruments and hedging
activities was issued. The new standard, which Edison International will be
required to implement on January 1, 2001, requires all derivatives to be
recognized on the balance sheet at fair value. Gains or losses from changes in
fair value would be recognized in earnings in the period of change unless the
derivative is designated as a hedging instrument. Gains or losses from hedges of
a forecasted transaction or foreign currency exposure would be reflected in
other comprehensive income. Gains or losses from hedges of a recognized asset or
liability or a firm commitment would be reflected in earnings for the
ineffective portion of the hedge. SCE anticipates that most of its derivatives
under the new standard would qualify for hedge accounting. SCE expects to
recover in rates any market price changes from its derivatives that could
potentially affect earnings. Edison International is studying the impact of the
new standard on its nonutility subsidiaries, and is unable to predict at this
time the impact on its financial statements.
21
Forward-looking Information
In the preceding Management's Discussion and Analysis of Results of Operations
and Financial Condition and elsewhere in this quarterly report, the words
estimates, expects, anticipates, believes, and other similar expressions are
intended to identify forward-looking information that involves risks and
uncertainties. Actual results or outcomes could differ materially as a result of
such important factors as further actions by state and federal regulatory bodies
setting rates and implementing the restructuring of the electric utility
industry; the effects, unfavorable interpretations and applications of new or
existing laws and regulations relating to restructuring, taxes and other
matters; the effects of increased competition in the electric utility business
and other energy-related businesses, including direct customer access to retail
energy suppliers and the unbundling of revenue cycle services such as metering
and billing; changes in prices of electricity and fuel costs; changes in
financial market conditions; risks of doing business in foreign countries, such
as political changes and currency devaluations; power plant construction and
operation risks; the ability to sell or retain electric generation assets; new
or increased environmental liabilities; the ability to create and expand new
businesses, such as telecommunications; and other unforeseen events.
22
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Edison International
Geothermal Generators' Litigation
Edison International, The Mission Group, and Mission Power Engineering Company,
have been named as defendants in a lawsuit more fully described under "Southern
California Edison Company - Geothermal Generators' Litigation below."
Southern California Edison Company
Geothermal Generators' Litigation
On June 9, 1997, SCE filed a complaint in Los Angeles County Superior Court
against an independent power producer of geothermal generation and six of its
affiliated entities (Coso parties). SCE alleges that in order to avoid power
production plant shutdowns caused by excessive noncondensable gas in the
geothermal field brine, the Coso parties routinely vented highly toxic hydrogen
sulfide gas from unmonitored release points beginning in 1990 and continuing
through at least 1994, in violation of applicable federal, state, and local
environmental law. According to SCE, these violations constituted material
breaches by the Coso parties of their obligations under their contracts with SCE
and applicable law. SCE seeks damages for excess power purchase payments made to
the Coso parties and other relief. The Coso parties' motion to transfer venue to
Inyo County Superior Court was granted on August 31, 1997.
The Coso parties filed a cross-complaint against SCE, The Mission Group, and
Mission Power Engineering Company (Mission parties), which contains claims for
breach of contract, unfair competition, interference with contract, defamation,
breach of an earlier settlement agreement between the Mission parties and the
Coso parties, and other claims. As against SCE, the cross-complaint seeks
restitution, compensatory damages in excess of $115 million, punitive damages in
an amount not less than $400 million, interest, attorney's fees, declaratory
relief, and injunctive relief. As against the Mission parties, the
cross-complaint seeks damages for breach of warranty of authority with respect
to the settlement agreement, and for equitable indemnity. Edison International
was named as a cross-defendant, allegedly as an alter ego of SCE and the Mission
parties. The Coso parties voluntarily dismissed the claims against Edison
International.
Three of the Coso parties also filed a separate action in the Inyo County
Superior Court against SCE and Edison International, alleging claims for unfair
competition, false advertising and for violations of Public Utilities Code ss.
2106, and seeking injunctive relief, restitution, and punitive damages. The
Court ordered this action consolidated with the SCE action.
Effective February 8, 2000, the parties entered into confidential agreements
resolving all claims in the consolidated action and calling for dismissals with
prejudice and releases. The settlement is subject to the approval of the CPUC.
On February 10, 2000, the Court approved a stipulation staying all proceedings
during the period required to obtain CPUC approval. On April 26, 2000, SCE filed
an application to obtain such approval. The settlement is not expected to have a
material financial effect on SCE.
23
Item 4. Submission of Matters to a Vote of Security Holders
Election of Directors
At Edison International's Annual Meeting of Shareholders on April 20, 2000,
shareholders elected thirteen nominees to the Board of Directors. The number of
broker non-votes for each nominee was zero. The number of votes cast for and
withheld from each Director-nominee were as follows:
Number of Votes
- --------------------------------------------------------------------------
Name For Withheld
- --------------------------------------------------------------------------
John E. Bryson 287,405,875 7,931,036
Warren Christopher 285,708,853 9,628,058
Stephen E. Frank 287,961,165 7,375,746
Joan C. Hanley 287,879,576 7,457,335
Carl F. Huntsinger 287,834,637 7,502,274
Charles D. Miller 287,629,657 7,707,254
Luis G. Nogales 287,881,852 7,455,059
Ronald L. Olson 286,492,801 8,884,110
James M. Rosser 287,976,247 7,360,664
Robert H. Smith 288,043,802 7,293,109
Thomas C. Sutton 288,107,808 7,229,103
Daniel M. Tellep 287,990,022 7,346,889
Edward Zapanta 287,889,918 7,446,993
24
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Restated Articles of Incorporation of Edison International dated May
7, 1998 (File No. 1-9936, Form 10-K for the year ended December 31,
1998)*
3.2 Certificate of Determination of Series A Junior participating
Cumulative Preferred Stock of Edison International dated November 21,
1996 (Form 8-A dated November 21, 1996)*
3.3 Amended Bylaws of Edison International as adopted by the Board of
Directors on February 17, 2000 (File No. 1-9936, filed as Exhibit 3.3
to Form 10-K for the year ended December 31, 1999)*
10.1 Form of Agreement for 2000 Employee Awards under the Equity
Compensation Plan
10.2 Resolution regarding the computation of disability and survivor
benefits prior to age 55 for Alan J. Fohrer
10.3 Agreement among Edward R. Muller, Edison International and Edison
Mission Energy concerning the terms of Mr. Muller's employment
separation
11 Computation of Primary and Fully Diluted Earnings per Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
- ---------------------
* Incorporated by reference pursuant to Rule 12b-32.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDISON INTERNATIONAL
(Registrant)
By THOMAS M. NOONAN
------------------------------
THOMAS M. NOONAN
Vice President and Controller
By KENNETH S. STEWART
------------------------------
KENNETH S. STEWART
Assistant General Counsel and
Assistant Secretary
May 12, 2000