SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 20, 2001
SOUTHERN CALIFORNIA EDISON COMPANY
(Exact name of registrant as specified in its charter)
CALIFORNIA 001-2313 95-1240335
(State or principal jurisdiction of (Commission file (I.R.S. employer
incorporation or organization) number) identification no.)
2244 Walnut Grove Avenue
(P.O. Box 800)
Rosemead, California 91770
(Address of principal executive offices, including zip code)
626-302-1212
(Registrant's telephone number, including area code)
Items 1 through 4, 6, 8 and 9 are not included because they are inapplicable.
Item 5. Other Events
As previously reported, Southern California Edison Company (SCE), the electric
utility subsidiary of Edison International (EIX), has temporarily suspended the
payment of certain obligations. As of March 20, 2001, obligations of SCE in the
following approximate amounts are unpaid and overdue: (1) $580 million to the
California Power Exchange (PX) or the California Independent System Operator
(ISO) (which does not include an estimated $239 million for which no invoice has
been received from the PX); (2) $839.5 million to power producers that are
qualifying facilities (QFs); (3) an estimated $227.9 million of PX energy
credits for energy service providers; (4) $493.3 million of matured commercial
paper; (5) $220.4 million of principal and interest on other debt securities;
and (6) $14.9 million of other obligations. In addition, SCE has failed to
declare and pay $960,410 in preferred stock dividends when due. The amounts due
to the ISO or PX in clause (1) above do not include $275 million that has been
charged back to SCE as a result of defaults in payments by Pacific Gas and
Electric Company (PG&E). SCE has disputed its obligation for such amount in
proceedings before the Federal Energy Regulatory Commission (FERC). The amount
of unpaid interest in clause (5) above includes interest on SCE's first and
refunding mortgage bonds in the amount of $14.5 million on Series 93H Due 2004
and Series 93C Due 2026, which was due on March 1, 2001. On March 16, 2001, SCE
paid $8 million of interest on SCE's first mortgage bonds, Series 93G Due 2025,
which was due on January 16, 2001. Interest payments on SCE's first mortgage
bonds are subject to 60-day grace periods under the applicable indenture. If any
overdue interest installment is not paid within the 60-day grace period, the
trustee or holders of the bonds would be entitled to exercise the remedies
specified in the indenture against the properties of SCE designated as
collateral under the indenture. At March 20, 2001, SCE has estimated cash
reserves of approximately $1.91 billion, which is approximately $722 million
less than its outstanding unpaid obligations and preferred stock dividends in
arrears. Through April 30, 2001, SCE expects to have an aggregate of
approximately $428.6 million of additional obligations that will become due and
payable, including (1) approximately $100 million to the PX or ISO (excluding an
additional estimated amount of approximately $600 million for energy and
ancillary services procured for SCE's customers by the ISO, which SCE believes,
as discussed below, should be paid by the California Department of Water
Resources (CDWR) and recovered from SCE's customers through a mechanism to be
determined by the California Public Utilities Commission (CPUC)); (2)
approximately $231.4 million to QFs; (3) an estimated $2.9 million of PX energy
credits for energy service providers; (4) $37.4 million of maturing commercial
paper; (5) $27.8 million of interest on debt securities, and (6) $29.1 million
of interest on bank credit facility loans. In addition, SCE will accrue $4.7
million of additional unpaid preferred stock dividends. The amounts in this
paragraph representing past or future obligations for purchased power, PX energy
credits and certain other items include amounts that are in dispute, and the
publishing of these figures is not an admission by SCE of liability for any
disputed amounts.
2
On March 19, 2001, the board of directors of EIX decided not to declare the
quarterly common stock dividend that customarily would have been paid to its
shareholders on April 30, 2001. The EIX board previously decided not to declare
the quarterly common stock dividend that customarily would have been paid on
January 31, 2001. Dividends on EIX's common stock are not cumulative. On March
19, 2001, the board of directors of SCE decided not to declare the regular
quarterly dividend that would have been paid on April 30, 2001 to holders of
SCE's $100 Cumulative Preferred Stock, 7.23% Series ($100 par value). The SCE
board also decided to continue deferral of dividends on its preferred stock that
would have been paid on February 28 and March 31, 2001. Dividends on SCE's
preferred stock are cumulative and, so long as any accumulated preferred stock
dividends remain unpaid, SCE cannot declare or pay future cash dividends on any
series of preferred stock or on its common stock.
On March 21, 2001, a commissioner of the CPUC distributed a draft proposed
decision which, if adopted by the CPUC in the form proposed, would require SCE
and the other California investor-owned utility companies to pay QFs for energy
deliveries made on and after the date of the decision, within 15 days of
delivery, at the rate of $79 per megawatt hour, consistent with pricing formulas
in the decision. Failure to make a required payment within 15 days of delivery
would result in a fine in the amount owed to the QF. The proposed decision also
would require the utilities to offer QFs long-term pricing options at $79 per
megawatt hour for a five-year contract or $69 per megawatt hour for a ten-year
contract. The proposed decision is on the agenda for the Commission's meeting on
March 27, 2001. The release of the proposed decision followed public statements
by California Governor Gray Davis and the President of the CPUC that utilities
should be required to pay QFs for power deliveries. The prices in the proposed
decision would be lower than previously existing contract prices but would
exceed, on a per kilowatt hour basis, the generation-related portion of SCE's
current rates. The impact on SCE of this proposed decision, if adopted by the
CPUC, would depend on the outcome of other proceedings described in this report.
Neither EIX nor SCE can predict what action the CPUC will take on the proposed
decision.
As previously reported, the CDWR began making emergency power purchases for
customers of SCE in mid-January 2001. On January 31, 2001, the CPUC issued an
interim order in which it held that California's investor-owned electric utility
companies are financially responsible for any shortfall between the CDWR's costs
of procuring power for delivery to a utility's customers and the amount
collected by the utility from customers on behalf of the CDWR. On February 22,
2001, in response to a petition for modification filed by the utilities, the
CPUC modified the earlier interim order and deleted the portions that imposed
the obligation for shortfalls on the utilities. As a result, SCE believes it
will not have direct financial responsibility for such shortfalls incurred by
CDWR. However, as described below, purchases of power by the CDWR and the ISO
could have adverse financial impacts on SCE.
On March 7, 2001, the CPUC issued an interim order in which it held that the
CDWR's purchases are not subject to prudency review by the CPUC, and that the
CPUC must approve and impose, either as a part of existing rates or as
additional rates, rates sufficient to enable the CDWR to recover its revenue
requirements. The CPUC will determine an interim allocation of revenues in
future proceedings. SCE believes that under Assembly Bill 1 (First Extraordinary
3
Session) (AB1X), enacted into law on February 1, 2001, the allocation of
revenues to the CDWR should take place on a residual basis after the utility is
allocated sufficient revenues to pay its own generation costs and costs
attributable to bilateral and QF contracts and ancillary services. The CDWR, in
a letter to the CPUC which has been entered into the record of the applicable
proceeding, has asserted a different basis for allocation based on a ratio
between the CDWR's costs and the utilities' costs. Recently introduced
amendments to legislation pending in the California Legislature would enact into
law the CDWR's proposed basis for allocation. If the CPUC adopts or the
Legislature enacts a basis for allocation similar to that proposed by the CDWR,
SCE may be unable to fully recover its own costs of generating and purchasing
power for its customers. This would materially and adversely affect SCE's
financial condition and liquidity unless customer rates were increased
sufficiently by the CPUC.
SCE further believes that the intent of AB1X was for the CDWR to assume full
responsibility for purchasing all power needed to serve the retail customers of
electric utilities, in excess of the output of generating plants owned by the
electric utilities and power delivered to the utilities under existing
contracts. However, the CDWR has stated that it is only purchasing power that it
considers to be reasonably priced, leaving the ISO to purchase in the short-term
market the additional power necessary to meet system requirements. The ISO, in
turn, takes the position that it will charge SCE for the costs of power it
purchases in this manner. If SCE is found responsible for any portion of the
ISO's purchases of power for resale to SCE's customers, SCE will continue to
incur purchased power costs in addition to the unpaid costs described above. The
CPUC has declined to decide this issue. Litigation among certain power
generators, the ISO and the CDWR (to which SCE is not a party), and proceedings
before the FERC (to which SCE is a party), may result in rulings clarifying the
CDWR's financial responsibility for purchases of power; and in any event SCE
takes the position that SCE is not responsible for purchases of power by the
CDWR or the ISO from and after January 18, 2001, the day after Governor Davis
signed the order authorizing the CDWR to begin purchasing power for utility
customers. SCE cannot predict the outcome of any of these proceedings or issues.
On March 15, 2001, an assigned commissioner of the CPUC issued a ruling that
reopened the record in the above CPUC proceedings in order to include updated
financial information about current payables, including past-due items and cash
balances, as of March 8, 2001, for PG&E and SCE. The ruling also stated, "Based
on the updated financial information . . . and the assumption that each utility
continues to be responsible for power purchases to cover its net short position,
. . . all interested parties shall file comments by March 19, 2001 on the need
of PG&E and [SCE] for further financial relief on a going-forward basis." SCE is
seeking clarification of the meaning of the assigned commissioner's ruling. On
March 19, 2001, SCE filed a response to the ruling in which SCE stated that SCE
is not responsible for covering its "net short" position (i.e., the amount of
energy needed beyond that available from SCE's own generation sources and
existing contracts), and that for SCE to reassume such responsibility the CPUC
must make SCE creditworthy by ending the current rate freeze, authorizing SCE to
recover its past procurement costs, authorizing a substantial rate increase to
amortize past costs and cover going-forward costs, and adopting a mechanism to
increase rates in the event of future undercollection of power procurement
costs. SCE cannot predict the outcome of this proceeding.
4
As previously reported, SCE has implemented cost-cutting and cash conservation
measures, which include reducing employment levels, operating expenses and
capital expenditures. On March 15, 2001, the CPUC issued an order rescinding
SCE's layoffs to the extent that the positions terminated affect SCE's ability
to fully staff its customer call center, read meters on a monthly basis for all
customers, timely respond to service calls and outages, and connect new
customers. SCE was also ordered to restore specified service levels, make
regular reports to the CPUC concerning its cost-cutting measures, and track its
cost savings pending future adjustments to rates. While SCE expressed concern
that the CPUC's order would exacerbate SCE's current financial crisis, the
portion of the expected cost savings affected by the order is not material.
As previously reported, as of January 31, 2001, the amount of undercollections
in SCE's transition revenue account (TRA) was $5.465 billion (including
approximately $168 million of purchases of power by the ISO for which SCE
believes the CDWR is financially responsible as discussed above, and which,
therefore, was removed from the TRA in February 2001). If SCE is ultimately
found responsible for any portion of these purchases, the TRA undercollection
would increase accordingly. The TRA is a CPUC-authorized regulatory asset
account in which SCE records the difference between revenues received from
customers through currently frozen rates and the costs of providing service to
customers, including power procurement costs. As of January 31, 2001, SCE had
overcollected balances of $82 million in its transition cost balancing account
(TCBA), representing recovery of stranded costs net of a previously recorded
credit for market valuation of hydroelectric generating assets, and $1.671
billion in its balancing accounts relating to coal and hydroelectric generating
assets. The CPUC is considering proposals to reduce the amount of the
undercollected TRA balance that could be recovered by SCE by offsetting against
such amount the balances in the TCBA and the coal and hydroelectric balancing
accounts, which would reduce SCE's net undercollected TRA balance as of January
31, 2001 to approximately $3.7 billion (excluding any additional amount of power
purchases by the CDWR or ISO for which SCE might be held responsible). Without
further resolution of the issues in the CPUC proceedings described above, SCE is
unable to determine the amount of the TRA undercollections as of dates after
January 31, 2001.
The accounting treatment of SCE's TRA undercollections is an important element
of the financial results of EIX and SCE. The undercollections can be recorded as
a regulatory asset on the balance sheet rather than being charged against
earnings if it is probable that the undercollections will be recovered through
the ratemaking process, as provided in Statement of Financial Accounting
Standards No. 71 (FAS 71), "Accounting for the Effects of Certain Types of
Regulation." "Probable" in FAS 71 means that a future event is likely to occur
and is a higher level of certainty than "reasonably possible." If it is
determined that all or a portion of the existing TRA undercollections are not
probable of recovery through regulatory proceedings and mechanisms, the
undercollections or a portion thereof must be charged against earnings.
Thereafter, any further undercollections that are not probable of recovery under
FAS 71 also would be charged against earnings. Under FAS 71, if a rate mechanism
were subsequently established that made recovery probable as to all or a portion
of the TRA undercollection that was previously charged against earnings, the
regulatory asset would be correspondingly reinstated with a corresponding
increase in earnings. At the time that EIX and SCE must release
5
their financial results for the fourth quarter and year-end 2000, if they cannot
conclude that the status of regulatory proceedings at the CPUC and any other
developments that impact ratemaking processes and rates (including any
agreements with Governor Davis and his representatives or legislative
enactments) are such that recovery of all the TRA undercollection through rates
is probable, EIX's and SCE's financial statements for the fourth quarter and
year-end 2000 would show a substantial charge to earnings. The amount of the
charge, if any, cannot be estimated at this time due to the uncertainties
discussed above, but on an after-tax basis the amount could be as much as $2.7
billion (reflecting a charge of the entire TRA undercollection of $4.5 billion
as of December 31, 2000, on an after-tax basis). Some or all of the charge could
later be reversed, as described above, depending on the outcome of the matters
discussed in this report. Substantial earnings charges would materially and
adversely affect SCE's and EIX's ability to pay dividends and to restore their
creditworthiness.
On February 23, 2001, Governor Davis announced an "agreement in principle" with
SCE to keep the utility solvent. He said that the State of California has agreed
to purchase SCE's transmission lines for an estimated price of $2.76 billion
(2.3 times book value) and to allow SCE to issue bonds for a substantial portion
of its TRA undercollection. He said that in exchange the agreement would include
(1) payment of $420 million from EIX to SCE (which EIX and SCE understand would
represent payments in accordance with existing tax sharing agreements); (2)
commitment of the entire output of the Sunrise project (being developed by EIX's
subsidiary Edison Mission Energy) at "cost-based" rates for 10 years; (3)
provision of power at cost-based rates from generating facilities owned by SCE
for 10 years; (4) conservation easements on 20,000 acres of SCE's watershed
lands for 99 years; and (5) SCE dropping its pending litigation against the CPUC
(which is described below). Governor Davis also said on February 23rd that he
hoped within a week to be able to represent that he has a final deal with SCE.
EIX and SCE acknowledged that a preliminary agreement had been reached. No
definitive agreements have been reached, nor has any memorandum of
understanding, letter of intent or other memorializing document been entered
into. There are a significant number of open issues and items that need to be
clarified and elaborated. Neither EIX nor SCE can predict whether any final
agreement will be reached or memorializing document executed or, if an agreement
is reached, whether it will be implemented through any necessary action by the
California Legislature and the CPUC.
As previously reported, SCE is pursuing a lawsuit against the CPUC commissioners
in federal district court in Los Angeles seeking a ruling that SCE is entitled
to full recovery of its costs for wholesale purchases of electricity. On March
5, 2001, the court directed the parties to complete pretrial discovery by May
21, file summary judgment motions by May 25, and be prepared for trial on July
31, 2001. On March 16, 2001, the magistrate judge in this case ordered the CPUC
to provide documents to SCE by April 6, 2001 in response to document discovery
requests by SCE and set a hearing for April 19, 2001 to resolve any disputes
relating to that document production. In his announcement of a preliminary
agreement, described above, Governor Davis stated that SCE will dismiss the
lawsuit in return for implementation of a final agreement. While SCE will
continue to cooperate with the Governor's effort, SCE also intends to pursue the
lawsuit pending satisfactory resolution with the State of California. Neither
SCE nor EIX can
6
predict whether or when a favorable final judgment or other resolution might be
obtained in this legal action.
As previously reported, the agenda for the CPUC's February 8, 2001 meeting
included a proposed order instituting an investigation whether California's
investor-owned utilities, including SCE, have complied with past CPUC decisions
authorizing the formation of their holding companies and governing affiliate
transactions, as well as applicable statutes. Action on this agenda item
repeatedly has been deferred and the item has continued to appear on the agendas
for subsequent CPUC meetings. On March 15, 2001, the CPUC released a draft of
the proposed order instituting an investigation. The proposed order would reopen
the past holding company decisions and initiate an investigation into (1)
whether the holding companies violated requirements to give priority to the
capital needs of their respective utility subsidiaries; (2) whether "ring
fencing" actions by EIX and PG&E Corporation and their respective nonutility
affiliates also violated the requirements to give priority to the capital needs
of their utility subsidiaries; (3) whether the payment of dividends by the
utilities violated requirements that the utilities maintain dividend policies as
though they were comparable stand-alone utility companies; (4) any additional
suspected violations of laws or CPUC rules and decisions; and (5) whether
additional rules, conditions, or other changes to the holding company decisions
are necessary. The proposed order is currently on the agenda for the CPUC's
meeting on March 27, 2001. Neither EIX nor SCE can predict whether the CPUC will
institute this investigation or what effects any investigation or any subsequent
actions by the CPUC may have on either of them.
On February 20, 2001, a group of geothermal energy suppliers affiliated with
CalEnergy Operating Company filed a lawsuit against SCE in the superior court of
Imperial County, California. The lawsuit asks the court to order immediate
payment by SCE of $45 million for energy and capacity supplied under QF
contracts in November and December 2000, and to allow the plaintiffs to stop
providing power to SCE and sell the power elsewhere in California.
On March 2, 2001, two geothermal energy suppliers filed a lawsuit against SCE in
federal district court in Nevada seeking payment of more than $20 million for
energy and capacity delivered to SCE under QF contracts during November and
December 2000 and January 2001. The suppliers sought a writ of attachment
against SCE's interest in the Mohave Generating Station for the amount of their
claim. On March 14, 2001, the court issued an order granting a prejudgment
attachment, subject to the suppliers posting surety in the amount of the
attachment unless the parties otherwise agree. SCE believes that the court erred
in applying Nevada law rather than California law, as specified in the QF
contracts; and SCE is reviewing avenues for appealing or seeking reconsideration
of the court's order granting the attachment.
On March 5, 2001, a group of wind energy suppliers filed a lawsuit against SCE
in the superior court of Los Angeles County, California seeking payment of
"several million dollars" for energy and capacity delivered to SCE under QF
contracts during November and December 2000 and January 2001. The suppliers have
filed a motion for a writ of attachment against unspecified assets of SCE, and a
hearing on the motion is scheduled for March 28, 2001.
7
On March 15, 2001, a purported class action lawsuit was filed in federal
district court in Los Angeles, California against EIX and SCE and certain of
their officers. The complaint alleges that the defendants engaged in securities
fraud by misrepresenting and/or failing to disclose material facts concerning
the financial condition of EIX and SCE, including that the defendants allegedly
overreported income and improperly accounted for the TRA undercollections. The
complaint purports to be filed on behalf of a class of person who purchased all
publicly-traded securities of EIX between May 12, 2000 and December 22, 2000.
As previously reported, SCE's failure to make certain payments on its
outstanding notes and commercial paper constitutes an event of default under
both SCE's and EIX's credit facilities, even though both SCE and EIX are not in
arrears on any payments to the bank lenders under those facilities. The bank
lenders agreed to forbear until March 14, 2001, subject to certain conditions,
from exercising remedies, including acceleration of borrowed amounts, against
SCE or EIX with respect to this and certain other related events which may be
considered events of default under the credit facilities. EIX and SCE have each
initiated discussions with their bank lenders about an extension of the
forbearance period. Neither SCE nor EIX can provide any assurance that the
forbearance agreements will be further extended or that the bank lenders will
not declare the outstanding loans under the credit facilities to be immediately
due and payable or pursue other remedies against SCE or EIX.
In the preceding discussion and elsewhere in this report, the words "expects,"
"believes," "anticipates," "projects," "forecasts," "intends," "predicts,"
"probable," 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 legislative enactments; the outcome of judicial proceedings regarding
recovery of costs and other matters; the outcome of state and federal regulatory
proceedings concerning wholesale and retail electric rates, accounting
mechanisms and other matters; the actions of securities rating agencies; changes
in prices of electricity and fuel costs; the availability of credit; changes in
financial market conditions; weather conditions; and other unforeseen events,
some of which are discussed above.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Not applicable
(b) Not applicable
(c) Not applicable
8
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.
SOUTHERN CALIFORNIA EDISON COMPANY
(Registrant)
KENNETH S. STEWART
---------------------------------------------
KENNETH S. STEWART
Assistant General Counsel and Assistant Secretary
March 22, 2001