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): January 15, 2001
EDISON INTERNATIONAL
(Exact name of registrant as specified in its charter)
CALIFORNIA 001-9936 95-4137452
(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)
626-302-2222
(Registrant's telephone number, including area code)
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Items 1 through 4, 6, 8 and 9 are not included because they are inapplicable.
Item 5. Other Events
Edison International (EIX) and Southern California Edison Company (SCE), have
previously disclosed material adverse impacts from unusually high prices for
energy and ancillary services procured through the California Power Exchange
(PX) and the California Independent System Operator (ISO). The high wholesale
prices, coupled with the current freeze on SCE's retail rates, have resulted in
substantial increases in the amount of undercollections in SCE's transition
revenue account (TRA). The TRA is a regulatory asset account in which SCE
records the difference between revenues received from customers through the
currently frozen rates and the costs of providing service to customers,
including power procurement costs. The amount of undercollections recorded in
SCE's TRA was $4.5 billion as of December 31, 2000, and is continuing to
increase.
The undercollections and the concerns of lenders and others that SCE may not
obtain regulatory approval of rate increases sufficient to cover ongoing
procurement costs and recover past costs have materially and adversely affected
SCE's liquidity. SCE's revenues provide substantially less cash flow than is
needed for power purchases and other ongoing costs. SCE and EIX have no unused
borrowing capacity under their existing credit facilities and have been unable
to arrange any additional facilities. In addition, EIX and SCE currently are
unable to issue commercial paper or otherwise access the capital markets on
reasonable terms.
As of January 15, 2001, SCE's cash reserves totaled approximately $1.196
billion. However, SCE's current cash flow forecast, assuming all payments are
made when due, projects that SCE will run out of cash on February 2, 2001. SCE's
substantial payments coming due in the near future include a payment to the PX
of about $215 million due on January 16, 2001, payments to qualifying facilities
(QFs) aggregating approximately $529 million due through January 31, 2001
(including payments due on or after January 2, 2001 that have not been paid), a
scheduled principal and interest payment of $230 million on maturing 5-7/8%
senior unsecured notes due on January 16, 2001, and payments for maturing
commercial paper aggregating $255 million through January 31, 2001. SCE's total
expenses accrued for energy delivered by, and not yet paid for at, January 15,
2001 (including payables to the PX and QFs listed above) are estimated to be
$697 million to QFs, $359 million to the PX forward market, $461 million to the
PX/ISO real-time market, $4 million to interutility transactions, and $24
million to bilateral contracts, for a total accrued energy payable of $1.543
billion as of January 15, 2001. Due to significant lag time between the delivery
of energy, determination of actual usage and final billing, actual expenses
through January 15, 2001 cannot be determined at this time. These estimates are
generally based on accepted criteria for accruing liabilities for accounting
purposes, however they include only the current portion of contracts with fixed
payment schedules and do not include certain contingent liabilities or the
possibility of acceleration of any obligations. The above figures include
certain amounts that are in dispute, and the publishing of these figures is not
an admission by SCE of liability for any disputed amounts.
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As a result of this liquidity crisis, SCE has taken steps to conserve cash, and
has been forced to consider further alternatives for conserving cash, so that it
can continue to provide service to its customers. As part of this process, SCE
has temporarily suspended payment of $230 million of principal and interest due
on the 5-7/8% series of notes on January 16, 2001, $215 million due to the PX on
January 16, 2001, $151 million due to QFs through January 16, 2001, and certain
other obligations. Failure to pay when due the principal amount of the series of
notes constitutes a default on the series, entitling those noteholders to
exercise their remedies, and also constitutes an event of default under SCE's
and EIX's credit facilities, entitling those lenders to exercise their remedies.
If not cured or waived within specified time periods, such defaults may also
trigger a default on all outstanding series of SCE's senior unsecured notes and
subordinated debentures. Failure to make the payment to the PX constitutes a
default under the PX's tariffs, entitling the PX to foreclose on collateral and
exercise other remedies in accordance with the tariffs. As described below,
governmental officials, power generators and utility companies have been
involved in discussions of solutions to the current energy crisis that could
include a period of forbearance on payments to the PX for power previously sold.
If such a forbearance period is not agreed to and implemented, SCE cannot
predict what actions the PX or the power generators may take.
SCE is attempting to avoid bankruptcy. Subject to the outcome of regulatory and
legal proceedings and negotiations regarding purchased power costs, SCE intends
to pay all of its obligations once a permanent solution to the current energy
and liquidity crisis has been reached. However, the crisis requires a regulatory
solution, which is not likely to occur immediately. SCE's current actions are
intended to allow SCE to continue to operate while efforts to reach a regulatory
solution, involving both state and federal authorities, are underway. It is
possible that SCE could be forced into bankruptcy proceedings. If this were to
occur, payments to trade vendors, suppliers and creditors would be subject to
significant delays associated with the lengthy bankruptcy court process.
SCE is working aggressively to cut costs and conserve cash until a permanent
solution can be developed. SCE has begun immediate cost cutting measures which,
together with previously announced measures, are aimed at reducing general
operating costs by $465 million annually. The plans will impact about 1,450 to
1,850 jobs, require lower service levels for customers, and reduce near-term
capital expenditures to levels that will not sustain operations in the long
term.
In view of the uncertainties discussed in this report, EIX and SCE plan to
postpone release of their financial results for the fourth quarter and year-end
2000, pending further developments in federal and state regulatory proceedings,
judicial proceedings, legislative enactments, and other efforts to resolve the
current energy crisis. Those developments could materially affect SCE's and
EIX's financial results for the fourth quarter and the year ended December 31,
2000.
As previously reported, SCE filed a rate stabilization plan with the California
Public Utilities Commission (CPUC) seeking an immediate 30% rate increase and
other relief. On January 4, 2001, the CPUC issued an interim decision on SCE's
rate stabilization plan and authorized SCE to establish an interim surcharge of
one cent per kilowatt-hour for 90 days, subject to refund. The revenues from the
surcharge are to be tracked through a balancing account and applied to
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ongoing procurement costs. The surcharge is expected to result in rate increases
of approximately 9% for residential customers, 7% for small business customers,
12% for medium commercial customers, and 15% for large commercial customers. The
CPUC noted that the 90-day period will allow the independent auditors engaged by
the CPUC to perform a comprehensive review of SCE's financial position, as well
as that of EIX and other affiliates. The decision states that the CPUC is
considering modifying the transition cost recovery accounting mechanisms by
requiring SCE to credit the year-end excess revenues accrued in its generation
memorandum accounts to the TRA rather than to the Transition Cost Balancing
Account (TCBA); and SCE was ordered to reverse accounting entries to the extent
that SCE has credited the net amounts in the generation memorandum accounts as
of December 31, 2000 to the TCBA, pending later action by the CPUC. The CPUC
stated that in the next phase of the proceedings it will address such issues as,
among others, (1) the proposal by The Utility Reform Network (TURN) to net the
TRA and TCBA; (2) the necessary ratemaking to ensure that power produced from
retained generation assets is dedicated to serve SCE's customers; (3) SCE's
cost-cutting efforts; (4) SCE's efforts to pursue remedies at the FERC or courts
reviewing the FERC, and lawsuits against generators or marketers of electricity
and natural gas; (5) whether and how holding company assets or guarantees should
be applied to utility power procurement requirements; (6) conservation and rate
design issues; (7) condemnation efforts to ensure generation availability; and
(10) mechanisms and options to securitize existing liabilities. The CPUC held a
prehearing conference on January 10, 2001, to begin to consider the issues and
to establish a timetable to consider the reports of the independent auditors.
The CPUC's schedule for the proceeding likely will lead to a decision in late
April 2001 on a limited number of the issues described above.
The CPUC's interim decision, standing alone, provides no real relief for SCE
given current market prices and the failure of the CPUC to confirm that SCE's
power procurement costs must be recovered from customers. The rate increase will
increase SCE's revenues by only about $65 million per month for three months.
The accounting changes being considered by the CPUC for the generation
memorandum accounts also would adversely affect SCE's recovery of transition
costs recorded in the TCBA. SCE does not believe that the currently scheduled
phase of the proceeding is likely to result in meaningful relief from the
current situation.
Following the CPUC decision on January 4, Fitch lowered its credit ratings for
SCE's and EIX's debt securities to "a deeply speculative grade," stating that
the newly-authorized rate increase "is wholly insufficient to reverse the cash
drain that could lead to default. To remain solvent, the utilities require the
ability to recover future power procurement costs, or wholesale power market
prices must decline to levels within retail rates. Lenders are unlikely to
advance funds without these assurances." Moody's Investors Service reduced its
ratings on SCE's and EIX's debt securities to the lowest investment grade
levels, while Standard & Poor's Corporation reduced its ratings on SCE's debt
securities to the lowest investment grade levels, its rating on EIX's senior
unsecured debt securities to the highest speculative grade (BB+) and its
short-term debt rating for EIX to the lowest investment grade (A-3). Both rating
agencies have kept the ratings subject to continuing review for possible further
downgrades. Neither Edison International nor SCE can provide any assurance as to
what further actions may be taken by the rating agencies. The
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lowered credit ratings do not constitute an event of default under any of SCE's
or EIX's debt instruments, but may have other consequences as discussed below.
Under the existing PX and ISO tariffs, SCE must maintain specified credit
ratings or provide the PX and ISO with collateral, such as a letter of credit,
cash, surety bond or guarantee. After the recent downgrades by Moody's and
Standard & Poor's, SCE no longer meets the existing credit requirements. The PX
and ISO have filed amendments with the Federal Energy Regulatory Commission
(FERC) to revise the credit requirements in their tariffs so that collateral is
not required as long as SCE maintains at least an investment grade credit
rating. The PX and ISO requested that the tariff amendments be made effective
from before the time SCE's ratings were downgraded, and they have conducted
business with SCE in accordance with the proposed revised tariffs. If SCE is
downgraded further by Moody's and Standard & Poor's to below investment grade,
SCE would be required under the revised tariffs to provide collateral. SCE does
not expect that it will be able to satisfy the collateral requirements of the PX
or ISO if it is downgraded below investment grade. Failure to post collateral
may result in SCE being precluded from conducting transactions with the PX and
ISO. The PX and ISO also would be entitled to exercise any other remedies
available to them under the tariffs.
To isolate Edison Mission Energy (EME), a wholly-owned indirect subsidiary of
EIX, from the credit downgrade of EIX and SCE, and to facilitate EME and its
subsidiaries maintaining their respective investment grade ratings, and thereby
to help preserve the value of EME, EME has taken steps to adopt so-called "ring
fencing" provisions in the form of amendments to its articles of incorporation
and bylaws. These provisions require the unanimous approval of EME's board of
directors, including at least one independent director, before EME can (a)
consolidate or merge with any entity or transfer substantially all of its assets
to any entity, except to an entity that is subject to similar restrictions; (b)
institute or consent to bankruptcy, insolvency or similar proceedings or
actions; or (c) declare or pay dividends or distributions unless (i) EME then
has an investment grade rating and receives rating agency confirmation that the
dividend or distribution will not result in a downgrade or (ii) such dividends
do not exceed $32.5 million in any fiscal quarter and EME then meets an interest
coverage ratio of not less than 2.2 to 1 for the immediately preceding four
fiscal quarters. EME currently meets this interest coverage ratio.
As previously reported, on December 26, 2000, SCE filed an emergency petition in
the federal court of appeals in Washington, D.C. challenging an order of the
FERC and seeking a writ of mandamus requiring the FERC to immediately establish
cost-based wholesale rates. On January 5, 2001, the court denied SCE's petition.
The effect of the denial is to leave in place the FERC's market controls that
have allowed wholesale prices to climb to current levels. SCE has pending before
the FERC a petition for rehearing of the FERC order. SCE cannot predict what
action the FERC may take. SCE is considering the possibility of judicial appeals
and other actions.
As previously reported, SCE has filed a lawsuit against the CPUC in federal
district court in California seeking a ruling that SCE is entitled to full
recovery of its costs for wholesale purchases of electricity in accordance with
tariffs filed with the FERC. On January 8, 2001, in a ruling from the bench
(with a written order expected to follow by the end of January), the court
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denied the CPUC's motion to dismiss the action. Although the court also denied
SCE's motion for summary judgment without prejudice, the court found that SCE is
not estopped from challenging the applicable CPUC decisions and that the
"filed-rate doctrine" relied upon by SCE seems to apply to the case and, thus,
supports SCE's central claim of the right to recover its prudently incurred
costs of purchasing power for customers. The court found that there is an issue
of fact as to whether there are or were alternative markets from which SCE could
procure less costly power. The case will proceed regarding that issue. SCE
believes its power purchases should be found prudent. Neither SCE nor EIX can
predict whether or when a favorable final judgment might be obtained in this
legal action.
During the week of January 8, federal and California officials met with power
generators, marketers, utilities and other interested parties in Washington,
D.C. to discuss the California electricity situation. According to a press
release from the United States Department of the Treasury on January 10, 2001,
the participants agreed on the need for cooperation to maintain stability and
avoid bankruptcy of California utilities, and assure the long-term regularity of
market conditions. The press release stated that crucial elements of a solution
include: (1) the development of approaches to promote long-term purchases of
electricity, possibly by the State, from generators at an attractive fixed rate;
(2) the willingness of generators, qualifying facilities, and marketers to
provide on a short-term basis forbearance of amounts owed by SCE and Pacific Gas
and Electric Company in the context of the framework of a comprehensive
long-term solution; (3) the need to find satisfactory approaches with respect to
the obligation accumulation of the utilities for the purchase of power,
consistent with contractual obligations, and which are in the public interest;
(4) cooperation to better match supply and demand in the short and long term;
and (5) review of the existing qualifying facilities payment structures.
Discussions are continuing among various of the parties, including proposals for
an agency of the State of California to purchase power and resell it to the
electric utility companies. Various legislative proposals are being considered
in a special session of the California Legislature. SCE and EIX cannot predict
any outcomes of the discussions or legislative proposals.
As previously reported, the United States Secretary of Energy issued and later
extended an order under the Federal Power Act requiring power companies to make
arrangements to generate and deliver electricity as requested by the ISO after
the ISO certifies that it has been unable to acquire adequate supplies of
electricity in the market. The order has been further extended, but only to
January 17, 2001. SCE cannot predict what effect the expiration of the order
after January 17, 2001 will have on its ability to procure power for its
customers.
In the preceding discussion and elsewhere in this report, the words "expects,"
"believes," "anticipates," "projects," "forecasts," "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 further actions by state and
federal regulatory bodies setting rates, adopting or modifying cost recovery,
accounting or rate setting mechanisms, and implementing the restructuring of the
electric utility industry; the effects, unfavorable interpretations and
implementations of new or existing laws and regulations relating to
restructuring, taxes and other matters; the actions of securities rating
agencies; changes in prices of electricity and fuel costs; the availability of
credit; changes in financial
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market conditions; the effects of increased competition in the electric utility
business and other energy-related businesses; the amount of revenue available to
recover both transition and non-transition costs; the ability to sell or retain
electric generation assets; the ultimate selling price of those plants that are
sold; new or increased environmental liabilities; the ability to create and
expand new businesses such as telecommunications; 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
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)
KENNETH S. STEWART
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KENNETH S. STEWART
Assistant General Counsel and Assistant Secretary
January 16, 2001
