A few months back, Rosemead-based Edison International’s prospects looked bright.
The company was on a buying spree of power plants around the world, and the stock price rose, flirting with $30 a share going into February. But now, Edison International’s future has dimmed. The stock has been nearly halved, trading last week between $16 and $18. Its debt is under review by Moody’s Investors Service.
Suddenly, the buying spree looks like a binge gone awry. Several disappointing announcements from the company about lower earnings and other disappointments have raised concerns among investors about some of the company’s acquisitions and the prices that Edison paid for them.
The biggest blow came in England, where Edison last year bought two power plants for $2 billion. The British government enacted deregulation measures several years sooner than Edison had anticipated, with a resulting sharp cutback in the profitability of the two plants. Instead of earning a projected $105 million to $185 million annually for the next three years, Edison now expects the plants to generate only about $15 million to $55 million in profit.
Further, the company now says it has “experienced some higher-than-anticipated start-up costs” with Midwest Generation, which operates 12 U.S. plants. Edison Mission bought the facilities from Commonwealth Edison last year for nearly $5 billion.
Setback in Indonesia
And then there is Edison’s 40 percent stake in an Indonesian power plant called Paiton, which was recently constructed at a cost of $2.5 billion. Although the power plant was completed by mid-1999, it hasn’t yet started generating any revenue because of a dispute with the Indonesian government.
In early March, Edison and the Indonesian government reached an interim agreement that the facility will provide energy at prices below what Edison originally anticipated. Both sides have agreed to drop their lawsuits against each other for now. The agreement holds until the end of the year and the two sides are working on a permanent deal.
A source of many of the recent woes is the same division that held so much promise not long ago, Edison Mission Energy. Edward Muller, its president and CEO since 1994, departed abruptly in January, shortly before the bad news was announced.
He was replaced by Alan J. Fohrer, who was chief financial officer of Edison International. Fohrer declined to comment.
When reached at his home in Santa Monica, Muller said, “Was my departure related to the recent announcement about earnings? The answer is unequivocally no.”
Muller said confidentiality reasons preclude him from speaking about the exact reason for his departure, but he hopes to do so in a few months.
Muller departed with a $35 million payment for phantom stock he held in Edison Mission. That was part of $75 million in charges that Edison took to clear its books of that form of executive incentive compensation $67.5 million to Edison Mission executives and $7.5 million to Edison Capital executives. The company announced it was taking the charge at the same time it announced Miller’s departure.
Neither event rattled Wall Street at the time, as Edison International stock hit its peak in late January.
But since then, the Street has definitely soured on Edison. Out of 18 analysts tracked by Zack’s Investment Research, nine ranked Edison as a “hold,” up from six a month ago. Only three call it a “strong buy” while six said it’s a “moderate buy.”
Out of 101 utilities ranked by analysts on Yahoo, Edison was ranked No. 55, an unusual position for the traditionally well-regarded utility.
A.J. Sabatelle, vice president and senior credit officer of corporate finance for Moody’s, said he plans to meet soon with Edison International executives to discuss a possible downgrading of about $4 billion of Edison International’s $13 billion in long-term debt. These involve the long-term security ratings of Edison International’s senior unsecured debt, currently rated A2, and Edison Mission’s senior unsecured debt, which is rated A3. The debt of Southern California Edison and Edison Capital are not under review.
Double whammy
It has been an industry-wide practice to finance power-plant purchases using “double leverage” debt issued by both the holding and the operating subsidiary. For aggressive Edison, this is now a double whammy.
“Ultimately, they have much more debt that they have to service in some shape or form. The problem the company faces is that its stock price is where it is, and it’s difficult to issue new equity when it’s weak,” Sabatelle said.
Edison’s debt increased 64 percent last year, to $13.3 billion. Its short-term debt jumped five-fold, to $2.6 billion. Nonetheless, some observers think Edison might now be under-valued.
“I think it’s an overreaction,” said Paul Patterson, an analyst with Credit Suisse First Boston. “The market had thought very highly of Edison International’s management. It’s really one of the blue chips. They were trading at a premium. Essentially, with this (stock downturn) they’re trading at a discount.”
Edison executives have been spending the past two weeks trying to convince skeptical analysts that the company is still a good bet. It announced a 3.7 percent increase in the annual dividend. Edison International also said it would step up the pace of a $350 million stock buyback program.
It’s also looking at ways to cut costs at the non-utility operations, but spokeswoman Diane Whittenberg said, “We haven’t worked out the specifics yet.”
Edison’s management is on record as remaining committed to achieving a 12 percent annual compound growth rate in the 1999-2003 period. But the company acknowledges that would require some additional growth from future investment opportunities.
Sabatelle said Edison International is “still a solid company with good financial fundamentals.”
But one analyst said, “From an investor’s perspective, it’s unstable. People need more certainty. There are a lot of other stocks to pick from.”
