Los Angeles Business Journal
Don’t look now, but Edison International, the utility holding company that was nearly bankrupt a little over one year ago, is considering reinstating its dividend.
Edison suspended its dividend in late 2000, as it fought for survival during the state energy crisis. At the time, it was paying out at an annual rate of $1.12 per share.
But the turnaround has been lightning fast at the Rosemead-based parent of Southern California Edison, largely due to a controversial surcharge the utility has been allowed to assess its customers. Edison‘s battle with consumer groups isn’t over, and a case pending before the California Supreme Court could upset its plans to resume the dividend by the end of this year.
Under the deregulation plan that Edison and other large California utilities initially supported, power costs soared during 2000 and 2001, straining utility balance sheets. Edison‘s Northern California counterpart, PG&E Corp., filed for bankruptcy protection.
In an October 2001 settlement with the state Public Utilities Commission, Edison was allowed to institute a surcharge to recover $3.6 billion that the state spent buying power for Edison‘s customers during the crisis. Edison said recently it expects to pay off the remaining $574 million by mid-year. It has filed a request with the PUC to eliminate the surcharges after that.
Repaying the procurement debt would satisfy what Chairman and Chief Executive John Bryson has called the “principal precondition” to resumption of a dividend. Edison‘s goal, he said in November, is to re-launch its dividend by the end of 2003.
“We believe restoring the dividend is important to obtaining access to equity markets and investment-grade status as well as access to debt markets,” he said.
Legal challenge
Before resuming the dividend, Edison has a legal hurdle to overcome as well.
The Utility Reform Network (TURN), a San Francisco-based consumer group, filed suit in federal court last year, seeking to undo the settlement agreement that allowed Edison to level the surcharges in the first place.
TURN maintains that California’s deregulation laws allow Edison to charge customers only for ongoing power-generation costs — not to pay back debts the utility incurred buying high-cost power during the crisis.
“It’s an outrage that Edison is considering reinstating dividend payments while ratepayers are left holding the bag for $3 billion in deregulation debts,” said Carmen Balber of the Foundation for Taxpayer and Consumer Rights, a Santa Monica-based consumer group.
In the transition to a deregulated market, Edison and other utilities were allowed to set rates higher than their costs would have allowed under previous pricing formulas.
From 1998 to early 2000, Edison‘s utility unit pocketed an extra $10 billion in “competition transition charges” to ratepayers, according to TURN.
Once power costs skyrocketed, the utility found itself short of funds, precipitating the bailout.
Going to high court
In September, the Ninth Circuit Court of Appeals gave the activists a partial victory, ruling that the Edison–PUC settlement “appeared” to be prohibited under California law. In November, the California State Supreme Court agreed to take the case. (Briefs are scheduled for March.)
In recent months, value investors have been buying Edison‘s stock, some with resumption of the dividend in mind. Edison‘s share price had risen to $12.78 last week, from a recent low of $8 on Oct. 17.
Martha Ortiz, a principal with the Philadelphia investment firm of Aronson + Johnson + Ortiz, said the potential for a dividend didn’t play into the firm’s decision to buy more than 2.8 million Edison shares about six months ago.
“We currently like the stock based on the ratios: price to book, price to forecast earnings, price to sales.”
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Financial Editor Anthony Palazzo can be reached at 323-549-5225, ext. 224, or at [email protected]
