The board of Commonwealth Edison meets this week to consider whether to fire employees, delay billions of dollars in capital spending, or, almost unthinkably, trim its redoubtable stock dividend.
Strong medicine is needed, said Edison Chairman James J. O`Connor, to stanch ”a drastic deterioration in our financial condition.”
”Officers of the company have been meeting on a regular basis to consider a wide range of options that might be taken to manage the crisis we face,” O`Connor said in a recent memo to employees. ”No final decisions have been made.”
Board members said they see the situation as serious but have not been briefed on possible responses. The board has a regularly scheduled meeting Wednesday.
”You hate to see employed people become unemployed, but from time to time this becomes necessary in any business,” said James W. Compton, president of the Chicago Urban League and an Edison board member. ”We haven`t been given particulars.”
”I`ve never seen anything as complex and difficult as what I see happening at Commonwealth Edison,” said George E. Johnson, retired chairman of Johnson Products Co. and Edison`s senior director, having served since 1971. ”It`s more serious now than at any time since I`ve been on the board.” Edison`s immediate crisis comes after two decisions about its rates-both related to the company`s efforts to get ratepayers, rather than shareholders, to pay the cost of building its last three nuclear plants. The company spent $7.1 billion on its Byron 2 and Braidwood 1 and 2 plants and has been trying to recover the money since the mid-1980s.
First, the Illinois Supreme Court Dec. 16 reversed a rate order granting the company a phased-in 14 percent increase, allowing only the first phase of 9 percent. It was the second time the high court had reversed the Illinois Commerce Commission on this issue.
Second, on June 23 the ICC set a new ground rule for recommending an increase to replace the 14 percent hike. The commission must decide how much electricity generated by the three plants is ”used and useful” and how much is excess. Edison is allowed a rate increase only for the used and useful portion.
The state commission said that for the first time it would use as a measuring device a reserve margin of power, and set the margin at 20 percent. In other words, Edison can claim a reserve of 20 percent as ”used and useful.” The commission is due to make a fresh recommendation in January.
Edison complains the 20 percent is miserly. Illinois Power Co., for example, was allowed a 27 percent reserve.
This may seem an esoteric argument. But the announcement June 23 cost Edison stockholders $600 million in value, as the stock dropped $2.75, to close at $28.62. It traded at more than $42 a share in December.
Traders figured the announcement could mean any of several things: Edison would not get a satisfactory rate increase; it might lose part of the 9 percent increase the court let stand; or it may be forced to cut its $3-a-share annual dividend.
The generous and reliable dividend has made the company`s stock a prized component of conservative portfolios, including those maintained by influential cultural and educational institutions. In some quarters, the dividend has benchmark status.
Forty-eight percent of Edison stock is owned by institutions, 52 percent by individuals. There are about 200,000 stockholders of record, about half of whom live in Illinois.
O`Connor raised the possibility of a dividend cut in April at Edison`s annual meeting. The board is due to consider the third-quarter payment at a meeting Sept. 10, but a company spokesman said the board could act sooner.
”Earnings have fallen far short in the last two years of a level adequate to meet dividend payments,” O`Connor said in April. Future dividends, O`Connor said, depend on the outcome of current rate proceedings.
Wall Street analysts estimate Edison`s earnings this year at $2.50 to $2.70, less than the $3 dividend payout. Earnings for 1993 can`t be sensibly predicted until the Commerce Commission acts in January.
Edison`s stock has been dropping since December, though it is paying the highest dividend-about 11.2 percent-of any major public utility. That`s a clear indication Wall Street expects a dividend cut. Stable utilities pay around 6.5 percent, according to utility company analysts.
The utility`s earnings fell 64 percent in 1990-91, compared with a nationwide industry increase of 2 percent, said Thomas Kuhn, president of the Edison Electric Institute, a Washington, D.C.-based industry association.
”I don`t know of any other utility in the country that`s experiencing as much difficulty in rate and regulation areas that Com Ed`s experiencing,”
said Kuhn.
The company and many Wall Street analysts say Edison has been unfairly punished by the failure of the commission and Supreme Court to agree on adequate, timely compensation for the construction costs.
Other observers hint that dire warnings about layoffs and dividend cuts are a ploy by the utility to put pressure on the commission.
Whatever the motive, the tone of the debate is taking on an edge.
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”The plunge in the value of Edison stock reflects the financial community`s eroding confidence in the Illinois Commerce Commission,” the company said in a release.
”The commerce commission hasn`t demonstrated concern for the overall financial health of the company,” seconded Linda Byus, a senior utility analyst for Duff & Phelps Inc. ”The commission has been ignoring the macro-issues-financing and long-term planning.”
With uncertain rates, Edison expects to have difficulty raising capital for future construction.
The commission can make its decisions only on information in the record, said Phillip M. Gonet, its executive director. ”But to say the commissioners are unmindful of those considerations is foolish. They go before financial analysts and bond rating people all the time.”
Howard Learner, counsel for Business and Professional People for the Public Interest, a public interest group, said Edison has continued its $3 dividend for an unnaturally long time, and ”the chickens are finally coming home to roost.”
He said other Midwestern utilities with nuclear plant cost overrun problems cut or eliminated their dividends, including Illinois Power, PSI Energy Inc. and Nipsco Industries Inc. Some utilities such as Detroit Edison and Duke Power have, like Edison, continued their dividends despite similar problems.
O`Connor`s remarks show Edison is at least seriously considering going beyond a dividend cut to the sort of restructuring undertaken by other major companies, including Amoco Corp. and Inland Steel Industries Inc.
That would be a historic departure for Edison. Its stock, like that of most utilities, long has been recommended for widows and orphans. As an employer, it hasn`t had significant layoffs at least since the Great Depression, according to John Hogan, an Edison spokesman.
Stockholders and employees have been Edison`s loyal bulwark as troubles mounted from the nuclear program.
In a letter to employees July 9, O`Connor warned that layoffs may be coming, though he later denied a report by WMAQ radio that the company would lay off 8 percent of the work force of 20,195.
”Staffing reductions can be accomplished in many ways, and one way to reduce staff is to lay off employees,” O`Connor said. ”This clearly is an option that must be considered, but no decision has been made.”
O`Connor promised to let employees know through company channels what was going to happen before they learned about it through the media, and he asked for continued support. The company declined to make officials available before the coming board meeting.
Layoffs are only one possible response.
The company also is considering cutting back or delaying a $3 billion, three-year program to upgrade transmission and distribution systems, according to Hogan.
The company also has programs to cut electricity use, particularly in peak air conditioning times, and increase operating efficiencies.
And Edison continues to pursue new contracts with Western coal companies that could allow it to produce electricity at low enough costs to make sales to other utilities profitable, thus helping the bottom line. Though other utilities have been able to renegotiate fairly steep drops in their coal contracts, Edison has not.
The January decision will be a major test of a newly aligned commerce commission, and a sustainable decision seems more likely than in the past.
Terry Barnich resigned as chairman in February, though he remains a member until 1994, amid charges he was too cozy with the utilities and their agents. He faces a suit by the Citizens Utility Board asking that he recuse himself from the January decision on grounds he is biased in Edison`s favor.
In March Gov. Jim Edgar named two new members to the seven-member board and appointed a new chairman, Ellen Craig. The governor also admonished the commission to try to regain public trust with decisions that would hold up under judicial review.
Gonet, the commission`s executive director, said the commission wants to make sure the coming decision holds up in court. He said the situation has become a ”horrible mess,” and the company, commission and ratepayers are entitled to a more coherent situation.
But hewing to the legal line, he warned, may result in a decision that closely tracks the last Supreme Court ruling, which was unfavorable for Edison.