U.S. Utility Shares Drop on Edison Earnings News

Shares in U.S. power companies with investments in British power plants sank Monday after Edison International cut its earnings projection for the current year, citing in part expected changes in the operating rules for electricity generators in Britain.

The Rosemead-based power company, parent of Southern California Edison, California’s No. 2 electric utility, changed its 2000 earnings-per-share projection to a range of $1.90 to $2.10, down from $2.20 to $2.30. It attributed the lower projection to a drop in power prices in Britain stemming from uncertainty about a new law, and unseasonably warm weather that reduced demand.

Edison International shares plunged $7.69, about 30%, to close at $17.94 on the New York Stock Exchange after earlier touching $17.50, a 52-week low. Merrill Lynch downgraded its near-term rating for the stock to “neutral” from “accumulate,” and DB Alex Brown cut its 2000 earnings-per-share forecast for Edison to $2 from $2.25.

Merrill Lynch analyst Steven Fleishman also downgraded near-term ratings for three other U.S. power companies with British power plants: Arlington, Va.-based AES Corp., Dallas-based TXU Corp. and New Orleans-based Entergy Corp..

Britain’s Utilities Act, to be implemented Nov. 1, changes the way British generators sell power. At present, electricity is sold into a power pool, but after Nov. 1 business will largely be conducted through bilateral contracts.

TXU spokeswoman Carol Peters said her company had already anticipated the changes in the regulatory environment and the impact of warmer-than-normal weather. She said she did not know of any plans to issue an earnings warning.

“I don’t know of anything like that in the works,” Peters said.

AES spokesman Kenneth Woodcock noted that AES had already been predicting significantly lower prices than many of its competitors and had hedged more than half this year’s electricity output from British plants.

He noted that the company had not changed its guidance for analysts that it would earn around 35 cents to 40 cents a share this year from its massive Drax power plant in Britain and $2.65 to $2.95 for the company as a whole.

Analysts also noted a fifth U.S. power company, Minneapolis-based Northern States Power, had significant investments in British power plants and could be adversely affected by the legislative changes.

AES shares fell $5.56 to close at $81.38; TXU lost $1.63 to close at $28; Entergy closed down $3.69 at $16.69; and Northern States Power slipped $1.06 to close at $16.44. All trade on the NYSE. The Dow Jones utility index slid 3.2%.

Fleishman said there had been concern for several days about the outlook for companies with British power plants.

“We have been worried about this for the last week. [The Edison announcement] was the nail in the coffin,” Fleishman said.

Edison International said if prices in Britain remain low for several years, profit growth will fall to 9% annually through 2003 from a forecast 12%.