Business Context and Reporting Period
Company: Edison International (EDISON INTERNATIONAL)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: Edison International is a holding company with principal operating subsidiaries including Southern California Edison Company (SCE), a rate-regulated electric utility, and Edison Mission Group (EMG), which engages in nonutility power generation and financial services. The company operates in a highly regulated environment subject to the California Public Utilities Commission (CPUC) and the Federal Energy Regulatory Commission (FERC).
Key Financial Metrics
| Metric (in millions, except per share) | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2006 |
|---|---|---|---|
| Total Operating Revenue | $3,942 | $9,902 | $9,555 |
| Operating Income | $898 | $2,027 | $2,016 |
| Net Income | $461 | $887 | $893 |
| Diluted EPS (Total) | $1.39 | $2.67 | $2.71 |
| Operating Cash Flow | N/A | $2,597 | $2,942 |
| Capital Expenditures | N/A | $(1,979) | $(1,757) |
| Total Assets | $37,820 | N/A | N/A |
| Total Liabilities | $28,207 | N/A | N/A |
| Long-Term Debt | $9,056 | N/A | N/A |
| Cash and Equivalents | $1,458 | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenue increased $134 million (3.7%) for the quarter and $347 million (3.6%) for the nine-month period compared to 2006. This was driven by higher net revenue from the 2006 General Rate Case (GRC) and increased sales volume, partially offset by rate reductions due to lower natural gas prices and regulatory adjustments.
- Profitability: Net income for the nine months ended September 30, 2007, decreased slightly to $887 million from $893 million in 2006. This decline was primarily due to a $241 million pre-tax loss on the early extinguishment of debt and higher development costs, offset by higher energy margins and tax benefits.
- Debt Restructuring: In May 2007, Edison Mission Energy (EME) completed a $2.7 billion senior notes offering to refinance existing debt, resulting in a significant one-time charge for the early extinguishment of debt.
- Segment Performance:
- SCE: Earnings decreased slightly year-to-date due to benefits recorded in 2006 related to tax resolutions and generator settlements, partially offset by higher revenue and lower taxes in 2007.
- EMG: Earnings increased significantly year-to-date ($313 million vs. $221 million) due to higher energy margins at Illinois and Homer City facilities and increased project income, despite the debt extinguishment charge.
Guidance, Outlook, Risks, and Unusual Items
- Regulatory Risks (SCE):
- Performance Incentives: A Presiding Officer's Decision ordered SCE to refund $136 million and pay a $40 million penalty regarding performance incentive rewards (customer satisfaction and employee safety) for the 1997-2003 period. SCE has appealed this decision; potential exposure ranges from $52 million to $388 million.
- Rate Cases: SCE filed its 2009 General Rate Case application requesting a $724 million increase in base rate revenue. A decision is expected by December 2008.
- Renewable Portfolio: SCE projects meeting renewable goals for 2007 and 2008 but faces a potential deficit in 2009, with penalties capped at $25 million per year.
- Legal and Tax Contingencies:
- IRS Disputes: The company is under examination for tax years 1994-present. Significant disputes involve leveraged lease transactions (SILO/LILO) with potential deferred tax liabilities of $1.5 billion plus interest and penalties. The company expects earnings and cash flow impacts of $70-$80 million and $300-$325 million, respectively, from a specific affirmative claim settlement.
- Illinois Auction Settlement: Midwest Generation agreed to pay $25 million over three years to settle allegations regarding the 2006 Illinois power procurement auction. Class action lawsuits remain pending.
- Environmental: The EPA issued a Notice of Violation (NOV) to Midwest Generation regarding Clean Air Act violations. Settlement talks are ongoing, but penalties are unspecified.
- Unusual Items:
- Debt Extinguishment: A $241 million pre-tax loss was recorded in the second quarter of 2007 related to the refinancing of EME and MEHC debt.
- Accounting Change: Adoption of FIN 48 (Accounting for Uncertainty in Income Taxes) on January 1, 2007, resulted in a $250 million cumulative-effect adjustment increasing retained earnings.
Investor Verification Checklist
- Regulatory Outcome: Monitor the appeal of the CPUC Presiding Officer's Decision regarding the $176 million (plus interest) refund and penalty order for performance incentives.
- Tax Resolution: Track the status of IRS examinations regarding leveraged lease transactions and the potential impact of the $1.5 billion deferred tax liability on future cash flows.
- Rate Case Approval: Verify the CPUC's final decision on the 2009 General Rate Case, specifically the approved revenue requirement increase.
- Environmental Compliance: Assess the outcome of the EPA NOV settlement with Midwest Generation and potential capital expenditures required for compliance.
- Renewable Targets: Confirm SCE's ability to meet 2009 renewable portfolio standards to avoid penalties.