Business Context and Reporting Period
Company: Edison International
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: Edison International is a holding company with principal operating subsidiaries including Southern California Edison Company (SCE), Edison Mission Energy (EME), and Edison Capital. The company operates in electric utility, nonutility power generation, and financial services segments.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2006 |
|---|---|---|
| Total Operating Revenue | $3,802 | $9,555 |
| Operating Income | $963 | $2,016 |
| Net Income | $458 | $893 |
| Diluted EPS (Total) | $1.38 | $2.71 |
| Cash Provided by Operating Activities | N/A | $2,970 |
| Cash Used by Investing Activities | N/A | $(1,986) |
| Cash Used by Financing Activities | N/A | $(673) |
| Total Assets | $36,291 | N/A |
| Total Liabilities | $27,534 | N/A |
| Long-Term Debt | $8,983 | N/A |
| Cash and Equivalents | $2,204 | N/A |
Material Changes vs. Prior Period
- Revenue: Total operating revenue increased slightly by $19 million (0.5%) for the quarter and by $677 million (7.6%) for the nine-month period compared to 2005. The nine-month increase was driven primarily by rate changes and increased sales volume at SCE due to record heat conditions.
- Net Income: Net income decreased by $4 million for the quarter but increased by $29 million for the nine-month period. The nine-month increase was driven by higher earnings from SCE and discontinued operations, partially offset by a $143 million loss on early extinguishment of debt at EME.
- Operating Expenses: Purchased power expense increased significantly by $534 million for the quarter and $1.2 billion for the nine months, primarily due to net unrealized losses on derivative instruments at SCE compared to gains in the prior year.
- Discontinued Operations: Income from discontinued operations was $75 million for the nine months ended September 30, 2006, compared to $55 million in 2005, largely due to distributions from the Lakeland project.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Regulatory Developments: The California Public Utilities Commission (CPUC) authorized a $274 million increase in SCE's base rate revenue, retroactive to January 2006. The Federal Energy Regulatory Commission (FERC) approved a settlement increasing SCE's transmission revenue requirement by $26 million.
- Mohave Generating Station: SCE announced it will not return the Mohave plant to service. A net regulatory asset of approximately $89 million remains, with recovery expected through future rate-making proceedings.
- Capital Expenditures: EME has firm commitments to spend approximately $230 million in the remainder of 2006 and $147 million in 2007 on capital projects, primarily wind energy developments.
Risks and Contingencies
- Tax Disputes: The IRS is challenging Edison Capital's cross-border leveraged lease transactions (SILO and LILO), potentially involving $1.48 billion in deferred taxes plus interest and penalties. Edison International is vigorously defending these positions.
- Performance Incentives Investigation: The CPUC is investigating SCE's performance-based ratemaking (PBR) regarding customer satisfaction and employee injury reporting. Potential refunds and penalties could range from $32 million to $396 million.
- Environmental Compliance: New state and federal regulations regarding mercury, NOx, and SO2 emissions may require significant capital expenditures at coal-fired plants, particularly in Illinois and Pennsylvania.
- FERC Investigation: The FERC is considering initiating a formal investigatory proceeding against Edison Mission Marketing & Trading (EMMT) regarding alleged bidding practice violations.
Unusual Items
- Debt Extinguishment: EME recorded a $143 million loss on early extinguishment of debt in the second quarter of 2006 following a refinancing transaction.
- Accounting Change: Adoption of SFAS No. 123(R) for stock-based compensation resulted in a $1 million cumulative effect adjustment to net income in the first quarter of 2006.
Investor Verification Checklist
- Verify the status and potential financial impact of the IRS audit regarding leveraged lease transactions (SILO/LILO) and the $1.48 billion deferred tax exposure.
- Monitor the outcome of the CPUC investigation into SCE's PBR program and the potential range of refunds/penalties ($32M - $396M).
- Assess the recoverability of the $89 million Mohave regulatory asset and the timeline for rate recovery.
- Review the impact of new environmental regulations (mercury, NOx, SO2) on future capital expenditure requirements for EME's coal plants.
- Track the resolution of the FERC investigatory proceeding against EMMT regarding bidding practices.