Business Context and Reporting Period
Company: Edison International (EIX)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Structure: Edison International is a holding company with no direct operations. Its primary subsidiaries are Southern California Edison Company (SCE), a regulated electric utility; Edison Mission Energy (EME), an independent power producer; and Edison Capital, a financial services provider. EME and Edison Capital are reported together as Edison Mission Group (EMG).
Key Financial Metrics
Note: Consolidated revenue, profit, and cash flow figures for the entire enterprise are incorporated by reference to the Annual Report (Exhibit 13) and are not explicitly detailed in the provided text. The following data is derived from the Parent Company (Edison International) condensed financial statements included in Schedule I.
| Metric (Parent Company Only) | 2008 | 2007 |
|---|---|---|
| Operating Revenue | $27 million | $49 million |
| Operating Loss | $(47) million | $(34) million |
| Equity in Earnings of Subsidiaries | $1,244 million | $1,116 million |
| Net Income | $1,215 million | $1,098 million |
| Diluted Earnings Per Share | $3.68 | $3.31 |
| Cash and Equivalents (Year End) | $320 million | $37 million |
| Long-Term Debt (Parent) | $24 million | $19 million |
Segment Specific Data:
- SCE Assets: $31.0 billion (Consolidated); Shareholder Equity: $7.4 billion.
- SCE Debt: Approximately $5.80 billion in first and refunding mortgage bonds outstanding as of February 27, 2009.
- EME Debt: Consolidated debt was $3.8 billion as of December 31, 2007. Subsidiaries also held $3.9 billion in long-term power plant lease obligations.
- Edison Capital Investments: $2.5 billion in leveraged leases; $39 million in infrastructure funds; $7 million in affordable housing.
Material Changes and Operational Highlights
- Parent Company Liquidity: Cash and equivalents at the parent level increased significantly from $37 million in 2007 to $320 million in 2008, driven by a net increase in cash of $283 million.
- Dividend Payments: Parent company dividends paid increased to $397 million in 2008 from $378 million in 2007.
- Accounting Changes: The parent company reclassified cash dividends received from consolidated subsidiaries from financing activities to operating activities in 2008, with conforming changes to prior years.
- System Implementation: Edison International, SCE, and EME implemented SAP enterprise resource planning (ERP) modules in 2008, resulting in material changes to internal controls over financial reporting.
- Project Termination: EME terminated a turbine supply agreement for the Walnut Creek project in Q4 2008 to preserve capital, recording a pre-tax charge of $23 million ($14 million after tax).
Guidance, Risks, and Contingencies
Liquidity and Capital Markets
EME faces significant liquidity risks due to the global financial crisis. Capital markets were unavailable to EME in Q4 2008. Lehman Commercial Paper Inc., a lender with a $36 million commitment, filed for bankruptcy in October 2008. EME warns that lack of available capital could affect its ability to complete environmental improvements or develop renewable projects.
Regulatory and Environmental Risks
- Climate Change: Potential federal and state regulations (e.g., California AB 32) regarding greenhouse gas emissions could significantly increase costs for coal-fired plants and purchased power.
- Air Quality: EME is subject to stringent mercury and NOx reduction requirements in Illinois and Pennsylvania. Compliance may require substantial capital expenditures.
- FERC Investigation: EME's trading subsidiary (EMMT) settled a FERC investigation regarding bidding practices in May 2008, paying $7 million in civil penalties and implementing a compliance program. Third parties have appealed the settlement, and the outcome remains uncertain.
- Environmental Liabilities: Midwest Generation has accrued approximately $4 million for environmental investigation and remediation costs at the Illinois Plants.
Legal Proceedings
- SCAQMD: SCE is in settlement negotiations regarding Notices of Violation (NOVs) for NOx emissions at Catalina Island diesel units.
- Navajo Nation: SCE's rights in the Four Corners facility may be subject to defects related to easements and leases on Navajo Nation land.
Investor Verification Checklist
- Consolidated Financials: Verify the full consolidated revenue, operating income, and cash flow figures in the Annual Report (Exhibit 13), as the 10-K text only provides Parent Company data.
- EME Liquidity: Assess the current status of EME's access to capital markets and the impact of the Lehman bankruptcy on its credit facilities.
- Environmental Compliance Costs: Review the MD&A for specific capital expenditure estimates required to meet Illinois and Pennsylvania mercury/NOx regulations.
- FERC Settlement Status: Monitor the status of the appeal regarding the EMMT FERC settlement to determine potential for further penalties or litigation.
- Dividend Restrictions: Confirm the current restrictions on subsidiaries transferring funds to the parent company, which limit the ability to pay cash dividends.