Business Context and Reporting Period
Company: Edison International (Parent of Southern California Edison Company and Edison Mission Group Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: Edison International operates through two primary segments: the regulated electric utility (SCE) and nonutility power generation (EME/EMG). The company is a large accelerated filer with 325,811,206 shares of common stock outstanding as of April 30, 2007.
Key Financial Metrics
| Metric (in millions) | Q1 2007 | Q1 2006 |
|---|---|---|
| Total Operating Revenue | $2,912 | $2,751 |
| Operating Income | $627 | $462 |
| Net Income | $333 | $258 |
| Diluted EPS (Total) | $1.01 | $0.78 |
| Operating Cash Flow | $708 | $608 |
| Capital Expenditures | ($691) | ($553) |
| Total Assets | $36,639 | $36,261 |
| Total Debt (Short-term + Long-term) | $9,583 | $9,589 |
| Cash and Equivalents | $1,701 | $1,795 |
Note: Debt figures include short-term debt and long-term debt due within one year plus long-term debt. Q1 2006 Net Income included $73 million from discontinued operations (Lakeland project), whereas Q1 2007 included only $3 million.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenue increased by $161 million (5.9%) year-over-year, driven primarily by a $162 million increase in nonutility power generation revenue due to higher wholesale energy margins and generation volumes.
- Profitability Surge: Net income increased by $75 million (29%). Earnings from continuing operations rose from $184 million to $330 million. This was largely due to a $31 million tax benefit at SCE related to an IRS administrative appeal regarding environmental remediation costs and improved margins at EMG.
- Discontinued Operations: Income from discontinued operations dropped significantly from $73 million in Q1 2006 to $3 million in Q1 2007, reflecting the winding down of distributions from the U.K. Lakeland project.
- Purchased Power Expense: Decreased by $696 million to $317 million. This reduction was primarily due to a $134 million net unrealized gain on economic hedging activities in 2007, compared to a $334 million net unrealized loss in 2006.
- Effective Tax Rate: The effective tax rate from continuing operations decreased from 38% in 2006 to 28% in 2007, driven by the aforementioned tax reserve reductions.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Capital Expenditures: SCE approved a 2007-2011 capital investment plan totaling up to $17.3 billion. Q1 2007 capital spending was $495 million for SCE and $131 million for EMG.
- Refinancing Activity: In a subsequent event (May 7, 2007), EME completed a $2.7 billion private offering of senior notes to refinance existing debt. This is expected to result in a pre-tax loss of approximately $242 million in Q2 2007 due to early extinguishment of debt.
- Renewable Portfolio: SCE successfully challenged CPUC accounting determinations regarding renewable targets, projecting it will meet 2007 and 2008 goals, though a potential deficit exists for 2009.
Risks and Contingencies
- Tax Litigation: The IRS is challenging Edison Capital's cross-border leveraged lease transactions (SILO/LILO). Total deferred taxes at risk are estimated at $1.537 billion, with potential interest and penalties of approximately $419 million. Edison International is vigorously defending these positions.
- Regulatory Investigations: The CPUC is investigating SCE's Performance-Based Ratemaking (PBR) program regarding customer satisfaction and employee safety reporting. Potential refunds and penalties range from $52 million to $388 million; SCE has accrued the lower end of this range.
- Illinois Auction Litigation: EMMT faces a FERC complaint and class-action lawsuits alleging collusion and price-fixing in the Illinois power procurement auction. Outcomes are unpredictable.
- Environmental Remediation: Recorded liability is $79 million, but costs could exceed this by up to $125 million due to uncertainties in site remediation.
Investor Verification Checklist
- Tax Reserve Adjustments: Verify the sustainability of the $31 million tax benefit and the status of the $1.5 billion deferred tax liability challenge by the IRS.
- CPUC PBR Investigation: Monitor the outcome of the CPUC investigation into SCE's PBR rewards, which could result in penalties up to $388 million.
- Debt Refinancing Impact: Confirm the Q2 2007 financial impact of the $242 million pre-tax loss associated with the May 2007 debt refinancing.
- Illinois Auction Legal Risks: Track the progress of the FERC complaint and class-action lawsuits regarding the Illinois power auction.
- Renewable Compliance: Assess SCE's ability to meet 2009 renewable portfolio standards given the projected deficit.