Business Context and Reporting Period
Company: Edison International
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
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.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2008 | Q1 2007 |
|---|---|---|
| Total Operating Revenue | $3,083 | $2,912 |
| Operating Income | $628 | $627 |
| Net Income | $299 | $333 |
| Diluted EPS (Total) | $0.91 | $1.00 |
| Operating Cash Flow | $573 | $733 |
| Long-Term Debt | $9,325 | $9,016 |
| Cash and Equivalents | $1,545 | $1,441 |
Segment Performance:
- Electric Utility (SCE): Revenue $2,349 million; Net Income $150 million.
- Nonutility Power Generation (EME): Revenue $719 million; Net Income $145 million.
- Financial Services: Revenue $15 million; Net Income $9 million.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenue increased $171 million (5.9%) year-over-year, driven primarily by a $127 million increase in electric utility revenue due to balancing account over/under collections and sales for resale, partially offset by rate decreases and lower sales volumes.
- Profit Decline: Net income decreased $34 million (10.2%) to $299 million. The decline was primarily due to a $31 million tax benefit recognized in Q1 2007 related to environmental remediation costs that did not recur in 2008.
- Expense Increases: Purchased power expense rose $174 million, largely due to higher bilateral energy purchases and QF purchased-power expenses. Fuel expense increased $51 million due to higher coal/transportation costs and generation levels.
- Cash Flow: Operating cash flow decreased $160 million, attributed to lower revenue collections from customers following rate changes effective in early 2007 and timing of working capital items.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook:
- Regulatory Proceedings: SCE is in the midst of its 2009 General Rate Case (GRC), requesting a $726 million increase in base rate revenue. The Division of Ratepayer Advocates (DRA) has recommended a significantly lower increase of $7 million. A final decision is expected prior to year-end 2008.
- Capital Expenditures: SCE projects $2.3 billion in capital expenditures for the remainder of 2008, focusing on transmission/distribution infrastructure and generation assets. EME has significant commitments for wind turbine projects ($474 million remaining in 2008).
- Renewable Resources: SCE is pursuing a Solar Photovoltaic (PV) Program to develop up to 250 MW of utility-owned facilities, with an estimated base case capital cost of $875 million over five years.
Risks and Contingencies:
- Tax Disputes: Edison International is under active IRS examination for tax years 2000-2002 and administrative appeals for 1994-1999 regarding leveraged lease transactions (LILO/SILO). Unrecognized tax benefits totaled $2.149 billion as of March 31, 2008. Resolution could impact earnings and cash flow significantly.
- Environmental Remediation: Recorded liability for 44 identified sites is $68 million, with a reasonable possibility that costs could exceed this by up to $150 million.
- CPUC Investigation: An ongoing CPUC investigation into SCE's Performance-Based Ratemaking (PBR) program regarding customer satisfaction and employee safety reporting could result in refunds and penalties ranging from $52 million to $388 million.
- Wind Turbine Issues: EME is addressing performance issues (rotor blade cracks and gearbox problems) with turbines from suppliers Suzlon and Clipper, which may impact project timelines and costs.
Unusual Items:
- Contract Buyout Gain: Recorded a $15 million pre-tax gain from buying out a coal supply contract for the Illinois plants.
- Derivative Valuation: Adoption of SFAS No. 157 resulted in fair value adjustments for derivatives, with significant unrealized losses on cash flow hedges ($138 million net of tax) impacting comprehensive income.
Investor Verification Checklist
- 2009 GRC Outcome: Monitor the CPUC's final decision on SCE's 2009 rate case, as the gap between the company's request and the DRA's recommendation is substantial.
- Tax Resolution Timeline: Track the status of IRS appeals regarding leveraged lease transactions, as the potential cash outflow for taxes, interest, and penalties is material.
- CPUC PBR Penalties: Verify the final ruling on the CPUC investigation into PBR reporting misconduct to assess potential refund obligations.
- Wind Project Execution: Review updates on EME's wind turbine performance issues and their impact on the $1.3 billion turbine commitment pipeline.
- Coal Price Exposure: Assess the impact of rising coal and transportation costs on EMG's margins, particularly for the Illinois plants where contracts expire in 2011.