Business Context and Reporting Period
Company: Edison International (EIX)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Edison International is a holding company with no direct operations, deriving its financial results from its subsidiaries. Its primary segments are:
- Southern California Edison Company (SCE): A regulated electric utility serving over 13 million people in central, coastal, and southern California.
- Edison Mission Group (EMG): A nonutility segment comprising Edison Mission Energy (EME), an independent power producer with merchant and contracted generation assets, and Edison Capital, which holds energy, infrastructure, and affordable housing investments.
Key Financial Metrics
Note: Specific consolidated revenue, net income, and cash flow figures for the full entity are incorporated by reference to the Annual Report and are not explicitly detailed in the provided text. The following data is available from the Parent Company Condensed Financial Statements (Schedule I) and segment descriptions.
Parent Company Financials (Edison International)
| Item (in millions) | 2006 | 2005 | 2004 |
|---|---|---|---|
| Operating Revenue & Other Income | $55 | $57 | $60 |
| Operating Expenses & Interest | $82 | $89 | $125 |
| Loss Before Equity in Earnings of Subsidiaries | $(27) | $(32) | $(65) |
| Equity in Earnings of Subsidiaries | $1,208 | $1,169 | $981 |
| Net Income | $1,181 | $1,137 | $916 |
| Basic Earnings Per Share | $3.58 | $3.47 | $2.81 |
| Diluted Earnings Per Share | $3.57 | $3.43 | $2.77 |
Segment Specific Data
- SCE Assets: $26.1 billion (Dec 31, 2006).
- SCE Equity: $6.4 billion (Dec 31, 2006).
- EME Debt: Consolidated debt of $3.2 billion plus $4.3 billion in long-term power plant lease obligations.
- Edison Capital Investments: $2.5 billion in leveraged leases; $29 million in affordable housing projects.
- Parent Liquidity: Cash and equivalents of $84 million (Dec 31, 2006).
Material Changes and Operational Highlights
- Mohave Generating Station: SCE announced in June 2006 the decision not to return the Mohave coal-fired plant to service after it ceased operations on December 31, 2005.
- Mountainview Power Plant: SCE's new natural gas plant (1,050 MW) commenced commercial operations in late 2005 and early 2006.
- EME Portfolio: As of year-end 2006, EME operated 29 domestic power plants with a net physical capacity of 10,473 MW (EME pro rata share: 9,303 MW).
- Revenue Mix (SCE): 2006 revenue derived from 41% commercial, 37% residential, 7% industrial, and 5% public authorities.
- EME Revenue Concentration: Sales into the PJM market accounted for approximately 58% of EME's consolidated operating revenues in 2006 (up from 23% in 2004).
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Wind Development: EME expects significant investment in wind projects, having purchased turbines for 487 MW of future projects. Production tax credits were extended through 2008.
- Thermal Projects: EME is pursuing permits for peaker plants in southern California and developing a hydrogen power project in Carson, California.
- Edison Capital Strategy: No new investments are expected; the focus is on managing the existing portfolio of leveraged leases and infrastructure funds.
Key Risks and Contingencies
- Regulatory Risk (SCE): Financial viability depends on the ability to recover costs through CPUC-approved rates. General rate cases occur every three years.
- Merchant Risk (EME): EME's merchant plants (Illinois and Homer City) are exposed to volatile wholesale energy prices, fuel costs, and transmission congestion. Hedging strategies may not fully mitigate these risks.
- Environmental Compliance: Significant capital expenditures are anticipated for environmental controls. Midwest Generation (EME) expects to spend $2.7 billion to $3.4 billion through 2018 to reduce mercury, NOx, and SO2 emissions at Illinois plants.
- Nuclear Fuel Storage: Risks associated with the Department of Energy's default on spent fuel storage obligations could hinder operations at San Onofre and Palo Verde.
- Legal Proceedings: Ongoing matters include Navajo Nation litigation regarding Four Corners, a Corps of Engineers notice regarding wetlands discharge, and FERC investigations into EME's trading subsidiary.
Investor Verification Checklist
- Consolidated Financials: Verify total consolidated revenue, operating income, and cash flow figures in the full Annual Report (incorporated by reference), as the 10-K text provided only Parent Company schedules.
- Environmental CapEx: Confirm the actual capital expenditure timeline and funding sources for the $2.7B-$3.4B environmental upgrade plan at Midwest Generation.
- Regulatory Rate Cases: Review the status of SCE's upcoming general rate case and cost of capital proceedings to assess revenue recovery risks.
- Merchant Exposure: Analyze the specific volume of EME's merchant generation that remains unhedged and the sensitivity of earnings to PJM market price fluctuations.
- Debt Covenants: Review the specific financial covenants in MEHC's senior secured notes and EME's credit facilities that could restrict dividend payments or refinancing.