01—Abstract
Summary
Summary of the 10-K filed March 25, 1998. Cited figures are marked; the original filing is the authoritative source.
Edison International (EIX), the holding company for Southern California Edison (SCE) and the nonutility businesses, reported 1997 net income of $700 milliona, or $1.75 basic EPS and $1.73 diluted, down from $717 million ($1.64) in 1996.
Share count fell sharply, from 437 million to 400 million weighted-average shares, because of an aggressive buyback: about 49 million shares were repurchased in 1997 for $1.2 billionb, and over 72 million shares for $1.6 billion since the 1995 program began. Management attributed the 1997 EPS gain largely to the buyback, which added roughly 15 cents per share. Underlying SCE earnings were flat at $1.44 per share, and the nonutility segments (Edison Mission Energy, Edison Capital, Mission Land) grew to 44 cents per share, with EME posting a record $115 million in net income.
The dominant story is California electric industry restructuring. SCE issued about $2.5 billionc of rate reduction notes in December 1997 to fund a 10% residential and small-commercial rate cut starting January 1, 1998, and sold 11 of its 12 oil- and gas-fired plants for $1.1 billion, roughly 2.16 times book value. The retail market was scheduled to open March 31, 1998, after the PX and ISO start-up was delayed.
SCE estimated transition costs (CTC) recoverable from customers at $13.1 to $13.8 billiond in 1998 net present value, though recovery depends on market prices and on regulatory outcomes still pending. Key risks include a proposed voter initiative that could block recovery of nuclear stranded costs and reduce rates further, pending CPUC rulings on Mojave contract disallowances, San Onofre steam generator problems, and the Paiton project in Indonesia, whose debt ratings were cut to speculative grade.
For investors, the filing shows strong cash generation (operating cash flow of $2.1 billion), a dividend of $1.00 per share with a 57% payout ratio, and a balance sheet with $1.9 billion of cash after the rate reduction note proceeds. Earnings quality going forward depends heavily on how transition cost recovery, divestiture proceeds, and buybacks play out during the 1998 to 2002 transition period.
02—Key points
Key Highlights
- 1997 basic EPS of $1.75 (diluted $1.73), up from $1.64 in 1996, driven mainly by share repurchases; net income fell to $700 million from $717 million.
- Share repurchases of about 49 million shares for $1.2 billion in 1997 (over 72 million shares, $1.6 billion, since 1995), with a total authorization of $2.3 billion; the buyback added roughly 15 cents to 1997 EPS.
- SCE earnings were $1.44 per share, flat excluding 1996 special charges, while EME, Edison Capital and Mission Land combined for 44 cents per share, up from 27 cents.
- Roughly $2.5 billion of rate reduction notes were issued in December 1997 to finance a 10% residential rate cut effective January 1, 1998; the rate freeze runs through March 2002.
- Sale of 11 gas-fired plants for $1.1 billion (2.16x book value of $531 million), with net proceeds to reduce stranded costs.
- Estimated transition costs (CTC) of $13.1 to $13.8 billion in 1998 net present value, with recovery subject to regulatory and market-price assumptions; a pending voter initiative could materially affect results.
- Dividend of $1.00 per share in 1997 (57% payout ratio) and operating cash flow of $2.1 billion, with a $1.9 billion year-end cash balance.
03—Questions
Frequently Asked Questions
How did Edison International's earnings change in 1997?
Basic EPS rose to $1.75 from $1.64, but net income declined slightly to $700 million from $717 million. The per-share gain came mainly from a 9% drop in weighted-average shares, reflecting the buyback program. Excluding special charges, SCE's contribution was roughly flat, and the nonutility businesses grew.
What is the financial impact of California's electricity restructuring on SCE?
The restructuring legislation and CPUC decisions allow SCE to recover transition costs through a non-bypassable competition transition charge (CTC). SCE estimates these costs at $13.1 to $13.8 billion in 1998 present value, but actual recovery depends on market prices, pending CPUC proceedings, and the outcome of the proposed voter initiative. Rates are frozen through 2002, with a 10% cut for residential and small commercial customers starting in 1998.
What risks could affect Edison International's future earnings?
Key risks include the proposed Utility Reform Initiative, which could block nuclear stranded-cost recovery and cut rates; adverse CPUC rulings on ECAC reasonableness disallowances, such as the Mojave contract; possible write-offs of generation-related regulatory assets (about $600 million) if recovery becomes improbable; the nuclear steam generator issues at San Onofre; and the financial difficulties of the Paiton project in Indonesia. Litigation exposure includes the False Claims Act suit, which seeks damages tied to $383 million attributed to SCE.
How much capital has Edison International returned to shareholders?
In 1997 the company paid $1.00 per share in dividends, totaling about $408 million in cash, and repurchased $1.2 billion of stock. Since the buyback program began in 1995, it has repurchased over 72 million shares for $1.6 billion, leaving authorization within the $2.3 billion limit. Management reported dividend coverage of 5.2 times.
What is the outlook for the nonutility businesses?
Edison Mission Energy reported a record $115 million net income in 1997, driven by foreign projects and lower tax rates, with 5,180 MW of attributable capacity and major projects under construction, including Paiton, ISAB and Doga. Edison Capital posted a record $61 million, helped by cross-border leases and affordable housing investments. Edison Enterprises, the retail arm, remained a drag on earnings through start-up costs. Mission Land is winding down its real estate portfolio.
04—Continue