01—Abstract
Summary
Summary of the 10-K filed March 24, 1999. Cited figures are marked; the original filing is the authoritative source.
Edison International (EIX), the holding company for Southern California Edison (SCE), Edison Mission Energy (EME), Edison Capital and Edison Enterprises, reported 1998 net income of $668 milliona, or $1.84 diluted EPS, down from $700 million ($1.73 diluted) in 1997.
Consolidated operating revenue rose to $10.2 billionb, but the earnings picture is shaped heavily by California's electric restructuring. SCE's own earnings fell to $1.37 per share from $1.44, reflecting lower authorized returns on generation assets and a smaller earning asset base after the sale of its 12 gas- and oil-fired plants for $1.2 billion. The nonutility companies (EME and Edison Capital combined) contributed roughly 66 cents per share, up from 44 cents, and now account for about 35% of total earnings.
Share repurchases of roughly $724 millionc in 1998 (over 25 million shares) helped lift per-share results. The main risks for investors lie in the transition to competition. SCE's transition costs are estimated at $10.6 billion, and about $2.4 billion (after tax) of generation-related regulatory assets would be written off as a non-cash charge if recovery became improbable.
Other notable exposures include the pending $1.8 billiond Homer City acquisition by EME, the troubled Paiton project in Indonesia whose PLN contract is under renegotiation pressure, pending CPUC decisions on Section 376 cost recovery and rate-of-return issues, and the Coso geothermal litigation seeking punitive damages of $400 million. Management also highlighted that California voters rejected Proposition 9 in November 1998, removing a threat to rate reduction note collections. From a financial perspective, the company had cash flow coverage of dividends of 3.9 times and a dividend payout ratio of 55%, with the dividend declared at $1.04 per share for 1998.
Long-term debt declined to $8.0 billion from $8.9 billion, and total assets were $24.7 billion. The Year 2000 remediation was reported as on track, with a total estimated cost of $75 million.
02—Key points
Key Highlights
- 1998 net income of $668 million ($1.84 diluted EPS), down modestly from $700 million ($1.73) in 1997, while revenue rose to $10.2 billion, largely because of sales to the Power Exchange.
- SCE sold its 12 gas- and oil-fired generating plants for $1.2 billion, more than $500 million above book value; proceeds were used to reduce stranded costs.
- Nonutility businesses (EME and Edison Capital) grew to about 66 cents per share of earnings, now roughly 35% of total earnings, versus 25% in 1997.
- Transition cost exposure is significant: SCE estimates $10.6 billion in transition costs through 2030, and a potential $2.4 billion after-tax write-off if generation-related regulatory assets lose probable-recovery status.
- Share repurchases continued, with about 25 million shares bought in 1998 for about $724 million; cumulative buybacks since 1995 total over 97 million shares for about $2.3 billion.
- Pending EME acquisition of the 1,884-MW Homer City plant for about $1.8 billion, expected to close by the end of Q1 1999; the Paiton project in Indonesia faces contract renegotiation risk.
- Proposition 9 was defeated by roughly 73% of voters in November 1998, preserving the non-bypassable charges that support the $2.5 billion rate reduction notes.
03—Questions
Frequently Asked Questions
Why did Edison International's earnings per share increase even though net income declined?
Net income fell from $700 million to $668 million, but the share count dropped sharply due to buybacks. Basic EPS rose to $1.86 from $1.75, and diluted EPS to $1.84 from $1.73. Management attributed about 19 cents of the 1998 per-share improvement to the lower share count.
What is the risk to earnings from California's electric restructuring?
SCE's generation assets earn lower authorized returns during the transition period, and its earnings fell to $1.37 per share from $1.44. If recovery of about $2.4 billion (after tax) in generation-related regulatory assets became improbable, SCE would take a one-time non-cash write-off. Market price assumptions in the $10.6 billion transition cost estimate could also materially change those figures.
How significant are the nonutility businesses to the company's results?
They are growing in importance. EME contributed $132 million and Edison Capital a record $105 million in 1998, together about 35% of total earnings, up from 25% in 1997. Edison Capital's gains came largely from cross-border lease transactions, affordable housing and infrastructure investments.
What major litigation or project risks should investors watch?
The Coso geothermal suit against SCE seeks more than $115 million in compensatory damages and $400 million in punitive damages, with trial set for March 2000. Recovery of these amounts through rates is a key mitigating factor. The Paiton power project in Indonesia has been downgraded to speculative grade, and PLN contract renegotiations could affect EME's returns.
Is the dividend well supported by cash flow?
Yes. The 1998 dividend was $1.04 per share, with a payout ratio of 55% and cash flow coverage of dividends of 3.9 times, versus 5.2 times in 1997. Coverage declined mainly because of the rate-making treatment of gains on the sale of SCE's gas- and oil-fired plants. Net cash from operations was $1.5 billion in 1998.
04—Continue