Why did Edison International's earnings decline in 1999 despite strong revenue growth?

Net income fell to $623 million from $668 million, largely because 1998 included a gain of over $500 million on the sale of SCE's gas- and oil-fired plants that did not recur. SCE's earnings also declined on accelerated depreciation of generation assets. 1999 results were further reduced by a 24-cent special charge, mainly EME and Edison Capital phantom stock option accruals and Edison Enterprises business closures, partly offset by a 4-cent SCE tax benefit. Share repurchases helped EPS by about 6 cents.

How much of the company's earnings comes from the regulated utility versus nonutility businesses?

SCE contributed $1.39 per share, while EME and Edison Capital each contributed 37 cents per share (EME's figure excluding special charges was 57 cents, and Edison Capital's was 39 cents). Edison Enterprises and the parent company were a combined drag of 34 cents. The utility therefore remains the largest earnings contributor, but the nonutility segments are growing quickly and now generate a meaningful share of earnings.

What are the main regulatory risks facing SCE over the next few years?

The rate freeze lasts until March 31, 2002, and SCE must sell generation into the California Power Exchange through the end of the transition period. Key pending matters include the FERC transmission return on equity (ALJ recommended 9.68%), the CPUC decision on hydroelectric market valuation (expected by end-2000), the Mohave Station auction, and the proposed post-freeze rate redesign. If recovery of about $2.6 billion in generation-related regulatory assets became improbable, SCE would face a one-time, non-cash write-off.

What are the biggest legal and financial exposures disclosed in the filing?

The Navajo Nation lawsuit seeks at least $600 million in damages (trebled) plus at least $1 billion in punitive damages, though SCE is contesting it. Paiton's PLN payment dispute is subject to an interim agreement through December 31, 2000. Environmental cleanup liabilities are $163 million recorded, with up to $284 million in additional reasonably possible exposure. Edison International has also accrued $299 million for phantom stock option obligations and an exchange offer. The Coso geothermal litigation was settled in February 2000, subject to CPUC approval.

How is the company's capital structure changing?

Long-term debt more than doubled to $13.4 billion and short-term debt rose to $2.6 billion, largely from financing EME's acquisitions. Edison International issued $500 million and $325 million of quarterly income preferred securities and EME issued additional preferred shares, bringing total preferred securities of subsidiaries to $1.66 billion. Common shareholders' equity increased modestly to $5.2 billion. Projected 2000 debt maturities total $940 million, and construction expenditures are forecast at $1.4 billion for 2000.

EIX 10-K FY1999 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 29, 2000. Cited figures are marked; the original filing is the authoritative source.

Edison International (EIX) reported 1999 basic EPS of $1.79^a on net income of $623 million, down from $668 million in 1998 (basic EPS $1.86).

The decline reflects a one-time 1998 gain on the sale of SCE's generating plants, lower SCE earnings from accelerated depreciation, and a 24-cent special charge in 1999 (EME and Edison Capital phantom stock option charges, plus Edison Enterprises restructuring). Consolidated operating revenue rose 9% to $9.67 billion^b, driven by nonutility power generation, which nearly doubled to $1.64 billion on acquisitions including Homer City, Ferrybridge/Fiddler's Ferry, Contact Energy and the ComEd Illinois plants. Total assets nearly doubled to $36.2 billion, and long-term debt rose to $13.4 billion, so the company's risk profile has shifted substantially toward merchant generation.

The core utility, Southern California Edison (SCE), remains the earnings anchor, contributing $1.39^c per share in 1999 including a one-time 4-cent tax benefit. Its restructuring plan is still in transition: the rate freeze runs through March 2002, and the company carries roughly $2.6 billion of generation-related regulatory assets that would be written off if recovery became improbable. Pending decisions in 2000 include the FERC transmission rate case, the CPUC hydroelectric market valuation (about $1.0 billion, nearly twice book value), the Mohave Station sale, and a proposed rate redesign targeting roughly a 17% reduction in system average rates after the freeze.

Key risks for investors include EME's exposure to foreign and merchant markets (Paiton in Indonesia, where PLN payments are uncertain; UK pool price volatility, with forward prices down about 20%), litigation such as the Navajo Nation suit seeking at least $600 million^d in damages, and potential environmental cleanup costs that could exceed recorded liabilities by up to $284 million. Management also disclosed a $299 million accrual for phantom stock option obligations. Overall, the filing describes a utility whose regulated earnings are being reshaped by restructuring, alongside a rapidly expanding, higher-leverage independent power business.

02—Key points

Key Highlights

Basic EPS fell to $1.79 in 1999 from $1.86 in 1998; net income was $623 million versus $668 million, and 1999 included a 24-cent special charge.
Total operating revenue rose 9% to $9.67 billion, with nonutility power generation up 84% to $1.64 billion after acquiring Homer City, UK plants, Contact Energy and the ComEd fossil assets (9,510 MW total).
Total assets increased to $36.2 billion from $24.7 billion, and long-term debt rose to $13.4 billion from $8.0 billion, reflecting significant acquisition financing.
SCE earned $1.39 per share in 1999 (including a 4-cent one-time tax benefit), and carries about $2.6 billion of generation-related regulatory assets at risk of write-off if recovery becomes improbable.
The CPUC hydroelectric market valuation filing (~$1.0 billion, nearly 2x book value) and a proposed rate redesign (~17% system average reduction) are key pending regulatory decisions expected in 2000.
Paiton (Indonesia) and UK pool exposure present elevated risk: PLN has ordered no power from the plant while still needing to pay capacity charges, and UK forward electricity prices fell about 20%.
Edison Capital net income rose to $129 million and EME net income to $130 million; the parent company shows increased interest expense and common equity of $5.2 billion.

03—Questions

Frequently Asked Questions

Why did Edison International's earnings decline in 1999 despite strong revenue growth?
Net income fell to $623 million from $668 million, largely because 1998 included a gain of over $500 million on the sale of SCE's gas- and oil-fired plants that did not recur. SCE's earnings also declined on accelerated depreciation of generation assets. 1999 results were further reduced by a 24-cent special charge, mainly EME and Edison Capital phantom stock option accruals and Edison Enterprises business closures, partly offset by a 4-cent SCE tax benefit. Share repurchases helped EPS by about 6 cents.
How much of the company's earnings comes from the regulated utility versus nonutility businesses?
SCE contributed $1.39 per share, while EME and Edison Capital each contributed 37 cents per share (EME's figure excluding special charges was 57 cents, and Edison Capital's was 39 cents). Edison Enterprises and the parent company were a combined drag of 34 cents. The utility therefore remains the largest earnings contributor, but the nonutility segments are growing quickly and now generate a meaningful share of earnings.
What are the main regulatory risks facing SCE over the next few years?
The rate freeze lasts until March 31, 2002, and SCE must sell generation into the California Power Exchange through the end of the transition period. Key pending matters include the FERC transmission return on equity (ALJ recommended 9.68%), the CPUC decision on hydroelectric market valuation (expected by end-2000), the Mohave Station auction, and the proposed post-freeze rate redesign. If recovery of about $2.6 billion in generation-related regulatory assets became improbable, SCE would face a one-time, non-cash write-off.
What are the biggest legal and financial exposures disclosed in the filing?
The Navajo Nation lawsuit seeks at least $600 million in damages (trebled) plus at least $1 billion in punitive damages, though SCE is contesting it. Paiton's PLN payment dispute is subject to an interim agreement through December 31, 2000. Environmental cleanup liabilities are $163 million recorded, with up to $284 million in additional reasonably possible exposure. Edison International has also accrued $299 million for phantom stock option obligations and an exchange offer. The Coso geothermal litigation was settled in February 2000, subject to CPUC approval.
How is the company's capital structure changing?
Long-term debt more than doubled to $13.4 billion and short-term debt rose to $2.6 billion, largely from financing EME's acquisitions. Edison International issued $500 million and $325 million of quarterly income preferred securities and EME issued additional preferred shares, bringing total preferred securities of subsidiaries to $1.66 billion. Common shareholders' equity increased modestly to $5.2 billion. Projected 2000 debt maturities total $940 million, and construction expenditures are forecast at $1.4 billion for 2000.

04—Continue

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