How did Edison International's earnings change in 2006 and what drove them?

Consolidated income from continuing operations was $1.083 billion, or $3.28 per basic share, compared with $1.108 billion ($3.38) in 2005. SCE's earnings rose to $776 million on higher authorized revenue from the 2006 GRC, a $81 million benefit from resolving a state income-tax revenue issue, and higher Mountainview earnings. Those gains were offset by EMG's decline to $334 million from $414 million, mainly due to a $90 million after-tax charge for debt extinguishment at EME and lower Midwest Generation generation. Reported net income of $1.181 billion also includes $97 million from discontinued operations, mainly Lakeland project distributions.

What are the biggest financing and capital needs facing the company?

SCE's 2007–2011 capital investment plan calls for up to $17.3 billion, with planned capex of $2.4 billion in 2007, $2.8 billion in 2008, and $3.9–4.2 billion annually in 2009–2010. SCE expects to finance this through operating cash flow and new debt and preferred equity. EME also faces turbine commitments of about $463 million in 2007 and environmental capex for its Illinois plants. Liquidity is supported by SCE's credit facility, amended in February 2007 to $2.5 billion, and Edison International's $1.5 billion facility. Parent-level dividends are constrained by CPUC capital-structure rules, and MEHC cannot pay dividends unless its interest coverage ratio is at least 2.0x (it was 2.79x).

What are the main risks to the non-utility business (EME)?

EME's merchant plants (Illinois plants and Homer City, about 7.8 GW of coal-heavy PJM capacity) have no long-term contracts and face wholesale price volatility, fuel cost swings, and collateral requirements. Its consolidated debt was $3.2 billion, and its subsidiaries carry $4.3 billion of lease obligations. Environmental rules (CAIR, CAMR, the Illinois mercury and NOx agreement, and possible CO2 regulation) could force retrofits, shutdowns, or cost increases. EME was also an unsuccessful bidder in a February 2007 SCE capacity solicitation, leaving $489 million of turbine commitments to be redeployed. A FERC investigation of EMMT's bidding practices is pending.

What tax and regulatory contingencies could materially affect earnings?

The IRS is challenging Edison Capital's SILO and LILO leveraged lease transactions, with deferred taxes of about $1.5 billion plus approximately $417 million of interest as of year-end 2006. Edison International has paid some disputed amounts to preserve litigation rights. Under FSP FAS 13-2, a more-likely-than-not acceleration of tax payments could trigger a material earnings charge. At SCE, the CPUC performance-incentive investigation could require refunds and penalties of $52–388 million, with $ accrued at the low end. Other items include the FERC ISO charge dispute ($20–25 million) and a $41 million accrual for the DWP scheduling-coordinator tariff dispute.

What is the status of the Mohave plant and its effect on SCE?

Mohave ceased operations on December 31, 2005, because the co-owners could not resolve post-2005 coal and water supply or fund pollution-control retrofits. SCE announced on June 19, 2006 that it would not seek to return the plant to service, and SRP also abandoned its effort in February 2007. SCE has a Mohave net regulatory asset of about $81 million and continues to earn its authorized return during the 2006 GRC cycle. The CPUC could disallow unamortized plant balances if SCE cannot show it preserved the 'Mohave-open' alternative, though SCE believes it did so. Disposition options remain under review.

EIX 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 28, 2007. Cited figures are marked; the original filing is the authoritative source.

Edison International's FY2006 10-K shows a holding company whose earnings are dominated by its regulated utility, Southern California Edison (SCE), which earned $776 million^a from continuing operations in 2006, up from $725 million in 2005.

Consolidated earnings from continuing operations were $1.083 billion^b ($3.28 per basic share), roughly flat versus $1.108 billion in 2005, while net income rose to $1.181 billion ($3.58 per share) helped by $97 million from discontinued operations. Revenue grew about 6.5% to $12.6 billion, driven by rate increases tied to the 2006 General Rate Case and ERRA fuel and procurement recovery. The key investor issues are capital intensity and the non-utility generation business.

SCE's 2007–2011 capital plan calls for up to $17.3 billion^c of spending, with 2007 capex of about $2.4 billion, and this will require heavy external financing. Edison Mission Energy (EME) carries about $3.2 billion of consolidated debt plus $4.3 billion of long-term lease obligations, and it faces an estimated $2.7–3.4 billion of environmental capex at its Illinois coal plants through 2018, along with merchant price exposure in PJM. The parent's MEHC holding company has 13.5% senior secured notes due 2008 that depend on dividends from EME.

Edison Capital's leveraged leases (about $2.5 billion^d) are under IRS challenge, and the company estimates a possible cumulative-effect adjustment of $250–300 million on FIN 48 adoption in 2007. Other open items include the CPUC performance-incentive refund proceeding (range $52–388 million) and the Mohave plant shutdown. Overall, the filing shows a stable core utility with improving cash flow, offset by significant leverage, large capital needs, tax contingencies, and merchant generation risk concentrated at EME.

02—Key points

Key Highlights

Consolidated net income of $1.181 billion ($3.58 basic EPS) in 2006 versus $1.137 billion in 2005; continuing operations earnings were $1.083 billion, slightly below 2005's $1.108 billion.
SCE earnings from continuing operations rose to $776 million from $725 million, driven by the 2006 GRC decision (authorized increase of $134 million net in 2006) and Mountainview plant operations.
Operating revenue grew to $12.622 billion from $11.852 billion, mainly from rate increases and warmer weather boosting kWh sales.
SCE's 2007–2011 capital investment plan totals up to $17.3 billion, with 2007 expected capex of about $2.4 billion, implying significant external financing needs.
EME's consolidated debt was $3.2 billion at year-end 2006, and its subsidiaries carry $4.3 billion of long-term power plant lease obligations; MEHC's 13.5% senior secured notes due 2008 (~$800 million) depend on EME dividends.
Midwest Generation's December 2006 Illinois EPA agreement implies $2.7–3.4 billion of environmental capital expenditures through 2018, a material future cash requirement for the merchant fleet.
IRS challenges to Edison Capital's leveraged leases involve $1.5 billion of deferred taxes plus about $417 million of interest; FIN 48 adoption in 2007 is expected to add $250–300 million to retained earnings, and an adverse ruling under FSP FAS 13-2 could trigger a material charge.

03—Questions

Frequently Asked Questions

How did Edison International's earnings change in 2006 and what drove them?
Consolidated income from continuing operations was $1.083 billion, or $3.28 per basic share, compared with $1.108 billion ($3.38) in 2005. SCE's earnings rose to $776 million on higher authorized revenue from the 2006 GRC, a $81 million benefit from resolving a state income-tax revenue issue, and higher Mountainview earnings. Those gains were offset by EMG's decline to $334 million from $414 million, mainly due to a $90 million after-tax charge for debt extinguishment at EME and lower Midwest Generation generation. Reported net income of $1.181 billion also includes $97 million from discontinued operations, mainly Lakeland project distributions.
What are the biggest financing and capital needs facing the company?
SCE's 2007–2011 capital investment plan calls for up to $17.3 billion, with planned capex of $2.4 billion in 2007, $2.8 billion in 2008, and $3.9–4.2 billion annually in 2009–2010. SCE expects to finance this through operating cash flow and new debt and preferred equity. EME also faces turbine commitments of about $463 million in 2007 and environmental capex for its Illinois plants. Liquidity is supported by SCE's credit facility, amended in February 2007 to $2.5 billion, and Edison International's $1.5 billion facility. Parent-level dividends are constrained by CPUC capital-structure rules, and MEHC cannot pay dividends unless its interest coverage ratio is at least 2.0x (it was 2.79x).
What are the main risks to the non-utility business (EME)?
EME's merchant plants (Illinois plants and Homer City, about 7.8 GW of coal-heavy PJM capacity) have no long-term contracts and face wholesale price volatility, fuel cost swings, and collateral requirements. Its consolidated debt was $3.2 billion, and its subsidiaries carry $4.3 billion of lease obligations. Environmental rules (CAIR, CAMR, the Illinois mercury and NOx agreement, and possible CO2 regulation) could force retrofits, shutdowns, or cost increases. EME was also an unsuccessful bidder in a February 2007 SCE capacity solicitation, leaving $489 million of turbine commitments to be redeployed. A FERC investigation of EMMT's bidding practices is pending.
What tax and regulatory contingencies could materially affect earnings?
The IRS is challenging Edison Capital's SILO and LILO leveraged lease transactions, with deferred taxes of about $1.5 billion plus approximately $417 million of interest as of year-end 2006. Edison International has paid some disputed amounts to preserve litigation rights. Under FSP FAS 13-2, a more-likely-than-not acceleration of tax payments could trigger a material earnings charge. At SCE, the CPUC performance-incentive investigation could require refunds and penalties of $52–388 million, with $ accrued at the low end. Other items include the FERC ISO charge dispute ($20–25 million) and a $41 million accrual for the DWP scheduling-coordinator tariff dispute.
What is the status of the Mohave plant and its effect on SCE?
Mohave ceased operations on December 31, 2005, because the co-owners could not resolve post-2005 coal and water supply or fund pollution-control retrofits. SCE announced on June 19, 2006 that it would not seek to return the plant to service, and SRP also abandoned its effort in February 2007. SCE has a Mohave net regulatory asset of about $81 million and continues to earn its authorized return during the 2006 GRC cycle. The CPUC could disallow unamortized plant balances if SCE cannot show it preserved the 'Mohave-open' alternative, though SCE believes it did so. Disposition options remain under review.

04—Continue

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