01—Abstract
Summary
Summary of the 10-K filed February 27, 2008. Cited figures are marked; the original filing is the authoritative source.
Edison International (EIX) reported 2007 consolidated net income of $1.098 billiona, or $3.31 diluted EPS, down slightly from $1.181 billion ($3.57) in 2006, largely because 2006 included a number of one-time tax and regulatory benefits.
Operating revenue rose about 4% to $13.1 billionb. The company's earnings are concentrated in its regulated utility, Southern California Edison (SCE), which contributed $707 million, and its nonutility power generator, Edison Mission Group (EMG), which contributed $412 million from continuing operations. Edison Capital, the financial services arm, contributed a further $69 million of net income.
Parent-level results were a $19 millionc loss. The main investor concerns are the size of SCE's capital program, which management plans at up to $19 billion for 2008 through 2012, and a large unresolved federal tax dispute. The IRS is challenging Edison Capital's leveraged lease transactions.
The filing estimates the deferred taxes at stake at about $1.6 billiond, with interest of roughly $525 million and a 20% penalty asserted. Management also notes that the IRS position could be partly resolved within 12 months. Other exposures include EMG's need for substantial environmental capital spending on its coal plants, notably Midwest Generation, a potential EPA Clean Air Act enforcement proceeding, and a CPUC proceeding over SCE's performance-incentive rewards, where potential refunds and penalties range from $52 million to $388 million.
EMG's earnings are sensitive to wholesale power prices in PJM, where it sells most of its output. Its PJM capacity auctions produced materially higher capacity prices for the period through May 2011. The company also has a large wind development program, with roughly 566 MW in service and about 5,000 MW in its development pipeline.
Those projects depend partly on production tax credits that expire for projects placed in service after December 31, 2008 unless extended. The company's 2007 total assets were $37.6 billion, and its common equity was $8.4 billion.
02—Key points
Key Highlights
- Consolidated 2007 net income of $1.098 billion ($3.31 diluted EPS), versus $1.181 billion ($3.57) in 2006; 2006 included roughly $130 million of favorable SCE tax and regulatory items.
- SCE earned $707 million, and EMG earned $412 million from continuing operations, up from $334 million on higher Illinois and Homer City operating income and lower interest expense.
- Capital plan of up to $19 billion for SCE over 2008 to 2012, with 2008 capital expenditures projected at $2.8 billion; 2007 capital spending was $2.8 billion consolidated.
- IRS challenge to Edison Capital leveraged lease deferrals: $1.6 billion of deferred taxes at stake, about $525 million of after-tax interest, and a 20% penalty asserted, with settlement talks underway.
- EMG's PJM capacity auctions set higher prices through May 2011, with fixed-price sales at $40.80 to $191.32 per MW-day; the January 2008 auction cleared at $174.29 per MW-day for 2010/2011.
- Environmental exposure: EPA NOV against Midwest Generation for alleged NSR violations, and multi-phase Illinois CPS compliance spending estimated at roughly $2.7 billion to $3.4 billion over the coming decade.
- SCE faces a CPUC performance-incentive investigation with potential refunds and penalties from $52 million to $388 million, and has accrued the low end of the range.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 27, 2008Financial Statements
| Revenue | $12.87B |
| Operating Expenses | $10.36B |
| Operating Income | $2.51B |
| Interest Expense | $752.00M |
| Net Income | $1.10B |
| EPS (Basic) | $3.33 |
| EPS (Diluted) | $3.31 |
| Shares Outstanding (Basic) | 326.00M |
| Shares Outstanding (Diluted) | 331.00M |
05—Questions
Frequently Asked Questions
How did Edison International's earnings change in 2007 compared with 2006?
Consolidated net income fell to $1.098 billion ($3.31 diluted EPS) from $1.181 billion ($3.57 diluted EPS). The decline mainly reflects 2006 one-time benefits at SCE, including a $130 million benefit from tax and regulatory resolutions. EMG's earnings rose to $412 million from $334 million, and results were also helped by lower interest expense after the 2007 debt refinancing, which carried a $241 million pre-tax loss on early debt extinguishment.
What is the biggest risk to the company's balance sheet?
The largest identified risk is the IRS dispute over Edison Capital's leveraged lease transactions. The asserted deficiencies could require payment of about $1.6 billion in deferred taxes plus interest and penalties if the IRS position is sustained, though the company believes its tax treatment is correct and is in settlement discussions with IRS Appeals. Separately, SCE's capital program of up to $19 billion over 2008 to 2012 will require substantial external financing and regulatory approvals.
How exposed is EMG to power prices and environmental regulation?
EMG sells most of its merchant output into PJM and is exposed to wholesale energy and capacity prices. PJM's RPM capacity auctions have improved its capacity revenue through May 2011. Its coal plants face significant environmental spending for mercury, NOx, and SO2 controls, including a Midwest Generation phase-three program with an estimated range of $2.2 billion to $2.9 billion that depends on which units are retrofitted or retired. The company has not yet finalized those estimates.
What does the 10-K say about the dividend and shareholder payouts?
Dividends declared rose to $1.175 per share in 2007 from $1.10 in 2006. The quarterly rate was raised to $0.305 in December 2007. Dividend payments depend on upstream cash from SCE, which is limited by CPUC capital-structure rules, and from EMG, which is restricted by covenants in some financing arrangements. Edison International's parent company had about $37 million of cash at year-end.
What are the main growth drivers for the company?
The main drivers are SCE's rate base growth from transmission, distribution, and generation investment, including four new peaker plants and the EdisonSmartConnect meter program, and EMG's wind development. EMG had 566 MW of wind in service, 447 MW under construction, and a development pipeline of about 5,000 MW. Continued growth depends on regulatory approvals, the extension of federal production tax credits past 2008, and the timing of turbine deliveries, where some suppliers have reported blade and gearbox problems.
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