01—Abstract
Summary
Summary of the 10-K filed March 2, 2009. Cited figures are marked; the original filing is the authoritative source.
Edison International (EIX) reported 2008 consolidated net income of $1,215 milliona, up from $1,098 million in 2007, with earnings from continuing operations of $1,215 million (diluted EPS $3.68 versus $3.31 in 2007).
The increase was driven mainly by EMG (Edison Mission Group), whose continuing earnings rose to $561 millionb from $412 million, helped by the absence of the 2007 $148 million after-tax loss on early debt extinguishment and higher Midwest Generation and trading income. SCE (Southern California Edison) earnings declined modestly to $683 million from $707 million, mainly due to a $49 million after-tax charge tied to a CPUC performance-based ratemaking decision. Liquidity appeared solid at year-end, with $5.57 billion of available liquidity, including $3.92 billion of cash and short-term investments, though the company drew heavily on credit lines as a precaution during the financial crisis.
The key risk for investors is the unresolved IRS dispute over cross-border leveraged leases at Edison Capital. The company estimates maximum after-tax earnings exposure of about $1.3 billionc and has negotiated a Global Settlement that awaits Joint Committee on Taxation review.
Terminating the leases before settlement could trigger an after-tax charge of at least $650 milliond. Other pressures include a 2009 General Rate Case in which the CPUC's proposed decisions could reduce SCE's capital plan by roughly $2 billion, large pension and nuclear decommissioning trust losses, weak forward power prices affecting merchant generation, and multi-billion-dollar environmental compliance costs at the Illinois coal plants.
02—Key points
Key Highlights
- Consolidated 2008 net income of $1.215 billion (EPS $3.68 diluted), up about 11% from $1.098 billion in 2007.
- SCE earnings fell to $683 million from $707 million, largely due to a $49 million after-tax PBR-related charge; SCE's 2009-2013 capital plan ranges from $17.1 billion to $21 billion, subject to the pending GRC decision.
- EMG earnings rose to $561 million from $412 million, aided by the non-recurrence of a $148 million after-tax debt extinguishment loss in 2007 and higher Midwest Generation and energy trading results.
- Total available liquidity of $5.57 billion at year-end 2008, including $3.92 billion of cash and short-term investments, after the company drew about $2.39 billion on credit facilities during 2H 2008 as a precaution.
- Tax exposure on cross-border leveraged leases: maximum after-tax earnings exposure of about $1.3 billion, with a pending Global Settlement with the IRS; early lease termination could cause an after-tax charge of at least $650 million.
- Pension and PBOP plan assets fell 35% and 33% in 2008; pension plans were underfunded by $937 million and PBOP by $1 billion, though SCE expects rate recovery.
- Merchant power exposure: forward PJM energy prices fell 38% to 42% from mid-2008 levels, and EME's 942 MW of wind turbine commitments ($706 million due in 2009) add financing risk.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed March 2, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $14.11B$12.87B | +9.7% |
| Operating Expenses | $11.55B$10.36B | +11.5% |
| Operating Income | $2.56B$2.51B | +2.2% |
| Interest Expense | $700.00M$752.00M | −6.9% |
| Net Income | $1.22B$1.10B | +10.7% |
| EPS (Basic) | $3.69$3.33 | +10.8% |
| EPS (Diluted) | $3.68$3.31 | +11.2% |
| Shares Outstanding (Basic) | 326.00M326.00M | 0.0% |
| Shares Outstanding (Diluted) | 329.00M331.00M | −0.6% |
05—Questions
Frequently Asked Questions
Why did Edison International's earnings increase in 2008 even though SCE's earnings declined?
Growth came from EMG, whose continuing earnings rose $149 million to $561 million. The 2007 results included a $148 million after-tax loss on early extinguishment of debt, which did not recur in 2008. EMG also benefited from higher Midwest Generation operating income driven by capacity prices, new wind projects, and higher trading income at EMMT. SCE's earnings were down $24 million, mainly because of a $49 million after-tax charge related to a CPUC performance-based ratemaking decision.
How large is the IRS exposure on leveraged leases, and what could happen next?
Edison International estimates its maximum after-tax earnings exposure on the cross-border leveraged leases at about $1.3 billion, measured as of December 31, 2008, excluding 20% penalties the company does not believe would be sustained. Edison International has negotiated a Global Settlement with the IRS that is pending review by the Joint Committee on Taxation. If the leases are terminated before the settlement is finalized, the company expects an initial after-tax charge of at least $650 million, which could be reduced later. If no settlement is reached, litigation would require payment of disputed taxes, interest, and possibly penalties before refund claims are pursued.
What is the outlook for SCE's capital spending and earnings?
SCE's 2009-2013 capital plan is $17.1 billion to $21 billion, depending on the outcome of its 2009 General Rate Case. The Administrative Law Judge's proposed decision would authorize a $4.6 billion base revenue requirement for 2009 and require about $2.0 billion of 2009-2010 capital expenditure reductions, while CPUC President Peevey's alternate would authorize $4.9 billion. SCE cannot predict which decision will be adopted. SCE expects to fund 2009 capital spending through cash on hand, operating cash flow, and new capital market financing, and does not expect to pay additional dividends to Edison International from SCE in 2009.
What are the main risks to the nonutility generation business (EME)?
EME's merchant plants lack long-term power purchase agreements and are exposed to wholesale power and fuel prices. Forward PJM energy prices fell sharply in late 2008, which will reduce gross margins on unhedged volumes from Midwest Generation and Homer City. EME also faces significant environmental capital requirements under Illinois' Combined Pollutant Standard, including potential costs of about $1 billion for FGD at Powerton, and ongoing turbine commitments of $706 million in 2009. Disruption in the capital markets and Lehman Brothers-related counterparty losses have further constrained liquidity.
How exposed are the company's pension and nuclear decommissioning trusts to the market decline?
The pension trust fell 35% and the PBOP trust fell 33% in 2008, leaving pension plans underfunded by $937 million and PBOP by $1 billion at year-end. The nuclear decommissioning trusts declared a $2.5 billion balance, down from $3.4 billion, due to unrealized losses and other-than-temporary impairments. Because SCE recovers pension, PBOP, and decommissioning costs in customer rates through regulatory balancing accounts, these changes are expected to affect the timing of cash flows and future contribution levels rather than reported earnings directly, though a prolonged market decline could raise future expense and funding requirements.
06—Continue