August 30, 2007
Mr. William Thompson
Branch Chief
Division of Corporation Finance
United States Securities and Exchange Commission
Washington, D.C. 20549-3561
Dear Mr. Thompson:
This letter is submitted on behalf of Edison International and Southern California Edison
Company (SCE) in response to comments from the staff of the Division of Corporation Finance
of the Securities Exchange Commission (the Commission) with respect to the companies' (1)
Form 10-K for fiscal year ended December 31, 2006, and Form 10-Q for fiscal quarter ended
March 31, 2007, as set forth in your letter to Ms. Linda G. Sullivan, Vice President and
Controller, dated August 9, 2007.
For reference purposes, the text of your letter has been reproduced in this letter, with
our responses appearing below each numbered comment.
Edison International
Form 10-K for Fiscal Year Ended December 31, 2006
Controls and Procedures, page 53
1. We note the disclosure on page 21 of SCE's December 31, 2006 Form 10-K that SCE has
not designed, established or maintained internal control over financial reporting for
four consolidated variable interest entities (VIEs) and that SCE's evaluation of
internal control over financial reporting did not include these VIEs. Please tell us
whether you included such VIEs in your evaluation of internal control over financing
reporting. If not, please disclose that you have not evaluated the internal controls
of the VIEs and that your conclusion regarding effectiveness of your internal control
over financial reporting does not extend to the controls of the VIEs. Also disclose
any key sub-totals, such as assets, revenues and net income that result from
consolidation of entities whose internal controls have not been assessed. See
Question 1 of "Management's Report on Internal Control over Financial Reporting and
Certification of Disclosure in Exchange Act Periodic Reports Frequently Asked
Questions," available on our website at www.sec.gov.
Response: Edison International has not designed, established or maintained internal
control over financial reporting for the four consolidated VIEs - Kern River,
Midway-Sunset, Sycamore and Watson - and our conclusion regarding the effectiveness
of internal control over financial reporting did not extend to the internal controls
of these VIEs because, when taken as a whole considering location scoping and
significant accounts analysis for each individual project, it
Page 1
was not material at the Edison International level, which was the level that
management was required to provide an internal control assessment in 2006.
Edison International will include a disclosure in its Annual Report on Form 10-K
regarding the conclusion that its internal control assessment does not include an
evaluation of internal control over financial reporting for the VIEs and that the
conclusion regarding the effectiveness of internal control over financial reporting
does not extend to the controls of the VIEs, as well as disclosure of key subtotals,
as appropriate.
SCE was not required to perform an internal control assessment over financial
reporting nor include a disclosure regarding the effectiveness of internal control
over financial reporting in 2006 due to SCE being a non-accelerated filer. As SCE
did not have legal, contractual or other rights to design, establish, maintain or
evaluate the effectiveness of internal controls over financial reporting for these
VIEs, SCE was unable to conclude as to whether there have been any material changes
in internal control over financial reporting. Appropriate disclosure has been made
under Item 9A in SCE's 2006 Annual Report on Form 10-K on this basis. Due to the
requirements to evaluate the effectiveness of internal controls over financial
reporting for non-accelerated filers, effective in 2008, SCE will include the same
disclosures referenced above for Edison International in the SCE Annual Report on
Form 10-K, as appropriate.
Exhibit 12 - Computation of Ratios of Earnings to Fixed Charges and Preferred and
Preference Stock
2. Please provide us with a reconciliation of the line item "income from continuing
operations before fixed charges and taxes" to your income statement. Additionally,
please consider revising your computation in future filings to clearly disclose how
you derived earnings, as that term is defined in Item 503(d) of Regulation S-K.
Response: A reconciliation for Edison International's and SCE's line item "income
from continuing operations before fixed charges and taxes" to the income statement
has been provided in Attachment A. Edison International and SCE will include similar
reconciliations as part of the computation of ratio of earnings to fixed charges and
preferred and preference stock in both Edison International's and SCE's 2007 Annual
Report on Form 10-K and prospectively.
Exhibit 13 - 2006 Annual Report
Management's Discussion and Analysis of Financial Condition and Results of Operations, page
5
Results of Operations and Historical Cash Flow Analysis, page 51
Page 2
3. We note your presentation of basic earnings per share by subsidiary, which represent
non-GAAP financial measures. Please disclose how these measures are used by
management and in what way they provide meaningful information to investors.
Additionally, please identify these per share measures as non-GAAP measures of
performance and disclose that the non-GAAP measures should not be considered as an
alternative to earnings per share determined in accordance with GAAP as an indicator
of operating performance. Refer to Item 10(e)(1)(i) of Regulation S-K and Question
11 of our "Frequently Asked Questions Regarding the Use of Non-GAAP Measures,"
available on our website at www.sec.gov.
Response: Basic earnings per share is a recognized financial measure used by
investors to evaluate performance as it relates to profitability. Edison
International's management uses earnings per share by principal operating subsidiary
for financial planning and analysis of performance. Edison International also uses
these financial measurements as a primary performance measurement when communicating
with analysts and investors. Edison International's management believes that the
presentation of earnings per share contributed by its principal operating
subsidiaries provides additional useful information regarding each subsidiary's
relative contribution to Edison International's consolidated earnings per share.
The principal operating subsidiary basic earnings per share is based on the principal
operating subsidiary net income and Edison International's weighted average
outstanding common shares. The impact of participating securities for each principal
operating subsidiary is not material to each principal operating subsidiary's basic
earnings per share amount and is therefore reflected in the caption "Edison
International (parent) and other." The impact of participating securities reduced
Edison International's basic earnings per share by about 1%. The tabular
presentation provided on page 51 reconciles the principal operating subsidiary basic
earnings per share measures to Edison International's consolidated basic earnings per
share measure.
In future filings, Edison International will identify these subsidiary earnings per
share measures as non-GAAP measures of performance and provide disclosure indicating
the reasons Edison International's management believes these measures provide useful
information to investors regarding it results of operations and that these non-GAAP
measures should not be considered as alternatives to the consolidated basic earning
per share measure, which is determined in accordance with generally accepted
accounting principles.
Commitments, Guarantees and Indemnities, page 73
4. Please revise your table of contractual obligations to include other long-term
liabilities reflected on your balance sheet, as applicable. See Item 303(a)(5) of
Regulation S-K.
Page 3
Response: Edison International has a process in place in which all other long-term
liabilities are reviewed each reporting period to ensure appropriate disclosure.
Edison International believes that all other long-term liabilities that meet the
disclosure requirements of Regulation S-K, Item 303(a)(5) are properly included in
the table of contractual obligations. Other long-term liabilities that do not meet
the disclosure requirements of Regulation S-K, Item 303(a)(5) are disclosed as
guarantees, indemnities, or environmental matters, as appropriate. Edison
International will continue to review all other long-term liabilities each reporting
period and will include other long-term liabilities in the table of contractual
obligations or provide a cross reference to other disclosures, as appropriate.
Consolidated Statements of Changes in Common Shareholders' Equity, Page 98
5. Please explain to us why it is appropriate to record proceeds from stock option
exercises in retained earnings rather than common stock.
Response: As disclosed in the policy for stock based compensation set forth in Note
1, Significant Accounting Policies in both Edison International's and SCE's
consolidated financial statements included in their Annual Reports on Form 10-K,
Edison International does not issue new common stock for stock option exercises.
Rather, an independent third party is used to facilitate the exercise of stock
options. After a stock option exercise, the independent third party purchases Edison
International stock in the open market and is reimbursed by Edison International for
the cost of shares purchased. The shares are never registered in Edison
International's name nor retired as a result of the transactions.
Edison International is incorporated in California and is not able to hold treasury
stock. California corporate law provides that when a California corporation
purchases or otherwise acquires its own shares, those shares are restored to the
status of authorized but unissued shares (eliminating treasury shares). The
accounting for this transaction, however, is analogous to a non-California company
with treasury stock that has a policy of purchasing shares delivered upon a stock
option exercise in the open market to prevent dilution. In that case, when an option
is exercised, such company would be able to deliver shares out of treasury stock and
record the transaction by debiting cash and crediting treasury stock. Any loss or
gain on the re-issuance of the treasury shares would be recorded as a charge or
credit to retained earnings. Subsequently, such company would purchase shares in the
open market to replace those shares and would credit cash and debit treasury stock.
The net effect of these transactions would impact retained earnings for the difference
between the option exercise price and the market price of the stock.
The substance of the above treasury stock transaction and Edison International's use
of an independent third party to facilitate the settlement of stock option
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exercises are essentially the same except that Edison International does not have
treasury stock. The net effect of Edison International's reimbursement to the
independent third party for the settlement of stock option exercises and the receipt
of the option exercise price is a charge to retained earnings.
Edison International elects to present the gross components in the Consolidated
Statement of Changes in Common Shareholders' Equity in the captions "Shares purchased
for stock-based compensation" (representing the cost to reimburse the independent
third party for Edison International stock purchased on the open market) and
"Proceeds from stock option exercise" to ensure full disclosure.
Note 1. Summary of Significant Accounting Policies, page 100
Earnings Per Share, page 103
6. For each period for which an income statement is presented, please provide a
reconciliation of the numerators and denominators of the basic and diluted per-share
computations for income from continuing operations. Additionally, disclose the
amount of securities that could potentially dilute basic earnings per share in the
future that were not included in the computation of diluted earnings per share
because to do so would have been antidilutive for the periods presented. Refer to
paragraph 40 of SFAS 128.
Response: Attachment B provides a reconciliation of the numerators and denominators
of the basic and diluted per-share computation for income from continuing operations
for each period for which an income statement is presented.
The impact of the two-class method in computing basic earnings per share resulted in
the numerator being reduced by the adjustment for dividend equivalents on vested
stock options (participating share dividends), resulting in a decrease to basic
earnings per share. This earnings allocation method is different than the
calculation of diluted earnings per share which reflects all dilutive securities in
the numerator and denominator (as disclosed) and assumes that the participating
securities were converted to common stock. For the year-ended 2006, the diluted
earnings per share amount was greater than the basic earnings per share amount mainly
due to the participating securities having a greater impact on basic earning per
share than on diluted earnings per share. As a result, Edison International disclosed
a diluted earnings per share amount equal to the basic earnings per share amount.
Edison International did not have any other securities that could potentially dilute
basic earnings per share in the future that were not included in the computation of
diluted earnings per share.
Edison International will include additional disclosure to clarify this antidilution
effect in Edison International's consolidated financial statements, as well as disclosure
of the amount of securities that could potentially dilute basic earnings per share in the
future that were not included in the computation of diluted earnings per share because to
do so would have been antidiultive for the periods presented, prospectively, as
appropriate.
Page 5
Property and Plant, page 107
Nonutility Property, page 108
7. Please explain to us why it is appropriate to amortize acquired emission allowances
over the estimated lives of the plants rather than to amortize them as used to
generate power.
Response: The following background information is provided below related to our
accounting for emission allowances:
In 1999, Midwest Generation acquired the Illinois plants from Commonwealth Edison, a
subsidiary of Exelon Corporation (Exelon). In a letter dated August 12, 2000, EME
requested the SEC Staff's concurrence with its conclusion that Midwest Generation's
acquisition of the Illinois plants did not constitute the acquisition of a business
for which financial statements under Rule 3-05 of Regulation S-X would be required.
In a letter dated August 16, 2000, the staff responded that it did not object to
EME's conclusion. As a result, EME accounted for the 1999 transaction as a purchase
of assets, i.e. the power plants and related assets. We note that the sale of the
Illinois plants by Exelon was a competitive auction in which EME was selected to
negotiate and execute an asset purchase agreement.
In preparing the bid, management developed a series of forecasted cash flows from
future generation of electricity and related operating costs. Embedded in the
projected operating costs was the purchase of additional emission allowances needed
to comply with the EPA Acid Rain program. The amount of emission allowances needed
to be purchased was determined by estimating the total emission allowances needed
based on projected SO2 and NOx emissions from generation, less projected emission
allowances to be allocated under the EPA Acid Rain program. The amount allocated
under the EPA Acid Rain program was viewed as the threshold above which future cash
expenditures would be required to purchase allowances. As a result, management
viewed the principal assets purchased in this transaction as the power plants and
related inventory and property.
In early 2000, an independent appraisal was completed to allocate the purchase price
for federal income tax matters. This appraisal was subsequently also used for
financial reporting purposes. The independent appraisal used an economic model that
assigned future cash flows to various components of the assets acquired. The
independent appraisal segregated the future cash flows into two key components:
o the power plants without any existing or future emissions allowances (i.e. the future
cash flows assumed that emission allowances were purchased for all projected
emission from generation).
Page 6
o the theoretical purchase of emission allowances that were either allocated by the EPA
at the date of the asset purchase (December 15, 1999) to the Illinois plants or
projected to be allocated over the estimated useful life of such power plants.
We believe that allocated emission allowances from the EPA are an inherent part of
the power plants; accordingly, we have accounted for the two components set forth in
the appraisal as part of the historical cost of property, plant and equipment. The
disclosure is set forth in Note 1, Summary of Significant Accounting Policies to
Edison International's consolidated financial statements included its 2006 Annual
Report on Form 10-K under the heading "Property and Plant--Nonutility Property."
The amortization of acquired emission allowances on a straight-line basis was based
on the foregoing analysis.
Revenue Recognition, page 110
8. Please tell us and disclose how you account for sales and purchases of power to and
from Independent Systems Operators and Regional Transmission Organizations that do
not use marginal pricing. Specifically address whether you account for these
transactions on a gross or net basis. In addition, tell us and disclose the basis on
which you net purchases and sales (for example, on a net hourly basis).
Response: Currently, the California Independent System Operator (CAISO) market is a
scheduling mechanism rather than a forward market, therefore SCE does not sell or
purchase power to and from the CAISO. However, during real-time scheduling,
imbalance energy requirements may occur and the CAISO will make appropriate
scheduling adjustment resulting in sales and purchases made through the CAISO.
Consistent with EITF 03-11, Reporting Realized Gains and Losses on Derivative
Instruments That Are Subject to FASB Statement No. 133 (FAS 133), Accounting for
Derivative Instruments and Hedging Activities, and Not "Held for Trading Purposes" as
Defined in EITF Issue No. 02-3, Issues Involved in Accounting for Derivative
Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk
Management Activities SCE records the purchases and sales for imbalance energy on a
gross basis since the imbalance energy has either been (a) delivered to and received
by a market participant through the CAISO scheduling mechanism or (b) has been
provided by a market participant and used to meet SCE's load requirement through the CAISO
scheduling mechanism.
EITF 03-11 requires net presentation for wholesale procurement transactions that do
not result in physical delivery (i.e. book-outs). Since the imbalance energy is
physically settled (gross delivery of the underlying commodity), SCE's gross
Page 7
treatment for imbalance energy is appropriate and consistent with the consensus
reached in EITF 03-11. SCE will continue to monitor CAISO imbalance energy activity
and will disclose its accounting policy for CAISO imbalance energy in future filings,
as appropriate.
EME's merchant sales activities are conducted in PJM. PJM uses locational marginal
pricing. The policy for revenue recognition is set forth in Note 1, Significant
Accounting Policies to Edison International's consolidated financial statements
included in its 2006 Annual Report on Form 10-K.
Note 5. Compensation and Benefit Plans, page 118
Stock-Based Compensation, page 125
9. We note stock options accrue dividend equivalents for the first five years of the
option term. Please tell us and disclose how you reflected such dividend protection
in calculating the fair value of options. Refer to the guidance in paragraphs A35
through A37 and B90 through B93 of SFAS 123R.
Response: As disclosed in the Note 5, Compensation and Benefit Plans to both Edison
International's and SCE's consolidated financial statements included in their 2006
Annual Reports on Form 10-K, "Beginning with awards made in 2003, stock options
accrue dividend equivalents for the first five years of the option term. Unless
transferred to nonqualified deferral plan accounts, dividend equivalents accumulate
without interest. Dividend equivalents are paid only on options that vest, including
options that are unexercised. Dividend equivalents are paid in cash after the vesting
date."
SFAS 123R paragraph A36 states that dividend protection may take a variety of forms
and shall be appropriately reflected in estimating the fair value of a share option.
Edison International believes that a stock option that pays cash dividends to the
holder should be valued as two separate awards with the total fair value equal to:
(1) the present value of the estimated dividend payments that will be received prior
to exercise; and (2) the value of the stock option estimated using the Black-Scholes
option-pricing model.
Edison International believes the dividend protection has been appropriately
reflected in estimating the fair value of the stock options and will provide
additional disclosure on how the dividend protection was reflected in calculating the
stock option fair value in both Edison International's and SCE's consolidated
financial statements included in their 2007 Annual Reports on Form 10-K and
prospectively.
10. In calculating the fair value of options using the Black-Scholes options-pricing
model, please explain to us why it is appropriate to base the expected term of
options on the actual remaining contractual term rather than the
Page 8
period of time for which the instrument is expected to be outstanding. Refer to the
guidance in paragraphs A3, A18 and A26 through A30 of SFAS 123R.
Response: Edison International considered many factors in developing an expected
term assumption, including vesting period, contractual term, historical exercise and
post-vesting cancellation experience, and stock price history. Based on analysis
performed at the date of grant for the 2006 stock options, the contractual term of
the stock options represented Edison International's best estimate of the expected
term. The analysis took into consideration the factors mentioned above, including the
inherent weakness in using historical exercise data which included the effects of
unusual stock option activity resulting from the California energy crisis and the
uncertainty in the stock market at the date of grant.
Edison International will continue to prospectively reevaluate its expected term
assumption for new stock option grants, based on new trends, market conditions and
other appropriate factors and will adjust its expected term assumption as appropriate
under the guidance in paragraphs A3, A18 and A26 through A30 of SFAS 123R.
Note 18. Discontinued Operations, page 158
11. As paragraph 5 of SFAS 144 specifically excludes investments in equity securities
accounted for under the equity method from its scope, it is unclear how you concluded
the sale of certain equity method investments, such as the Tri Energy and
Caliraya-Botocan-Kalayaan projects, qualified for discontinued operations treatment.
Please explain to us in detail why these dispositions meet the scope requirements of
SFAS 144.
Response: EME entered into an agreement dated July 29, 2004 to sell its remaining
international power generation portfolio, owned by a wholly-owned Dutch subsidiary,
MEC International B.V. to a consortium comprised of International Power plc (70%) and
Mitsui & Co. LTD. (30%). The purchase price was $2.3 billion, subject to certain
power price adjustments. Closing of the transaction was subject to approval of
International Power's shareholders and to a number of regulatory approvals and
project level consents. If certain project level approvals and consents were not
obtained, one or more projects could be excluded from the sale transaction and the
purchase price adjusted accordingly.
Based on the July 2004 sales agreement, EME accounted for the sale of its
international holding company as discontinued operations under SFAS 144 and reflected
the accounting in its third quarter 2004 Form 10-Q. As part of the approval and
consent process, local partners in several projects interceded, resulting in:
Page 9
o A separate agreement with the same consortium on the same terms and conditions for
the TriEnergy project.
o A separate agreement with the existing owner of the Caliraya-Botocan-Kalayaan (CBK)
project at the same price and on substantially the same terms and conditions.
o Retention of the Doga project, which EME continues to own.
We believed it was appropriate to continue to account for the sale of the TriEnergy
and CBK projects as discontinued operations as they were sold pursuant to the same
underlying sales transaction entered into on July 29, 2004. As a supplemental note,
the Doga project was part of this same sales transaction, but due to its subsequent
retention by EME, it was reclassified to continuing operations during the fourth
quarter of 2004 as required under SFAS 144.
Southern California Edison Company
Form 10-K for Fiscal Year Ended December 31, 2006
12. To the extent applicable, please address the comments above.
Response: The responses provided above address SCE, as applicable.
In connection with our response to the comments of the Staff set forth herein, we
acknowledge that:
o Each of Edison International and SCE are responsible for the adequacy and accuracy of
the disclosure in their respective filings;
o Staff comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the filing; and
o Neither Edison International nor SCE may assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal securities
laws of the United States.
Should you have any questions or comments on the above responses, please advise us by
letter or by calling me at (626)302-1502 or via e-mail at linda.sullivan@sce.com, or Jeff
Duran at (626)302-4513 or via e-mail at jeff.duran@sce.com.
Sincerely,
/s/ Linda G. Sullivan
---------------------
Linda G. Sullivan
ATTACHMENT A
EDISON INTERNATIONAL
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED AND PREFERENCE STOCK
RECONCILIATION OF "INCOME FROM CONTINUING OPERATIONS BEFORE FIXED CHARGES" TO INCOME STATEMENT
Year Ended December 31,
------------------------------------------------------------
(In millions of dollars) 2002 2003 2004 2005 2006
-------- -------- -------- -------- --------
Income from continuing operations
(per annual reports) $ 1,055 $ 655 $ 226 $ 1,108 $ 1,083
Add:
Interest expense - net of amounts
capitalized 1,126 1,020 985 794 807
AFUDC - borrowed (included in
interest expense for the years
2005 and 2006) - - - 14 19
Income tax expense (benefit) 330 124 (92) 457 582
Dividends on preferred and
preference stock of utility
not subject to mandatory redemption 6 5 6 24 51
Dividends on preferred securities
subject to mandatory redemption 102 52 - - -
Other 1 - (1) - 1
Income from continuing -------- -------- -------- -------- --------
operations before fixed
charges and taxes $ 2,620 $ 1,856 $ 1,124 $ 2,397 $ 2,543
======== ======== ======== ======== ========
SOUTHERN CALIFORNIA EDISON COMPANY AND CONSOLIDATED UTILITY-RELATED SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED AND PREFERENCE STOCK
RECONCILIATION OF "INCOME FROM CONTINUING OPERATIONS BEFORE FIXED CHARGES" TO INCOME STATEMENT
Year Ended December 31,
---------------------------------------------------------------
(In millions of dollars) 2001 2002 2003 2004 2005 2006
------ ------ ------ ------ ------ ------
Income from continuing operations
(per annual reports) $ 2,408 $ 1,247 $ 882 $ 921 $ 749 $ 827
Add:
Interest expense - net of amounts
capitalized 786 585 457 409 360 400
AFUDC - borrowed (included in
interest expense for the years
2005 and 2006) - - - - 14 19
Income tax expense 1,658 642 388 438 292 438
Other (1) (1) - (1) (1) (1)
Income from continuing operations
before fixed charges ------- ------- ------- ------- ------- -------
$ 4,851 $ 2,473 $ 1,727 $ 1,767 $ 1,414 $ 1,683
======== ======= ======= ======= ======= =======
ATTACHMENT B
Edison International
Reconciliation of Basic and Diluted Earnings Per Share
(Millions of Dollars)
2006 2005 2004
----------------------------------------------------------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED
Earnings:
Continuing Operations $ 1,083 $ 1,083 $ 1,108 $ 1,108 $ 226 $ 226
Adjustment for Undistributed
Earnings of Participating
Securities (A) (14) - (7) - - -
Adjustment for Compensation
Awards (B) - 3 - 3 - -
--------------------- ------------------- ---------------
Adjusted Earnings from
Continuing Operations $ 1,069 $ 1,086 $ 1,101 $ 1,111 $ 226 $ 226
===================== =================== ===============
Basic Weighted Average
Shares 326 326 326 326 326 326
Dilutive Compensation
Awards - Shares (C) - 4 - 6 - 5
--------------------- ------------------- ---------------
Total Weighted Average
Shares 326 330 326 332 326 331
===================== =================== ===============
Earnings Per Share:
Continuing Operations $3.28 $3.28 * $ 3.38 $3.34 $0.69 $0.68
===================== =================== ===============
(A) Participating securities represent vested stock options that earn dividend equivalents on an equal
basis with common shares.
(B) Represents the income impact of assumed conversion of dilutive compensation awards to common shares.
(C) Represents the incremental shares from assumed conversion of dilutive compensation awards to common
shares.
* EPS has been adjusted to agree with basic EPS because fully diluted EPS should be no greater than basic
EPS.
