Business Context and Reporting Period
Edison International filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The company reports two principal segments: Southern California Edison (SCE), a regulated electric utility serving Southern California, and Edison Mission Group (EMG), a competitive power-generation and energy-trading business.
Financial Performance and Liquidity
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Operating revenue | $2.983 billion, versus $2.741 billion | $5.766 billion, versus $5.552 billion |
| Operating income | $380 million, versus $351 million | $829 million, versus $851 million |
| Net income attributable to common shareholders | $176 million, or $0.54 diluted EPS, versus $344 million, or $1.05 | $376 million, or $1.15 diluted EPS, versus $580 million, or $1.77 |
| Operating margin | Approximately 12.7%, versus 12.8% | Approximately 14.4%, versus 15.3% |
| Cash flow from operating activities | Not separately provided for the quarter | $1.222 billion, versus $962 million |
| Capital expenditures | Not separately provided for the quarter | $2.256 billion, versus $2.070 billion |
- Consolidated cash and cash equivalents were $945 million at June 30, 2011, down from $1.389 billion at December 31, 2010. Total assets were $47.075 billion and total equity was $11.757 billion.
- Debt consisted of $388 million of short-term debt, $53 million of current long-term debt and $12.956 billion of long-term debt. Long-term debt, including the current portion, had a carrying value of $13.009 billion and fair value of $13.075 billion.
- SCE had approximately $2.623 billion available under credit facilities after $200 million of borrowings and $71 million of letters of credit. SCE reported a debt-to-total-capitalization ratio of 0.47, below its 0.65 covenant limit.
- EMG reported $870 million of cash and $945 million of available credit-facility capacity. EME had $3.7 billion of senior notes outstanding, including $500 million due in 2013. EMG credit ratings were below investment grade and on negative outlook.
- Edison International declared common dividends of $0.320 per share in the quarter and $0.640 per share for the first six months, compared with $0.315 and $0.630, respectively, in 2010.
Material Changes Versus the Prior Comparable Period
- Revenue increased 8.8% in the second quarter and 3.9% year to date, primarily from higher SCE authorized revenue, FERC-related transmission revenue, capital-related recovery mechanisms and increased renewable-generation revenue.
- Common-shareholder earnings declined 49% in the quarter and 35% year to date. The principal comparison issue was the absence of $138 million of 2010 tax benefits from the Global Settlement and asset-removal-cost accounting changes, as well as weaker EMG results.
- SCE common earnings declined to $211 million from $301 million in the quarter and to $433 million from $465 million year to date. Higher rate-base revenue was more than offset by higher taxes, operations and maintenance expense, and depreciation.
- EMG reported a common-shareholder loss of $31 million in the quarter and $51 million year to date, compared with income of $27 million and $104 million, respectively. The year-to-date deterioration reflected Homer City outages, lower realized energy prices, higher maintenance costs and lower trading income.
- Operating cash flow increased $260 million year to date, while investing cash use increased to $2.332 billion from $2.205 billion, mainly because of higher capital expenditures. Financing cash provided increased to $666 million from $438 million.
- SCE capital expenditures, including accruals, were $1.6 billion in the first six months, compared with $1.5 billion in 2010. EMG began construction of the 479 MW Walnut Creek gas-fired peaker project and acquired and began construction of the 55 MW Pinnacle wind project.
Guidance, Outlook, Risks and Unusual Items
- SCE projected 2011 capital investments of $3.9 billion to $4.4 billion and 2011–2014 capital spending of $15.6 billion to $17.5 billion.
- SCE’s updated 2012 general rate-case request was $6.2 billion, but intervenors proposed substantial reductions. The final CPUC revenue requirement was uncertain; a decision was expected by year-end 2011.
- FERC accepted a formula-rate framework effective January 1, 2012, but reduced SCE’s proposed base return on equity from 11.5% to 9.93%, subject to further proceedings.
- Management expected EMG profitability to be significantly lower in 2011 and warned that EMG could incur net losses in 2011 and later years absent higher energy and capacity prices or lower costs. Midwest Generation faced lower capacity prices beginning in June 2012 and higher rail costs after a favorable contract expires at the end of 2011.
- CSAPR, effective January 1, 2012, creates substantial compliance uncertainty. Homer City’s preliminary estimate for SO2 and related environmental retrofits was $600 million to $700 million, and the plant did not have sufficient capital or operating cash flow to fund the work. Financing could result in dilution, reduced dispatch or cessation of operations.
- Homer City Units 1 and 2 were offline during the first half of 2011 and returned to service on April 5 and May 25, respectively. The outage affected liquidity and required use of $12 million from an equity rent reserve.
- Environmental and legal exposure includes Midwest Generation and Homer City Clean Air Act litigation, potential class actions, nuclear insurance assessments, spent-nuclear-fuel claims and environmental remediation. Recorded environmental remediation liabilities were $60 million, with reasonably possible additional costs of up to $199 million.
- Tax contingencies included $595 million of unrecognized tax benefits and proposed IRS adjustments that could require approximately $189 million and $91 million of federal tax payments if sustained.
- Other commitments included $1.9 billion of renewable power-purchase obligations for periods after 2015, $634 million of coal commitments at June 30, 2011, and potential turbine-related charges, including a possible $29 million termination charge.
- The filing states that disclosure controls and procedures were effective as of June 30, 2011.
Most Important Facts to Verify
- Whether SCE ultimately receives the requested 2012 rate-case revenue requirement and how the lower FERC return on equity affects transmission earnings and cash flow.
- EMG’s ability to refinance or replace credit facilities maturing in 2012 and the $500 million of EME senior notes due in 2013.
- Final CSAPR compliance requirements, Homer City financing, retrofit costs, operating restrictions and potential impairment or dilution.
- Whether EMG’s weak energy and capacity pricing, plant outages and higher transportation and environmental costs lead to sustained losses.
- Resolution and financial exposure from the Midwest Generation and Homer City environmental litigation and the pending tax examinations.
- Actual capital spending, operating cash flow, collateral requirements and changes in derivative fair values, particularly SCE’s reported $532 million net derivative liability.