Business Context and Reporting Period
Company: Edison International (EDISON INTERNATIONAL)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: Edison International is a holding company with three primary reportable segments: Southern California Edison Company (SCE), a regulated electric utility; Edison Mission Energy (EME), an independent power producer; and Edison Capital, a financial services provider. The company operates primarily in California and internationally.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Sept 30, 2003 |
Three Months Ended Sept 30, 2002 |
Nine Months Ended Sept 30, 2003 |
Nine Months Ended Sept 30, 2002 |
|---|---|---|---|---|
| Total Operating Revenue | $3,833 | $3,706 | $9,479 | $9,020 |
| Operating Income | $925 | $704 | $1,460 | $2,216 |
| Net Income | $544 | $352 | $624 | $1,101 |
| Diluted EPS | $1.65 | $1.07 | $1.89 | $3.35 |
| Cash and Equivalents | $3,246 (as of Sept 30, 2003) | |||
| Total Assets | $35,622 (as of Sept 30, 2003) | |||
| Total Liabilities | $29,800 (as of Sept 30, 2003) | |||
| Long-Term Debt | $11,370 (as of Sept 30, 2003) |
Cash Flow (Nine Months Ended Sept 30, 2003):
- Net cash provided by operating activities: $2,841 million
- Net cash used by financing activities: $(978) million
- Net cash used by investing activities: $(1,091) million
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenue increased 3.4% year-over-year for the quarter and 5.1% for the nine-month period, driven by higher retail and wholesale revenue at SCE and increased generation at EME's Homer City and Contact Energy projects.
- Profitability Decline (YTD): While quarterly net income rose 54.5% to $544 million, nine-month net income fell 43.3% to $624 million. The YTD decline is primarily due to a $251 million asset impairment charge at EME (related to Midwest Generation peaking plants) and the absence of a $480 million one-time gain recorded in 2002 related to SCE's utility retained generation decision.
- Asset Impairment: EME recorded a $246 million impairment charge in Q2 2003 for small peaking plants in Illinois due to revised long-term capacity revenue outlooks and higher natural gas prices. This contrasts with an $86 million impairment in the same period in 2002.
- Discontinued Operations: The company recorded a $44 million after-tax gain in Q3 2003 from the sale of SCE's fuel oil pipeline and storage business, classified as discontinued operations.
- Regulatory Adjustments: SCE fully recovered its $3.6 billion procurement-related obligations account (PROACT) in July 2003, leading to a $1.2 billion annual rate reduction for customers effective August 1, 2003, with no impact on earnings.
Guidance, Outlook, Risks, and Unusual Items
Liquidity and Debt Maturity Risks
Critical Debt Maturity: Edison Mission Midwest Holdings (a subsidiary of EME) has $781 million of debt maturing on December 11, 2003. The subsidiary does not have sufficient cash to repay this obligation. A failure to refinance or extend this debt could trigger a default under MEHC's senior secured notes and potentially lead to Chapter 11 reorganization for MEHC or EME.
Financing Plan: On November 13, 2003, EME's subsidiary received a commitment letter for a $700 million secured loan to provide bridge financing. Proceeds are intended to fund an equity contribution to Midwest Holdings to repay the December 2003 debt. Completion is subject to closing conditions and is not guaranteed.
Credit Ratings: On October 28, 2003, Standard & Poor's downgraded EME's senior unsecured credit rating to B from BB- and placed it on CreditWatch with negative implications. This downgrade triggered mandatory prepayments of $246 million from a cash flow recapture account.
Regulatory and Legal Contingencies
- CPUC Litigation: The California Supreme Court denied a petition for rehearing regarding the PROACT settlement agreement. The case returns to the Ninth Circuit for final disposition. SCE believes recovery of costs is probable but cannot predict the ultimate outcome.
- FERC Investigations: FERC has issued enforcement orders regarding market manipulation. While FERC staff filed a motion to dismiss charges against SCE in November 2003, the company faces potential refunds if unjust profits are found. 90% of any refunds would be passed to ratepayers.
- Navajo Nation Litigation: Ongoing litigation regarding coal royalties for the Mohave Generating Station. The Supreme Court ruled against the Navajo Nation in a related government suit, but the case against SCE and Peabody remains pending.
- Environmental Remediation: Recorded liability is $91 million, but costs could exceed this by up to $242 million due to uncertainties in cleanup estimates.
Accounting Changes
- Asset Retirement Obligations (ARO): Adopted Jan 1, 2003. Resulted in a $354 million after-tax gain for SCE (deferred as regulatory liability) and a $9 million charge for EME.
- Variable Interest Entities (VIEs): Edison International expects to consolidate certain projects (Brooklyn Navy Yard, Storm Lake) effective Oct 1, 2003, which may result in an $82 million loss in Q4 2003.
Investor Verification Checklist
- Debt Refinancing Status: Verify the finalization of the $700 million bridge loan commitment and the ability of Edison Mission Midwest Holdings to repay or refinance the $781 million debt due December 11, 2003.
- Credit Rating Trajectory: Monitor further rating agency actions on EME and Midwest Holdings, as downgrades could trigger additional collateral requirements or mandatory prepayments.
- Regulatory Outcomes: Track the final disposition of the CPUC PROACT litigation and FERC market manipulation proceedings, as these could impact future rate recovery or require refunds.
- Asset Sales Execution: Confirm the completion of planned asset sales (e.g., Gordonsville, Thailand project, international operations) intended to generate liquidity for EME.
- Q4 Accounting Impact: Assess the financial impact of the expected $82 million loss from VIE consolidations and the potential $100 million earnings decrease from the expiration of the San Onofre incremental cost incentive pricing mechanism in 2004.