Business Context and Reporting Period
Company: Edison International
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Business Overview: Edison International is a holding company with three primary segments: Southern California Edison (SCE), a regulated electric utility; Edison Mission Energy (EME), an independent power producer; and Edison Capital, a financial services provider. The reporting period is heavily influenced by the aftermath of the California energy crisis, ongoing regulatory settlements regarding procurement costs (PROACT), and significant credit rating downgrades affecting EME.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended Sep 30, 2002 | 9 Months Ended Sep 30, 2002 | 3 Months Ended Sep 30, 2001 | 9 Months Ended Sep 30, 2001 |
|---|---|---|---|---|
| Total Operating Revenue | $3,997 | $9,510 | $3,882 | $8,524 |
| Operating Income | $830 | $2,463 | $1,775 | $1,516 |
| Net Income (Loss) | $352 | $1,101 | $(413) | $(1,132) |
| Diluted EPS (Total) | $1.07 | $3.35 | $(1.27) | $(3.47) |
| Cash and Equivalents (Balance Sheet) | $2,548 (Sep 30, 2002) vs $3,991 (Dec 31, 2001) | |||
| Net Cash Provided by Operating Activities | $1,320 (9 Months 2002) | $2,260 (9 Months 2001) | ||
| Long-Term Debt | $13,539 (Sep 30, 2002) |
Material Changes vs. Prior Period
- Turnaround in Net Income: The company reported a net income of $352 million for the quarter and $1.1 billion for the nine months ended September 30, 2002, compared to net losses of $413 million and $1.1 billion, respectively, in the prior year periods. This reversal is primarily due to the absence of massive losses from discontinued operations (Fiddler's Ferry and Ferrybridge coal stations in the U.K.) in 2002, which caused $1.2 billion in losses in 2001.
- Regulatory Asset Recovery: SCE recorded a one-time credit to earnings of $480 million (after tax) in the second quarter of 2002 following a CPUC decision (URG Decision) that allowed the reestablishment of regulatory assets related to nuclear plants and purchased power settlements.
- Operating Expenses: Total operating expenses decreased significantly year-over-year for the nine-month period ($7.0 billion in 2002 vs. $7.0 billion in 2001), driven largely by a sharp decline in purchased power costs ($1.6 billion in 2002 vs. $3.3 billion in 2001) as SCE ceased purchasing power from the California Power Exchange/ISO after January 2001.
- Credit Rating Downgrades: In October 2002, Moody's downgraded EME's senior unsecured rating to Ba3 (below investment grade) and Mission Energy Holding Company (MEHC) to B3. Standard & Poor's placed ratings on CreditWatch with negative implications.
Guidance, Outlook, Risks, and Contingencies
Management Commentary and Outlook
- SCE Liquidity: SCE expects to meet obligations in 2002 from cash on hand ($1.3 billion) and operating cash flows. The company projects recovery of the remaining $905 million in the PROACT (procurement-related obligations account) balance by the end of 2003, though this is subject to regulatory proceedings.
- EME Restructuring: EME is reducing capital expenditures by $363 million over five years, suspending operations at certain Illinois plants, and cutting general and administrative expenses by $25 million annually to improve cash flow amidst depressed wholesale energy prices.
- Dividend Restrictions: SCE is prohibited from paying dividends on common stock until it recovers all procurement-related obligations or until January 1, 2005, whichever is earlier. EME is restricted from paying dividends to MEHC unless specific interest coverage ratios are met, which are currently not satisfied.
Material Risks and Contingencies
- CPUC Litigation: A federal appeals court affirmed the settlement agreement allowing SCE to recover past procurement costs but certified questions regarding California state law to the California Supreme Court. The outcome remains uncertain, though collection under PROACT continues.
- EME Credit and Liquidity: Downgrades have increased borrowing costs by an estimated $37 million annually and triggered "cash trap" provisions, restricting EME's ability to distribute cash from subsidiaries. EME faces potential collateral requirements for trading activities.
- Legal Proceedings:
- Navajo Nation Litigation: Claims against SCE and Peabody regarding coal royalties seek damages of at least $600 million plus treble damages and punitive damages of $1 billion.
- Electric Line Maintenance: CPUC investigation alleges 4,721 violations; a penalty of $97 million has been recommended.
- Aircraft Leases: Edison Capital has potential earnings exposure of $83 million related to aircraft leased to United and American Airlines, with United considering bankruptcy.
- Market Risk: EME faces increased merchant risk as ExGen has notified EME it will not purchase capacity from 2,684 MW of coal-fired units and 1,864 MW of Collins Station units for 2003 and 2004, forcing EME to sell into volatile wholesale markets.
Investor Verification Checklist
- PROACT Recovery Timeline: Verify the status of the California Supreme Court certification regarding the CPUC settlement and its potential impact on the projected 2003 recovery of the $905 million procurement balance.
- EME Liquidity Constraints: Monitor EME's ability to meet debt service obligations given the "cash trap" provisions triggered by credit downgrades and the suspension of distributions from subsidiaries.
- Illinois Plant Exposure: Assess the financial impact of ExGen's decision to release significant capacity (over 4,500 MW) from power purchase agreements starting in 2003, exposing EME to merchant market risks.
- Legal Exposure: Track the outcomes of the Navajo Nation litigation and the CPUC electric line maintenance penalty, which could result in significant unplanned charges.
- Dividend Policy: Confirm the timeline for the resumption of dividends, which is currently blocked by regulatory restrictions on SCE and financial covenants on EME/MEHC.