Business Context and Reporting Period
Company: Edison International (EDISON)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended June 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 unregulated power generation and trading company; and Edison Capital, a financial services provider. The company is navigating the aftermath of the California energy crisis, focusing on regulatory settlements and liquidity management.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended June 30, 2002 |
3 Months Ended June 30, 2001 |
6 Months Ended June 30, 2002 |
6 Months Ended June 30, 2001 |
|---|---|---|---|---|
| Total Operating Revenue | $2,926 | $2,446 | $5,513 | $4,642 |
| Operating Income | $1,266 | $453 | $1,633 | $(258) |
| Net Income (Loss) | $665 | $(102) | $749 | $(719) |
| Diluted EPS | $2.02 | $(0.31) | $2.28 | $(2.21) |
| Cash and Equivalents (Balance Sheet) |
$1,593 | N/A | $1,593 | N/A |
| Net Cash from Operating Activities | N/A | N/A | $(348) | $937 |
| Short-term Debt | $72 | N/A | $72 | N/A |
| Long-term Debt | $13,643 | N/A | $13,643 | N/A |
Note: Balance sheet figures represent the position as of June 30, 2002. Prior period balance sheet data is not provided in the text for direct comparison.
Material Changes vs. Prior Period
- Turnaround in Profitability: The company reported a net income of $665 million for the quarter and $749 million year-to-date, a significant improvement from net losses of $102 million and $719 million, respectively, in the prior year periods.
- Regulatory Impact (URG Decision): A primary driver of the 2002 earnings was a one-time after-tax gain of $480 million recorded in the second quarter. This resulted from a California Public Utilities Commission (CPUC) decision allowing SCE to reestablish regulatory assets related to nuclear plants and purchased power, reducing the Procurement-Related Obligations Account (PROACT) balance.
- Revenue Growth: Total operating revenue increased 19.6% year-over-year for the quarter ($2,926M vs $2,446M) and 18.8% for the six-month period ($5,513M vs $4,642M). This was driven by CPUC-authorized surcharges and the implementation of performance-based ratemaking.
- Expense Reduction: Purchased power expenses decreased significantly ($581M in Q2 2002 vs $807M in Q2 2001) due to lower natural gas prices and the cessation of purchases from the California Power Exchange (PX) since January 2001.
- Cash Flow Shift: Net cash provided by operating activities turned negative ($348M used) for the six months ended June 30, 2002, compared to $937M provided in 2001. This was primarily due to SCE repaying $1.65 billion in past-due obligations and debt maturities in March 2002.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- SCE Liquidity: SCE expects to meet 2002 obligations from cash on hand and operating cash flows. The company projects recovery of the remaining PROACT balance by late 2003.
- Dividend Restrictions: SCE is prohibited from paying common stock dividends until it recovers all procurement-related obligations or until January 1, 2005, whichever is earlier. Edison International does not expect to pay dividends to common shareholders until the PROACT balance is recovered.
- EME Strategy: EME has suspended new business development and is reviewing capital expenditures due to lower wholesale energy prices and credit market constraints. EME expects to sell a significant portion of its Illinois plant output into wholesale markets starting in 2003, increasing merchant risk.
- Power Procurement: SCE may resume power procurement for customers on January 1, 2003, pending regulatory approval of a procurement plan.
Risks and Contingencies
- Regulatory Appeals: Consumer advocacy groups (TURN, FTCR) are appealing the CPUC settlement agreement regarding SCE's cost recovery. A reversal could materially impact SCE's financial position.
- Credit Ratings: EME and its subsidiaries face potential credit rating downgrades below investment grade due to industry conditions and increased merchant risk. A downgrade could trigger "cash traps" in financing agreements, restricting distributions to the parent company.
- Market Volatility: EME is exposed to commodity price risks (electricity, natural gas) and foreign exchange risks. Lower wholesale prices have adversely affected EME's earnings.
- Legal Proceedings: Significant litigation includes the Navajo Nation lawsuit regarding coal royalties and various QF lawsuits regarding payment suspensions during the energy crisis (mostly settled).
Investor Verification Checklist
- PROACT Recovery Timeline: Verify the assumptions regarding the timing of the $1.6 billion remaining PROACT balance recovery, as this dictates dividend resumption.
- EME Credit Ratings: Monitor Moody's and S&P reviews of EME and its subsidiaries (Edison Mission Midwest Holdings, Homer City) for potential downgrades that could restrict cash flows.
- Illinois Plant Contracts: Confirm the status of Exelon Generation's options to purchase capacity from EME's Illinois plants for 2003 and 2004, as 2,684 MW were released from contracts.
- Regulatory Appeals: Track the status of the federal court appeal by TURN and the California Supreme Court petition by FTCR regarding the CPUC settlement.
- Goodwill Impairment: Monitor the completion of the second step of the goodwill impairment test for the Citizens Power acquisition, expected by December 31, 2002.