Edison International 2009 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Edison International is a holding company whose principal businesses are Southern California Edison Company (SCE), a regulated electric utility, and Edison Mission Group (EMG), which includes competitive power generation and financial services. The filing covers the three and six months ended June 30, 2009, compared with the corresponding 2008 periods. Financial statements are unaudited.
Key Financial Metrics
| Metric | Three months ended June 30, 2009 | Three months ended June 30, 2008 | Six months ended June 30, 2009 | Six months ended June 30, 2008 |
|---|---|---|---|---|
| Operating revenue | $2.834 billion | $3.477 billion | $5.646 billion | $6.591 billion |
| Operating income (loss) | $(364) million | $506 million | $188 million | $1.132 billion |
| Net income (loss) attributable to Edison International | $(16) million | $261 million | $234 million | $559 million |
| Diluted EPS | $(0.05) | $0.79 | $0.72 | $1.69 |
| Net cash from operating activities | Not separately presented | Not separately presented | $883 million | $733 million |
- Second-quarter revenue declined approximately 18.5%; six-month revenue declined approximately 14.3% year over year.
- Second-quarter operating margin was approximately negative 12.8%; six-month operating margin was approximately 3.3%.
- Cash and equivalents were $2.701 billion at June 30, 2009, down from $3.916 billion at December 31, 2008.
- Total debt, including short-term debt and current maturities, was approximately $11.735 billion at June 30, 2009, compared with approximately $13.267 billion at year-end 2008. Long-term debt was $11.276 billion, and long-term debt due within one year was $382 million.
- Total available credit-facility capacity was approximately $4.265 billion after borrowings and letters of credit. Edison International parent liquidity included $27 million of cash and $1.349 billion of available credit; SCE reported $3.26 billion of available liquidity, including $2.806 billion of credit capacity.
- Total assets were $41.881 billion and total equity was $10.772 billion at June 30, 2009.
- Capital expenditures were $1.540 billion in the first six months, compared with $1.460 billion in 2008. SCE accounted for approximately $1.4 billion of 2009 capital expenditures.
- Cash flow from financing activities was an outflow of $1.820 billion, primarily reflecting $2.066 billion of net short-term debt repayments, partially offset by $939 million of long-term debt issuance.
Material Changes Versus the Prior Comparable Period
- SCE earnings attributable to Edison International increased to $499 million in the quarter and $707 million year to date, from $157 million and $307 million, respectively. The increase included a $300 million after-tax benefit related primarily to tax timing differences under the Global Settlement, as well as improved regulated operating results.
- EMG competitive power generation earnings declined to $40 million in the quarter and $96 million year to date, from $72 million and $217 million. Lower power prices, weaker demand, reduced trading income and lower Illinois Plants earnings offset improved Homer City results.
- Financial services and other recorded a $598 million quarterly loss and a $606 million year-to-date loss, compared with income of $39 million and $48 million. The principal cause was the termination of Edison Capital cross-border leveraged leases and related tax effects.
- Electric utility revenue decreased primarily because of lower balancing-account collections, lower sales for resale, lower fuel and purchased-power costs, and reduced electricity demand. Retail billed and unbilled revenue increased, supported by rate increases, but sales volume declined.
- EME’s Northern Illinois and PJM West Hub average energy prices fell to $30.08/MWh and $41.40/MWh, respectively, from $52.42/MWh and $72.17/MWh in the first six months of 2008.
- Operating cash flow increased $150 million to $883 million, while investing cash outflow improved to $278 million from $1.548 billion, largely because of $1.385 billion of proceeds from terminated leases and lower net investment activity.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- The Global Settlement with the IRS was finalized May 5, 2009. Edison International recorded a consolidated after-tax earnings charge of $274 million through the second quarter, but expects an estimated positive cash impact of approximately $380 million over time. SCE expects approximately $640 million of positive cash impact, while Edison Capital expects approximately $300 million of net cash outflow.
- Edison Capital received $1.385 billion of net proceeds from terminating cross-border leases and recorded a $920 million pretax loss, or $628 million after tax including related tax effects. Edison Capital also recorded a $33 million pretax gain on the sale of its Midland Cogeneration Ventures lease.
- SCE’s 2009 general rate case authorized a $4.83 billion base revenue requirement for 2009, with approximate requirements of $5.04 billion for 2010 and $5.25 billion for 2011. SCE’s proposed FERC transmission settlement would provide a $448 million revenue requirement, subject to approval.
- SCE’s 2009–2013 capital investment plan totals approximately $16.8 billion to $20.4 billion. Recovery of portions of the plan remains subject to future CPUC and FERC approvals, permitting, financing, construction and other conditions.
- SCE expects to meet continuing obligations through cash, operating cash flow, debt and capital-market access, but notes that capital-market availability remains uncertain. A potential $125 million to $175 million 2009 cash benefit from accelerated tax depreciation was expected.
- EME had approximately $4.9 billion of consolidated debt, $1.67 billion of cash and short-term investments excluding certain Edison Capital funds, and only $110 million of available borrowing capacity under its principal credit facilities.
- EME had commitments for 484 wind turbines totaling 942 MW, with remaining payments of up to $596 million in 2009 and $242 million in 2010. Vendor-financing discussions were non-binding; failure to obtain financing or power-purchase agreements could require turbine cancellations and a material charge.
- Environmental and legal matters include EPA New Source Review notices involving Homer City and Midwest Generation, potential environmental compliance costs, Navajo Nation litigation, spent nuclear fuel issues, and other regulatory proceedings. The filing states that several outcomes cannot currently be predicted or reliably estimated.
- Recorded environmental remediation liabilities were $43 million, with reasonably possible costs potentially exceeding recorded amounts by up to $178 million. Edison Funding failed certain minimum-net-worth covenants following the lease termination loss, potentially requiring approximately $92 million of loan repayments and $20 million of affordable-housing project purchases under guarantees.
- At June 30, 2009, SCE had $188 million of posted collateral and could require an additional $220 million if downgraded below investment grade. EME estimated that margin and collateral requirements could increase by approximately $85 million under adverse market conditions.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2009, with no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether the Global Settlement’s estimated future cash benefits, tax payments and final IRS interest calculations develop as expected.
- The sustainability of SCE’s improved earnings after excluding the $300 million tax-related benefit and the effect of regulatory balancing accounts.
- EME’s exposure to low wholesale power prices, weak demand, congestion, credit downgrades, collateral calls and limited borrowing capacity.
- Progress and final terms of vendor financing for EME’s turbine commitments, including potential cancellation costs and deposit write-offs.
- Approval and implementation of SCE’s FERC transmission settlement and recovery of planned capital expenditures through regulated rates.
- Potential financial effects of EPA and environmental proceedings, including Homer City, Midwest Generation, Four Corners and renewable-compliance matters.
- Liquidity available at the parent, SCE and EMG levels, recognizing that subsidiary cash may not be freely available to the parent and that debt covenants restrict distributions.