EDISON INTERNATIONAL quarterly report, Q3 FY2010

Edison International 10-Q Summary

Reporting period: Quarterly and year-to-date periods ended September 30, 2010; comparative periods ended September 30, 2009. Financial statements are unaudited. Edison International operates primarily through Southern California Edison Company (SCE), a regulated electric utility, and Edison Mission Group (EMG), a competitive power-generation business.

Financial performance and condition

Metric	Q3 2010	Q3 2009	9M 2010	9M 2009
Operating revenue	$3.788 billion	$3.664 billion	$9.340 billion	$9.310 billion
Operating income	$862 million	$768 million	$1.712 billion	$958 million
Net income attributable to common shareholders	$510 million	$403 million	$1.090 billion	$637 million
Diluted EPS	$1.56	$1.22	$3.31	$1.94
Net cash from operating activities	Not separately presented	Not separately presented	$2.750 billion	$2.112 billion
Capital expenditures	Not separately presented	Not separately presented	$3.129 billion	$2.287 billion

Margins: Consolidated operating margin was approximately 22.8% in Q3 2010 versus 21.0% in Q3 2009, and 18.3% for the first nine months versus 10.3% in the prior-year period. Net income attributable to common shareholders represented approximately 13.5% of revenue in Q3 and 11.7% year to date, compared with approximately 11.0% and 6.8%, respectively, in the comparable periods.

SCE generated common-shareholder earnings of $394 million in Q3 and $858 million for nine months, compared with $346 million and $1.053 billion, respectively, in 2009.
EMG generated common-shareholder earnings of $110 million in Q3 and $214 million year to date, compared with $60 million and a $450 million loss, respectively, in 2009.
Quarterly core earnings increased to $477 million from $358 million; nine-month core earnings increased to $950 million from $870 million. Core earnings are a non-GAAP measure excluding significant discrete items.
Dividends declared were $0.315 per common share for the quarter and $0.945 year to date, versus $0.310 and $0.930 in the comparable 2009 periods.

Liquidity, debt and balance sheet

Cash and equivalents were $2.009 billion at September 30, 2010, up from $1.673 billion at December 31, 2009.
Total debt consisted of $98 million of short-term debt, $43 million of current long-term debt and $12.117 billion of long-term debt. Long-term debt including current maturities was $12.160 billion, compared with $10.814 billion at year-end 2009.
Total assets were $45.566 billion and total liabilities were $34.020 billion, compared with $41.444 billion and $30.438 billion, respectively, at December 31, 2009.
Consolidated debt-to-total-capitalization was 0.53 to 1.00, below the 0.65 covenant limit.
At September 30, SCE had $861 million of cash and short-term investments and $2.883 billion available under credit facilities. The parent company had $17 million of cash and $1.426 billion available under its credit facility.
EMG and its subsidiaries had $1.1 billion of cash and equivalents and $960 million of available credit capacity, against $4.2 billion of consolidated debt and approximately $3.0 billion of sale-leaseback obligations.
Operating cash flow increased to $2.750 billion from $2.112 billion, while investing cash outflows increased to $3.319 billion from $1.303 billion, primarily because of higher capital expenditures and the absence of 2009 lease-termination proceeds.

Material changes versus the prior comparable period

Consolidated nine-month earnings improved by $453 million, principally because 2009 included a $274 million after-tax charge related to the Global Settlement and termination of Edison Capital cross-border leases. In 2010, the Global Settlement produced a $175 million earnings benefit.
Q3 earnings increased by $107 million, supported by higher SCE earnings and stronger EMG results. The 2009 quarter included a $46 million non-core benefit associated with the Mountainview plant transfer to utility rate base; 2010 included a $37 million Global Settlement benefit.
SCE’s quarterly core earnings increased $52 million, primarily from authorized revenue supporting rate-base growth and higher AFUDC. Nine-month core earnings increased $95 million, despite higher operating costs and lower sales volumes.
EMG’s Q3 core earnings increased $59 million, driven by higher realized energy prices, capacity revenue and a $24 million gain on the sale of Lehman-related bankruptcy claims. Nine-month core earnings declined $21 million because of higher scheduled maintenance costs and unfavorable unrealized energy and fuel results.
Effective January 1, 2010, revised variable-interest-entity guidance resulted in deconsolidation of the Big 4 projects and two wind projects and consolidation of the Ambit project. The adoption increased retained earnings by $15 million and changed asset, liability and segment comparability.
SCE’s retail billed and unbilled revenue increased, but electricity sales volumes declined because of milder weather and economic conditions. CPUC-authorized decoupling limits SCE’s exposure to volumetric sales risk.

Outlook, commentary, risks and unusual items

SCE projected 2010 capital investments of $3.3 billion to $4.0 billion and $18 billion to $21.5 billion for 2010–2014. Nine-month 2010 capital investments were approximately $2.4 billion.
SCE’s proposed 2012 general rate case requested a $6.3 billion base-rate revenue requirement, or a $903 million increase over projected 2011 base-rate revenue. The request remained subject to CPUC approval.
SCE expected $250 million to $300 million of 2010 cash-flow benefit from extended 50% bonus depreciation.
Midwest Generation estimated that full retrofits for sulfur-dioxide controls and related particulate-removal upgrades could cost approximately $1.2 billion, although the company could instead shut down certain units. Final decisions could be deferred until 2012 or later.
EMG had five renewable projects totaling 630 MW under construction and an approximately 3,700 MW development pipeline. Renewable capital expenditures through 2011 were projected at $511 million.
Key market risks include electricity, natural gas, coal, capacity and emissions-allowance prices; transmission congestion; counterparty credit; interest rates; collateral requirements; and lower forward power prices affecting 2011–2012 results.
SCE’s derivative portfolio had a net liability of approximately $1.262 billion at September 30, 2010, largely offset by regulatory accounting. A downgrade below investment grade could have required approximately $201 million of incremental SCE collateral, in addition to $18 million already posted.
Material legal and regulatory matters include the Homer City New Source Review notice of violation, Midwest Generation New Source Review litigation, Navajo Nation litigation seeking at least $600 million plus punitive damages, the 2010 FERC rate case, environmental remediation, nuclear safety and spent-fuel matters, and a California Coastal Commission proceeding.
The IRS proposed an adjustment related to the 2004 sale of EMG’s international assets that could result in approximately $152 million of federal and state tax payments including interest; Edison International disputed the adjustment and expected to appeal.
On October 8, 2010, EME settled its Mitsubishi turbine dispute. The settlement applied a $68 million deposit to 23 turbines, permitted an election to deploy 60 additional turbines, and could require payments of up to $30 million and $40 million under specified conditions.

Important facts for investors to verify

Confirm the final outcome and timing of SCE’s 2010 FERC rate case and the requested 2012 general rate case.
Monitor San Onofre corrective actions, steam-generator work, NRC oversight and potential cost-recovery limitations.
Assess the ultimate compliance strategy, capital cost and operating impact for Midwest Generation and Homer City environmental requirements.
Track the Homer City and Midwest Generation New Source Review proceedings and potential penalties, retrofit obligations or shutdowns.
Evaluate EMG’s exposure to declining power and capacity prices, hedge settlements, collateral calls and below-investment-grade credit ratings.
Verify the status of the IRS proposed tax adjustment and any remaining unrecognized tax benefits.
Reconcile reported earnings with core earnings and separately assess the effect of the Global Settlement, health-care legislation tax charge, VIE accounting changes and other non-recurring items.