Edison International 2010 Form 10-K Summary
Business context and reporting period
Edison International is a California holding company with two reportable segments: Southern California Edison Company (SCE), a rate-regulated electric utility, and Edison Mission Group (EMG), a competitive power generation business. The filing covers the fiscal year ended December 31, 2010. The request identifies 2010 Q4, but this document is an annual Form 10-K; quarterly data is presented separately.
SCE served an approximately 50,000-square-mile Southern California territory with about 13 million residents. EMG owned or leased interests in 39 operating projects with 10,979 MW of net physical capacity and had 480 MW of wind projects under construction at year-end.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Operating revenue | $12.409 billion | $12.361 billion | Up $48 million |
| Operating income | $2.126 billion | $1.398 billion | Up $728 million |
| Income from continuing operations | $1.303 billion | $952 million | Up $351 million |
| Net income attributable to common shareholders | $1.256 billion | $849 million | Up $407 million |
| Diluted EPS | $3.82 | $2.58 | Up $1.24 |
| Operating cash flow | $3.477 billion | $3.045 billion | Up $432 million |
| Capital expenditures | $4.543 billion | $3.282 billion | Up $1.261 billion |
- Approximate consolidated operating margin was 17.1%, compared with 11.3% in 2009. Net income attributable to common shareholders represented approximately 10.1% of revenue, compared with 6.9% in 2009.
- SCE generated $1.040 billion of net income attributable to Edison International, down from $1.226 billion. SCE core earnings increased to $984 million from $874 million, excluding significant discrete items.
- EMG generated $224 million of net income attributable to Edison International, compared with a $395 million loss in 2009. EMG core earnings declined to $192 million from $222 million.
- Year-end cash and cash equivalents were $1.389 billion, down from $1.673 billion. Total assets were $45.530 billion and common shareholders’ equity was $10.583 billion.
- Long-term debt was $12.371 billion, compared with $10.437 billion in 2009. Including current and short-term debt, reported debt was approximately $12.534 billion.
- Net cash used in investing activities was $4.814 billion, primarily reflecting capital expenditures and nuclear decommissioning trust activity. Net cash provided by financing activities was $1.053 billion.
- SCE had $257 million of cash and $2.870 billion available under credit facilities. EMG had $1.099 billion of cash and $981 million of available credit capacity. Edison International parent had $21 million of cash and $1.407 billion available under its credit facility.
Material changes versus the prior comparable period
- Consolidated earnings improved substantially because 2009 included a $610 million after-tax EMG charge related to the IRS Global Settlement and termination of cross-border leases. In 2010, the Global Settlement contributed a $175 million after-tax benefit at the consolidated level.
- 2010 included a $39 million after-tax charge related to federal health care legislation and a $24 million after-tax EMG charge for writing off capitalized Powerton emissions-control costs.
- SCE revenue was broadly stable, while utility earning-activity revenue increased $303 million due mainly to the 2009 general rate case, higher FERC-related revenue and capital-related recovery. SCE operating expenses increased because of infrastructure spending, San Onofre outages, depreciation and higher wildfire insurance costs.
- SCE capital expenditures increased to $3.8 billion from approximately $3.0 billion. Utility property, plant and equipment increased to $24.778 billion from $21.966 billion.
- EMG operating income improved to $303 million from a $491 million loss, primarily because 2009 included the cross-border lease termination charge. EMG core earnings nevertheless declined because of higher maintenance costs and unfavorable hedge results, partly offset by stronger energy-trading revenue.
- EMG adjusted operating income from the Midwest Generation plants declined to $264 million from $340 million, while Homer City declined to $114 million from $186 million. Energy trading adjusted operating income increased to $110 million from $49 million.
- Edison International adopted new variable-interest-entity guidance in 2010, deconsolidating the Big 4 projects and two wind projects and consolidating the Ambit project. The adoption increased retained earnings by $15 million.
- SCE’s 2010 operating cash flow declined to $3.386 billion from $4.069 billion, mainly because 2009 included substantial Global Settlement-related tax receipts. EMG operating cash flow improved to $310 million from a $992 million use of cash.
Guidance, outlook, management commentary, risks and unusual items
- SCE forecasts $15.6 billion to $17.5 billion of capital expenditures for 2011–2014, including $4.350 billion in planned 2011 spending. Major priorities are distribution reliability, transmission expansion, generation projects, smart meters and renewable integration.
- SCE filed a 2012 CPUC general rate case seeking a $6.3 billion revenue requirement and an $866 million base-rate increase. The final authorized amount and timing remained uncertain. A February 2011 FERC settlement authorized a $490 million revenue requirement, with a $42 million increase retroactive to March 1, 2010; $58 million collected subject to refund was expected to be returned to customers.
- Management expected EMG merchant profitability to decline significantly in 2011 because of lower realized energy prices, expiring hedge contracts and higher fuel costs. EMG could incur net losses in 2011 and later periods absent improved energy prices or lower costs.
- EMG expected additional pressure in 2012 from lower PJM capacity prices and higher rail transportation costs following expiration of a favorable Union Pacific contract at the end of 2011.
- Midwest Generation estimated that full retrofits for sulfur-dioxide compliance could cost approximately $1.2 billion through 2018, although the company could instead shut down certain units. Planned 2011–2013 environmental spending was approximately $481 million under the then-current retrofit assumptions.
- EMG had approximately $4.5 billion of consolidated debt and $2.9 billion of long-term power-plant lease obligations. Its EME and Midwest Generation credit facilities totaling $1.064 billion mature in June 2012, creating refinancing and liquidity risk. Credit ratings for EME, Midwest Generation and EMMT were below investment grade and on negative outlook.
- Major risks include regulatory cost recovery, NRC oversight and operating performance at San Onofre, wildfire liability and insurance availability, environmental compliance for coal plants, greenhouse-gas and air-quality rules, wholesale power and fuel price volatility, counterparty credit, collateral requirements and access to capital markets.
- Material contingencies include Midwest Generation and Homer City New Source Review litigation, the Navajo Nation litigation seeking at least $600 million in damages plus punitive damages, tax audits, environmental indemnities and potential nuclear-related liabilities. The filing states that outcomes and potential losses for several matters cannot be reliably estimated.
- SCE’s recorded minimum environmental remediation liability was $50 million; reasonably possible additional costs for identified sites could reach $200 million. Nuclear decommissioning costs were estimated at approximately $8.6 billion through 2053, with a $2.4 billion related asset-retirement obligation at year-end.
- Bonus depreciation provisions were expected to provide SCE approximately $550 million of additional 2011 cash flow, but were also expected to delay EMG tax-allocation payments for several years.
- PricewaterhouseCoopers issued an unqualified audit opinion. Management and the auditors concluded that internal control over financial reporting was effective as of December 31, 2010.
Most important facts for investors to verify
- Whether SCE ultimately receives the requested 2012 CPUC rate increases and how regulatory decisions affect recovery of its multibillion-dollar capital program.
- EMG’s ability to refinance or replace the June 2012 credit facilities and manage approximately $4.5 billion of debt and substantial lease obligations.
- The realized impact of lower energy and capacity prices, expiring hedges, higher coal transportation costs and fuel prices on EMG’s 2011–2012 earnings and liquidity.
- Final environmental requirements and spending for Midwest Generation and Homer City, including potential retrofit costs, allowance purchases or plant shutdowns.
- Progress and regulatory findings related to San Onofre, including outage costs, corrective actions and potential cooling-system capital requirements.
- Developments in the New Source Review lawsuits, Navajo Nation litigation, tax audits, wildfire claims and other indemnity obligations.
- The sustainability of dividends from SCE to the parent and Edison International’s ability to fund dividends using subsidiary distributions and tax-allocation payments.
- Reconciliation of reported GAAP earnings with management’s non-GAAP core earnings and the extent to which 2010 results benefited from Global Settlement-related tax items.