Edison International 2010 First-Quarter Form 10-Q Summary
Business context and reporting period
Edison International reported unaudited results for the three months ended March 31, 2010. Its principal businesses are Southern California Edison Company (SCE), a rate-regulated electric utility serving central, coastal and southern California, and Edison Mission Group (EMG), a competitive power generation and energy trading business. Results are not necessarily indicative of full-year performance.
Financial performance and key metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Operating revenue | $2.810 billion | $2.812 billion | Approximately flat |
| Operating income | $498 million | $553 million | Down $55 million |
| Income from continuing operations | $243 million | $266 million | Down $23 million |
| Net income attributable to common shareholders | $236 million | $250 million | Down $14 million |
| Diluted EPS | $0.72 | $0.76 | Down $0.04 |
| Dividends declared per share | $0.315 | $0.310 | Up $0.005 |
| Operating margin | Approximately 17.7% | Approximately 19.6% | Lower |
| Net margin attributable to common shareholders | Approximately 8.4% | Approximately 8.9% | Lower |
- SCE revenue was $2.159 billion versus $2.189 billion. SCE net income attributable to Edison International declined to $164 million from $208 million, primarily because of higher operating and maintenance costs, depreciation, and a $39 million non-cash tax charge related to federal health care legislation.
- EMG revenue increased to $652 million from $624 million. EMG net income increased to $77 million from $48 million, supported by higher trading income and distributions from the Doga and March Point projects, partly offset by weaker merchant coal and renewable results.
- Management’s non-GAAP core earnings increased to $269 million from $258 million, excluding discontinued operations and significant discrete items. Core earnings are not comparable to GAAP earnings or necessarily to similarly named measures used by other companies.
- Cash flow from operating activities was $599 million versus $686 million. Investing cash outflow increased to $1.022 billion from $691 million, primarily reflecting $951 million of capital expenditures versus $785 million.
- Financing activities provided $259 million versus a $368 million use of cash, reflecting $547 million of long-term debt issuance, $343 million of repayments, and $192 million of net short-term borrowings.
- Cash and equivalents declined to $1.418 billion from $1.673 billion at December 31, 2009. Total assets were $42.357 billion and total liabilities were $31.374 billion at March 31, 2010.
- Total debt, including short-term debt and current maturities, was approximately $11.348 billion. Long-term debt, including current maturities, had a carrying value of $11.071 billion and a fair value of $10.435 billion.
- SCE issued $500 million of 5.5% first and refunding mortgage bonds due 2040. SCE reported $2.632 billion of available credit capacity and approximately $2.7 billion of cash and short-term investments and available liquidity. Edison International parent reported $1.329 billion of available credit capacity and approximately $22 million of cash.
Material changes versus the prior comparable period
- Consolidated revenue was essentially unchanged, but operating income declined because operating expenses increased by $53 million. Operations and maintenance expense rose to $1.037 billion from $969 million, and depreciation, decommissioning and amortization rose to $369 million from $342 million.
- Fuel expense declined to $295 million from $387 million, while purchased power increased to $608 million from $540 million.
- SCE utility earning activities declined as higher authorized revenue and AFUDC were more than offset by increased transmission, distribution, generation and outage-related costs. San Onofre Unit 2 incurred additional work and an extended outage; it returned to service on April 11, 2010.
- EMG adjusted operating income increased to $175 million from $137 million. Midwest Generation adjusted operating income declined to $87 million from $114 million, while energy trading increased to $47 million from $10 million. Renewable project adjusted operating income declined to $10 million from $27 million because of low wind, adverse weather and lower production tax credits.
- Effective January 1, 2010, new variable-interest-entity accounting resulted in deconsolidation of certain wind projects and the Big 4 projects, consolidation of the Ambit project, a $15 million increase to retained earnings, and a significant change in reported assets and noncontrolling interests.
- Regulatory assets increased to $4.978 billion from $4.259 billion, primarily due to energy derivative and other regulatory balances. Derivative liabilities increased materially, including SCE’s net commodity derivative liability of $827 million at March 31, 2010 versus $251 million at December 31, 2009.
Guidance, outlook, risks and unusual items
- SCE projected 2010 capital investments of $3.3 billion to $4.0 billion and total 2010–2014 capital investments of $18 billion to $21.5 billion. First-quarter SCE capital investments totaled $640 million.
- EMG expected approximately $905 million of capital expenditures during the remainder of 2010, excluding the disputed Mitsubishi turbine amount, funded through project financing, Treasury grants, cash and operating cash flow. EMG received approximately $92 million of Treasury grant proceeds in April 2010.
- SCE’s proposed 2010 FERC rates would increase its revenue requirement by $107 million, or 24%, subject to refund. SCE terminated settlement negotiations and began litigation; a final decision was expected in the second half of 2011.
- SCE expected a possible $27 million energy-efficiency incentive payment in late 2010, but stated that no final payment was assured.
- Environmental compliance remains a significant uncertainty for Midwest Generation. The company was evaluating nitrogen-oxide and sulfur-dioxide controls, potential unit shutdowns and related capital costs, with final decisions for some units potentially delayed until 2012 or later.
- On May 4, 2010, California issued a final once-through-cooling policy that could require significant capital expenditures and affect San Onofre operations and other coastal generation capacity.
- Homer City received a May 6, 2010 EPA notice of violation alleging additional New Source Review violations. The Midwest Generation New Source Review litigation continued; an adverse outcome could require substantial penalties, controls and remedial actions, although the filing does not provide a reliable estimate of potential losses.
- EME disputed approximately $289 million of remaining payments under a Mitsubishi wind-turbine supply agreement and had previously paid $68 million in deposits. The litigation seeks, among other remedies, return of deposits and relief from disputed obligations.
- The Navajo Nation litigation seeks at least $600 million of damages, interest and at least $1 billion of punitive damages relating to the former Mohave coal supply agreement. The company could not predict the outcome.
- Recorded environmental remediation liabilities were $42 million, with reasonably possible costs exceeding recorded amounts by up to $171 million. SCE expects recovery of 90% of certain remediation costs through customer rates.
- EMG had approximately $4.1 billion of consolidated debt, $3.2 billion of sale-leaseback obligations and $962 million of available borrowing capacity. Its credit ratings were below investment grade, and future power-price movements could increase collateral or termination-payment requirements.
Most important facts for investors to verify
- Progress and final outcomes of the FERC rate case, CPUC proceedings and SCE’s ability to recover capital, environmental and procurement costs.
- San Onofre operating performance, once-through-cooling compliance requirements and potential nuclear-related capital expenditures.
- Midwest Generation and Homer City environmental litigation, regulatory compliance costs, potential plant shutdowns and related indemnification rights.
- EMG’s liquidity, credit ratings, debt covenants, collateral requirements and exposure to merchant power, coal, emissions and congestion prices.
- Resolution and financial impact of the Mitsubishi turbine dispute and the Navajo Nation litigation.
- Whether reported cash generation is sufficient to fund SCE’s and EMG’s substantial capital programs while maintaining parent-company dividends and liquidity.
- The effect of VIE deconsolidation and other accounting changes on comparability of reported assets, liabilities, revenue and segment results.