Edison International — Form 10-Q Summary
Business context and reporting period
Edison International filed its unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The company 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 key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Operating revenue | $3.057 billion, versus $2.983 billion | $5.912 billion, versus $5.766 billion |
| Operating income | $272 million, versus $380 million | $573 million, versus $829 million |
| Net income attributable to common shareholders | $74 million, versus $176 million | $167 million, versus $376 million |
| Diluted EPS | $0.22, versus $0.54 | $0.50, versus $1.16 |
| Operating margin | Approximately 8.9%, versus 12.7% | Approximately 9.7%, versus 14.4% |
- SCE contributed net income attributable to Edison International of $191 million in the second quarter and $373 million for the first six months, compared with $211 million and $433 million in the comparable 2011 periods.
- EMG reported net losses available for common stock of $110 million for the quarter and $194 million year to date, compared with losses of $31 million and $51 million, respectively.
- Six-month net cash provided by operating activities was $1.160 billion, compared with $1.222 billion in 2011. Capital expenditures were $2.291 billion, compared with $2.256 billion.
- Cash and cash equivalents declined to $1.175 billion at June 30, 2012, from $1.469 billion at December 31, 2011. Net cash used in investing activities was $2.476 billion, partly offset by $1.022 billion of financing cash inflows.
- Total debt, including current portions, was approximately $14.550 billion at June 30, 2012, compared with $14.175 billion at year-end 2011. The consolidated balance sheet reported total assets of $49.388 billion and total equity of $11.945 billion.
- Dividends declared were $0.325 per common share for the quarter and $0.650 per share year to date.
Material changes versus the prior comparable period
- Consolidated earnings declined primarily because EMG experienced lower energy and capacity prices, higher fuel costs and reduced Midwest Generation output. EMG’s core loss increased to $141 million for the first six months from $33 million.
- SCE earnings declined as higher depreciation, interest expense, pension costs and San Onofre inspection and repair costs exceeded higher authorized-project revenue. The pending 2012 CPUC general rate case delayed recovery of certain costs and revenue requirements.
- San Onofre Units 2 and 3 remained offline following steam-generator tube wear and leakage issues. Replacement power costs through June 30 were approximately $117 million, subject to CPUC reasonableness review and recovery through the ERRA balancing account.
- SCE issued $400 million of 4.05% mortgage bonds and issued preference stock. Edison International consolidated financing activities included $805 million of net preference-stock issuance and $238 million of contributions from noncontrolling interests.
- EME consolidated additional wind projects following the Capistrano Wind equity transaction, which generated $238 million of third-party capital and increased other noncontrolling interests.
Guidance, outlook, risks and unusual items
- SCE expected 2012 capital expenditures to be at or below the lower end of its previously projected $4.4 billion to $5.0 billion range because of the delayed GRC decision, Tehachapi project delays and San Onofre issues. Its 2012–2014 capital expenditure outlook remained $11.8 billion to $13.2 billion.
- SCE’s GRC decision was expected in the second half of 2012. The company recognized GRC-related revenue largely using the 2011 authorized revenue requirement, with a memorandum account providing for retroactive adjustment to January 1, 2012.
- Management stated that EME’s adverse operating trends, $3.7 billion of unsecured notes, $500 million maturity due in June 2013 and required environmental spending could exhaust liquidity. Absent restructuring, EME was not expected to have sufficient liquidity to repay that maturity and might need to seek Chapter 11 protection.
- EME reported $879 million of cash at entities without contractual dividend restrictions and $1.069 billion of total EMG cash, but its prior revolving credit facilities had terminated or expired. EME’s debt ratings were below investment grade and on negative outlook.
- If EME entered bankruptcy, Edison International expected to deconsolidate it and potentially recognize a loss on its $1.4 billion carrying-value investment. The filing also identified possible effects on tax benefits, joint liabilities and retirement obligations.
- Homer City had not paid its April 1, 2012 equity rent, was not expected to meet its October 1 rent obligation without additional support and faced a possible divestiture or bankruptcy. Planned environmental controls were estimated at $700 million to $750 million.
- Midwest Generation planned to shut down the Fisk and Crawford stations in September 2012. Remaining environmental retrofits were estimated at approximately $625 million, with additional possible retrofit costs for Joliet Unit 6 and Waukegan.
- Other material exposures included Midwest Generation and Homer City Clean Air Act litigation, proposed penalties in the Malibu wildfire proceeding, Four Corners environmental litigation, tax disputes with approximately $291 million of asserted federal tax exposure, and environmental remediation liabilities.
- The filing stated that disclosure controls and procedures were effective as of June 30, 2012, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Timing, scope and cost of repairs or replacement of the San Onofre steam generators, NRC restart approvals, CPUC rate treatment and insurance or manufacturer recoveries.
- Outcome of SCE’s 2012 GRC and 2013 cost-of-capital proceedings, including recovery of deferred costs, pension contributions and San Onofre-related revenue requirements.
- EME’s liquidity, negotiations with bondholders, the June 2013 $500 million maturity and any restructuring, asset sales or bankruptcy filing.
- Actual environmental compliance spending, plant-retirement decisions and regulatory requirements affecting Midwest Generation and Homer City.
- Potential losses, penalties and remediation costs from environmental, wildfire, tax, nuclear and other legal proceedings.
- Whether low power prices, weak generation volumes and higher fuel costs persist and further pressure EMG cash flow and consolidated earnings.