Business Context and Reporting Period
Company: Edison International
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: Edison International is a holding company with principal operating subsidiaries including Southern California Edison Company (SCE), a rate-regulated electric utility, and Edison Mission Group (EMG), which engages in nonutility power generation and financial services.
Key Financial Metrics
| Metric (in millions) | Three Months Ended June 30, 2008 |
Three Months Ended June 30, 2007 |
Six Months Ended June 30, 2008 |
Six Months Ended June 30, 2007 |
|---|---|---|---|---|
| Total Operating Revenue | $3,382 | $3,047 | $6,466 | $5,959 |
| Operating Income | $506 | $501 | $1,132 | $1,129 |
| Net Income | $261 | $93 | $559 | $426 |
| Diluted EPS (Total) | $0.79 | $0.28 | $1.69 | $1.29 |
| Operating Cash Flow | N/A | N/A | $708 | $1,312 |
| Cash and Equivalents | $1,070 | N/A | $1,070 | N/A |
| Total Debt (Short-term + Long-term) | $10,269 | N/A | $10,269 | N/A |
Note: Debt figures represent Short-term debt ($800M) plus Long-term debt ($9,292M) as of June 30, 2008.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenue increased 11% ($335 million) for the quarter and 9% ($507 million) for the six-month period compared to 2007. This was driven by higher electric utility revenue due to rate increases and sales volume, as well as higher nonutility power generation revenue from the Illinois plants.
- Profitability Surge: Net income for the quarter more than doubled to $261 million from $93 million in 2007. The six-month net income increased to $559 million from $426 million. This improvement is largely attributable to the absence of a $241 million loss on early extinguishment of debt recorded in the second quarter of 2007.
- Expense Increases: Fuel expenses rose significantly ($116 million for the quarter) due to higher natural gas and coal costs. Purchased power expenses decreased for the quarter ($173 million) primarily due to net unrealized gains on economic hedging activities ($333 million), offsetting higher bilateral energy purchase costs.
- Cash Flow Decline: Operating cash flow for the six months ended June 30, 2008, decreased by $604 million to $708 million. This was primarily due to Energy Resource Recovery Account (ERRA) undercollections at SCE caused by higher gas and power prices, and increased margin/collateral deposits for EMG's hedging activities.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Rate Increases: SCE expects to file an ERRA Trigger Application in the third quarter of 2008 to increase customer rates due to higher fuel costs. A 2009 General Rate Case is pending, with a final decision expected before year-end.
- Capital Expenditures: SCE projects capital expenditures of up to $19.9 billion for 2008-2012. EMG has significant commitments for wind and thermal projects, including turbine purchases totaling $1.6 billion.
- Dividends: The Board declared a quarterly dividend of $0.305 per share.
Material Risks and Contingencies
- IRS Tax Disputes (Critical): Edison International is engaged in settlement negotiations with the IRS regarding cross-border leveraged lease transactions (SILOs and LILOs). The company estimates a maximum earnings exposure of approximately $1.25 billion after taxes. Termination of these leases, which may occur in 2008, could result in an after-tax charge of at least $650 million. A global settlement is being pursued to reduce this net charge.
- Regulatory Investigations:
- SCE PBR Investigation: The CPUC is investigating performance incentive rewards. A Presiding Officer's Decision ordered refunds of $136 million plus penalties, though SCE has appealed. Potential refunds and penalties range from $52 million to $388 million.
- Environmental Violations: EME Homer City and Midwest Generation received Notices of Violation (NOV) from the EPA regarding Clean Air Act violations. Settlement talks are ongoing, but penalties are undetermined.
- Market Risk: EMG faces significant commodity price risk. Unrealized losses on cash flow hedges increased to $379 million (after tax) due to rising forward energy prices, recorded as a reduction in shareholder equity.
Investor Verification Checklist
- IRS Settlement Status: Verify the progress of the "global" settlement with the IRS regarding leveraged leases and the likelihood of the projected $650 million+ charge materializing.
- SCE Rate Recovery: Monitor the outcome of the CPUC investigation into Performance-Based Regulation (PBR) rewards and the timing of the ERRA rate increase to offset fuel costs.
- Environmental Liabilities: Track the resolution of EPA Notices of Violation for Midwest Generation and EME Homer City to assess potential fines and compliance costs.
- Commodity Hedging: Review the impact of volatile energy prices on EMG's unrealized losses and the potential for reclassification of these losses into earnings.
- Liquidity Position: Confirm the sufficiency of cash flows to meet the $19.9 billion capital expenditure plan and debt obligations, given the decline in operating cash flow.