Edison International 2012 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Edison International reported unaudited results for the three and nine months ended September 30, 2012. Its principal segments were Southern California Edison Company (SCE), a regulated electric utility, and Edison Mission Group (EMG), whose principal subsidiary was Edison Mission Energy (EME), a competitive power-generation business.
Beginning in the third quarter, Homer City was classified as a discontinued operation following an agreement to divest substantially all of its remaining assets and specified liabilities.
Key Financial Metrics
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Operating revenue | $4.07 billion, up from $3.82 billion | $9.80 billion, up from $9.34 billion |
| Operating income | $636 million, down from $785 million | $1.29 billion, down from $1.64 billion |
| Income from continuing operations | $296 million, down from $426 million | $564 million, down from $848 million |
| Net income attributable to common shareholders | $190 million, or $0.58 diluted EPS | $357 million, or $1.09 diluted EPS |
| Operating margin | 15.6%, versus 20.5% | 13.2%, versus 17.6% |
| Net cash from operating activities | $2.16 billion, versus $2.82 billion in the prior-year period | |
| Capital expenditures | $3.37 billion, versus $3.48 billion in the prior-year period |
Discontinued operations generated losses of $76 million in the quarter and $129 million year to date, compared with income of $15 million and a loss of $3 million, respectively, in the comparable 2011 periods. The company declared common dividends of $0.325 per share in the quarter and $0.975 per share year to date.
At September 30, 2012, cash and cash equivalents were $1.08 billion, compared with $1.39 billion at December 31, 2011. Total debt, including current maturities, was approximately $14.70 billion, consisting of $14.27 billion of long-term debt including current maturities and $429 million of short-term debt. Total equity was $12.02 billion, compared with $11.09 billion at year-end 2011.
SCE had $2.17 billion available under its $2.75 billion revolving credit facility. Edison International parent had $1.22 billion available under its $1.25 billion facility. EME and its subsidiaries reported total cash and cash equivalents of $851 million, including $627 million at EME and subsidiaries without contractual dividend restrictions.
Material Changes Versus the Prior Comparable Period
- Consolidated common-shareholder earnings declined by $236 million in the quarter and $445 million year to date. Core earnings declined to $235 million in the quarter from $411 million and to $455 million year to date from $805 million.
- SCE earnings declined $43 million in the quarter and $102 million year to date. Higher San Onofre inspection, repair, severance, depreciation and interest costs, together with the delayed general rate case decision, more than offset cost savings and higher revenue from certain authorized projects.
- EMG reported common-shareholder losses of $137 million in the quarter and $331 million year to date, compared with income of $33 million and a loss of $17 million, respectively. Midwest Generation was affected by lower capacity and energy prices, reduced generation, higher fuel costs and competition from low-priced natural gas.
- Midwest Generation plant generation declined to 6,653 GWh in the quarter from 7,957 GWh and to 17,459 GWh year to date from 20,987 GWh.
- Operating cash flow declined primarily because of lower EMG operating results, EME tax-allocation payments and working-capital timing, partly offset by higher SCE operating cash flow.
- EME's operating cash flow from continuing operations was negative $545 million year to date, compared with positive $578 million in 2011.
Guidance, Outlook, Risks and Unusual Items
- San Onofre: Units 2 and 3 remained offline following steam-generator tube wear and inspection issues. SCE reported $221 million of replacement-power costs and $96 million of incremental inspection and repair costs through September 30. Unit 2 restart plans contemplated operation at approximately 70% power, subject to NRC approval; Unit 3's restart timing remained uncertain. SCE had collected approximately $625 million of San Onofre-related revenue through the third quarter, subject to CPUC review and potential refunds.
- Regulatory proceedings: The CPUC administrative law judge proposed a 2012 SCE base-rate revenue requirement of $5.69 billion, approximately $400 million above currently authorized revenue but below SCE's $6.29 billion request. The final decision was expected by year-end and could materially affect the timing and amount of SCE earnings.
- EME liquidity: EME had $3.7 billion of unsecured notes outstanding, including $500 million due in June 2013, and expected insufficient liquidity to repay that maturity. Management stated that continued adverse market conditions and environmental retrofit requirements could exhaust liquidity. Failure to pay approximately $97 million of interest due November 15, 2012 could lead to Chapter 11 proceedings and cross-defaults involving Midwest Generation.
- Going concern and consolidation: The financial statements assumed EME would continue as a going concern, but the filing stated there was no assurance that it would do so. A bankruptcy filing could cause Edison International to deconsolidate EME and recognize a potentially material loss; the carrying value of Edison International's investment in EME was $1.24 billion at September 30.
- Homer City: Edison recorded a $113 million pre-tax, $68 million after-tax, charge to write down assets held for sale. Completion of the divestiture depended on restructuring related debt and receiving regulatory approvals; failure could result in bankruptcy proceedings.
- Capital program: SCE expected 2012 capital expenditures to be below its prior $4.4 billion to $5.0 billion range, but maintained a 2012–2014 capital-expenditure outlook of $11.8 billion to $13.2 billion. Potential San Onofre-related transmission and reliability projects could require an additional $100 million to $125 million during 2013–2015.
- Environmental and legal exposure: Midwest Generation faced New Source Review, coal-ash groundwater and other environmental proceedings, as well as approximately $2.3 billion of coal-transportation commitments. Estimated remaining environmental retrofit costs were approximately $619 million for specified units, excluding possible additional projects.
- Other unusual items: Edison recognized a $65 million pre-tax, $31 million after-tax, gain on the sale of a Beaver Valley lease interest. A proposed tax decision could provide SCE an approximately $230 million earnings benefit related to prior repair deductions, but the outcome remained subject to regulatory action.
Most Important Facts for Investors to Verify
- Final CPUC decisions on the 2012 general rate case, San Onofre cost recovery, refunds and rate-base treatment.
- NRC approval and the timing, power level and cost of any San Onofre Unit 2 restart; the feasibility of returning Unit 3 to service.
- EME's ability to refinance or restructure the $500 million June 2013 maturity and meet near-term interest obligations.
- Whether the Homer City transaction closes and whether related restructuring avoids bankruptcy or additional losses.
- Actual SCE capital spending, San Onofre replacement-power costs, environmental retrofit decisions and associated funding requirements.
- Potential liabilities from Midwest Generation and Homer City environmental litigation, regulatory proceedings, indemnities and tax disputes.