Edison International 10-Q Summary
Business context and reporting period
Edison International filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. Its principal segments are Southern California Edison Company (SCE), a regulated electric utility serving Southern California, and Edison Mission Group (EMG), a competitive power-generation and energy-trading business.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Operating revenue | $4.0 billion | $3.8 billion | $9.7 billion | $9.3 billion |
| Operating income | $810 million | $862 million | $1.64 billion | $1.71 billion |
| Net income attributable to common shareholders | $426 million | $510 million | $802 million | $1.09 billion |
| Diluted EPS | $1.30 | $1.56 | $2.45 | $3.31 |
| Operating margin | 20.3% | 22.7% | 16.8% | 18.3% |
| Common dividends per share | $0.320 | $0.315 | $0.960 | $0.945 |
Revenue increased 5% in the quarter and 4% year to date, primarily from higher SCE revenue. Profit declined because of weaker EMG results, higher depreciation, interest expense and taxes, and the absence of significant 2010 tax benefits. SCE generated common-shareholder earnings of $406 million in the quarter and $838 million year to date; EMG generated $33 million in the quarter and a $17 million year-to-date loss.
Nine-month operating cash flow was $2.82 billion, compared with $2.75 billion in 2010. Investing cash use was $3.63 billion, including $3.49 billion of capital expenditures. Financing cash flow was $805 million. Cash and cash equivalents were $1.38 billion at September 30, 2011, compared with $2.01 billion at September 30, 2010.
Total debt, including short-term debt and the current portion of long-term debt, was approximately $13.62 billion at September 30, 2011, versus $12.53 billion at December 31, 2010. Long-term debt, including the current portion, had a carrying value of $13.06 billion and a fair value of $13.50 billion. Total assets were $47.67 billion and total equity was $12.05 billion.
Material changes versus the prior comparable period
- Consolidated common-shareholder earnings decreased 16% in the quarter and 26% for the first nine months.
- EMG operating revenue declined to $596 million in the quarter and $1.69 billion year to date, from $691 million and $1.84 billion, respectively.
- EMG’s year-to-date loss reflects lower realized energy and capacity prices, reduced coal generation, Homer City outages and maintenance costs, higher interest expense and weaker trading results.
- SCE’s quarterly common earnings increased $12 million, while nine-month earnings decreased $20 million. SCE benefited from rate-base growth and higher authorized revenue, but faced higher depreciation, operating costs, interest expense and taxes.
- The 2010 comparable periods included substantial nonrecurring tax benefits, including a $175 million Global Settlement benefit and a $40 million asset-removal tax-method benefit. These benefits did not recur in 2011.
- SCE capital expenditures, including accruals, were $2.5 billion for the first nine months, compared with $2.4 billion in 2010. Consolidated capital expenditures were $3.49 billion, compared with $3.13 billion.
Guidance, outlook, risks and unusual items
- SCE projected 2011 capital expenditures of $3.9 billion to $4.4 billion and 2011-2014 capital expenditures of $15.6 billion to $17.5 billion. Management noted cost pressures, scope changes and permitting delays affecting the Tehachapi Transmission Project.
- SCE’s updated 2012 general rate case request reflected a $6.3 billion base-rate revenue requirement. Regulatory parties proposed substantial reductions, and the filing stated that the ultimate revenue requirement and timing of the CPUC decision were uncertain.
- FERC reduced SCE’s proposed transmission base return on equity from 11.5% to 9.93%. SCE estimated its 2012 weighted-average transmission ROE at 11.1% and reduced its forecast 2012 transmission revenue requirement by $49 million to $722 million.
- EMG expected materially lower 2011 profitability and warned it could incur net losses in 2011 and later periods unless power and capacity prices improve or costs decline.
- Homer City faced major CSAPR compliance requirements. Estimated retrofit costs were $600 million to $700 million, while the plant lacked sufficient capital and expected to require third-party financing. Financing could dilute EME’s interest or result in deconsolidation and a potentially material loss.
- Homer City’s senior rent service coverage ratio was 1.64 to 1 versus a 1.7 to 1 covenant threshold, restricting distributions. Management indicated that low power prices, outages and expected CSAPR costs could impair its ability to pay equity rent in April 2012.
- Midwest Generation anticipated environmental compliance expenditures of approximately $1.2 billion if all planned units were retrofitted, although future decisions could include unit shutdowns.
- SCE reported a proposed $50 million allocation of approximately $99 million in penalties related to the Malibu wildfire investigation; the final amount, if any, was undetermined.
- Tax authorities proposed adjustments that could result in approximately $191 million and $92 million of federal tax payments, including interest and penalties, relating to EMG asset-sale gains and SCE repair deductions. Edison International disputed the adjustments.
- Environmental remediation liabilities were recorded at a minimum of $60 million, with reasonably possible additional costs of up to $195 million for identified material sites and $7 million for immaterial sites. Much of SCE’s remediation cost is expected to be recoverable through rates.
- Other key risks include nuclear operations and regulatory responses following Fukushima, wildfire liability, power-market and counterparty exposure, collateral requirements, environmental litigation, rate-case outcomes, interest rates and access to capital.
Most important facts for investors to verify
- Whether EMG’s weak operating performance, low power prices and declining capacity prices persist.
- Homer City’s ability to obtain financing and comply with CSAPR without material dilution, foreclosure, deconsolidation or loss.
- The CPUC’s final 2012 SCE rate-case decision and the ultimate treatment of capital expenditures, repair deductions and wildfire-related costs.
- The effect of FERC’s lower transmission ROE on SCE’s future revenue and earnings.
- Actual consolidated debt maturities, refinancing requirements and availability under credit facilities, particularly EMG facilities maturing in 2012 and $500 million of EME senior notes due in 2013.
- Potential cash collateral needs, derivative fair-value changes and counterparty exposures.
- Outcomes of tax audits, environmental proceedings, New Source Review litigation, the Malibu wildfire investigation and other contingent liabilities.