Edison International 2009 Form 10-K Summary
Business context and reporting period
Edison International is a holding company with three principal businesses: Southern California Edison Company (SCE), a regulated electric utility; Edison Mission Energy (EME), a competitive power-generation and trading business; and Edison Capital, a financial-services and leveraged-lease business. The filing covers the fiscal year ended December 31, 2009. The requested “2009 Q4” information is presented within the annual filing; quarterly data are unaudited.
- SCE generated approximately $10.0 billion of 2009 operating revenue and served more than 13 million people across central, coastal and southern California.
- EME owned or leased interests in 39 operating projects with 11,269 MW of aggregate physical capacity and 10,072 MW of pro rata capacity.
- The company had 19,244 full-time employees at year-end.
Key financial metrics
| ($ millions, except per-share data) | 2009 | 2008 | Change |
|---|---|---|---|
| Operating revenue | $12,361 | $14,112 | Down $1,751 |
| Operating income | $1,398 | $2,563 | Down $1,165 |
| Income from continuing operations | $952 | $1,348 | Down $396 |
| Net income attributable to common shareholders | $849 | $1,215 | Down $366 |
| Diluted EPS | $2.58 | $3.68 | Down $1.10 |
| Operating margin | 11.3% | 18.2% | Down 6.9 percentage points |
| Net margin attributable to common shareholders | 6.9% | 8.6% | Down 1.7 percentage points |
| Cash flow from operating activities | $3,045 | $2,261 | Up $784 |
| Capital expenditures | $3,282 | $2,824 | Up $458 |
| Long-term debt | $10,437 | $10,950 | Down $513 |
| Cash and equivalents | $1,673 | $3,916 | Down $2,243 |
Fourth-quarter 2009 unaudited results included operating revenue of $3.05 billion, income from continuing operations of $227 million, net income attributable to common shareholders of $212 million and diluted EPS of $0.65.
- SCE net income available for common stock was $1.226 billion, versus $683 million in 2008. SCE core earnings increased to $874 million from $732 million.
- EMG reported a net loss attributable to Edison International of $395 million, versus income of $561 million in 2008. Competitive power-generation net income was $203 million, while financial services and other activities produced a $598 million loss.
- EME revenue was $2.377 billion, down from $2.811 billion. Operating income fell to $389 million from $852 million, primarily because of lower wholesale energy prices and trading income.
- Consolidated debt to total capitalization was 0.53 to 1.00, below the parent-company covenant maximum of 0.65 to 1.00.
Material changes versus the prior comparable period
- Consolidated revenue declined 12% because of lower natural-gas and wholesale electricity prices, weaker demand, and lower EME trading revenue.
- SCE benefited from its 2009 CPUC and FERC rate decisions. The CPUC authorized a 2009 revenue requirement of $4.83 billion, $512 million above 2008, while the FERC settlement increased the transmission revenue requirement by $136 million.
- SCE’s retail billed and unbilled revenue increased $184 million, as rate increases of $564 million more than offset a $380 million decline from lower sales volume.
- SCE’s fuel and purchased-power costs declined substantially because of lower natural-gas prices and reduced purchased volumes. These costs are generally recovered through regulatory mechanisms and primarily affect cash flow rather than earnings.
- EME’s Midwest Generation adjusted operating income declined to $340 million from $688 million, reflecting a 21% decline in average realized energy prices, higher environmental compliance costs and lower demand.
- EME energy-trading adjusted operating income declined $115 million because of lower transmission congestion in the eastern power grid.
- Edison Capital recorded a $614 million after-tax loss from terminating cross-border leveraged leases under the Global Settlement with the IRS. Consolidated earnings included a $254 million after-tax Global Settlement charge, partially offset by SCE tax benefits of approximately $306 million.
- Cash flow from operations increased primarily because of tax-allocation receipts, improved regulatory-balancing-account cash flows, bonus depreciation and a $192 million tax benefit from changing the tax accounting method for certain repair costs.
- Cash declined because the company repaid short-term debt, funded capital expenditures and paid dividends. Consolidated financing activities used $2.929 billion of cash, while investing activities used $2.359 billion.
Guidance, outlook, commentary and unusual items
- SCE expected 2010 capital expenditures of approximately $3.3 billion to $4.0 billion and total 2010–2014 capital investment of approximately $18 billion to $21.5 billion. The program includes distribution and transmission upgrades, renewable integration, smart meters, solar generation and San Onofre steam-generator replacement.
- SCE’s authorized return on common equity was 11.5%, and its authorized capital structure included 48% common equity, 43% long-term debt and 9% preferred equity.
- SCE expected to receive an approximate $27 million final energy-efficiency incentive payment in 2010, subject to verification and review.
- EME anticipated approximately $1.3 billion of 2010 capital expenditures, primarily for renewable projects, environmental compliance and turbine commitments. Funding was expected from project financing, U.S. Treasury grants, cash and operating cash flow.
- Big Sky Wind, a 240 MW project, and Cedro Hill Wind, a 150 MW project, were under construction at year-end. EME had an approximately 4,000 MW potential wind-development pipeline at January 31, 2010.
- Midwest Generation expected approximately $88 million of 2010 and $70 million of 2011 capital expenditures for nitrogen-oxide controls. The company had not determined the final sulfur-dioxide compliance strategy and could elect to retrofit or shut down certain units.
- Management identified no material weakness in internal control over financial reporting. PricewaterhouseCoopers issued an unqualified opinion on the financial statements and internal control.
Principal risks and contingencies
- EME remained exposed to merchant power-price volatility, particularly in PJM, as well as fuel, transmission-congestion, emissions-allowance and counterparty risks.
- EME had approximately $4.1 billion of consolidated debt and $3.2 billion of long-term power-plant lease obligations. Its credit ratings were below investment grade or on negative outlook for certain entities.
- Environmental requirements could require significant capital expenditures, reduce dispatch, make coal units uneconomic or result in unit shutdowns. The Midwest Generation New Source Review lawsuit seeks civil penalties and potentially extensive pollution controls.
- Future greenhouse-gas rules, California renewable requirements, regional haze requirements and once-through-cooling restrictions could materially affect costs, operations and asset values.
- SCE’s ability to pay dividends to Edison International was subject to regulatory capital-structure requirements. SCE had approximately $3.3 billion of available liquidity and $2.9 billion available under credit facilities at year-end.
- Parent-company liquidity remained dependent on subsidiary dividends, tax-allocation payments and access to capital markets. The parent had approximately $18 million of cash and $1.341 billion available under its credit facility.
- Consolidated contractual obligations totaled approximately $46.8 billion, including debt maturities and interest, operating leases, purchased-power obligations, fuel contracts and capital commitments.
- SCE recorded a $3.1 billion nuclear-decommissioning liability and estimated total decommissioning costs of approximately $11.5 billion through 2049.
- Other contingencies included Navajo Nation litigation, Homer City environmental proceedings, nuclear-insurance exposure, spent-nuclear-fuel litigation and environmental remediation. The recorded minimum environmental-remediation liability was $43 million, with possible additional costs of up to $178 million based on disclosed reasonably possible outcomes.
Investor verification checklist
- Verify the sustainability of SCE’s rate-based earnings and the timing and recoverability of its $18 billion–$21.5 billion capital program.
- Assess EME’s sensitivity to PJM energy and capacity prices, including the unusually low forward capacity price for Midwest Generation for June 2012–May 2013.
- Review the final outcomes and costs of Midwest Generation’s New Source Review litigation and environmental-compliance requirements.
- Reconcile recurring earnings with non-GAAP core earnings, particularly the $254 million Global Settlement charge and SCE’s $306 million tax benefit.
- Monitor parent-company liquidity, subsidiary dividend restrictions, debt maturities and the ability to refinance or fund planned investments.
- Evaluate potential liabilities from nuclear decommissioning, wildfire insurance limits, once-through cooling, greenhouse-gas regulation and spent-fuel obligations.
- Confirm subsequent developments after March 1, 2010, including regulatory decisions, project financing, wind-project construction and Edison Capital debt redemption.