Business Context and Reporting Period
Company: Edison International (EIX)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: Edison International is a holding company with two primary operating subsidiaries: Southern California Edison Company (SCE), a rate-regulated electric utility, and Edison Mission Group (EMG), which includes Edison Mission Energy (EME) for nonutility power generation and Edison Capital for financial services.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Total Operating Revenue | $4,111 | $10,576 | $9,902 |
| Operating Income | $965 | $2,099 | $2,027 |
| Net Income | $439 | $999 | $887 |
| Diluted EPS (Total) | $1.33 | $3.02 | $2.67 |
| Operating Cash Flow | N/A | $1,597 | $2,732 |
| Cash and Equivalents (Sep 30, 2008) | $3,464 | ||
| Total Debt (Short-term + Long-term) | $12,504 |
Note: Operating cash flow for the nine months ended Sep 30, 2008, decreased significantly compared to the prior year due to Energy Resource Recovery Account (ERRA) under-collections and the repayment of rate reduction notes in the prior year.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenue increased 4.3% for the quarter and 6.8% year-to-date compared to 2007. This was driven by higher retail billed revenue and increased nonutility power generation revenue.
- Profitability: Net income for the nine months increased 12.6% to $999 million, primarily due to a $241 million loss on early extinguishment of debt recorded in 2007 that did not recur in 2008, and higher gross margins at EMG's Illinois plants.
- Expense Increases:
- Fuel Expense: Increased $300 million year-to-date due to higher natural gas and coal costs.
- Purchased Power: Increased $680 million year-to-date, largely due to higher bilateral energy purchases and QF expenses.
- Nonoperating Deductions: Increased significantly due to a $49 million after-tax charge related to a CPUC decision requiring refunds and penalties for performance incentive misreporting (1997-2003).
- Balance Sheet: Cash and equivalents increased from $1.44 billion (Dec 31, 2007) to $3.46 billion (Sep 30, 2008), bolstered by borrowings under credit facilities to ensure liquidity amidst financial market instability.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management highlighted severe credit tightening and volatility in global financial markets. To mitigate liquidity risks, the company borrowed approximately $2.1 billion under credit facilities in September 2008, investing proceeds in U.S. Treasury securities. EMG intends to preserve capital by focusing on completing projects under construction rather than aggressive new growth until markets stabilize.
Unusual Items
- CPUC Penalty: A $49 million after-tax charge was recorded in Q3 2008 related to the CPUC's decision on performance incentive rewards, requiring refunds and penalties totaling over $116 million.
- Lehman Brothers Impact: The bankruptcy of Lehman Brothers Holdings resulted in the termination of power contracts with Lehman Brothers Commodity Services, Inc., causing a $26 million pre-tax loss for EME in Q3 2008.
- Investment Losses: Volatile markets caused a 22% decline in pension trust assets and significant unrealized losses in nuclear decommissioning trusts ($452 million unrealized loss YTD).
Risks and Contingencies
- Tax Disputes: Edison International is negotiating a "Global Settlement" with the IRS regarding cross-border leveraged leases (SILOs and LILOs). The maximum after-tax earnings exposure is estimated at $1.3 billion. Termination of leases prior to settlement could result in an initial charge of at least $650 million.
- Environmental Litigation:
- Midwest Generation: Received a Notice of Violation (NOV) from the EPA regarding New Source Review requirements; settlement talks are ongoing.
- Homer City: Received an EPA NOV regarding construction permits and Title V permits.
- Climate Change: Subject to litigation regarding greenhouse gas emissions (e.g., Kivalina case) and evolving state regulations (AB 32).
- Regulatory: The 2009 General Rate Case (GRC) for SCE is pending, with a final decision expected by year-end. The outcome will significantly impact future revenue requirements.
Investor Verification Checklist
- Tax Settlement Status: Monitor the progress of the "Global Settlement" with the IRS regarding cross-border leases and the potential for a $650 million+ charge if leases are terminated without a final agreement.
- Liquidity Position: Verify the company's ability to maintain liquidity given the reliance on credit facilities and the impact of the Lehman Brothers bankruptcy on counterparty credit risk.
- 2009 GRC Outcome: Track the CPUC's final decision on SCE's 2009 General Rate Case, which could alter revenue requirements by hundreds of millions.
- Environmental Compliance Costs: Assess the financial impact of EPA Notices of Violation (Midwest Generation and Homer City) and potential capital expenditures for environmental controls (mercury, NOx, SO2).
- Pension and Decommissioning Trusts: Review the funded status of pension and nuclear decommissioning trusts, as market declines have eroded asset values, potentially requiring increased future contributions.