Business Context and Reporting Period
Company: Edison International (EDISON INTERNATIONAL)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended June 30, 2003
Business Overview: Edison International is a holding company with three primary reportable segments: Southern California Edison (SCE), a regulated electric utility; Edison Mission Energy (EME), a nonutility power generator; and Edison Capital, a financial services provider. The company operates primarily in California and internationally.
Key Financial Metrics
| Metric (in millions) | Three Months Ended June 30, 2003 |
Three Months Ended June 30, 2002 |
Six Months Ended June 30, 2003 |
Six Months Ended June 30, 2002 |
|---|---|---|---|---|
| Total Operating Revenue | $3,133 | $2,824 | $5,664 | $5,313 |
| Operating Income | $228 | $1,203 | $544 | $1,512 |
| Net Income | $24 | $665 | $80 | $749 |
| Diluted EPS | $0.07 | $2.02 | $0.24 | $2.28 |
| Operating Cash Flow | N/A | N/A | $1,333 | $(317) |
| Cash and Equivalents (End of Period) | $2,381 | N/A | $2,381 | N/A |
| Total Debt (Short-term + Long-term) | $14,158 | N/A | $14,158 | N/A |
Note: Total Debt calculated as Short-term debt ($298M) + Long-term debt due within one year ($1,502M) + Long-term debt ($12,358M) as of June 30, 2003.
Material Changes vs. Prior Period
- Significant Earnings Decline: Net income dropped from $665 million in Q2 2002 to $24 million in Q2 2003. This is primarily due to a $150 million after-tax asset impairment charge at EME and the absence of a $480 million one-time gain in 2002 related to SCE's utility retained generation (URG) decision.
- Asset Impairment: EME recorded a $251 million asset impairment charge in the first half of 2003. This included a $245 million write-down of eight small peaking plants in Illinois due to revised long-term capacity revenue outlooks and a $6 million charge related to the planned disposition of the Gordonsville project.
- Revenue Growth: Total operating revenue increased 11% year-over-year for the quarter ($3,133M vs $2,824M), driven by higher wholesale and retail sales at SCE and increased generation at EME's Homer City facilities.
- Operating Expenses: Total operating expenses rose significantly to $2,905 million in Q2 2003 from $1,621 million in Q2 2002, largely due to the asset impairment charge and higher purchased power costs.
Guidance, Outlook, Risks, and Unusual Items
Liquidity and Debt Maturities
- Substantial Doubt on Going Concern: Independent accountants have expressed substantial doubt regarding the ability of Mission Energy Holding Company (MEHC) and EME to continue as going concerns due to significant debt maturities.
- Debt Maturities: EME has $275 million of debt maturing September 16, 2003. Edison Mission Midwest Holdings (a subsidiary) has $911 million maturing December 11, 2003, which it is not expected to have sufficient cash to repay without refinancing.
- Refinancing Risk: Discussions with lenders are ongoing, but there is no assurance that debt can be extended or refinanced on commercially reasonable terms. Failure to do so could trigger defaults or Chapter 11 reorganization.
Regulatory and Legal Risks
- CPUC Settlement Appeal: The California Supreme Court is reviewing the validity of SCE's $3.6 billion procurement cost recovery settlement (PROACT). A decision is expected by August 25, 2003. While SCE believes recovery is probable, the outcome remains uncertain.
- FERC Investigations: The FERC has issued orders requiring SCE and others to show cause regarding market manipulation and anomalous bidding behavior, potentially leading to disgorgement of profits.
- Environmental Remediation: Recorded liability is $103 million, but costs could exceed this by up to $280 million.
Unusual Items and Accounting Changes
- Asset Retirement Obligations (ARO): Adoption of new accounting standards in Jan 2003 resulted in a $9 million cumulative effect charge at EME. For SCE, the change resulted in a deferred regulatory liability with no immediate earnings impact.
- Variable Interest Entities (VIEs): Edison International expects to consolidate several VIEs (including Brooklyn Navy Yard and Storm Lake) effective July 1, 2003, which will increase assets by ~$452 million and liabilities by ~$530 million, with an expected $78 million loss recorded in Q3 2003.
- Dividend Restrictions: Edison International has deferred interest payments on $825 million of quarterly income debt securities since May 2001. Common stock dividends cannot be declared while interest is deferred. EME and MEHC are also restricted from paying dividends due to covenant requirements.
Investor Verification Checklist
- Debt Refinancing Status: Verify the outcome of refinancing discussions for the $911 million Midwest Holdings debt due December 2003 and the $275 million EME debt due September 2003.
- CPUC Litigation Outcome: Monitor the California Supreme Court decision regarding the PROACT settlement, which is critical for SCE's cost recovery and future rate reductions.
- Going Concern Status: Assess the likelihood of MEHC or EME filing for Chapter 11 reorganization given the "substantial doubt" expressed by auditors.
- Asset Impairment Scope: Review if further impairments are necessary for EME's merchant generation assets given volatile wholesale power prices.
- Dividend Resumption: Confirm if the company can resume interest payments on deferred debt securities, a prerequisite for declaring common stock dividends.