Edison International 2009 Q3 Form 10-Q Summary
Business context and reporting period
Edison International reported unaudited consolidated results for the three and nine months ended September 30, 2009. Its principal segments were Southern California Edison Company (SCE), a regulated electric utility; Edison Mission Group (EMG), including competitive power generation; and financial services and other operations.
Financial performance and key metrics
| Metric | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Operating revenue | $3,664 million | $4,294 million | $9,310 million | $10,884 million |
| Operating income | $768 million | $965 million | $958 million | $2,099 million |
| Net income attributable to Edison International | $403 million | $439 million | $637 million | $999 million |
| Diluted EPS | $1.22 | $1.33 | $1.94 | $3.02 |
| Operating cash flow | Not separately provided | Not separately provided | $2,112 million | $1,635 million |
| Dividends declared per share | $0.310 | $0.305 | $0.930 | $0.915 |
Consolidated operating margin was approximately 21.0% in Q3 2009 versus 22.5% in Q3 2008, and approximately 10.3% for the first nine months versus 19.3% in the comparable 2008 period. Net margin attributable to Edison International was approximately 11.0% in Q3 versus 10.2% in the prior-year quarter, and 6.8% for nine months versus 9.2% in 2008.
- SCE generated attributable net income of $346 million in Q3 and $1.053 billion for nine months, compared with $235 million and $542 million, respectively, in 2008.
- EMG competitive power generation generated $53 million in Q3 and $149 million for nine months, compared with $209 million and $426 million, respectively, in 2008.
- Financial services and other operations recorded a $599 million nine-month loss, primarily reflecting the $628 million after-tax loss from termination of cross-border leveraged leases and related tax effects.
- Total assets were $42.772 billion at September 30, 2009, compared with $44.615 billion at December 31, 2008. Total equity was $11.005 billion versus $10.709 billion.
- Cash and equivalents declined to $2.411 billion from $3.916 billion at year-end 2008. Total debt, including short-term debt, current maturities and long-term debt, was approximately $11.375 billion versus $13.267 billion at December 31, 2008.
- Net cash used in financing activities was $2.314 billion, primarily due to short-term debt repayments, compared with $2.524 billion of cash provided in the 2008 period. Capital expenditures were $2.287 billion versus $1.959 billion.
Material changes versus the prior comparable period
- Revenue declined 14.7% in Q3 and 14.5% for nine months, mainly because of lower fuel and purchased-power costs, lower wholesale power prices, reduced sales volumes and SCE balancing-account collections.
- SCE’s earnings improved substantially due to the 2009 general rate case, lower nonoperating deductions, a $300 million after-tax Global Settlement benefit, and a $46 million noncash benefit from transferring Mountainview assets into utility rate base.
- EMG earnings fell sharply as lower electricity demand, natural gas prices and wholesale power prices reduced Illinois Plants and Homer City results. Nine-month Northern Illinois Hub and PJM West Hub prices declined to $28.62/MWh and $38.65/MWh from $52.68/MWh and $73.86/MWh, respectively.
- Operating cash flow increased by $477 million, primarily from improved ERRA balancing-account collections and regulatory cash flows, despite tax payments and other working-capital effects.
- Other comprehensive income was a $76 million loss in Q3 2009 versus $469 million of income in Q3 2008, largely reflecting changes in cash-flow hedge values.
Guidance, outlook, commentary and unusual items
- SCE’s 2009-2013 capital investment plan totaled $16.8 billion to $19.8 billion. SCE expects 2009 capital expenditures of $2.6 billion to $3.1 billion, subject to permitting, regulatory, construction and financing conditions.
- SCE expected approximately $125 million to $175 million of 2009 cash-flow benefit from bonus depreciation. Management had not completed its analysis of a potential repair-cost tax accounting election and could not determine its earnings or cash-flow impact.
- FERC accepted proposed 2010 SCE transmission rates subject to refund and settlement procedures; the proposed rates would increase the transmission revenue requirement by $107 million, or 24%, and were expected to increase SCE’s system average rate by approximately 1%.
- EME had $718 million of obligations due in 2010 under wind-turbine commitments covering 419 turbines and 785 MW. It also held 67 turbines totaling 163 MW in storage. EME stated that inability to finance projects or terminate turbine orders could result in a material charge.
- The Global Settlement resolved federal tax disputes for 1986-2002 and cross-border lease disputes. Edison International recorded a $274 million consolidated after-tax earnings charge through Q2 2009 but expected a positive cash impact of approximately $380 million over time.
- At September 30, 2009, SCE had approximately $3.5 billion of liquidity, including cash and short-term investments and available credit facilities. EMG had $1.2 billion of cash and short-term investments and $496 million of available credit capacity. Edison International parent had $37 million of cash and $1.341 billion available under its credit facility.
- Material risks included wholesale power-price volatility, lower capacity prices, commodity and collateral requirements, counterparty defaults, below-investment-grade EMG credit ratings, environmental compliance costs, nuclear and wildfire liabilities, regulatory cost recovery, tax examinations and litigation.
- Midwest Generation faced a U.S. EPA and State of Illinois lawsuit seeking civil penalties and potentially substantial pollution-control, permitting and mitigation measures. The company could not estimate the outcome or financial impact.
- Environmental remediation liabilities were recorded at $44 million, with reasonably possible additional costs of up to $178 million. SCE also faced potential effects from proposed once-through-cooling requirements and greenhouse-gas regulation.
Most important facts for an investor to verify
- Whether SCE’s favorable rate-case, tax-settlement and Mountainview benefits are recurring or nonrecurring.
- The sustainability of SCE’s cash generation and its ability to fund the $16.8 billion to $19.8 billion capital plan while maintaining dividends and credit metrics.
- EMG’s exposure to sustained low wholesale power and capacity prices, environmental compliance requirements and collateral calls.
- The ultimate cash and earnings effects of the Global Settlement, remaining tax examinations and Edison Funding covenant deficiencies.
- The potential financial consequences of the Midwest Generation New Source Review lawsuit, Four Corners inquiry, wildfire insurance limitations and other environmental matters.
- The status of EME turbine commitments, project financing and the Big Sky and Cedro Hill wind projects after the October 2009 subsequent events.
- Changes in SCE and EMG credit ratings, liquidity availability, debt maturities and covenant compliance.