Business Context and Reporting Period
Company: Edison International (EDISON INTERNATIONAL)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: Edison International is a holding company with principal operating subsidiaries including Southern California Edison Company (SCE), a rate-regulated electric utility, and Edison Mission Group (EMG), which encompasses competitive power generation (Edison Mission Energy - EME) and financial services (Edison Capital).
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Operating Revenue | $2,812 | $3,113 |
| Operating Income | $553 | $628 |
| Net Income (Consolidated) | $269 | $320 |
| Net Income Attributable to Edison International | $250 | $299 |
| Diluted EPS (Attributable to Edison International) | $0.76 | $0.91 |
| Operating Cash Flow | $686 | $586 |
| Cash and Equivalents (Ending Balance) | $3,543 | $1,545 |
| Total Debt (Short-term + Long-term) | $12,730 | $13,267 |
| Dividends Declared per Common Share | $0.310 | $0.305 |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenue decreased by $301 million (9.7%) year-over-year. This was driven by a $190 million decrease in electric utility revenue due to lower electrical demand and a $108 million decrease in competitive power generation revenue due to lower power prices and generation levels.
- Profitability: Net income attributable to Edison International declined by $49 million (16.4%).
- SCE: Earnings increased to $208 million from $150 million, primarily due to the 2009 General Rate Case (GRC) decision effective January 1, 2009.
- EME: Earnings decreased significantly to $56 million from $145 million. This was caused by lower power prices, reduced generation, lower trading income, and a loss from the termination of two lease agreements at Edison Capital.
- Cost Reductions: Fuel expenses decreased by $150 million and purchased power expenses decreased by $153 million, largely due to lower natural gas prices and reduced demand.
- Cash Flow: Operating cash flow increased by $100 million to $686 million, despite lower net income, due to timing differences in balancing account activities and working capital.
Guidance, Outlook, and Risks
Global Settlement Impact
Edison International finalized a Global Settlement with the IRS on May 5, 2009, resolving tax disputes for years 1986–2002. The company expects:
- A consolidated after-tax earnings charge of approximately $225 million to $300 million through the second quarter of 2009.
- An overall positive cash impact of approximately $325 million to $400 million.
- Specific impacts include an earnings charge of $550–$600 million at Edison Capital and earnings of $275–$300 million at SCE.
Outlook and Management Commentary
- Capital Markets: Access to capital markets remains uncertain due to financial market conditions. EME is preserving capital by focusing on completing projects under construction and deferring new wind project expenditures until financing is available.
- Commodity Prices: Continuing economic recessionary conditions have led to declines in electrical demand and natural gas/power prices, adversely impacting EME results. SCE projects it will recover under-collected purchased power costs without a rate increase.
- Capital Expenditures: SCE's 2009–2013 capital investment plan is projected at $16.7 billion to $20.2 billion. EME has significant turbine commitments ($667 million in 2009) but is discussing deferrals with suppliers.
Risks and Contingencies
- Environmental Litigation: Ongoing Notices of Violation (NOV) from the EPA regarding New Source Review requirements at Midwest Generation (Illinois) and EME Homer City facilities. Settlement talks are ongoing, but litigation could take years.
- Regulatory: Pending CPUC decisions on the Solar Photovoltaic Program and FERC proceedings regarding transmission rates and Construction Work in Progress (CWIP) recovery.
- Credit Risk: Counterparty credit risk remains a concern, particularly with financial institutions and coal suppliers. EME and SCE have significant derivative positions requiring collateral.
Investor Verification Checklist
- Global Settlement Timing: Verify the exact timing and magnitude of the $225–$300 million earnings charge expected in Q2 2009.
- EME Liquidity: Monitor EME's ability to meet turbine payment commitments ($667 million in 2009) given the deferral discussions and tight credit markets.
- Environmental Compliance Costs: Assess potential capital expenditures required to meet new opacity regulations at Homer City and New Source Review requirements at Illinois plants.
- SCE Rate Recovery: Confirm the status of the CPUC's final decision on the Solar Photovoltaic Program and its impact on capital recovery.
- Derivative Valuation: Review the impact of volatile energy prices on the fair value of derivative assets and liabilities, particularly Level 3 instruments.