Edison International 2011 Q1 Form 10-Q Summary
Business Context and Reporting Period
Edison International filed its quarterly report for the three months ended March 31, 2011. Its principal businesses are Southern California Edison Company (SCE), a regulated electric utility serving Southern California, and Edison Mission Group (EMG), a competitive power-generation and energy-trading business.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Operating revenue | $2.782 billion | $2.810 billion | Down $28 million |
| Operating income | $450 million | $498 million | Down $48 million |
| Income from continuing operations | $216 million | $243 million | Down $27 million |
| Net income attributable to common shareholders | $200 million | $236 million | Down $36 million |
| Diluted EPS | $0.61 | $0.72 | Down $0.11 |
| Net cash from operating activities | $718 million | $599 million | Up $119 million |
| Capital expenditures | $1.133 billion | $951 million | Up $182 million |
Operating margin was approximately 16.2% in Q1 2011 versus 17.7% in Q1 2010. Net margin attributable to common shareholders was approximately 7.2% versus 8.4%. The effective tax rate on continuing operations declined to 23% from 38%, primarily because Q1 2010 included a $39 million non-cash charge related to federal health-care legislation.
- SCE contributed $222 million of earnings attributable to Edison International, up from $164 million. Core earnings increased $19 million, primarily from rate-base growth and higher authorized revenue.
- EMG recorded a $20 million loss attributable to Edison International, compared with $77 million of earnings in Q1 2010. Core earnings declined to an $18 million loss from $71 million of earnings.
- Cash and cash equivalents were $1.298 billion at March 31, 2011, compared with $1.389 billion at December 31, 2010.
- Total assets were $46.161 billion and total liabilities were $34.452 billion. Total equity was $11.709 billion.
- Debt consisted of $334 million of short-term debt, $53 million of current long-term debt and $12.522 billion of long-term debt. Total reported debt was approximately $12.909 billion.
- The common dividend declared was $0.320 per share, compared with $0.315 per share in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue declined because competitive power-generation revenue fell $100 million to $552 million, partially offset by a $73 million increase in SCE revenue to $2.232 billion.
- EMG results deteriorated substantially because of Homer City Units 1 and 2 outages, lower realized energy prices, lower trading revenue, higher operating expenses and the absence of prior-year distributions from the Doga and March Point projects.
- Homer City adjusted operating income declined to a $16 million loss from $37 million of income. Generation fell to 1,943 GWh from 2,954 GWh.
- Midwest Generation adjusted operating income declined to $55 million from $87 million due to lower generation, lower energy prices and higher plant operating costs.
- Renewable energy adjusted operating income increased to $21 million from $10 million, reflecting new projects, higher availability and favorable wind conditions.
- SCE operating cash flow increased to $672 million from $313 million, mainly due to higher tax receipts and timing of balancing-account and working-capital cash flows.
- Consolidated capital expenditures increased to $1.133 billion, with SCE capital investment including accruals of $765 million versus $640 million in Q1 2010.
Liquidity, Debt and Capital Program
- SCE had approximately $53 million of cash and $2.621 billion available under credit facilities after $200 million of borrowings and $73 million of letters of credit. Its debt-to-total-capitalization ratio was 0.46, below the 0.65 covenant limit.
- Edison International parent had $26 million of cash and $1.345 billion available under its credit facility after $81 million of borrowings. Its consolidated debt-to-total-capitalization ratio was 0.53.
- EMG reported $1.208 billion of cash and $981 million available under credit facilities, or total available liquidity of $2.189 billion. Its facilities mature in June 2012, creating refinancing risk.
- EME had $3.7 billion of senior notes outstanding, including $500 million maturing in 2013. EMG and its subsidiaries had below-investment-grade ratings on negative outlook.
- SCE issued $125 million of 6.5% Series D preference stock in March 2011 and issued $200 million of commercial paper.
- SCE projects 2011 capital investment of $3.9 billion to $4.4 billion and 2011–2014 capital investment of $15.6 billion to $17.5 billion.
- EMG forecast $345 million of capital expenditures and turbine commitments for April through December 2011, including $90 million of turbine commitments and substantial environmental spending.
Guidance, Outlook, Risks and Unusual Items
- Management expects EMG profitability to be significantly lower in 2011 because of lower realized energy prices, expiring hedge contracts, higher fuel costs and Homer City outages. EMG may incur net losses in 2011 and subsequent years unless energy prices recover or costs decline.
- EMG expects additional pressure in 2012 from lower Midwest Generation capacity prices and higher rail transportation costs following expiration of a favorable rail contract.
- Homer City Unit 1 returned to service on April 5, 2011; Unit 2 was expected to return during Q2 2011. The outages required advances, deferred fuel deliveries and a $12 million draw from an equity rent reserve.
- SCE updated its 2012 general rate case application to reflect bonus depreciation, reducing requested base-rate revenue requirements by $38 million in 2012, $133 million in 2013 and $145 million in 2014. The revised request contemplated incremental customer rate increases of $828 million, $152 million and $514 million, respectively.
- Additional NRC reviews following the Fukushima Daiichi accident could affect the operation and capital requirements of SCE’s San Onofre and Palo Verde nuclear facilities.
- Potential environmental compliance costs remain uncertain for Midwest Generation, Homer City and San Onofre. Proposed federal cooling-water standards could require significant spending for entrainment controls at some facilities.
- The Midwest Generation New Source Review litigation continues, although most PSD claims and claims against EME were dismissed in March 2011. Remaining claims could result in penalties or remedial obligations; trial was scheduled for June 2013.
- The Homer City New Source Review litigation and related private class-action claims could result in penalties, environmental controls and damages that may materially affect Homer City and EMG.
- The Navajo Nation litigation seeks at least $600 million of damages plus at least $1 billion of punitive damages. SCE cannot predict the outcome.
- Recorded environmental remediation liabilities were $59 million for 29 material sites, with reasonably possible additional costs of up to $190 million for identified material sites and $7 million for immaterial sites.
- SCE’s potential nuclear incident assessment was approximately $235 million per incident, limited to approximately $35 million in any one year; additional retrospective nuclear insurance assessments could total approximately $48 million annually.
- EMG had $90 million of turbine commitments due in 2011. Failure to schedule delivery by June 2011 could have resulted in a $21 million earnings charge.
Important Facts for Investors to Verify
- Whether Homer City Unit 2 returned to service as expected and whether outage-related liquidity support was fully repaid.
- EMG’s ability to refinance or replace credit facilities maturing in 2012 and address the $500 million senior-note maturity in 2013.
- Actual 2011 power prices, capacity prices, coal transportation costs and hedge expirations versus management’s assumptions.
- Final outcomes and potential capital requirements from Midwest Generation and Homer City environmental litigation and regulations.
- Results of SCE’s 2012 general rate case, including authorized revenue requirements and treatment of bonus depreciation.
- Effects of NRC reviews and California once-through-cooling requirements on San Onofre and Palo Verde operations and capital spending.
- Progress on the Navajo Nation litigation, environmental remediation matters and other unrecorded indemnity exposures.
- Reconciliation of management’s non-GAAP core earnings and adjusted operating income measures to GAAP results.