Business Context and Reporting Period
Company: Edison International (EDISON INTERNATIONAL)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 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), an unregulated power generator; and Edison Capital, a financial services provider. The company operates primarily in California and internationally.
Key Financial Metrics
| Metric (in millions) | Q1 2003 | Q1 2002 |
|---|---|---|
| Total Operating Revenue | $2,532 | $2,488 |
| Operating Income | $316 | $309 |
| Net Income | $57 | $84 |
| Diluted EPS | $0.17 | $0.26 |
| Operating Cash Flow | $680 | $(930) |
| Total Assets | $35,184 | $33,284 |
| Total Debt (Short-term + Long-term) | $14,310 | $14,396 |
| Cash and Equivalents | $2,333 | $2,468 |
Note: Q1 2002 operating cash flow was negative primarily due to the repayment of past-due obligations related to the California energy crisis.
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased by $27 million (32%) to $57 million. This was driven by a $44 million decrease in SCE earnings due to a planned refueling outage at the San Onofre Nuclear Generating Station and higher operating costs, partially offset by improved performance at EME.
- Revenue Growth: Total operating revenue increased by $44 million (1.8%). Nonutility power generation revenue rose significantly ($147 million increase) due to higher energy prices and increased generation at Homer City and Illinois plants. Electric utility revenue declined slightly due to allocation adjustments for California Department of Water Resources (CDWR) purchases.
- Expense Increases: Fuel and purchased power expenses increased due to higher natural gas prices and increased generation. Other operation and maintenance expenses rose due to storm damage and healthcare costs.
- Accounting Changes: The company adopted a new standard for Asset Retirement Obligations (ARO) effective January 1, 2003. This resulted in a $9 million cumulative effect charge to net income for EME. For SCE, the change resulted in a regulatory liability adjustment with no immediate impact on earnings.
Guidance, Outlook, Risks, and Contingencies
Liquidity and Going Concern Issues
A significant risk factor is the liquidity of Edison Mission Midwest Holdings (a subsidiary of EME), which has $911 million of debt maturing in December 2003. The company states it is not expected to have sufficient cash to repay this debt and there is no assurance it can refinance. Independent auditors have included an explanatory paragraph in their opinions indicating substantial doubt about the ability of MEHC, EME, and Midwest Generation to continue as going concerns.
Regulatory and Legal Risks
- CPUC Settlement Appeal: The California Supreme Court is reviewing the validity of the $3.6 billion settlement agreement (PROACT) allowing SCE to recover past procurement costs. Oral arguments are scheduled for May 27, 2003. An adverse ruling could jeopardize cost recovery.
- Navajo Nation Litigation: SCE is a defendant in a lawsuit seeking damages of at least $600 million (plus treble damages) regarding coal royalties. The Supreme Court recently ruled in favor of the government in a related case, and SCE has filed a motion to dismiss.
- CBK Project (Philippines): The Philippine government has suspended payments to the CBK Power project pending a review of alleged "overpayments." EME has invested $49 million and is committed to invest up to $30 million more. Failure to resolve this could lead to default on project loans.
Future Accounting Changes
Effective July 1, 2003, Edison International will consolidate certain Variable Interest Entities (VIEs), including the Brooklyn Navy Yard and Storm Lake projects. This is expected to increase total assets by approximately $447 million and liabilities by $528 million, with an anticipated cumulative loss of approximately $77 million.
Investor Verification Checklist
- Debt Refinancing: Verify the status of refinancing efforts for the $911 million debt maturing at Edison Mission Midwest Holdings in December 2003.
- PROACT Recovery: Monitor the outcome of the California Supreme Court oral arguments (May 27, 2003) regarding the $3.6 billion procurement cost recovery settlement.
- CBK Project Resolution: Track negotiations between CBK Power and the Philippine government regarding suspended payments and potential defaults.
- VIE Consolidation Impact: Review the financial impact of the July 1, 2003 consolidation of VIEs, specifically the expected $77 million loss.
- Dividend Restrictions: Note that SCE is restricted from paying dividends to the parent company until the PROACT balance is recovered or January 1, 2005, whichever is earlier.