Edison International (EIX) Q1 2010 Earnings Report, Transcript and Summary

Good morning, my name is Wendy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Edison International First Quarter 2010 Financial Teleconference. [Operator Instructions] I would now like to turn the call over to Mr. Scott Cunningham, Vice President of Investor Relations. Thank you. Mr. Cunningham, you may begin your conference.

Thanks, Wendy, and good morning, everyone. Our principal speakers today will be Chairman and CEO, Ted Craver; and Chief Financial Officer, Jim Scilacci. Also with us are other members of the management team. The presentation that accompanies Jim's financial review, together with the earnings press release and our first quarter 10-Q filings are available on our website at www.edisoninvestor.com. During this call, we will make forward-looking statements about the financial outlook for Edison International and its subsidiaries and about other future events. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our 10-Q and other SEC filings. We encourage you to read each carefully. The presentation also includes additional information, including certain outlook assumptions, as well as reconciliation of non-GAAP measures to the nearest GAAP measures. When we get to Q&A, please limit yourself to one question and one follow-up. If you have further questions, please return to the queue. We would like to give as many of you as possible an opportunity to ask a question. With that, I'll turn the call over to Ted Craver.

Thank you, Scott, and good morning, everyone. During the first quarter, we achieved solid earnings in a difficult power market. First quarter earnings reported on a GAAP basis were $0.72 per share. Core earnings, which are what we focused on were $0.82 per share, an increase of 4% over the first quarter of last year. Core earnings at Southern California Edison were $0.62 per share this quarter, $0.02 lower than in the first quarter of last year. Core earnings at Edison Mission Group were $0.22 per share, up $0.05 year-over-year. These results are consistent with our objectives of superior execution and financial discipline. We are also reaffirming today our core earnings guidance for 2010. Jim Scilacci is going to provide additional detail on our financial results in his remarks. I'd like to highlight some of the more important challenges and opportunities we are working on across the company. The key to our growth is the ability to execute the five-year capital spending plan at Southern California Edison. This plan entails spending in the range of $18 billion to $21.5 billion, and would in turn generate an 8% to 11% average annual growth in rate base. This represents one of the highest growth rates in our industry. SCE's capital program is heavily weighted to the wires side of the business. Transmission, distribution and installation of our Edison SmartConnect meters represents 82% of our investment program. We continue to advance our $5.5 billion transmission spending program, led by $3.7 billion in various projects that will access renewable energy resources. Most recent milestone came this past Tuesday, when we commemorated completion of the first leg of our Tehachapi renewable transmission project, northeast of Los Angeles. Installation of our SmartConnect meters are running at 7,500 meters per day. And we are on schedule to complete over 5 million Smart meter connections in 2012. Another major capital investment program that is progressing is 250 megawatts of solar panels on the roofs of commercial and industrial buildings. In the last quarter, we made our primarily solar panel technology selection. And we are now working with a number of warehouse and distribution center owners to finalize our next installation sites. We also completed the steam generator replacement project at unit 2 of our San Onofre Nuclear Generating Station and have the unit back producing electricity. Much of SCE's growth is supported by aggressive yet constructive public policy. For example, the Tehachapi transmission project I mentioned, was granted upfront funding by the Federal Energy Regulatory Commission rather than the more traditional approach of requiring developers of individual renewable projects to sponsor the funding. This approach, which was actively supported by the California Public Utilities Commission and the California Independent system operator, significantly reduces the uncertainty for developers, and will thereby facilitate the development of 4,500 megawatts of wind and solar projects in the Tehachapi mountains. Let me now turn to Edison Mission Group, which in addition to improved earnings from last year's first quarter made some good progress on several of its initiatives. In meetings with investors over the last couple of months, I've been asked about the various policy issues that might impact the coal fleet. Our environmental compliance approach for the Illinois fleet, ETA rules on air emissions, greenhouse gas legislation or regulation, the EPA's New Source Review litigation and so on. We've been clear that we are considering all of these issues in formulating our compliance approach. The issues are complex and we intend to be deliberate in reaching our decisions. During the first quarter, Midwest Generation continued its permitting and planning activities for installation of SNCR technology on multiple units to meet the NOx portion of the Illinois Combined Pollutant Standard. In addition, work continues on analysis and evaluation of FGD technology using dry scrubbing with sodium-based solvents, as a less capital intensive method to comply with the SO2 portion of the CPS [Combined Pollutant Standard] Given our use of low sulfur coal. EMG has continued its financial discipline in managing its wind turbine commitments. During the first quarter, EMG placed 211 megawatts of its remaining committed wind turbines into projects that met our investment and financing criteria. And we have contract negotiations underway that will place most of the remaining turbines. The most significant open position remains with Mitsubishi Heavy Industries or MHI . We have had and continue to have disputes with MHI. And in March, we initiated litigation to void the contract among other revenues and get back our deposits. Jim will discuss the near-term implications for EME's financing plans in his comments. At both SCE and EMG, we've been able to take advantage of improved capital markets conditions. SCE successfully extended a $500 million credit facility for an additional three years, and raised $500 million in fixed rate 30-year debt at an attractive rate of 5.5% or 90 basis points over treasuries. We're also seeing increased debt in the nonrecourse project Finance lending market, which represents an important tool for EMG's growth platforms. Our most recent success was $160 million construction and term financing for our Cedro Hill project in Texas. Finally, liquidity remains strong. SCE has over $2.7 billion in liquidity and EME and its subsidiaries have close to $2 billion, while the holding company has over $1.3 billion in liquidity. This is even a stronger position than where we were a year ago and reflects, I think, our focus on execution and financial discipline. With that, let me turn the call over to Jim Scilacci.

Thanks, Ted, and good morning, everyone. Today I will cover our financial and operating reviews, update EMG's wind construction program and funding plans for this program and review our reaffirmed 2010 core earnings guidance. On Page 2 of this presentation, we have summarized quarterly GAAP and core earnings. Ted already gave you the highlights for EIX. Before I talk about SCE and imaging core earnings, there are few non-core items in both the first quarter of 2009 and 2010 to discuss. First, during the first quarter of 2010, SCE reported a charge of $39 million after tax or $0.12 per share due to the changes in the 2010 healthcare reform bill. Also during the first quarter of 2010, EMG had a $0.02 per share benefit from discontinued operations related to exploration of a contract indemnity in foreign exchange gains on our remaining international asset sale obligations. The EMG's first quarter 2009 results included a net $0.03 per share charge, primarily related to terminating two of Edison Capital's cross-border leases. Turning to Page 3, from a big picture perspective, our 2010 guidance for SCE reflects higher earnings primarily from expected rate base growth. However, SCE's first quarter 2010 core earnings decreased $0.02 to $0.62 per share. You will recall that the utility received its 2009 General Rate Case in March of last year, and had curtailed O&M spending during the first quarter of 2009 until the decision was received. However, when we received the GRC decision, it authorized revenues retroactive to January of 2009. Starting at the end of 2009, we've provided a breakdown of activities that we earn a return on, which we refer to as utility earnings activities. For activities that do not earn a return, which we refer to as cost recovery activities. We have provided a summary table of these activities, as part of the backup information in the slides. The items I will cover here relate to utility earning activities. For 2010, SCE had higher operating revenue of $61 million or $0.11 per share from regulatory decisions authorizing higher rate base of $0.06 and escalation and other of $0.05 per share. SCE had higher O&M of $78 million or $0.14 per share, which includes the impact of curtail spending in the first quarter of 2009, as I previously mentioned. The increase in O&M was primarily due to $30 million of higher transmission and distribution expenses and $20 million of higher expenses, primarily at San Onofre and at Four Corners. SCE also had $27 million of higher depreciation expense or $0.05 per share, primarily from increased capital investments. And $10 million of lower net interest expense and other primarily due to an increase in AFUDC from an increase in the capitalization rate in 2010 relative to 2009 and higher levels of construction in progress. Now turning to Page 4, we'll go through EMG's earnings. From a big picture perspective again, our guidance for EMG's 2010 core earnings is slightly lower than last year's. However, EMG core earnings in the first quarter of 2010 were $0.05 higher than last year. This increase is primarily due to the following. In the natural gas projects category, we realized $33 million in income from the March Point and Doga projects during the first quarter of 2010 without comparable amounts during the first quarter of 2009. And a $37 million increase in energy trading income during the first quarter of 2010 from improved congestion and bases trading. These increases were partially offset by the following three items: $27 million decrease in adjusted operating income from Midwest Gen due to lower average realized energy prices. This decrease was partially offset by lower emissions cost and higher capacity revenues. In addition, Midwest Gen recorded unrealized gains of $15 million during the first quarter of 2009 compared to $2 million in the first quarter of 2010. Next, $70 million decrease in adjusted operating income from renewable projects due to poor wind conditions. Overall, availability increased as a result of completing the Suzlon blade remediation program but was partially offset by outages caused by severe winter weather. In addition, EMG received liquidated damages totaling $11 million related to the Suzlon blade issues during the first quarter of 2009. Lastly, a $10 million decrease in adjusted operating income from leveraged leases, which is reported in the corporate and other category, following the termination of the cross-border leases during 2009, which occurs as part of the global settlement with the Internal Revenue Service. On Page 5 or the operating statistics for our merchant coal fleet. During the first quarter of 2010, generation at both Midwest Gen and Homer City increased relative to the first quarter of last year. Fleet forced outage rates continue to improve leading to higher availability factors. This increase in generation partially offsets the lower average realized prices. Turning to Page 6, EMG added to its 2011 and '12 forward power sales positions. For 2011, EMG added 10.5-kilowatt hours and for 2012, it added 2.8-kilowatt hours. The majority of these additional hedges were at Midwest Gen and the change in average price reflects current market conditions. We also added to our coal position, primarily in 2011 with 1.9 million tons at Midwest Gen and 1.6 million tons at Homer City. As shown on Page 7, wind projects under construction or pending constructions stands at 601 megawatts. We have removed 199 megawatts or $289 million of MHI turbine commitments because of EMG has proceeded the litigation and has asked the court to void the contracts. As of March 31, there was 102 megawatts in uncommitted turbines with remaining payments of $86 million. Turning to Page 8, we have added this slide to better explain how EMG intends to fund remaining wind-related CapEx. The left side of the chart begins with wind capital commitments as of December 31, 2009. We had adjusted wind commitments for the disputed MHI wind payments and for actual first quarter 2010 capital expenditures. As indicated in the right side of the chart, as of March 31, there were $765 million of funding sources to cover the remaining $732 million of projects under construction and payments for uncommitted wind turbines. EMG has existing financings to fund $294 million of capital expenditures and expects to obtain approximately $470 million in U.S. Treasury grants under the existing Federal stimulus program. The majority of the cash grants is anticipated in 2011, following completion of projects under construction. Page 9 shows EMG's updated capital spending forecast. EMG continues to work on its plan for controlling SO2 emissions from their Midwest Generation plants. EMG will update the capital expenditure forecast for the decision on the compliance plan it's made. Turning to Page 10, we have summarized the principal financial covenants for the EME and Midwest Gen credit agreements and for the Homer City lease. We also have made several additional financing documents available on our website based on requests from our fixed income investors. They can be found at www.edisoninvestor.com. Please turn to Slide 11. We have reaffirmed our core earnings guidance at $3.15 to $3.45 per share or the midpoint of $3.30 per share. We have updated our GAAP earnings guidance to reflect non-core items recorded in the first quarter. Our reaffirmed guidance range reflects gas and forest [ph] as of March 31 otherwise there are no other major assumption changes. Before I move to Q&A, I want to point out one change to our financial reporting in the Edison International 10-Q. Effective this quarter, we have combined the segment reporting for Edison Mission Group. This change eliminates the separate financial information for Edison Capital. This change has no impact on the separate recording for Edison Mission Energy or subsidiary and has no impact on earnings or cash flow. With that, I'll turn the call over to the operator for questions.

[Operator Instructions] Our first question is from Hugh Wynne. [Sanford C. Bernstein] Hugh Wynne - Sanford C. Bernstein & Co., Inc.: I really just wanted to get a feel for the increase in the operating expense at Southern California Edison. Very large number of $0.14, it's completely offset the scheduled increase in revenues under the General Rate Case. It seems a fairly disappointing performance and I just wanted to understand better why that occurred?

This is Jim. I'll start and I'll pass it over to the utility to further elaborate. Really what you're seeing is what we expected to occur because the way the rate case rate works last year, where we got the revenues that have curtailed the expenses. There was a pick up in the first quarter of last year, so the earnings were relatively high but the expenses have been curtailed. Meaning if you roll forward in the 2010, there was an escalation that was expected for our own and expenditures. And so when you look quarter-to-quarter, you get this funding results. And so again, we reaffirmed our guidance. It shows the numbers that we're expecting to track, so I don't view it as a surprise. Hugh Wynne - Sanford C. Bernstein & Co., Inc.: I like the revenue increase side, and I like the operating expense cut. But why was it impossible to maintain that rate of expense?

Again, I don't know if there's anything there that's special or different. I'll look over on to Linda Sullivan, were there any outage related activities too?

We did have higher expenses associated with the upside [ph], and operating outage of $0.02 per share compared to last year. And we also have higher expenses associated with our Four Corners overhaul work in the fourth quarter of this year, other than that the expenses are more within -- all of those expenses were within expectations.

Our next question is from Hasan Doza. [Luminus Management]

Question on Slide #11 on the midpoint of EMG guidance. Your midpoint is the same based on the price deck as of the end of March versus the price deck as of the end of December. And we know that the price in NiHub and PJM declined meaningfully during the first quarter and you were about 50% hedged going into the first quarter. So I'm just curious as to what factors are allowing you to maintain the same midpoint with this decline in power prices?

There are a couple of things going on here. So it's within our range and as you look at our hedging program, we tend to hedge more on peak and we're well protected there. And what we also, at last year put on a large off peak position too and those hedges are performing well now with these lower prices that we're experiencing in April. And the last thing this all suggest is the level of trading activity has been solid in the first quarter.

One follow-up I had on actually on EMMT. You had a very strong first quarter at $47 million. How sustainable is this going forward that you chose not to address the range, which is 60 to 110 for the year?

I think the range is still consistent with our expectations, so that there's no further changes there.

Our next question is from Jonathan Arnold. [Deutsche Bank]

Could you be a little bit more specific about the nature of your dispute with Mitsubishi and just where that stands? What the timing is going to be for resolution?

Given that there's litigation involved, Jonathan, we just can't elaborate more on that.

On the Midwest Gen, the realized coal price in the first quarter that came down a decent amount. Is that a reasonable proxy for the delta you might expect to see on the year, and is it more a function of just having higher dispatch? Can you talk a little bit about what drove that and what we should think about in the future?

We don't talk a lot about what we're paying for coal. it's all bundled in, and you can see the average realized prices. And some of the factors that are playing here that you can see where prices have gone are emissions. Emissions have dropped dramatically and that affects the overall margins that are realized associated with the coal position.

It's more emission piece than the coal piece that's driving that in Q1?

That's correct.

Our next question is from Michael Lapides. [Goldman Sachs]

Can you just talk a little bit about Midwest Gen, you touched it at the beginning in your introductory comments about a combination absorbent injection and FGDs. Can you talk about the timing of when you think you'll make decisions or will it vary by unit, and how does that make you think in general about kind of long-term structuring, kind of three to five-year structuring of that business as a whole?

There's a couple of questions embedded in there. In terms of how we think about it, we do think about all of these decisions on a unit-by-unit basis. Number two, the technology, the particular FGD technology that we've been looking at, we believe from a technical standpoint works well with the low sulfur coal that we use. The issues that remain before we can really be conclusive on our decisions around the proper technology selection for SO2 removal, really have to do with financing and have to do with whether we're comfortable with the trade-off between operating expense and capital expense. And then most importantly, we want to make sure that we have a solution that's durable from a regulatory and legal standpoint. So those are the kinds of issues that remain. And at this point, we really think we have a specific point in time that we expect all of that will be resolved but we continue to work it.

What level of power prices do you need to earn a decent return on capital on an FGD investment?

That's way too complicated for this call. But I think what I would leave you with is the same statement we've made before. We're not going to make investments, unless we can satisfy ourselves that we can get that capital returned. And the investment decision often ends up circulating around, should we put the capital in, get that recovered in a reasonable timeframe given the life of the plants. Can we get a reasonable return on our investment and how does that compare with the alternative, which is fundamentally to shut it down.

And are you willing to make that decision based on your fundamental point of view about what power prices in the region should be, or will you primarily rely on kind of where the three- or four-year forward prices are at the point in time whenever you have to start making decisions?

Certainly, not betting the farm here on a single price point or expectation of prices. We're really looking at a number of sensitivities, a range of outcomes. And while you focus a lot on the power prices, and that is certainly one of the most important elements. There are also important element around the cost side including potential carbon prices. So there are many factors that go into this, the power prices perhaps are dominant but by no means the only variable.

Our next question is from the Lasan Johong. [RBC Capital Markets]

Midwest Gen saw some pretty nice increases in volume output, how much of that was weather? How much of that was just demand going up?

Lasan, this is Jim. I'll just give you an introductory comment and I'll kick it over to Ron. At times, it's hard for us to determine that because we're minuret [ph] plants. And the PJM dispatches is based on requirements. Clearly, the weather was colder the first quarter of this year relative to last year, so that would have something to do with it. And our availability was better in the first quarter of 2010. Ron, you have anything else to add?

It's availability driven and then we did see increased demand off peak, whether it's weather or a slight pick up in industrial demand. We really don't have a view.

Is it then fair to say that you cannot tell us what you're seeing in terms of kind of macro conditions in your operating area?

We are looking at available data, we do see industrial demand picking up in the area.

Can you tell us by how much?

Not on the top of my head.

There was another factor, Lasan, last year because of the slack demand, prices went pretty low in the first quarter of last year prior to some transmission-related congestion points that were affected. The prices and ultimately the generation come at -- and we just haven't seen that magnitude of the congestion that was experienced last year. There was a transmission fix that was put in. I think it's helped overall but it's really hard to tell exactly how you break out all those individual pieces.

On the wind turbine issues, obviously the PPA markets have been tough over the last year. Are you seeing any relief in the near future?

I'll turn it over to Ron.

The wind projects that we have placed into construction, we have been successful in obtaining PPAs for those projects that meet our returns and that continues to be the discipline we're going through as we placed the turbine commitments.

Well, I guess my question is really, is it easier to get these PPAs now than a year ago?

It's picked up from a year ago, definitely.

I think the markets are very competitive and you'll probably see a little bit more activity from the investor on utilities doing things directly versus contracting with others. And the other thing that the factor that helps in your PPA pricing is the price of turbines are well off the levels that were at the peak in 2008, probably 10% to 20%, maybe 15% less than the peaks we saw about 18 months ago.

If I could kind of put words in your mouth, is it fair to say that on the one hand, the market for wind is growing, but more of it is being occupied by direct utility investments?

It's a factor. How much you place in each one, we're seeing different places in each market. If you'll ask out for what's happening in California about when it's very actively had the RPS requirements they have to meet and they're continuing to have RFOs [Request for Offers] for renewable generation constantly, so it's state by state.

Any ongoing impact from healthcare legislation issues?

No.

[Operator Instructions] Our next question is from Terran Miller. [UBS]

With the coal transportation contract that expires at Midwest Gen in 2011, could you give us some indication of when that contract was entered into, and when was the last time there was an escalation on that contract?

It's a 10-year contract, Terran, so just work backwards. And there is an escalation that's embodied in the contract and that information is not public. It's confidential between the parties. But I can generally tell you, there are multiple components, there's a capital component, labor component, fuel component and it's weighted. So that's how it works.

But it's an annual escalation, it wasn't like it escalated once five years ago?

It's annual.

And the second question is on Homer City, is there a forward-looking that's a risk coverage ratio requirement also, as well as historic?

Yes, there is.

And is there any anticipation at this point based on the forward projections that you've made that there might be any issues with cash getting trapped?

Not at this time.

Our final question today is from Lasan Johong.[RBC Capital Markets]

I wanted to follow-up on kind of the recent macro environment in M&A. Obviously, a couple of deals have been going through. So question number one, around that is A, do you see opportunities for Midwest Gen EMG to get involved in M&A transaction? Is it a high priority for Edison to chase those opportunities and kind of how would you approach the general IPP market? Since the landscape is shifting rather dramatically right now.

This is Ted, I'm afraid I'm not going to give you a very satisfying answer. We just don't speculate on potential M&A activities.

But I was thinking more general terms, kind of are there opportunities that you could pursue?

I'm going have to stick with we really don't discuss those.

That concludes our questions for today. I'll now turn the call back over to Mr. Cunningham for closing comments.

Thanks very much, everyone, for participating in our call. And pleased do get to call on Investor Relations if you have any follow-up questions. Thank you very much.

Thank you. This includes today's conference. Thank you for participating. You may disconnect at this time.