Edison International 2015 Q3 Form 10-Q Summary
Business context and reporting period
This combined Form 10-Q covers Edison International and its principal subsidiary, Southern California Edison Company (SCE), for the three and nine months ended September 30, 2015. SCE is a regulated electric utility serving approximately 50,000 square miles in Southern California. Edison International also owns Edison Energy Group and other nonutility subsidiaries, which were not material reportable segments.
Financial results and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Edison International operating revenue | $3.763 billion, versus $4.356 billion | $9.183 billion, versus $10.298 billion |
| Income from continuing operations attributable to common shareholders | $378 million, versus $496 million | $1.056 billion, versus $1.046 billion |
| Net income attributable to Edison International common shareholders | $421 million, versus $480 million | $1.099 billion, versus $1.192 billion |
| Diluted EPS | $1.28, versus $1.46 | $3.34, versus $3.62 |
| SCE net income available for common stock | $389 million, versus $503 million | $1.079 billion, versus $1.072 billion |
| SCE operating revenue | $3.757 billion, versus $4.338 billion | $9.166 billion, versus $10.276 billion |
Management reported Edison International core earnings of $377 million for the quarter and $1.049 billion for the nine-month period, compared with $496 million and $1.142 billion, respectively, in the prior-year periods. Core earnings are a non-GAAP measure.
- SCE operating income was $626 million for the quarter and $1.714 billion year to date, compared with $881 million and $1.815 billion, respectively.
- SCE's effective tax rate was 18.1% for the quarter and 15.1% for the nine months, versus 29.7% and 21.1% in the comparable 2014 periods. The decline primarily reflected repair-deduction benefits and a $100 million benefit from revisions to uncertain tax positions.
- SCE generated $2.951 billion of operating cash flow during the first nine months, compared with $2.513 billion in 2014, and spent $3.121 billion on capital expenditures.
- Edison International generated $2.833 billion of operating cash flow and used $2.857 billion in investing activities during the first nine months.
- At September 30, 2015, Edison International had $134 million of cash, $11.252 billion of long-term debt including current maturities, and total assets of $51.270 billion.
- SCE had $38 million of cash, $10.615 billion of long-term debt including current maturities, and $50.822 billion of total assets.
- SCE had approximately $2.2 billion available under its $2.75 billion revolving credit facility. Edison International Parent had $512 million available under its $1.25 billion facility.
- SCE's debt-to-total-capitalization ratio was 0.44 to 1, below its 0.65 covenant limit. Edison International Parent's ratio was 0.48 to 1.
- SCE's nuclear decommissioning trusts totaled $4.388 billion at fair value, including approximately $3.0 billion associated with San Onofre Units 2 and 3.
Material changes versus the prior comparable period
- Third-quarter Edison International earnings declined primarily because SCE recorded an estimated $233 million customer refund related to the 2015 General Rate Case (GRC) proposed decision. The nine-month refund estimate was $318 million.
- SCE's purchased power and fuel costs declined $397 million in the quarter and $915 million year to date, primarily because of lower power and natural-gas prices.
- SCE depreciation, decommissioning and amortization expense increased $83 million in the quarter and $201 million year to date, driven largely by San Onofre regulatory-asset amortization and higher transmission and distribution investment.
- 2014 included a $231 million pre-tax San Onofre impairment and other charge; no comparable charge was recorded in 2015.
- Operating cash flow improved despite higher capital spending, aided by regulatory-account cash flows, including ERRA collections and customer amounts estimated to be refundable under the GRC proposal.
- SCE's regulatory assets totaled $8.594 billion at September 30, 2015, while regulatory liabilities totaled $6.153 billion. The ERRA undercollection was fully recovered by September 30, 2015.
- SCE issued approximately $1.3 billion of first and refunding mortgage bonds and $128 million of pollution-control bonds during the first nine months, while also redeeming $325 million of preference stock.
Guidance, outlook, commentary, risks and unusual items
- The CPUC's September 2015 GRC proposed decision would establish 2015 base-rate revenue of $5.159 billion, approximately $474 million below 2014 authorized revenue excluding San Onofre. The final decision was expected by year-end and could materially change revenue, refunds and regulatory assets.
- The proposal included a potential $40 million annual revenue impact from a $344 million rate-base adjustment related to tax repairs. SCE had not recorded the potential impact and stated that a final decision could require a revenue reduction and a write-down of some or all of a related $380 million regulatory asset.
- SCE forecast 2015–2017 capital expenditures of approximately $11.6 billion to $11.8 billion, including $3.9 billion for 2015. The forecast reflected reductions from the GRC proposal and removal of the $740 million Coolwater-Lugo project from the plan.
- The San Onofre owners reached a $400 million settlement with NEIL in October 2015; SCE's share was approximately $313 million. Under the CPUC settlement, 95% of the recovery after related costs would benefit customers and 5% SCE. SCE expected to record the recovery in the fourth quarter.
- SCE continued arbitration and claims against Mitsubishi Heavy Industries regarding defective San Onofre replacement steam generators. SCE sought at least $4 billion in damages; MHI denied liability and asserted $41 million of counterclaims. Recoveries are uncertain.
- A CPUC administrative law judge issued an October 2015 proposed decision recommending a $16.74 million penalty for alleged ex parte communication reporting violations. Other parties had sought penalties as high as $648 million, and petitions to reopen or modify the San Onofre settlement remained pending.
- Edison International and SCE faced related securities and shareholder derivative litigation and were cooperating with criminal investigations by the California Attorney General and U.S. Department of Justice. The companies could not predict the outcomes.
- SCE recorded a $137 million estimated minimum liability for remediation at 19 material environmental sites, with total environmental remediation liabilities of $140 million. Potential costs could exceed recorded liabilities by up to $163 million for material sites and $8 million for immaterial sites.
- Wildfire exposure remains significant. SCE had wildfire liability coverage of up to $610 million, with a $10 million self-insured retention per occurrence, plus additional coverage of $390 million in specified circumstances.
- Edison International paid $204 million on September 30, 2015 under the EME settlement and was obligated to pay an additional $214 million in September 2016.
- Management identified risks involving regulatory recovery, CPUC and FERC decisions, San Onofre decommissioning, wildfire and nuclear insurance, environmental compliance, capital-project execution, commodity prices, counterparty credit, interest rates, cybersecurity, weather and natural disasters.
Most important facts for an investor to verify
- Final CPUC action on the 2015 GRC, including the ultimate revenue requirement, customer refunds, rate-base adjustment and treatment of tax-repair regulatory assets.
- Timing and allocation of the $400 million NEIL insurance settlement and any subsequent MHI arbitration recovery.
- Potential CPUC penalties, settlement challenges, securities litigation and government investigations related to San Onofre communications.
- Actual 2015–2017 capital spending and regulatory recovery, including the effect of project delays, permitting and the Coolwater-Lugo cancellation.
- San Onofre decommissioning costs, trust withdrawals and the adequacy and investment performance of the $4.388 billion decommissioning trusts.
- Wildfire claims, insurance availability and policy limits relative to potential liability exposure.
- Debt refinancing needs, credit-facility availability, collateral requirements and SCE's ability to continue dividends to Edison International.
- Tax audit outcomes, including proposed adjustments related to capitalized overhead and repair deductions.