Edison International 2014 Second-Quarter Form 10-Q Summary
Business context and reporting period
Edison International is the parent holding company of Southern California Edison Company (SCE), an investor-owned electric utility serving approximately 50,000 square miles in Southern California. This combined Form 10-Q covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods. Competitive businesses were not material as a separate reportable segment.
Financial performance and key metrics
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Edison operating revenue | $3,016 million | $3,046 million | $5,943 million | $5,678 million |
| Edison operating income | $575 million | $(71) million | $906 million | $422 million |
| Edison income from continuing operations | $382 million | $(82) million | $606 million | $203 million |
| Net income attributable to Edison common shareholders | $536 million | $(94) million | $712 million | $176 million |
| Diluted EPS | $1.63 | $(0.29) | $2.17 | $0.54 |
| Net cash from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $603 million | $1,261 million |
SCE reported six-month operating revenue of $5,938 million, operating income of $935 million, net income of $626 million and net income available for common stock of $570 million, compared with $5,674 million, $442 million, $216 million and $165 million, respectively, in the 2013 period.
For the six months, Edison’s operating margin was approximately 15.2% versus 7.4% in 2013. The improvement primarily reflects the absence of the $575 million 2013 San Onofre impairment charge and lower operation and maintenance expense, partly offset by higher purchased power expense and the $231 million 2014 San Onofre-related charge.
At June 30, 2014, Edison had cash and cash equivalents of $190 million, total assets of $48.864 billion and total liabilities of $36.461 billion. Short-term debt was $1.253 billion, current maturities of long-term debt were $900 million and long-term debt was $9.926 billion. SCE had cash of $71 million, short-term debt of $587 million, current maturities of long-term debt of $900 million and long-term debt of $9.523 billion.
Edison’s six-month capital expenditures were $1.856 billion, including $1.853 billion at SCE. SCE expects 2014 capital expenditures of approximately $3.6 billion to $4.1 billion and 2014–2017 capital expenditures of approximately $15.1 billion to $17.2 billion.
Material changes versus the prior comparable period
- Second-quarter net income attributable to Edison common shareholders increased to $536 million from a $94 million loss. Six-month earnings increased to $712 million from $176 million.
- SCE core earnings increased by $88 million in the second quarter and $136 million for the six months. Management attributed the improvement primarily to rate-base growth, lower operation and maintenance expense, tax benefits and other income.
- Purchased power expense increased by $92 million for the quarter and $384 million for the six months at Edison, driven by warmer weather, higher power and natural gas prices and higher load.
- Operation and maintenance expense decreased by $179 million for the quarter and $240 million for the six months, primarily due to lower San Onofre-related costs, lower severance expense and the 2013 sale of Four Corners.
- Cash from operations declined to $603 million from $1.261 billion at Edison and to $1.078 billion from $1.325 billion at SCE, primarily because of larger fuel and power procurement undercollections and changes in regulatory and working-capital accounts.
- Regulatory assets increased to $8.610 billion at SCE from $7.779 billion at December 31, 2013. Regulatory liabilities increased to $7.060 billion from $5.762 billion.
- SCE issued $400 million of 1.125% first and refunding mortgage bonds due in 2017 and issued $269 million of preference stock. Edison International’s and SCE’s commercial paper balances increased materially from year-end.
Guidance, outlook and management commentary
- SCE projects 2014 capital expenditures of $3.6 billion to $4.1 billion. Actual spending remains subject to regulatory, permitting, engineering, labor, equipment and other risks.
- SCE filed its 2015 ERRA forecast requesting annual revenue requirements of $5.62 billion if the San Onofre settlement is approved in 2014, or $6.41 billion if approval is delayed or denied.
- SCE’s fuel and power procurement undercollection was approximately $1.62 billion at June 30, 2014. Delays in rate increases or recovery could adversely affect liquidity.
- SCE’s revised 2015 general rate case request was $5.860 billion, or $227 million above currently authorized base-rate revenue. The ultimate revenue requirement and timing of the CPUC decision remain uncertain.
- SCE had a $2.75 billion revolving credit facility and Edison International Parent had a $1.25 billion facility. In July 2014, both facilities were extended to July 2019.
- At June 30, 2014, SCE’s debt-to-total-capitalization ratio was 0.46 to 1, below its 0.65 covenant limit; Edison International Parent’s ratio was 0.49 to 1.
San Onofre, EME and other unusual items
- SCE permanently retired San Onofre Units 2 and 3 in 2013. In March 2014, SCE entered into a proposed CPUC settlement concerning cost recovery, refunds and rate treatment. CPUC approval remained pending and could be conditioned, delayed or denied.
- SCE recorded a $231 million pre-tax San Onofre charge, or approximately $96 million after tax, in the first quarter of 2014. Including the 2013 charge, the estimated total settlement impact was $806 million pre-tax, or approximately $461 million after tax.
- At June 30, 2014, SCE reported a San Onofre regulatory asset of approximately $1.371 billion and a San Onofre regulatory liability of approximately $483 million. The estimated potential customer refund under the proposed settlement was approximately $483 million.
- SCE estimated San Onofre decommissioning costs at $4.4 billion in 2014 dollars, including an SCE share of $3.3 billion. The present value of SCE’s share was approximately $2.9 billion, while the related asset retirement obligation was approximately $2.2 billion.
- SCE is pursuing insurance recoveries and arbitration claims against Mitsubishi Heavy Industries. The MHI arbitration seeks at least $4 billion, while MHI has asserted $41 million of counterclaims. No material recovery had been recognized.
- EME’s bankruptcy plan was completed on April 1, 2014 following the sale of substantially all EME assets to NRG Energy. Edison International recorded $184 million of discontinued-operations income in the second quarter.
- Edison International paid $225 million to the EME Reorganization Trust in April 2014 and expects two additional payments of approximately $199 million and $210 million, including interest, in 2015 and 2016 based on the initial tax-attribute estimate.
- Edison International deposited $189 million with the IRS related to disputed 2003–2006 tax years. Potential federal tax payments described in the filing include approximately $210 million and $102 million for two disputed matters, plus approximately $75 million related to 2007–2009 tax years.
Risks and contingencies
- CPUC, FERC and NRC decisions could affect San Onofre cost recovery, customer refunds, regulatory assets, rate base and future earnings.
- California’s severe drought increases wildfire risk, potential transmission constraints, hydroelectric generation variability, restoration costs, penalties and insurance exposure.
- SCE’s wildfire coverage included up to $547.5 million, subject to a $10 million self-insured retention per occurrence, plus additional coverage that applies above specified claim thresholds. Losses could exceed insurance limits.
- SCE had $167 million of collateral posted and estimated $53 million of incremental collateral requirements if its credit rating fell below investment grade.
- Environmental remediation liabilities totaled $115 million, including $111 million for 19 material sites. The filing states that reasonably possible costs could exceed recorded liabilities by up to $156 million for material sites and $7 million for immaterial sites.
- SCE remains exposed to nuclear insurance assessments, spent nuclear fuel obligations, environmental matters related to Four Corners, regulatory penalties and other legal and tax proceedings.
- SCE’s net derivative liability was approximately $885 million at June 30, 2014, compared with $821 million at December 31, 2013. Regulatory mechanisms generally defer the earnings impact of commodity-related derivative changes, but cash flows and collateral requirements may fluctuate.
Most important facts for investors to verify
- Whether the CPUC approved, modified or rejected the San Onofre OII Settlement Agreement and the resulting treatment of refunds and regulatory assets.
- Actual recovery, if any, from NEIL insurance and Mitsubishi Heavy Industries, including arbitration developments and allocation between customers and shareholders.
- Progress in reducing the $1.62 billion ERRA undercollection and the outcome of the 2015 ERRA forecast and general rate case proceedings.
- Actual 2014 capital expenditures, financing needs, credit-facility availability and compliance with debt covenants.
- Final EME tax-attribute calculations and the 2015 and 2016 settlement payments.
- Changes in wildfire insurance availability, drought conditions, regulatory exposure and potential uninsured losses.
- Whether reported earnings are being evaluated on a GAAP basis or management’s non-GAAP core earnings measure, particularly given the significant San Onofre and EME items.