Edison International 2019 Q1 Form 10-Q Summary
Business context and reporting period
This combined Form 10-Q covers Edison International and its wholly owned regulated utility subsidiary, Southern California Edison Company (SCE), for the three months ended March 31, 2019. Edison International owns and operates SCE, which supplies and delivers electricity across approximately 50,000 square miles of Southern California. Edison Energy Group provides competitive energy services but remains immaterial as a separate reporting segment.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Edison International operating revenue | $2.824 billion | $2.564 billion | +$260 million |
| Edison International net income attributable to common shareholders | $278 million | $218 million | +$60 million |
| Edison International diluted EPS | $0.85 | $0.67 | +$0.18 |
| SCE operating revenue | $2.816 billion | $2.554 billion | +$262 million |
| SCE net income available for common stock | $293 million | $286 million | +$7 million |
| SCE operating income | $358 million | $414 million | -$56 million |
| SCE net cash from operating activities | $247 million | $801 million | -$554 million |
| Edison International net cash from operating activities | $210 million | $859 million | -$649 million |
| Consolidated capital expenditures | $1.074 billion | $1.137 billion | -$63 million |
Edison International reported a consolidated operating margin of approximately 12.5% in Q1 2019, compared with approximately 12.9% in Q1 2018. The decline reflected higher operating and maintenance costs, depreciation, and interest expense. Net income benefited from a $69 million SCE income tax benefit related to the CPUC’s revised allocation of deferred tax remeasurement between customers and shareholders.
Management reported non-GAAP core earnings of $206 million, or $0.63 per diluted share based on the filing’s earnings data, compared with $262 million in Q1 2018. SCE core earnings were $221 million versus $286 million, while Edison International Parent and Other losses improved to $15 million from $24 million.
Liquidity, debt, and capital resources
- At March 31, 2019, Edison International had $328 million of cash and cash equivalents and $15.762 billion of long-term debt, including the current portion.
- SCE had $297 million of cash and cash equivalents, approximately $2.8 billion available under its $3.0 billion revolving credit facility, and $14.021 billion of long-term debt, including the current portion.
- SCE issued $1.1 billion of first and refunding mortgage bonds in March 2019 and borrowed $750 million under a term loan in February 2019. In April 2019, Edison International contributed the $750 million proceeds of a new parent-level term loan to SCE, which repaid SCE’s February term loan.
- Edison International had approximately $1.3 billion available under its $1.5 billion revolving credit facility at March 31, 2019. It also announced plans to issue up to $1.5 billion of registered common stock, principally to support equity contributions to SCE and general corporate purposes.
- SCE’s debt-to-total-capitalization ratio was 0.52 to 1, below its 0.65 covenant limit. Edison International Parent’s ratio was 0.57 to 1, below its 0.70 covenant limit.
- SCE’s credit ratings remained investment grade but had negative outlooks or watch status: Moody’s Baa2, Fitch BBB-, and S&P BBB. Edison International Parent was rated Moody’s Baa3, Fitch BBB-, and S&P BBB, also with negative outlooks or watch status.
Material changes versus the prior comparable period
- Consolidated net income increased primarily because the prior-year period included a $48 million after-tax impairment associated with the planned sale of SoCore Energy, while Q1 2019 included a $69 million SCE tax benefit.
- SCE’s core earnings declined by $65 million, primarily due to wildfire mitigation expenses and higher financing costs, partly offset by a 2018 customer refund for prior overcollections.
- SCE operation and maintenance expense increased $218 million, including $80 million in earning activities driven largely by wildfire mitigation and $138 million in cost-recovery activities, including wildfire insurance and public-purpose programs.
- SCE interest expense increased $23 million because of higher borrowings and interest on balancing-account overcollections.
- SCE operating cash flow fell $554 million, principally because of wildfire insurance premium payments, unfavorable regulatory-asset and liability movements, and other working-capital effects.
- SCE total capital expenditures, including accruals, were $856 million, broadly comparable with $853 million in Q1 2018.
- Adoption of the new lease accounting standard increased Edison International’s and SCE’s right-of-use assets and lease liabilities by approximately $956 million and $951 million, respectively, without a material income-statement effect.
Guidance, outlook, risks, contingencies, and unusual items
- 2018 General Rate Case: The CPUC issued a proposed decision in April 2019. If adopted as drafted, the 2018 base revenue requirement would be $5.102 billion versus SCE’s $5.534 billion request. The proposed decision could produce up to a $257 million pre-tax impairment, partially offset by an estimated $130 million increase in core earnings from retroactive application. SCE stated that the final decision could differ materially.
- Capital program: SCE forecasts approximately $4.477 billion of capital expenditures in 2019 and $4.419 billion to $4.619 billion in 2020, or $8.896 billion to $9.096 billion for 2019–2020. Estimated wildfire-mitigation capital expenditures are $346 million in 2019 and $500 million to $700 million in 2020.
- Wildfire and mudslide exposure: Edison International and SCE had accrued $4.7 billion for the 2017/2018 Wildfire/Mudslide Events, representing the low end of the reasonably estimated loss range. They recorded expected insurance recoveries of $2.0 billion and a $135 million FERC-related regulatory recovery. Management stated that actual losses could exceed the accrued amount but could not estimate an upper bound.
- At March 31, 2019, the consolidated balance sheet included $4.669 billion of wildfire-related claims. Recovery of uninsured CPUC-jurisdictional costs remains uncertain because the CPUC has not determined SCE’s prudency and prior SDG&E precedent resulted in denial of similar recovery.
- As of April 26, 2019, SCE was aware of at least 151 lawsuits involving approximately 2,300 plaintiffs related to the Thomas and Koenigstein Fires; 78 also named Edison International. SCE was aware of at least 72 Woolsey Fire lawsuits involving approximately 1,100 plaintiffs; 58 also named Edison International.
- SCE requested an additional 6% return on equity from both the CPUC and FERC to compensate investors for wildfire risk. Its proposed 2020 CPUC base ROE is 10.60%, plus the requested wildfire-risk ROE, and its proposed 2019 FERC base ROE is 17.12%, also including a 6% wildfire-risk component.
- SCE’s requested revised FERC formula rate could increase its 2019 retail base transmission revenue requirement by approximately $290 million if approved and effective on the requested date; the filing remains subject to FERC review, possible suspension, and refund provisions.
- SCE had $222 million of collateral posted, with potential incremental requirements of $14 million from a below-investment-grade downgrade and $10 million from adverse market-price movements. A further potential environmental-remediation collateral requirement of up to $50 million was disclosed if ratings fall below investment grade.
- Management expects 2019 wildfire insurance expense, before regulatory deferrals, to total approximately $399 million. Insurance availability, cost, coverage limits, and recoverability remain significant risks.
Most important facts for investors to verify
- Final CPUC action on the 2018 General Rate Case, including any impairment, retroactive revenue adjustment, rate-base changes, and disallowed historical spending.
- Developments in wildfire and mudslide investigations, litigation, settlements, insurance recoveries, and the recoverability of uninsured costs through regulated rates.
- SCE and Edison International credit ratings, access to capital markets, covenant compliance, collateral requirements, and the effect of any downgrade.
- Actual wildfire-mitigation spending and the extent to which such spending is included in approved rates or balancing and memorandum accounts.
- Approval and timing of SCE’s proposed CPUC and FERC returns on equity and revised FERC transmission formula rate.
- Future dividend capacity from SCE to Edison International and Edison International’s ability to fund dividends, capital contributions, debt maturities, and wildfire-related obligations.
- The filing’s non-GAAP core earnings measure and reconciliation to GAAP earnings, particularly the impact of the $69 million tax benefit and other non-core items.