Edison International 2017 Q1 Form 10-Q Summary
Business Context and Reporting Period
Combined quarterly report for Edison International and its principal subsidiary, Southern California Edison Company (SCE), covering the three months ended March 31, 2017. SCE supplies and delivers electricity across approximately 50,000 square miles of Southern California. Edison International also owns competitive energy-services and distributed-solar businesses through Edison Energy Group.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Edison International operating revenue | $2.463 billion | $2.440 billion | +$23 million |
| Operating income | $479 million | $448 million | +$31 million |
| Income from continuing operations | $392 million | $305 million | +$87 million |
| Net income attributable to Edison International common shareholders | $362 million | $281 million | +$81 million |
| Diluted EPS | $1.10 | $0.85 | +$0.25 |
| Operating margin | Approximately 19.5% | Approximately 18.4% | Improved |
| Net cash from operating activities | $879 million | $855 million | +$24 million |
| Capital expenditures | $939 million | $951 million | -$12 million |
SCE reported operating revenue of $2.456 billion, operating income of $507 million and net income available for common stock of $349 million, compared with $2.435 billion, $472 million and $295 million, respectively, in Q1 2016. SCE's operating margin was approximately 20.6% versus 19.4% in the prior-year period.
Edison International's effective tax rate was negative 11.4%, compared with 8.4% in Q1 2016, principally reflecting tax benefits associated with the San Onofre tax abandonment. SCE's effective tax rate was 3.1%, compared with 11.4%.
Material Changes Versus the Prior Comparable Period
- SCE earnings increased $54 million, primarily from higher authorized revenue under the 2015 General Rate Case escalation mechanism, lower operation and maintenance costs, and higher tax benefits, partially offset by higher financing costs.
- SCE operation and maintenance expense declined $33 million, while depreciation, decommissioning and amortization expense increased $22 million and interest expense increased $10 million.
- Purchased power and fuel expense declined $10 million, primarily because realized hedging losses decreased to $2 million from $27 million.
- Edison International Parent and Other improved to $13 million of income from a $15 million loss, largely because of $35 million of tax benefits related to stock-option exercises.
- Cash from operating activities increased to $879 million for Edison International and $931 million for SCE. Edison International used $937 million in investing activities, principally for capital expenditures.
- At March 31, 2017, Edison International cash and cash equivalents were $150 million, versus $96 million at December 31, 2016. Total liabilities were $37.491 billion and total equity was $14.242 billion.
Debt, Liquidity and Capital Program
- SCE had approximately $2.66 billion available under its $2.75 billion revolving credit facility; Edison International Parent had $955 million available under its $1.25 billion facility. Both facilities mature in July 2021.
- SCE's debt-to-total-capitalization ratio was 0.44 to 1 against a covenant limit of 0.65 to 1. Edison International Parent's ratio was 0.48 to 1. Both were in compliance with applicable covenants.
- SCE borrowed $300 million under a term loan, reissued $135 million of pollution-control bonds and issued $700 million of first and refunding mortgage bonds. Edison International issued $400 million of senior notes.
- SCE paid a $191 million dividend to Edison International during the quarter. Its 13-month weighted-average common-equity component was 50.4%, above the 48% threshold for distributions.
- SCE's 2017 capital-expenditure forecast was revised to approximately $4.0 billion from approximately $4.2 billion, primarily because a grid-modernization memorandum account had not been approved and the Mesa Substation Project was delayed.
Guidance, Outlook, Risks and Unusual Items
- SCE requested $5.885 billion of 2018 base revenue requirement in its 2018 General Rate Case. The CPUC Office of Ratepayer Advocates recommended a reduction of approximately $208 million. The ultimate authorized revenue requirement and timing of the CPUC decision remain uncertain.
- The CPUC had not approved SCE's requested memorandum account for $182 million of 2017 grid-modernization spending. Regulatory approval and cost recovery remain significant uncertainties.
- SCE recorded a $47 million regulatory liability for its net recovery from the Mitsubishi Heavy Industries arbitration concerning San Onofre replacement steam generators. SCE will not appeal the award.
- SCE retained an $815 million regulatory asset for expected San Onofre settlement recoveries. Management considered recovery probable, but not certain. The related CPUC settlement remains subject to mediation and possible modification or challenge.
- The San Onofre tax abandonment generated a $698 million federal and $1.14 billion state tax loss, producing an approximately $39 million flow-through tax benefit. Edison International and SCE expect federal taxable losses for 2017; Edison International also expects a California taxable loss.
- Edison International is conducting a strategic review of Edison Energy Group's competitive businesses. Investments in SoCore Energy and Edison Energy were $195 million and $103 million, respectively, at March 31, 2017; the review could affect recoverability of those investments.
- Key continuing risks include regulatory cost recovery, CPUC and FERC decisions, access to capital markets, San Onofre decommissioning and litigation, wildfire and nuclear liabilities, cybersecurity, commodity prices, counterparty credit, environmental obligations, weather and natural disasters.
- SCE had approximately $1 billion of wildfire-liability insurance through May 31, 2017, with a $10 million self-insured retention per occurrence. Future coverage and losses could differ materially.
- An approximately $7.7 million pretax pension settlement loss, or $4.6 million after tax, was expected in the second quarter of 2017 due to executive retirement-plan payments.
Important Facts for Investors to Verify
- Track the CPUC's final decision in SCE's 2018 General Rate Case and the treatment of grid-modernization spending.
- Assess whether the $815 million San Onofre regulatory asset remains probable of recovery and monitor mediation or litigation affecting the settlement.
- Review SCE's capital spending, financing needs, dividend capacity and debt levels as major transmission and substation projects advance.
- Follow the strategic review of Edison Energy Group and any impairment, restructuring or exit decisions.
- Monitor wildfire insurance availability, nuclear decommissioning costs, spent-fuel recovery claims and environmental-remediation estimates.
- Reconcile management's non-GAAP core earnings presentation with GAAP net income and assess the sustainability of tax-related benefits.