Edison International 2020 Q2 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, and Edison Energy Group, whose competitive energy-services activities are not material as a separate segment. This combined Form 10-Q covers the three and six months ended June 30, 2020, with comparisons to the corresponding 2019 periods. The filing was submitted July 28, 2020.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 | ||
|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |
| Edison International operating revenue | $3.0 billion | $2.8 billion | $5.8 billion | $5.6 billion |
| Net income attributable to Edison International common shareholders | $318 million | $392 million | $501 million | $670 million |
| Diluted EPS | $0.85 | $1.20 | $1.36 | $2.05 |
| SCE net income available for common stock | $381 million | $419 million | $600 million | $712 million |
| Edison International core earnings | $375 million | $515 million | $603 million | $721 million |
| SCE core earnings | $413 million | $542 million | $674 million | $763 million |
Edison International operating income was $500 million in the second quarter and $802 million for the six-month period. Net income was $348 million and $561 million, respectively, after preferred and preference stock dividend requirements.
SCE operating revenue increased to $3.0 billion in the second quarter and $5.8 billion for the six-month period. SCE’s revenue growth primarily reflected higher CPUC revenue under the 2018 General Rate Case escalation mechanism and higher FERC-related revenue. Cost-recovery revenue and purchased power and fuel costs declined, primarily because of contract amendments and lower power and gas prices.
SCE’s six-month net cash provided by operating activities was $683 million, compared with $673 million in 2019. Edison International consolidated operating cash flow was $625 million, compared with $598 million. Consolidated capital expenditures were $2.5 billion, compared with $2.2 billion, while SCE reported approximately $2.3 billion of capital expenditures including accruals.
Margins, debt and liquidity
- SCE operating income was $548 million in the second quarter and $864 million for the six-month period. SCE operating expenses increased because of wildfire insurance fund expense, wildfire mitigation, COVID-19 response costs, depreciation and other operating costs.
- SCE had $254 million of cash and approximately $2.9 billion available under its $3.0 billion revolving credit facility at June 30, 2020. It also had undrawn revolving facilities of $800 million and $1.5 billion, and a $475 million term loan due March 2021.
- SCE’s debt-to-total-capitalization ratio was 0.48 to 1, below its 0.65 covenant limit. Edison International Parent’s ratio was 0.56 to 1, below its 0.70 covenant limit. Both entities were in compliance with applicable financial covenants.
- Edison International had $524 million of cash and cash equivalents at June 30, 2020, compared with $68 million at December 31, 2019. Consolidated long-term debt, including the current portion, had a carrying value of $20.3 billion, compared with $18.3 billion at year-end 2019.
- SCE issued $2.3 billion of first and refunding mortgage bonds during the first six months and issued a further $600 million in the second quarter. Edison International issued $400 million of senior notes and approximately $800 million of common stock in May 2020.
- SCE declared a $269 million dividend to Edison International in June 2020. Edison International expects to maintain a target payout ratio of 45% to 55% of SCE core earnings, subject to liquidity, regulatory, legal and capital requirements.
Material changes versus the prior comparable period
- Second-quarter Edison International earnings declined $74 million, or approximately 19%, and six-month earnings declined $169 million, or approximately 25%, primarily because of lower SCE core earnings and higher Edison International Parent and Other losses.
- Core earnings declined $140 million in the second quarter and $118 million for the six-month period. Drivers included the timing of wildfire mitigation activities, COVID-19-related labor and customer uncollectible costs, higher interest expense and the absence of favorable 2019 rate-case and tax items.
- Second-quarter SCE operating revenue increased $180 million, while operating income increased $35 million. The comparison benefited from the 2019 recognition of the 2018 GRC decision, which included a $170 million impairment charge and related prior-period effects.
- Operation and maintenance expense increased $150 million for the quarter and $278 million for the six-month period, reflecting wildfire mitigation, legal, employee benefit, COVID-19 and other costs.
- Wildfire Insurance Fund expense was $83 million in the quarter and $167 million for the six-month period; there was no comparable expense in 2019.
- Edison International Parent and Other losses increased to $63 million in the quarter and $99 million for the six-month period, including a $34 million pre-tax goodwill impairment charge related to Edison Energy’s COVID-19-affected business.
Guidance, outlook, risks and unusual items
- SCE forecast 2020-2023 capital expenditures of $19.4 billion to $21.2 billion and weighted-average 2020 rate base of approximately $33.5 billion. Management expected to execute the 2020 capital program substantially as planned, but identified COVID-19, permitting, labor, supply-chain and project-delay risks.
- SCE requested a 2021 revenue requirement of approximately $7.5 billion after rebuttal testimony, compared with approximately $6.9 billion and $6.7 billion proposed by Cal Advocates and TURN, respectively. A final CPUC decision was expected in the first quarter of 2021, but the ultimate authorized amount remained uncertain.
- At June 30, 2020, SCE had recorded $549 million of regulatory assets for incremental wildfire mitigation expenses, $484 million for incremental wildfire insurance expenses and $49 million for incremental COVID-19 costs. Recovery remains subject to regulatory review and reasonableness determinations.
- SCE had accrued approximately $4.5 billion for the 2017/2018 Wildfire/Mudslide Events, with expected insurance recoveries of approximately $1.6 billion and $77 million of remaining expected recovery through FERC rates. Management stated that actual losses could exceed the accrued amount, but could not estimate an upper end of the range.
- SCE had approximately $1.0 billion of net wildfire-specific insurance coverage for July 1, 2020 through June 30, 2021, after stated coinsurance and self-insured retention. Management expected 2020 wildfire insurance expense, before regulatory deferrals, of approximately $450 million.
- AB 1054 excludes approximately $1.6 billion of wildfire risk-mitigation capital expenditures from the equity portion of SCE’s rate base. SCE had spent $811 million of these expenditures by June 30, 2020 and applied to finance $337 million through securitized bonds.
- COVID-19 may reduce commercial and industrial usage, increase customer payment delays and uncollectibles, disrupt labor and supply chains, delay permitting and capital projects, increase financing costs and affect access to capital markets. SCE had established regulatory accounts to track eligible incremental costs.
- Major San Onofre decommissioning activities were delayed because of COVID-19 restrictions. SCE’s share of forecasted 2020 decommissioning costs was $406 million, funded from nuclear decommissioning trusts.
- Environmental agencies were investigating unpermitted road grading and discharges in Santa Barbara County. The filing states that material fines were not expected, but the amount of any fines was not yet known.
Most important facts for investors to verify
- Progress and ultimate outcome of the 2021 GRC, including recovery of wildfire mitigation, insurance and COVID-19-related regulatory assets.
- Changes in the $4.5 billion accrued wildfire and mudslide liability, insurance recoveries, settlements and potential uninsured exposure.
- SCE’s ability to maintain investment-grade credit ratings, access capital markets and finance AB 1054-excluded expenditures.
- Actual 2020-2023 capital spending versus the $19.4 billion to $21.2 billion forecast and any COVID-19-related delays.
- Whether SCE maintains a valid wildfire safety certification and obtains continued approval of its wildfire mitigation plan.
- Future insurance availability, premiums, self-insured retentions and coverage limitations for California wildfire risk.
- Customer payment trends, regulatory-account undercollections and the timing of recovery through rates.
- Potential outcomes of wildfire litigation, environmental proceedings, tax examinations and other regulatory contingencies not fully estimable as of June 30, 2020.