Edison International 2018 Form 10-K Summary
Business context and reporting period
This combined Form 10-K covers Edison International and its wholly owned regulated utility, Southern California Edison Company (SCE), for the fiscal year ended December 31, 2018. SCE supplies and delivers electricity across approximately 50,000 square miles in Southern California and serves approximately 5.1 million customers. Edison Energy is a small competitive energy-services business; SoCore Energy was sold in April 2018.
The filing is an annual report rather than a standalone fourth-quarter filing, although fourth-quarter results include significant wildfire-related charges.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Edison International operating revenue | $12.657 billion | $12.320 billion | Up $337 million |
| Operating income | $(552) million | $1.456 billion | Down $2.008 billion |
| Net loss attributable to common shareholders | $(423) million | $565 million income | Down $988 million |
| Continuing operations EPS | $(1.40) | $1.73 | Down $3.13 |
| Core earnings | $1.351 billion | $1.466 billion | Down $115 million |
| Net cash from operating activities | $3.177 billion | $3.597 billion | Down $420 million |
| Capital expenditures | $4.509 billion | $3.844 billion | Up $665 million |
Reported results were dominated by a $4.7 billion gross wildfire-related claims accrual, offset by $2.0 billion of expected insurance recoveries and $135 million of expected FERC rate recovery. The resulting after-tax earnings charge was $1.825 billion. Excluding significant non-core items, Edison International reported $1.351 billion of core earnings, compared with $1.466 billion in 2017.
SCE reported operating revenue of $12.611 billion, operating loss of $406 million, and net loss available for common stock of $310 million, compared with 2017 income of $1.547 billion, $1.012 billion, respectively. SCE’s 2018 effective tax rate was negative 78.6%, principally reflecting tax benefits associated with the wildfire charge, Tax Reform effects, and tax settlements.
Liquidity, debt, and balance sheet
- Edison International ended 2018 with $144 million of cash and cash equivalents and $14.711 billion of long-term debt including the current portion, compared with $12.123 billion at year-end 2017.
- SCE ended 2018 with $21 million of cash and cash equivalents, $12.971 billion of long-term debt including the current portion, and $2.089 billion available under its $3.0 billion revolving credit facility.
- Edison International Parent had $97 million of cash and $1.5 billion available under its revolving credit facility.
- SCE’s debt-to-total-capitalization ratio was 0.50 to 1 against a 0.65 covenant limit. Edison International Parent’s ratio was 0.55 to 1 against a 0.70 limit.
- SCE had $1.3 billion of net regulatory balancing-account overcollections at December 31, 2018, including an approximately $815 million ERRA undercollection expected to be recovered beginning in April 2019.
- Total Edison International contractual obligations were estimated at $62.474 billion, including $36.189 billion of SCE power-purchase commitments and $23.510 billion of SCE debt maturities and interest.
Material changes versus 2017
- Revenue increased modestly, but profitability declined sharply because of the wildfire accrual, higher wildfire insurance and vegetation-management costs, higher financing costs, and the effect of the 2017 cost-of-capital decision on regulated revenue.
- SCE’s core earnings declined $53 million to $1.440 billion. Edison International Parent and Other losses improved to $147 million from $447 million, largely because 2017 included a $433 million deferred-tax remeasurement charge related to federal Tax Reform.
- Capital spending increased to $4.4 billion in management’s capital-program presentation, and SCE’s year-end rate base increased to $29.6 billion from $27.8 billion.
- Debt increased materially to fund capital requirements and liquidity needs. SCE issued $2.692 billion of long-term debt in 2018 and repaid or matured $639 million.
- SCE’s common equity component was 49.7% on the applicable 37-month average basis, but the wildfire accrual reduced its spot equity ratio below 47%, prompting a request for a limited CPUC waiver.
Guidance, outlook, management commentary, and risks
- SCE’s 2018–2020 General Rate Case remained pending. SCE requested revenue requirements of $5.534 billion for 2018, $5.965 billion for 2019, and $6.468 billion for 2020. The final decision could materially affect revenue, regulatory assets, and capital spending.
- SCE forecast capital expenditures of $4.477 billion for 2019 and $4.692 billion for 2020, including planned wildfire-mitigation and grid-modernization spending. Recovery of certain Grid Safety and Resiliency Program and Wildfire Mitigation Plan costs was not assured.
- Management expects continued investment in grid safety, reliability, renewable integration, electric transportation, distributed energy resources, and energy storage. SCE requested approximately $582 million for its Grid Safety and Resiliency Program and approximately $380 million of incremental 2019 Wildfire Mitigation Plan spending not contemplated in the GRC and GS&RP proceedings.
- Wildfire litigation and investigations remain the principal uncertainty. The $4.7 billion accrual represents the low end of the reasonably estimated loss range; management stated that the actual loss could be greater but could not estimate an upper bound.
- Recovery of uninsured CPUC-jurisdictional wildfire costs was not considered probable at year-end because of uncertainty over the CPUC’s prudency standard. Only $135 million of FERC-related recovery was recorded as probable.
- SCE had approximately $1 billion of wildfire-specific coverage for relevant events, but policy limits, retentions, co-insurance, multiple occurrences, and coverage disputes could leave material uninsured exposure. 2019 wildfire insurance expense was expected to be approximately $321 million before regulatory deferrals.
- San Onofre decommissioning remains a multidecade obligation. SCE estimated Units 2 and 3 decommissioning costs at $3.4 billion, with SCE’s share at $2.5 billion, and held $2.6 billion in related trust funds. Spent-fuel transfer operations were suspended after an August 2018 loading incident, with no restart date provided.
- SCE’s credit ratings remained investment grade but had negative or under-review outlooks. A downgrade could increase financing costs and trigger additional collateral requirements.
- Edison International maintained a target payout ratio of 45% to 55% of SCE core earnings, but future dividends depend on SCE’s regulatory capital structure, cash flows, wildfire liabilities, financing access, and regulatory approvals.
Investor verification checklist
- Verify the ultimate liability, insurance recoveries, settlements, and regulatory cost recovery related to the Thomas Fire, Montecito Mudslides, Woolsey Fire, and other wildfire claims.
- Track the CPUC’s 2018 GRC decision and resulting retroactive revenue requirements, regulatory assets, liabilities, and cash flows.
- Confirm the outcome of SCE’s equity-ratio waiver request and the effect on debt issuance and dividends to Edison International.
- Reconcile planned 2019–2020 wildfire mitigation and grid-modernization spending with amounts approved for recovery and included in rate base.
- Monitor credit ratings, borrowing costs, collateral requirements, and SCE’s ability to maintain adequate liquidity while funding capital expenditures and claims.
- Assess the sufficiency of San Onofre decommissioning trusts relative to updated costs, permitting, spent-fuel removal timing, and potential additional contributions.
- Review Edison Energy’s progress toward its stated breakeven earnings run rate and 5% customer-penetration target by the end of 2019.