Edison International Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017; filed October 30, 2017. The combined filing covers Edison International and its principal subsidiary, Southern California Edison Company (SCE). Financial statements are unaudited.
Business Context
Edison International is the holding company for SCE, a regulated electric utility serving approximately 50,000 square miles of Southern California. Edison International also owns Edison Energy Group, whose competitive energy-services and distributed-solar businesses were not material reportable segments.
Financial Performance and Key Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Edison International operating revenue | $3.672 billion | $3.767 billion | $9.100 billion | $8.985 billion |
| Net income attributable to common shareholders | $470 million | $421 million | $1.110 billion | $982 million |
| Basic EPS | $1.44 | $1.29 | $3.41 | $3.01 |
| Diluted EPS | $1.43 | $1.27 | $3.38 | $2.98 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $2.690 billion | $2.502 billion |
| Capital expenditures | Not separately provided | Not separately provided | $2.660 billion | $2.773 billion |
Edison International operating income was $561 million in the third quarter and $1.509 billion for the first nine months, compared with $695 million and $1.525 billion, respectively, in the prior-year periods. Reported operating margins were approximately 15.3% for the quarter and 16.6% year to date, versus approximately 18.5% and 17.0% in the comparable 2016 periods.
SCE net income available for common stock was $465 million in the third quarter and $1.121 billion for the first nine months, up $30 million and $73 million, respectively. SCE operating revenue was $3.652 billion for the quarter and $9.061 billion year to date. SCE operating income was $578 million and $1.602 billion, compared with $721 million and $1.622 billion in 2016.
SCE's effective tax rate was negative 7.6% in the quarter and 2.7% year to date, compared with 23.2% and 11.7% in 2016. The lower rates primarily reflected tax repair benefits, tax accounting method changes and the San Onofre tax abandonment loss, with related benefits generally subject to customer refunds or regulatory treatment.
Liquidity, Debt and Capital
- Edison International had $117 million of cash and cash equivalents at September 30, 2017, compared with $96 million at December 31, 2016. Total assets were $53.592 billion and total liabilities were $38.969 billion.
- SCE had $61 million of cash and approximately $2.15 billion available under its $2.75 billion revolving credit facility. Edison International Parent had $677 million available under its $1.25 billion facility.
- SCE's debt-to-total-capitalization ratio was 0.43 to 1, below its 0.65 covenant limit. Edison International Parent's ratio was 0.47 to 1; both entities were in compliance with applicable financial covenants.
- Edison International's consolidated short-term and long-term debt totaled approximately $13.129 billion at September 30, 2017, compared with $12.463 billion at year-end 2016. SCE's corresponding debt totaled approximately $11.334 billion, compared with $11.102 billion.
- SCE's first nine months of operating cash flow was $2.793 billion, down from $2.838 billion. Investing cash outflow was $2.432 billion, primarily reflecting capital expenditures, and financing cash outflow was $339 million.
- SCE capital expenditures were $2.3 billion in the first nine months of 2017, compared with $2.4 billion in 2016. The current 2017-2020 capital plan totals $18.454 billion, including $1.795 billion for grid modernization during 2018-2020.
Material Changes Versus the Prior Comparable Period
- Edison International earnings increased $49 million in the quarter and $128 million year to date, driven mainly by higher SCE earnings and lower Edison International Parent and Other losses.
- SCE earnings benefited from the escalation mechanism in the 2015 General Rate Case and, year to date, lower operation and maintenance expenses. These benefits were partly offset by customer refunds of prior overcollections, higher interest expense and lower FERC-related revenue.
- Purchased power and fuel costs increased $64 million in the quarter and $166 million year to date, primarily due to higher power and gas prices.
- SCE's regulatory assets increased to $8.473 billion from $7.805 billion at year-end 2016, while regulatory liabilities increased to $7.139 billion from $6.482 billion.
- During the third quarter, SCE reclassified $914 million of derivative liabilities to other liabilities after designating certain contracts as normal purchases and normal sales. The amounts will be amortized over the remaining contract terms.
- Edison International recorded a $16.5 million pretax, $10 million after-tax impairment of SoCore Energy goodwill in the second quarter. Management is evaluating strategic options, including a potential sale of SoCore Energy.
Guidance, Outlook, Risks and Unusual Items
- SCE's 2018 General Rate Case rebuttal testimony requested a 2018 revenue requirement of $5.859 billion, an increase of $196 million over projected 2017 authorized revenue. The CPUC decision was unlikely to be issued by year-end 2017, and the final authorized amounts and timing remained uncertain.
- SCE's authorized return on equity was set at 10.30% beginning January 1, 2018. The next investor-owned utility cost-of-capital application deadline was extended to April 2019.
- SCE recorded a $730 million regulatory asset for expected San Onofre settlement recoveries. The CPUC had not confirmed or vacated the settlement and ordered additional proceedings; management considered recovery probable but not certain.
- SCE received a $47 million net recovery from Mitsubishi Heavy Industries arbitration related to San Onofre replacement steam generators and recorded the amount as a regulatory liability pending allocation under the settlement.
- Key risks include regulatory disallowance or delayed recovery of San Onofre and grid-modernization costs, the outcome of the 2018 GRC, access to capital markets, wildfire liability and insurance availability, nuclear decommissioning and spent-fuel obligations, environmental remediation, cybersecurity, commodity prices, weather and natural disasters, and customer departures through community choice aggregation or distributed energy resources.
- SCE had approximately $1 billion of wildfire insurance coverage through May 31, 2018, with a $10 million self-insured retention per occurrence. Losses could exceed coverage, and recovery from customers is not assured.
- Edison Energy intends to pursue a proof of concept for its energy-services and managed-portfolio businesses, targeting a breakeven earnings run rate and 5% customer penetration by the end of 2019.
Most Important Facts for Investors to Verify
- Track the CPUC's final decision and effective date in the 2018 GRC, including treatment of grid-modernization spending.
- Monitor the San Onofre OII proceedings and assess whether the $730 million regulatory asset remains probable of recovery.
- Reconcile reported earnings growth with unusually low effective tax rates and customer-refund obligations.
- Review SCE's debt issuance, credit-facility availability, collateral requirements and covenant headroom as capital spending continues.
- Evaluate wildfire insurance limits, potential uninsured exposure and the regulatory framework for cost recovery.
- Assess Edison Energy Group's SoCore Energy strategic review, potential sale outcome and the sustainability of the stated 2019 targets.