Edison International and Southern California Edison Company: Q2 2015 Form 10-Q
Business context and reporting period
This combined Form 10-Q covers Edison International, the parent holding company, and Southern California Edison Company (SCE), its regulated electric utility serving approximately 50,000 square miles in Southern California. The reporting period ended June 30, 2015; results are unaudited and include three- and six-month comparisons with 2014.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Edison International operating revenue | $2.908 billion vs. $3.016 billion | $5.420 billion vs. $5.943 billion |
| Income from continuing operations attributable to common shareholders | $379 million vs. $352 million | $678 million vs. $550 million |
| Net income attributable to common shareholders | $379 million vs. $536 million | $678 million vs. $712 million |
| Diluted EPS from continuing operations | $1.15 vs. $1.07 | $2.06 vs. $1.68 |
| SCE net income available for common stock | $384 million vs. $362 million | $689 million vs. $570 million |
| SCE operating income | $536 million vs. $593 million | $1.086 billion vs. $935 million |
Edison International's consolidated operating margin was approximately 18.0% in the second quarter and 19.6% for the first six months, compared with approximately 19.1% and 15.2%, respectively, in the comparable 2014 periods. SCE's operating margin was approximately 18.5% for the quarter and 20.1% year to date.
- SCE's six-month operating revenue declined $529 million, primarily because of lower purchased-power and fuel costs passed through to customers, cooler weather and the absence of 2014 CAISO-related surcharge activity.
- SCE's six-month net income increased $119 million. Drivers included higher FERC-related revenue, rate-base growth, AFUDC equity income, lower operating and maintenance expense, and the absence of the $231 million 2014 San Onofre impairment and other charge.
- Second-quarter SCE earnings benefited from a $100 million income-tax benefit related to revisions of uncertain tax positions for 2010–2012; the comparable 2014 benefit was $29 million.
- Edison International reported no discontinued-operations income in 2015. The 2014 periods included $184 million for the quarter and $162 million year to date related primarily to the EME bankruptcy resolution.
Cash flow, capital spending, debt and liquidity
- Edison International generated $1.768 billion of operating cash flow in the first six months, compared with $608 million in 2014. Capital expenditures were $2.197 billion, producing $2.234 billion of investing cash outflow.
- SCE generated $1.689 billion of operating cash flow and spent $2.187 billion on capital expenditures in the first six months, compared with $1.083 billion and $1.853 billion, respectively, in 2014.
- SCE had $1.78 billion available under its $2.75 billion revolving credit facility at June 30, 2015. Edison International Parent had $705 million available under its $1.25 billion facility.
- SCE's debt-to-total-capitalization ratio was 0.46 to 1, below its 0.65 covenant limit; Edison International Parent's ratio was 0.49 to 1.
- SCE's long-term debt carrying value, including current maturities, was $10.654 billion; Edison International's was $11.469 billion. SCE issued $1.3 billion of mortgage bonds and $131 million of pollution-control bonds during the first half.
- SCE had $181 million of collateral posted and $250 million of posted plus potential collateral requirements, including the effect of a downgrade below investment grade.
- SCE's San Onofre nuclear decommissioning trusts totaled $3.4 billion at June 30, 2015. Total SCE nuclear decommissioning trust investments were $4.836 billion, or approximately $4.4 billion net of deferred taxes.
Material changes versus the prior comparable period
- Continuing-operations earnings improved despite lower reported revenue, primarily because regulated cost-recovery revenue and expenses declined together and tax benefits increased.
- SCE's depreciation, decommissioning and amortization expense rose $119 million year to date, including $69 million of San Onofre regulatory-asset amortization and higher depreciation from transmission and distribution investment.
- SCE recorded approximately $80 million of San Onofre decommissioning costs in the first six months of 2015 and estimated approximately $150 million of additional costs for the remainder of 2015.
- SCE's ERRA undercollection declined to $543 million at June 30, 2015 from $1.028 billion at December 31, 2014. Management expected recovery before year-end 2015 based on then-current rates and commodity prices.
- SCE deferred $85 million of 2014 authorized base-rate revenue during the first six months pending the 2015 general rate case. The deferral did not affect net income because it was offset by lower income taxes.
Guidance, outlook, commentary and unusual items
- SCE updated its 2015 general rate case request to $5.512 billion, a $121 million decrease from currently authorized base-rate revenue. The request included post-test-year increases of $236 million in 2016 and $320 million in 2017. The CPUC's final authorized amount and timing were uncertain.
- SCE forecast 2015–2017 capital investment of $11.5 billion to $13.1 billion, including $3.6 billion to $4.1 billion in 2015, after reducing the prior forecast by approximately $325 million. The Coolwater-Lugo project was removed from the forecast after the CPUC dismissed its approval proceeding.
- SCE filed a Distribution Resources Plan in July 2015 and expected future distribution-modernization investments to be addressed in later rate cases, subject to CPUC approval.
- Edison International was obligated to pay $204 million on September 30, 2015 and $214 million on September 30, 2016 under the amended EME Settlement Agreement. Management expected to fund these payments through tax-benefit realization, commercial paper or other borrowings.
- Management identified regulatory cost recovery, CPUC and FERC decisions, San Onofre decommissioning, commodity prices, capital-project execution, wildfire and nuclear liabilities, environmental requirements, cybersecurity, insurance availability and access to capital markets as significant risks.
Contingencies and unusual matters
- San Onofre-related ex parte communication proceedings remained pending. ORA recommended a $648 million penalty and another intervenor proposed a $38.2 million penalty; SCE stated it could not predict the outcome. Federal and shareholder litigation and government investigations were also pending.
- SCE was pursuing at least $4 billion in damages from Mitsubishi Heavy Industries in arbitration related to defective San Onofre replacement steam generators. MHI asserted a $41 million counterclaim; no recovery was assured.
- San Onofre insurance claims totaling approximately $433 million for the owners, including approximately $339 million attributable to SCE, remained under review. No amounts had been recognized in the financial statements.
- SCE's environmental remediation liability was $119 million, including $83 million related to San Onofre; management estimated possible additional costs of up to $167 million across identified material and immaterial sites.
- Wildfire insurance provided up to $610 million of coverage with a $10 million self-insured retention per occurrence, plus additional coverage of $390 million above that layer, subject to policy limitations.
- SCE faced a proposed $25 million civil penalty related to the Shaver Lake Dam Project and a criminal misdemeanor complaint related to the Dominguez Channel oil spill.
Most important facts for investors to verify
- Final CPUC decisions and retroactive revenue treatment in SCE's 2015 general rate case.
- Resolution of San Onofre ex parte proceedings, related penalties, litigation and government investigations.
- Timing, cost and regulatory recovery of San Onofre decommissioning, including access to the $3.4 billion trusts.
- Actual recoveries, if any, from MHI and NEIL, and the portion retained by SCE versus credited to customers.
- Capital-spending execution, future rate-base growth and the effect of the Distribution Resources Plan.
- Liquidity after the $204 million EME settlement payment, debt refinancing needs and collateral exposure under adverse commodity-price or credit-rating scenarios.
- Changes in wildfire insurance coverage, environmental liabilities and other legal contingencies.