EDISON INTERNATIONAL annual report, FY2015

Edison International 2015 Form 10-K Summary

Business context and reporting period

This combined Form 10-K covers Edison International and its wholly owned utility subsidiary, Southern California Edison Company (SCE), for the fiscal year ended December 31, 2015. SCE supplies and delivers electricity to approximately 5 million customers across roughly 50,000 square miles of Southern and Central California. Edison International’s competitive businesses, including Edison Energy, remained immaterial as a separate reportable segment.

The filing includes fourth-quarter results, but it is an annual report rather than a quarterly filing. The 2015 fourth quarter included a significant regulatory asset write-down related to the CPUC’s 2015 General Rate Case.

Financial performance and key metrics

Metric	2015	2014	Change
Edison International operating revenue	$11.524 billion	$13.413 billion	Down $1.889 billion
Operating income	$2.008 billion	$2.472 billion	Down $464 million
Income from continuing operations	$1.082 billion	$1.536 billion	Down $454 million
Net income attributable to common shareholders	$1.020 billion	$1.612 billion	Down $592 million
Diluted EPS	$3.10	$4.89	Down $1.79
Core earnings, non-GAAP	$1.336 billion	$1.497 billion	Down $161 million
Net cash from operating activities	$4.509 billion	$3.248 billion	Up $1.261 billion
Capital expenditures	$4.225 billion	$3.906 billion	Up $319 million

SCE generated $11.485 billion of operating revenue, $1.111 billion of net income and $998 million of net income available for common stock in 2015, compared with $13.380 billion, $1.565 billion and $1.453 billion, respectively, in 2014. SCE’s operating margin was approximately 18.1% in 2015 versus 18.9% in 2014, based on operating income divided by operating revenue.

• Retail billed and unbilled revenue, excluding wholesale sales and balancing-account effects, was approximately $12.2 billion in both 2015 and 2014. Cooler weather reduced sales volume by approximately $169 million, but decoupling substantially insulated earnings from changes in electricity usage.
• Purchased power and fuel expense declined to $4.266 billion from $5.593 billion, primarily because of lower power and natural-gas prices and related customer cost-recovery activity.
• Depreciation, decommissioning and amortization increased to $1.919 billion from $1.720 billion, reflecting rate-base growth and San Onofre-related amortization.
• SCE’s year-end rate base, excluding San Onofre, increased to $24.6 billion from $23.3 billion.
• Edison International’s total assets were $50.310 billion and common shareholders’ equity was $11.368 billion at December 31, 2015.

Liquidity, debt and capital resources

• SCE had $2.576 billion available under its $2.75 billion revolving credit facility; Edison International Parent had $604 million available under its $1.25 billion facility.
• SCE’s debt-to-total-capitalization ratio was 0.44 to 1, and Edison International’s consolidated ratio was 0.47 to 1, both below the applicable 0.65 to 1 covenant limit.
• Edison International reported $11.259 billion of long-term debt including current maturities at carrying value; SCE reported $10.616 billion.
• SCE’s 2015 operating cash flow of $4.624 billion exceeded capital expenditures of approximately $4.210 billion, before financing, dividends and other cash uses.
• SCE paid $758 million in dividends to Edison International in 2015, compared with $378 million in 2014. Edison International increased its annual common dividend rate by 15%, from $1.67 to $1.92 per share.
• SCE’s net regulatory balancing-account overcollections were approximately $2.0 billion at year-end and were expected to decline as customer refunds and rate adjustments occurred in 2016.

Material changes versus the prior comparable period

• The CPUC approved SCE’s 2015 GRC, authorizing revenue requirements of $5.182 billion for 2015, $5.391 billion for 2016 and $5.663 billion for 2017. The 2015 authorization was $451 million below 2014 authorized revenue excluding San Onofre, requiring customer refunds beginning in January 2016.
• SCE recorded a $382 million after-tax write-down of regulatory assets related to 2012–2014 tax repair deductions. The charge was the principal reason 2015 GAAP earnings declined.
• SCE recorded a $212 million regulatory liability for customer refunds associated with 2015 tax repair deductions exceeding amounts forecast in the GRC.
• Core SCE earnings declined $157 million to $1.368 billion, primarily because of lower CPUC-related revenue and lower tax benefits, partly offset by FERC rate-base growth, lower operating and maintenance costs and higher AFUDC equity income.
• The 2015 results included $35 million of discontinued-operation income, versus $185 million in 2014. The prior-year amount benefited from completion of the Edison Mission Energy bankruptcy-related transactions.
• SCE received $329 million from nuclear decommissioning trusts and refunded the amount primarily through the ERRA mechanism. San Onofre trust assets totaled $2.9 billion at year-end.

Guidance, outlook, commentary and unusual items

• SCE forecasts 2016–2017 capital expenditures of approximately $8.0 billion to $8.3 billion, with 2016 and 2017 estimates of approximately $4.0 billion and $4.1 billion, respectively. Distribution investment represents the majority of planned spending.
• Management expects SCE’s 2016 obligations, capital expenditures and dividends to be funded through operating cash flow, tax benefits, debt and preferred-equity financing as needed, together with available credit facilities.
• The company expects SCE’s rate base to grow to approximately $25.0 billion–$25.1 billion in 2016 and $26.6 billion–$26.8 billion in 2017, depending on the capital-spending scenario.
• SCE’s authorized return on common equity was 10.45%; the current cost-of-capital mechanism was extended through 2017, subject to CPUC action.
• San Onofre Units 2 and 3 remain permanently retired and are undergoing decommissioning. The 2014-dollar cost estimate for Units 2 and 3 was $4.4 billion in total, or $3.3 billion for SCE’s share, with completion estimated in 2052. The estimate is subject to significant uncertainty.
• SCE reached a $400 million settlement with Nuclear Electric Insurance Limited related to San Onofre replacement steam generators; SCE’s share was approximately $313 million. Customers receive 95% of recoveries and SCE receives 5%.
• SCE is pursuing at least $4 billion in damages from Mitsubishi Heavy Industries in arbitration related to the San Onofre steam generators. MHI disputes liability and has asserted counterclaims of $41 million. The outcome and timing of recovery are uncertain.
• In December 2015, the CPUC imposed a $16.74 million penalty related to unreported ex parte communications. Related securities, derivative, ERISA and regulatory proceedings remained pending, and the company could not predict their outcomes.
• Edison International paid $204 million in September 2015 under the Edison Mission Energy settlement and expects to pay a final $214 million in September 2016.

Principal risks and contingencies

• Regulatory recovery risk, including possible disallowances, delays in rate decisions and changes to authorized returns or rate-base treatment.
• Financing and liquidity risk arising from substantial capital needs, debt maturities, interest-rate changes and dependence on access to capital markets.
• San Onofre decommissioning, spent-fuel storage, nuclear insurance and third-party recovery risks.
• Wildfire liability and insurance availability risk; SCE’s reported wildfire coverage included $610 million of primary coverage plus additional coverage of $390 million for certain liabilities.
• Operational, reliability, safety and cybersecurity risks affecting the electric grid and customer information.
• Environmental compliance and remediation exposure. SCE recorded a minimum environmental remediation liability of $134 million, with possible additional costs of up to approximately $172 million based on disclosed ranges.
• Long-term contractual commitments totaled approximately $55.3 billion, including $19.5 billion of SCE debt maturities and interest and $33.6 billion of SCE power-purchase commitments.

Investor verification checklist

• Verify the final CPUC treatment and timing of the $451 million customer refund and the tax-related regulatory liabilities.
• Track whether SCE’s regulatory assets remain probable of recovery; total regulatory assets were $8.072 billion and regulatory liabilities were $6.804 billion at year-end.
• Monitor San Onofre decommissioning costs, trust performance, CPUC reasonableness reviews and potential recoveries from MHI.
• Review pending litigation and investigations concerning ex parte communications, including possible financial or regulatory consequences.
• Assess funding needs for the $8.0 billion–$8.3 billion 2016–2017 capital program, debt maturities and the $214 million EME settlement payment.
• Evaluate wildfire insurance limits, nuclear insurance exposure, environmental remediation estimates and cybersecurity controls.