EDISON INTERNATIONAL quarterly report, Q2 FY2016

Edison International 2016 Second-Quarter 10-Q Summary

Business context and reporting period

This combined Form 10-Q covers Edison International and its principal subsidiary, Southern California Edison Company (SCE), for the three and six months ended June 30, 2016. SCE supplies and delivers electricity across approximately 50,000 square miles of Southern California. Edison International also owns competitive energy businesses, which were not material reportable segments.

Key financial metrics

Metric	Three months ended June 30, 2016	Three months ended June 30, 2015	Six months ended June 30, 2016	Six months ended June 30, 2015
Edison International operating revenue	$2.777 billion	$2.908 billion	$5.218 billion	$5.420 billion
Operating income	$381 million	$524 million	$829 million	$1.060 billion
Net income attributable to common shareholders	$276 million	$379 million	$546 million	$678 million
Diluted EPS	$0.84	$1.15	$1.66	$2.06
Net cash from operating activities	Not separately provided for the quarter	Not separately provided for the quarter	$1.429 billion	$1.768 billion
Capital expenditures	Not separately provided for the quarter	Not separately provided for the quarter	$1.828 billion	$2.197 billion

Edison International’s operating margin was approximately 13.7% in the quarter and 15.9% for the first six months, compared with approximately 18.0% and 19.6%, respectively, in the comparable 2015 periods. SCE generated net income available for common stock of $315 million in the quarter and $601 million for the six months, compared with $384 million and $689 million, respectively, in 2015.

SCE operating revenue was $2.768 billion for the quarter and $5.204 billion for the six months.
SCE operating income was $429 million for the quarter and $902 million for the six months.
SCE net income declined primarily because of lower tax benefits, higher depreciation and, for the six-month period, higher operation and maintenance costs.
Edison International Parent and Other reported losses of $37 million for the quarter and $54 million for the six months, compared with losses of $5 million and $11 million in 2015.
Edison International declared dividends of $0.4800 per common share for the quarter and $0.9600 for the six months, compared with $0.4175 and $0.8350, respectively, in 2015.

Liquidity, debt and balance sheet

At June 30, 2016, Edison International had cash and cash equivalents of $111 million, total assets of $51.197 billion and total debt, including current and long-term debt, of approximately $12.341 billion.
SCE had $20 million of cash, total assets of $50.781 billion and total debt of approximately $11.009 billion.
SCE had approximately $2.15 billion available under its $2.75 billion revolving credit facility. Edison International Parent had $956 million available under its $1.25 billion facility.
SCE’s debt-to-total-capitalization ratio was 0.44 to 1, below its 0.65-to-1 covenant limit. Edison International Parent’s ratio was 0.47 to 1.
SCE issued $294 million of preference stock net of redemptions during the first six months. Edison International issued $400 million of 2.95% senior notes due 2023.
SCE paid $340 million of common dividends to Edison International during the first six months and declared and paid $170 million in the second quarter. The maximum additional dividend permitted under the applicable capital-structure limitation was approximately $540 million at June 30, 2016.

Material changes versus the prior comparable period

Quarterly Edison International net income attributable to common shareholders decreased $103 million, or approximately 27%, while six-month income decreased $132 million, or approximately 19%.
SCE recorded a $133 million customer revenue refund for 2012–2014 incremental tax repair deductions, offset by related tax benefits. The CPUC authorized a total $234 million reduction to SCE’s base revenue requirement over 2016–2020, subject to tax-authority audits.
The 2015 General Rate Case became effective in customer rates in 2016, including approximately $50 million of quarterly and $96 million of six-month authorized revenue escalation. These benefits were partly offset by prior-period customer refunds and lower retail rates.
The second quarter of 2015 included a $100 million SCE income-tax benefit from revisions to uncertain-tax-position liabilities, making the 2016 comparison less favorable.
Edison Energy Group’s losses increased, including a $13 million after-tax charge for buying out an earn-out provision related to a 2015 acquisition, higher operating and development costs, and lower solar-system gross margins.
Operating cash flow declined $339 million for Edison International and $175 million for SCE, although SCE capital expenditures also declined by approximately $365 million.

Guidance, outlook, commentary and unusual items

SCE forecasts 2016–2017 capital expenditures of approximately $7.9 billion to $8.1 billion, with a midpoint-style estimate of $8.058 billion before management’s project reductions. Forecast spending is concentrated in distribution, at approximately $6.063 billion.
Approximately $300 million of 2016 transmission capital expenditures were delayed, mainly because of licensing issues. Management expects approximately $100 million to move into 2017, with the remaining amount to be reflected in the 2018 General Rate Case forecast.
SCE planned to file its 2018 General Rate Case application in September 2016, covering forecast capital expenditures and rate base for 2018–2020.
SCE preliminarily estimated a $98 million, or 9%, increase in its 2017 transmission revenue requirement, subject to a FERC filing expected by December 1, 2016.
SCE received $122 million from the federal government in May 2016 related to the Department of Energy’s failure to accept spent nuclear fuel. The ultimate allocation among customers, shareholders and decommissioning or storage costs remains subject to CPUC review.
FERC approved recovery of 100% of prudently incurred Coolwater-Lugo project costs, while setting $8.5 million of overhead costs for further review.
SCE’s commodity derivative portfolio had a net liability of approximately $1.2 billion at June 30, 2016. Collateral posted or potentially required under specified scenarios totaled approximately $152 million.

Risks and contingencies

The CPUC reopened the record concerning the San Onofre settlement following issues involving undisclosed ex parte communications. Parties have requested modification or vacatur of the settlement, and SCE cannot predict the outcome.
SCE is pursuing arbitration against Mitsubishi Heavy Industries seeking at least $4 billion related to defective San Onofre steam generators. MHI has denied liability and asserted $41 million of counterclaims. No recovery is assured.
A CPUC proceeding could require SCE to refund $39.9 million of previously awarded energy-efficiency incentives; SCE disputes the claim.
The CPUC initiated a Long Beach service-interruption investigation in July 2016. Potential penalties could range from $500 to $50,000 per day per violation, but SCE cannot estimate a loss range.
SCE recorded $134 million of environmental remediation liabilities and estimated that costs could exceed recorded liabilities by up to $172 million across identified material and immaterial sites.
SCE had approximately $910 million of third-party wildfire insurance coverage, plus approximately $90 million of self-insurance, for the July 2016–May 2017 period. Losses could exceed available coverage.
SCE expects substantial future San Onofre decommissioning expenditures. Nuclear insurance and spent-fuel obligations also create potential funding and regulatory risks.
Key continuing risks include regulatory cost recovery, rate decisions, capital-project delays, wildfire liability, cybersecurity, distributed generation and storage, environmental requirements, commodity prices, counterparty credit, financing access and weather or natural disasters.

Most important facts for investors to verify

Whether the CPUC preserves, modifies or vacates the San Onofre settlement and the potential effect on regulatory assets, customer refunds and shareholder recoveries.
The outcome and timing of the MHI arbitration and the related treatment of any recovery.
Resolution of the energy-efficiency incentive and Long Beach service-interruption proceedings.
Actual 2016 capital expenditures, project delays and the rate-base effect of the 2018 General Rate Case.
SCE’s ability to maintain investment-grade credit metrics while funding capital spending, decommissioning and dividends.
The adequacy and future cost of wildfire and nuclear insurance coverage.
Whether Edison Energy Group can reduce losses and improve revenue and gross margins.