Edison International 2019 Q3 Form 10-Q Summary
Business context and reporting period
This combined Form 10-Q covers Edison International and its wholly owned regulated utility, Southern California Edison Company (SCE), for the three and nine months ended September 30, 2019. SCE supplies and delivers electricity across approximately 50,000 square miles of Southern California. Edison Energy Group’s competitive energy-services activities were not material as a separate segment.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Consolidated operating revenue | $3.741 billion, down from $4.269 billion | $9.377 billion, down from $9.648 billion |
| Net income attributable to Edison International common shareholders | $471 million, down from $513 million | $1.141 billion, up from $1.007 billion |
| Diluted EPS | $1.35, down from $1.57 | $3.42, up from $3.08 |
| Operating income | $636 million, down from $739 million | $1.488 billion, broadly comparable with $1.489 billion |
| Net cash from operating activities | Not presented for the quarter | $(817) million, versus $2.271 billion provided |
| Capital expenditures | Not presented for the quarter | $3.497 billion, versus $3.241 billion |
Consolidated operating margin was approximately 17.0% for the quarter and 15.9% for the first nine months, based on reported operating income and revenue. The nine-month net loss in operating cash flow primarily reflects SCE’s $2.363 billion contribution to the Wildfire Insurance Fund, regulatory-asset and liability timing, and working-capital movements.
- SCE’s net income available for common stock was $503 million in the third quarter and $1.215 billion for the first nine months, compared with $536 million and $1.119 billion, respectively, in the prior-year periods.
- SCE’s operating revenue declined 12% in the third quarter and 3% for the first nine months. Lower purchased-power and fuel costs offset much of the revenue decline; lower load reflected customer departures to community choice aggregators and cooler weather.
- SCE’s core earnings, a non-GAAP measure, increased to $551 million for the quarter and $1.314 billion for the first nine months, compared with $529 million and $1.112 billion, respectively.
- At September 30, 2019, Edison International had $547 million of cash and $17.545 billion of long-term debt including the current portion. SCE had $86 million of cash and $15.208 billion of long-term debt including the current portion.
- SCE had approximately $2.8 billion available under its $3.0 billion revolving credit facility. Its debt-to-total-capitalization ratio was 0.46, compared with a covenant maximum of 0.65. Edison International Parent had no borrowings under its $1.5 billion credit facility and a consolidated debt-to-total-capitalization ratio of 0.55.
- Long-term issuer ratings remained investment grade with stable outlooks: SCE was rated Baa2 by Moody’s, BBB- by Fitch and BBB by S&P; Edison International was rated Baa3, BBB- and BBB, respectively.
Material changes versus the prior comparable period
- The CPUC approved SCE’s 2018 General Rate Case in May 2019. The decision authorized revenue requirements of $5.116 billion for 2018, $5.451 billion for 2019 and $5.863 billion for 2020, retroactive to January 1, 2018.
- SCE recorded a $265 million revenue reduction related to the GRC decision, a $554 million regulatory liability for customer refunds expected through December 2020, and a $170 million impairment charge, or $123 million after tax, for disallowed historical capital expenditures.
- The GRC increased SCE’s core earnings by approximately $131 million, primarily through revised revenue, depreciation and income-tax treatment.
- Operating and maintenance expense increased by $250 million for the first nine months, largely due to wildfire insurance, mitigation activity, contractor scarcity, inspections and maintenance. Depreciation and amortization declined by $131 million, primarily due to revised depreciation rates and the GRC disallowance.
- Edison International issued approximately $2.2 billion of common stock in July 2019. SCE received $1.2 billion of that equity contribution and issued $1.2 billion of long-term debt to fund its initial Wildfire Insurance Fund contribution.
- The balance sheet reflects the January 1, 2019 adoption of lease accounting, adding approximately $956 million of Edison International right-of-use assets and $951 million for SCE at adoption.
Guidance, outlook, commentary and risks
- SCE filed its 2021 General Rate Case application requesting a 2021 revenue requirement of $7.601 billion, plus requested increases of $400 million in 2022 and $531 million in 2023. Management requested a final decision by the end of 2020.
- SCE forecasts 2019–2023 capital expenditures of approximately $23.8 billion to $25.6 billion, including approximately $4.2 billion of wildfire-mitigation-related capital expenditures. Total capital expenditures for the first nine months of 2019 were $3.3 billion.
- Under AB 1054, SCE contributed approximately $2.4 billion to the Wildfire Insurance Fund and committed to ten annual contributions of approximately $95 million beginning January 1, 2020. The initial SCE liability cap is approximately $2.5 billion, subject to maintaining safety certification and other conditions.
- Management expects to finance approximately $1.6 billion of wildfire-mitigation capital expenditures through securitized bonds. These expenditures will not be included in the equity portion of SCE’s rate base.
- SCE’s initial safety certification was obtained in July 2019 and is valid for 12 months. The Wildfire Insurance Fund could be smaller than expected if PG&E does not participate, and the fund and liability-cap protections could terminate if the fund is exhausted.
- Edison International and SCE retained a $4.7 billion liability for the 2017 and 2018 wildfire and mudslide events, recorded expected insurance recoveries of $2.0 billion and FERC-related recoveries of $135 million. Management stated that actual losses could exceed the accrued amount but could not estimate an upper range.
- Material wildfire litigation remains pending. The filing states that SCE is likely associated with the ignition of the Koenigstein and Woolsey fires, while SCE disputes or has not determined responsibility for the Thomas Fire and the Montecito Mudslides. A bellwether trial for certain Thomas and Koenigstein matters was scheduled for April 2020 and a Woolsey-related bellwether trial for July 2020.
- The October 2019 Saddle Ridge Fire originated near an SCE transmission tower; investigations were preliminary and SCE could not determine whether it would incur a material loss.
- Other risks include regulatory disallowance of wildfire, insurance and customer-system costs; adverse CPUC, FERC or NRC decisions; credit-rating downgrades; insurance availability and pricing; capital-market access; San Onofre decommissioning; cybersecurity; and implementation of SCE’s new customer service system, expected in 2021.
Important facts for investors to verify
- Resolution and ultimate cost of the 2017/2018 wildfire and Montecito Mudslide litigation, including recoveries from insurance and regulated rates.
- Whether the Wildfire Insurance Fund remains adequately funded, whether PG&E participates, and whether SCE maintains its safety certification and liability-cap protections.
- CPUС decisions on SCE’s 2021 General Rate Case, 2020 cost of capital request and recovery of incremental wildfire insurance and mitigation costs.
- FERC approval and final true-ups for SCE’s 2018 and 2019 Formula Rate settlements, including the applicable return on equity.
- Funding requirements and execution risk associated with SCE’s $23.8 billion to $25.6 billion five-year capital program and planned securitized-bond financing.
- Liquidity, leverage, dividend capacity and credit ratings if wildfire liabilities, regulatory disallowances or capital-market conditions worsen.
- San Onofre decommissioning progress, permitting challenges and potential cost overruns.