Business Context and Reporting Period
Edison International filed a combined unaudited Form 10-Q with Southern California Edison Company (SCE) for the three months ended March 31, 2018. Edison International is the holding company for SCE and Edison Energy Group. SCE supplies and delivers electricity across approximately 50,000 square miles of Southern California. SCE is the principal operating business.
Financial Performance and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Edison International operating revenue | $2.564 billion | $2.463 billion | +$101 million |
| Edison International net income attributable to common shareholders | $218 million | $362 million | -$144 million |
| Edison International diluted EPS | $0.67 | $1.10 | -$0.43 |
| SCE operating revenue | $2.554 billion | $2.456 billion | +$98 million |
| SCE net income available for common stock | $286 million | $349 million | -$63 million |
| SCE operating income | $414 million | $498 million | -$84 million |
| Edison International net cash provided by operating activities | $859 million | $884 million | -$25 million |
| SCE net cash provided by operating activities | $801 million | $936 million | -$135 million |
| Edison International capital expenditures | $1.137 billion | $944 million | +$193 million |
Edison International's operating margin declined to approximately 12.9% from 19.1%, primarily because of higher purchased power and fuel costs, higher operation and maintenance costs, a $66 million impairment and other charge, and higher interest expense. SCE's operating margin declined to approximately 16.2% from 20.3%.
- SCE earning-activity revenue declined $39 million, while cost-recovery revenue increased $137 million. Purchased power and fuel expense increased $142 million to $926 million, and total operation and maintenance expense increased $71 million to $651 million.
- SCE interest expense increased $14 million to $155 million, primarily due to increased borrowings.
- Edison International recorded a $66 million pretax, $48 million after-tax charge related to the planned sale of SoCore Energy.
- Edison International's effective tax rate was negative 14.7%, compared with negative 11.4% in the prior-year quarter. SCE's effective tax rate was negative 1.9%, compared with 3.1%.
- At March 31, 2018, Edison International had $105 million of cash and cash equivalents; SCE had $15 million. Edison International's current assets and liabilities included assets and liabilities held for sale related to SoCore Energy.
- Edison International reported $13.846 billion of long-term debt, including current maturities, at March 31, 2018; SCE reported $12.108 billion. SCE's debt-to-total-capitalization ratio was 0.45 to 1, and Edison International Parent's was 0.50 to 1, versus a covenant limit of 0.65 to 1.
- SCE had approximately $2.58 billion available under its $2.75 billion revolving credit facility. Edison International Parent had approximately $1.25 billion available under its $1.25 billion facility.
- SCE's capital expenditures, including accruals, were $853 million, compared with $647 million in Q1 2017. SCE continued to project approximately $4.2 billion of 2018 capital expenditures.
- Edison International declared a common dividend of $0.6050 per share, compared with $0.5425 in Q1 2017.
Material Changes Versus the Prior Comparable Period
- Consolidated earnings fell 40% year over year, driven by a $63 million decline in SCE earnings and an $81 million deterioration in Edison International Parent and Other.
- SCE earnings were pressured by the July 2017 cost-of-capital decision, the effect of Tax Reform on authorized revenue, higher wildfire-related insurance premiums, increased line-clearing and transmission and distribution maintenance costs, and higher financing costs.
- Parent and Other shifted from $13 million of income to a $68 million loss. The change included the SoCore Energy impairment, lower tax benefits associated with stock option exercises, and the effect of Tax Reform on pretax losses.
- Cash flow from operations declined at SCE despite a $405 million cash benefit from regulatory assets and liabilities. Working-capital cash use increased, particularly because of receivables and reductions in payables.
- Financing activity changed from $56 million of net cash provided in Q1 2017 to $216 million used in Q1 2018 at SCE, although SCE issued $1.25 billion of mortgage bonds and used proceeds largely to repay commercial paper.
- Edison International Parent issued $550 million of 4.125% senior notes due 2028 in March 2018 after using a $500 million term loan earlier in the quarter to refinance commercial paper.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Wildfires and mudslides: The December 2017 Wildfires, including the Thomas Fire, and the January 2018 Montecito Mudslides generated multiple lawsuits against SCE and, in some cases, Edison International. As of April 27, 2018, at least 52 Thomas Fire-related lawsuits had been filed; 29 also alleged that the Thomas Fire caused the Montecito Mudslides. The companies could not estimate probable losses. Potential liability could be substantial.
- SCE had approximately $1 billion of wildfire-specific insurance coverage, subject to a $10 million self-insured retention per occurrence, plus approximately $300 million of additional coverage for specified periods. Coverage limitations may leave material uninsured exposure, and regulatory recovery of uninsured costs is uncertain.
- San Onofre: The parties entered into a Revised San Onofre Settlement Agreement in January 2018. Implementation required CPUC approval, which was not assured as of the filing. The agreement would cease rate recovery after specified regulatory assets are reached and could result in a $448 million after-tax charge being excluded from SCE's ratemaking capital structure.
- 2018 General Rate Case: SCE's updated 2018 revenue requirement request was $5.534 billion, $106 million below the 2017 authorized revenue requirement. Proposed increases for 2019 and 2020 were $292 million and $319 million, respectively. A final CPUC decision was not expected until later in 2018. Until then, SCE recognized revenue using the prior authorized requirement, with a regulatory memorandum account for retroactive adjustment.
- Capital program: SCE expects approximately $4.2 billion of 2018 capital expenditures. Project timing, permitting, regulatory approvals, contractor bids, and potential disallowance remain risks. The CPUC issued proposed decisions affecting major transmission projects, including a proposed denial of the Alberhill System Project.
- SoCore Energy: Edison International agreed to sell SoCore Energy on February 28, 2018; closing conditions were satisfied April 16, 2018. The business was classified as held for sale at March 31 and generated the $66 million pretax impairment charge.
- Other risks include regulatory cost recovery, access to capital markets, insurance availability and pricing, San Onofre decommissioning and spent-fuel obligations, environmental remediation, power and fuel prices, counterparty credit, cybersecurity, extreme weather, and customer departures to community choice aggregators.
- SCE's recorded environmental remediation liability was $146 million, with possible additional costs of up to $139 million based on the disclosed ranges, although much of the recorded amount is expected to be recovered through regulatory mechanisms.
Important Facts for Investors to Verify
- Track CPUC decisions on the 2018 General Rate Case and the Revised San Onofre Settlement Agreement, including any resulting regulatory assets, liabilities, refunds, or charges.
- Monitor wildfire and Montecito Mudslides investigations, litigation counts, insurance coverage, potential claims, and whether uninsured costs may be recovered from customers.
- Reconcile SCE's projected $4.2 billion capital program with actual spending, financing needs, rate-base treatment, and project approvals.
- Assess liquidity after considering low reported cash balances, debt maturities, commercial paper requirements, collateral exposure, dividends, and potential wildfire-related funding needs.
- Review the effect of Tax Reform and the pending GRC on authorized revenue, effective tax rates, deferred taxes, and regulatory balances.
- Confirm the final accounting and cash proceeds from the completed SoCore Energy sale and the effect on Parent and Other earnings.