Edison International 2016 First-Quarter Form 10-Q Summary
Business context and reporting period
Combined quarterly report for Edison International and its principal subsidiary, Southern California Edison Company (SCE), covering the three months ended March 31, 2016. SCE is a regulated electric utility serving approximately 50,000 square miles of Southern California. Edison International also owns competitive energy-services businesses, which were not material as a separate reportable segment.
Financial performance and key metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Edison International operating revenue | $2.440 billion | $2.512 billion | Down $72 million |
| Operating income | $448 million | $538 million | Down $90 million |
| Income from continuing operations | $295 million | $318 million | Down $23 million |
| Net income attributable to common shareholders | $271 million | $299 million | Down $28 million |
| Diluted EPS | $0.82 | $0.91 | Down $0.09 |
| Operating cash flow | $853 million | $964 million | Down $111 million |
| Capital expenditures | $951 million | $1.268 billion | Down $317 million |
- Edison International's operating margin was approximately 18.4%, compared with 21.4% in the prior-year quarter. Net income attributable to common shareholders represented approximately 11.1% of revenue, compared with 11.9%.
- SCE operating revenue was $2.435 billion, operating income was $472 million, and net income available for common stock was $287 million, compared with $305 million in Q1 2015.
- SCE's effective income tax rate declined to 13.6% from 24.3%, primarily due to higher repair-related tax benefits and flow-through benefits recorded through regulatory balancing accounts.
- SCE capital expenditures were $950 million in the quarter. Management projects approximately $4 billion of SCE capital expenditures for 2016.
- At March 31, 2016, Edison International had $137 million of cash and cash equivalents; SCE had $21 million.
- SCE had approximately $2.56 billion available under its $2.75 billion revolving credit facility. Edison International Parent had $988 million available under its $1.25 billion facility.
- SCE's debt-to-total-capitalization ratio was 0.43 to 1, and Edison International Parent's ratio was 0.47 to 1, versus a covenant maximum of 0.65 to 1.
- Edison International issued $400 million of 2.95% senior notes due 2023. SCE issued $300 million of Series K preference stock and redeemed $125 million of Series D preference stock.
- Edison International declared dividends of $0.48 per common share, compared with $0.4175 in Q1 2015.
Material changes versus the prior comparable period
- SCE earnings declined $18 million, principally because Q1 2015 revenue reflected delayed 2015 General Rate Case (GRC) timing, while Q1 2016 included higher operation and maintenance costs, depreciation, and different tax-benefit timing.
- SCE retail billed and unbilled revenue declined to approximately $2.4 billion from $2.6 billion, due primarily to a $137 million rate decrease and a $55 million reduction from lower sales volume associated with cooler weather.
- Edison International Parent and Other increased its loss to $17 million from $6 million, primarily because of higher development and operating costs at Edison Energy Group and the absence of prior-year income from affordable-housing investments sold in December 2015.
- Operating cash flow declined, while investing cash outflows improved because capital spending was lower than in Q1 2015. Consolidated cash decreased $24 million to $137 million during the quarter.
- SCE's regulatory assets increased to $8.166 billion from $8.072 billion at December 31, 2015; regulatory liabilities increased to $7.077 billion from $6.804 billion.
Guidance, outlook, risks and unusual items
- SCE expects approximately $4 billion of capital expenditures in 2016 and planned to file its 2018 GRC application in September 2016, covering forecast capital expenditures and rate base for 2018–2020.
- SCE's authorized rate of return and CPUC-related capital structure were extended unchanged through December 31, 2017; the next cost-of-capital applications are due April 20, 2017.
- The CPUC approved a reduction of SCE's Base Revenue Requirement Balancing Account by $234 million over 2016–2020, subject to tax audits. Customer benefits were expected to begin in Q2 2016, with no expected gain or loss to SCE.
- SCE requested FERC recovery of $37.1 million of prudently incurred costs for the cancelled Coolwater-Lugo transmission project. A proposed CPUC decision supported the West of Devers transmission project, with a final decision expected in Q2 2016.
- ORA and TURN requested recalculation of SCE's 2006–2008 energy-efficiency incentives and a potential $39.9 million customer refund. SCE disputes the claim and cannot predict the outcome.
- SCE is pursuing arbitration against Mitsubishi Heavy Industries related to defective San Onofre steam generators and seeks at least $4 billion in damages. Hearings concluded April 29, 2016; a decision could be issued by year-end 2016 or later. Recovery is uncertain and subject to allocation between customers and shareholders.
- SCE recorded a minimum environmental-remediation liability of $136 million, including $133 million for 19 material sites. Management estimated that reasonably possible costs could exceed recorded liabilities by up to $172 million in total.
- In April 2016, SCE settled a spent-nuclear-fuel lawsuit against the Department of Energy for $162 million, of which SCE's share was $124 million, subject to CPUC review and allocation.
- Other principal risks include regulatory cost recovery, commodity and natural-gas availability, wildfire liability and insurance limits, nuclear decommissioning, cybersecurity, environmental requirements, counterparty credit, interest rates, and access to capital markets. The filing specifically identified potential electric-reliability risks associated with restrictions at the Aliso Canyon gas-storage facility.
- Edison International was obligated to make a final $214 million payment under the EME Settlement Agreement on September 30, 2016.
Important facts for investors to verify
- Reconcile the decline in earnings with the timing of the 2015 GRC decision, rate changes, operating costs, and tax repair benefits.
- Confirm the status and ultimate regulatory treatment of SCE's $8.166 billion regulatory-asset balance, including San Onofre-related assets.
- Monitor CPUC proceedings concerning energy-efficiency incentives, West of Devers, tax audits, and the allocation of DOE spent-fuel recoveries.
- Track the MHI arbitration, potential recovery amounts, legal costs, and the customer/shareholder allocation provisions.
- Assess whether the 2016 capital program and future GRC outcomes support SCE's targeted returns and liquidity.
- Review wildfire insurance renewals, nuclear insurance exposure, environmental-remediation estimates, and potential uninsured losses.
- Confirm the impact of the Aliso Canyon gas-storage restrictions on power procurement, reliability, commodity costs, and collateral requirements.
- Verify debt maturities, preference-stock obligations, dividend restrictions, and available revolver capacity before relying on reported liquidity.