EDISON INTERNATIONAL quarterly report, Q1 FY2014

Business Context and Reporting Period

Edison International filed a combined Form 10-Q with Southern California Edison Company (SCE) for the three months ended March 31, 2014. Edison International is the parent holding company; SCE is a regulated electric utility serving approximately 50,000 square miles in Southern California. The filing is unaudited and interim results are not necessarily indicative of full-year performance.

Key Financial Metrics

Metric	Q1 2014	Q1 2013	Change
Edison International operating revenue	$2.926 billion	$2.632 billion	+$294 million
Operating income	$331 million	$492 million	-$161 million
Operating margin	11.3%	18.7%	Down 7.4 percentage points
Income from continuing operations	$224 million	$286 million	-$62 million
Net income attributable to Edison International common shareholders	$176 million	$271 million	-$95 million
Basic EPS	$0.54	$0.83	-$0.29
Core earnings, non-GAAP	$294 million	$252 million	+$42 million
Dividends declared per common share	$0.355	$0.3375	Increased

Reported earnings were reduced by a $231 million pretax San Onofre settlement-related charge, or approximately $96 million after tax, and a $22 million loss from discontinued operations. Excluding these and other non-core items, management reported higher core earnings.

Cash Flow, Balance Sheet and Liquidity

Edison International operating cash flow was $498 million, compared with $506 million in Q1 2013. Capital expenditures were $940 million, producing negative free cash flow before financing and trust-investment activity.
Net cash used in investing activities was $975 million, principally reflecting $940 million of capital expenditures and net purchases of nuclear decommissioning trust investments.
Financing activities provided $480 million, including $401 million of net short-term debt financing and $270 million of preference stock issuance.
Cash and cash equivalents were $149 million at March 31, 2014, compared with $146 million at December 31, 2013.
Total Edison International assets were $47.388 billion and total liabilities were $35.386 billion. Long-term debt, including the current portion, had a carrying value of approximately $10.426 billion; short-term debt was $611 million.
SCE generated $521 million of operating cash flow and invested $939 million in capital expenditures. SCE ended the quarter with $46 million of cash and $405 million of short-term debt.
SCE maintained a $2.75 billion revolving credit facility; Edison International Parent maintained a $1.25 billion facility. Debt-to-total-capitalization ratios were 0.46 at SCE and 0.48 for Edison International Parent, within the 0.65 covenant limit.
SCE had $1.48 billion of ERRA fuel and purchased-power undercollections at March 31, 2014, compared with approximately $1.0 billion at year-end 2013.

Material Changes Versus the Prior Comparable Period

Revenue increased primarily from higher authorized CPUC and FERC revenue associated with rate-base growth, partly offset by the sale of SCE’s Four Corners interest and lower San Onofre-related revenue.
Purchased power expense increased by $291 million to $1.071 billion, primarily due to higher power and gas prices and higher realized hedging losses. This was the principal driver of higher cost-recovery expenses.
Operation and maintenance expense declined by $72 million at Edison International and $72 million at SCE, reflecting workforce reductions and lower San Onofre-related costs.
Operating income and reported net income declined because the 2014 results included the San Onofre charge, while 2013 did not.
SCE’s effective tax rate fell to negative 5.4% from 28.4%, principally due to lower pretax income and tax benefits associated with the San Onofre settlement.
SCE’s core earnings increased to $304 million from $256 million, driven by higher authorized revenue, lower operating and maintenance costs, and tax benefits, partially offset by reduced San Onofre earnings.
Capital expenditures declined to $939 million at SCE from $979 million, although the company continues to pursue a substantial multiyear capital program.

Guidance, Outlook, Commentary and Risks

San Onofre Settlement

SCE entered into a settlement agreement with several parties to resolve CPUC proceedings concerning the San Onofre steam-generator replacement project, outages and permanent retirement of Units 2 and 3. CPUC approval remained pending and could be delayed, modified or denied. The settlement-related impact recorded through the first quarter was estimated at $806 million pretax, or approximately $461 million after tax, including the current-quarter charge.

At March 31, 2014, the San Onofre regulatory asset was $1.37 billion and the related regulatory liability for customer refunds was approximately $371 million.
The proposed settlement contemplated recovery of remaining eligible San Onofre investment generally over ten years, but without a return on common equity for the amortizable investment.
SCE estimated approximately $680 million of San Onofre-related market power costs through retirement and was seeking recovery through the ERRA mechanism.
SCE was pursuing potential recoveries from Nuclear Electric Insurance Limited and Mitsubishi Heavy Industries. No recovery amounts were recognized because timing and ultimate outcomes remained uncertain. SCE’s arbitration demand against MHI sought at least $4 billion, while MHI asserted counterclaims of $41 million.

Capital Program and Rate Proceedings

SCE projected 2014 capital expenditures of $3.6 billion to $4.1 billion and 2014–2017 capital expenditures of $15.1 billion to $17.2 billion.
SCE revised its 2015 general rate case request to $5.860 billion, a proposed $227 million increase over currently authorized base-rate revenue. Proposed post-test-year increases were $321 million for 2016 and $330 million for 2017. The CPUC had not issued a final decision.
Management expected a final decision in the 2014 ERRA forecast proceeding during the second quarter of 2014 and anticipated implementing the decision before the end of that quarter. Delays in recovering the ERRA undercollection could adversely affect liquidity.

EME Bankruptcy and Other Contingencies

EME’s bankruptcy plan was approved in March 2014 and substantially completed on April 1, 2014. The transaction was treated as a subsequent event in the first-quarter financial statements.
Edison International paid $225 million in cash on April 1, 2014 and expected additional payments currently estimated at approximately $199 million and $210 million in 2015 and 2016, including interest. It also assumed certain tax and pension liabilities of approximately $350 million.
Tax disputes with the IRS could require payments of approximately $208 million, $101 million and $75 million for specified proposed adjustments if the company’s positions are not sustained.
SCE recorded an environmental remediation liability of $116 million and disclosed that potential costs could exceed recorded liabilities by up to $168 million across identified material and immaterial sites.
Other risks include wildfire liability, nuclear decommissioning, spent nuclear fuel disposal, environmental regulation, commodity prices, counterparty credit, access to capital markets, regulatory disallowances and ongoing NRC investigations related to San Onofre.

Most Important Facts for Investors to Verify

Whether the CPUC approved, modified or rejected the San Onofre settlement and the resulting treatment of the $1.37 billion regulatory asset and $371 million refund liability.
The timing and amount of ERRA rate increases and whether SCE’s $1.48 billion undercollection declines as projected.
Actual 2014 capital spending relative to the $3.6 billion–$4.1 billion forecast and the effect on debt and liquidity.
Recoveries, if any, from MHI, NEIL or other third parties related to San Onofre.
The final amount and realization period of EME tax attributes, including the remaining settlement payments and assumed liabilities.
Developments in IRS tax disputes, NRC investigations, wildfire claims, environmental proceedings and other regulatory contingencies.
Whether core earnings remain higher after excluding the one-time San Onofre charge and discontinued-operation effects.