EDISON INTERNATIONAL quarterly report, Q2 FY2018

Edison International 10-Q Summary

Business context and reporting period

Edison International, the parent holding company of Southern California Edison Company (SCE), filed a combined unaudited Form 10-Q for the quarter and six months ended June 30, 2018. SCE supplies and delivers electricity across approximately 50,000 square miles of Southern California. Edison Energy Group’s competitive activities were not material as a separate segment.

Key financial metrics

Metric	Three months ended June 30	Six months ended June 30
Edison International operating revenue	$2.815 billion, versus $2.965 billion	$5.379 billion, versus $5.428 billion
Net income attributable to Edison International common shareholders	$276 million, versus $278 million	$494 million, versus $640 million
Diluted EPS	$0.84, versus $0.85	$1.51, versus $1.95
SCE operating revenue	$2.803 billion, versus $2.953 billion	$5.357 billion, versus $5.409 billion
SCE net income available for common stock	$297 million, versus $307 million	$583 million, versus $656 million
SCE operating income	$439 million, versus $508 million	$853 million, versus $1.006 billion

Edison International’s core earnings were $274 million for the second quarter and $536 million for the first six months, compared with $278 million and $639 million, respectively, in the prior-year periods. Core earnings are a non-GAAP measure.

SCE’s effective tax rate was negative 0.6% for the quarter and negative 1.3% year to date, compared with 14.4% and 8.8% in the respective 2017 periods, primarily reflecting Tax Reform and regulatory treatment of property-related temporary differences.
Edison International generated $1.217 billion of operating cash flow in the first six months, compared with $1.438 billion in 2017. SCE generated $1.312 billion, compared with $1.526 billion.
Edison International capital expenditures were $2.159 billion year to date, compared with $1.759 billion. SCE capital expenditures were $2.141 billion, compared with $1.722 billion.
Edison International reported $99 million of cash and cash equivalents at June 30, 2018, compared with $1.091 billion at December 31, 2017. SCE reported $25 million, compared with $515 million.
Edison International’s total debt, including current and long-term debt, was approximately $14.624 billion; SCE’s was approximately $12.886 billion. The reported long-term debt carrying values were $14.324 billion and $12.586 billion, respectively.
SCE had approximately $2.60 billion available under its $3.0 billion revolving credit facility. Edison International Parent had approximately $1.5 billion available under its $1.5 billion facility.
SCE’s debt-to-total-capitalization ratio was 0.46 to 1, below its 0.65 covenant limit. Edison International Parent’s ratio was 0.51 to 1, below its 0.70 covenant limit.

Material changes versus the prior comparable period

First-half Edison International earnings declined $146 million, driven by a $73 million decline in SCE earnings and a $73 million increase in Edison International Parent and Other losses.
SCE earnings decreased primarily because of higher wildfire insurance costs, increased line-clearing activity, higher property taxes and higher financing costs. These effects were partly offset by higher revenue and lower depreciation and amortization.
SCE operating revenue declined despite customer refunds and regulatory adjustments. San Onofre revenue ceased under the Revised San Onofre Settlement Agreement, and FERC revenue declined following the federal tax-rate reduction.
Edison International Parent and Other recorded an $89 million loss for the first six months, compared with a $16 million loss in 2017. The 2018 result included a $63 million pretax loss, or $46 million after tax, from the sale of SoCore Energy, completed in April 2018.
SCE increased debt financing, issuing $1.25 billion of first and refunding mortgage bonds in the first quarter and $650 million in June. Proceeds were used primarily to repay commercial paper and for general corporate purposes.
SCE’s first-half operating cash flow fell by $214 million, while capital expenditures increased by approximately $419 million.

Guidance, outlook, risks and unusual items

SCE projects approximately $4.2 billion of 2018 capital expenditures. Spending for 2019 and 2020 depends substantially on the outcome of the pending 2018 General Rate Case.
SCE requested 2018, 2019 and 2020 revenue requirements of $5.534 billion, $5.965 billion and $6.468 billion, respectively. A final CPUC decision was not expected until later in 2018. Until then, SCE was recognizing revenue based on the 2017 authorized requirement, adjusted for the 2017 cost-of-capital decision and Tax Reform.
SCE expected 2018 wildfire insurance expense, before regulatory deferrals, of approximately $237 million. Current wildfire-specific coverage was approximately $1.0 billion for June 1 through December 30, 2018 and approximately $940 million for December 31, 2018 through May 31, 2019, subject to a $10 million self-insured retention per occurrence and policy limitations.
Liabilities from the December 2017 Wildfires and Montecito Mudslides could be material, but the companies could not reasonably estimate a loss range. At July 23, 2018, SCE was aware of at least 87 Thomas Fire-related lawsuits representing approximately 2,000 plaintiffs; 30 also named Edison International. Fifty-one lawsuits alleged that the Thomas Fire caused the Montecito Mudslides.
Potential exposure includes inverse-condemnation or negligence claims, personal injury and wrongful-death claims, business interruption, fire suppression, evacuation and regulatory penalties. Insurance may not cover all damages, and uninsured amounts may not be recoverable through rates.
The CPUC approved the Revised San Onofre Settlement Agreement on July 26, 2018, subject to eliminating a proposed aggregate $12.5 million greenhouse-gas research funding provision. The agreement would end San Onofre cost recovery after specified regulatory assets reach $775 million and could require customer refunds for amounts recovered after the cessation date.
The CPUC approved transportation-electrification programs, including a five-year program with a nominal budget of approximately $407 million, of which $268 million was identified as capital. SCE also requested a four-year, $760 million Charge Ready 2 program, including $561 million of capital, but could not estimate the amount ultimately approved.
Both SCE and Edison International Parent retained investment-grade ratings, but ratings were under negative outlook at Moody’s and S&P and under negative watch at Fitch. A downgrade could increase borrowing and collateral costs and affect liquidity.
SCE had $108 million of collateral posted at June 30, 2018; potential additional requirements were $17 million for a below-investment-grade downgrade and $4 million for adverse market movements.
Environmental remediation liabilities totaled $142 million, including $137 million recorded as a regulatory asset. Reasonably possible costs could exceed recorded liabilities by up to $143 million based on the company’s disclosed ranges.

Most important facts for investors to verify

Final CPUC decisions on the 2018 General Rate Case, wildfire insurance recovery and regulatory treatment of wildfire and mudslide costs.
Progress, causation findings, claim amounts and insurance coverage developments related to the December 2017 Wildfires and Montecito Mudslides.
Final effectiveness and financial consequences of the Revised San Onofre Settlement Agreement, including customer refunds and the treatment of the remaining regulatory asset.
SCE’s ability to fund its approximately $4.2 billion 2018 capital program while maintaining liquidity, investment-grade ratings and dividend capacity.
Future wildfire insurance pricing, coverage limits, self-insured exposure and the potential effect of any credit-rating downgrade on collateral requirements.
The impact of Tax Reform, the pending FERC formula-rate update and future regulatory decisions on revenue, taxes and cash flow.