Edison International Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016. The filing is jointly submitted by Edison International and its principal subsidiary, Southern California Edison Company (SCE). SCE supplies and delivers electricity across approximately 50,000 square miles of Southern California; Edison International’s competitive businesses were not material reportable segments.
Financial Performance and Key Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Edison International operating revenue | $3.767 billion | $3.763 billion | $8.985 billion | $9.183 billion |
| Edison International operating income | $695 million | $608 million | $1.525 billion | $1.670 billion |
| Net income attributable to common shareholders | $419 million | $421 million | $965 million | $1.099 billion |
| Diluted EPS | $1.27 | $1.28 | $2.94 | $3.34 |
| Operating margin | 18.4% | 16.2% | 17.0% | 18.2% |
SCE: Q3 operating revenue was $3.752 billion, operating income was $721 million, and net income available for common stock was $435 million, compared with $389 million in the prior-year quarter. For the nine months, revenue was $8.956 billion, operating income was $1.622 billion, and net income available for common stock was $1.037 billion, compared with $1.079 billion in 2015. SCE operating margins were approximately 19.2% for Q3 and 18.1% for the nine-month period.
- Edison International’s Q3 continuing-operations income attributable to common shareholders increased to $419 million from $378 million; the prior-year period included $43 million of discontinued-operations income.
- Nine-month continuing-operations income attributable to common shareholders declined to $966 million from $1.056 billion. The decline primarily reflects lower SCE earnings and increased losses at Edison International Parent and Other.
- SCE’s Q3 earnings benefited from implementation of the 2015 general rate case (GRC), the 2016 escalation mechanism, incremental pole-loading rate-base returns, lower operating and maintenance costs, and higher insurance benefits.
- SCE’s nine-month earnings declined despite higher authorized revenue because 2015 included a $100 million income-tax benefit from revisions to uncertain-tax-position liabilities. The 2016 period also included a $133 million customer refund related to 2012–2014 tax repair deductions.
- Edison International Parent and Other losses increased to $16 million in Q3 and $71 million for nine months, compared with $11 million and $23 million, respectively, in 2015. Edison Energy Group incurred higher operating and development costs, lower solar-system gross margin, and a $13 million after-tax earn-out buyout charge in Q2 2016.
Cash Flow, Liquidity, Debt and Capital Investment
- Edison International generated $2.500 billion of operating cash flow during the first nine months of 2016, down from $2.833 billion in 2015. Capital expenditures were $2.773 billion, producing $2.477 billion of investing cash outflow.
- SCE generated $2.836 billion of operating cash flow, used $2.443 billion in investing activities, and used $380 million in financing activities. SCE capital expenditures were $2.747 billion, compared with $3.121 billion in 2015.
- At September 30, 2016, SCE had $2.35 billion available under its $2.75 billion revolving credit facility. Edison International Parent had $732 million available under its $1.25 billion facility.
- SCE’s debt-to-total-capitalization ratio was 0.43 to 1, versus a credit-facility covenant maximum of 0.65 to 1. Edison International Parent’s ratio was 0.46 to 1.
- Edison International issued $400 million of 2.95% senior notes due 2023. SCE issued $300 million of 5.45% Series K preference stock and redeemed $125 million of Series D preference stock.
- SCE declared and paid a $170 million dividend to Edison International during Q3. Its 13-month weighted-average common-equity component was 50.4%, and approximately $567 million of additional dividends were available under the applicable capital-structure limitation.
- SCE posted $163 million of collateral; potential incremental requirements were $19 million for a below-investment-grade downgrade and $3 million for adverse market-price movements.
Outlook, Regulatory Matters and Unusual Items
- In September 2016, SCE filed its 2018 GRC application requesting a 2018 revenue requirement of $5.885 billion, or $222 million above projected 2017 authorized requirements, plus $48 million of one-time recoveries. Requested increases for 2019 and 2020 were $533 million and $570 million. Final CPUC authorization and timing remain uncertain.
- SCE forecasts up to $23.3 billion of capital expenditures for 2016–2020, including $21.0 billion of traditional capital expenditures and $2.3 billion for grid modernization. Recovery of certain grid-modernization spending depends on CPUC approval of a memorandum account or similar mechanism.
- SCE expects to fund obligations, capital spending and dividends through operating cash flow, tax benefits, debt and preference-stock financing, and available credit facilities. The filing does not provide formal consolidated earnings guidance.
- The CPUC reopened the record concerning the San Onofre settlement following its review of undisclosed ex parte communications. SCE cannot predict whether the settlement will be modified or vacated.
- SCE is pursuing arbitration against Mitsubishi Heavy Industries for San Onofre steam-generator losses and seeks at least $4 billion in damages; recovery is uncertain and the matter is confidential.
- The CPUC opened an investigation into 2015 Long Beach service interruptions. SCE believes penalties are probable, but no penalty amount has been proposed and the potential amount cannot currently be estimated.
- SCE received $122 million in 2016 from the Department of Energy relating to spent-nuclear-fuel litigation. The ultimate allocation among customers, shareholders, and decommissioning or storage costs remains subject to CPUC review.
- SCE recorded a minimum environmental-remediation liability of $134 million, including $130 million for 19 material sites. Management states that reasonably possible costs could exceed recorded liabilities by up to $166 million for material sites and $8 million for immaterial sites.
- SCE had approximately $1 billion of wildfire-liability insurance through May 31, 2017, with a $10 million self-insured retention per occurrence. Future coverage and costs remain uncertain.
- Net commodity derivative liabilities were approximately $1.2 billion at September 30, 2016. Regulatory mechanisms generally defer realized and unrealized commodity-related gains and losses from earnings.
Material Changes Versus the Prior Comparable Period
- Q3 Edison International net income attributable to common shareholders was essentially flat, while operating income increased by $87 million due mainly to improved SCE results and lower operating expenses.
- Nine-month Edison International earnings declined $134 million, primarily because 2015 included discontinued-operations income and significant tax benefits, while Edison Energy Group losses increased.
- SCE Q3 net income available for common stock rose $46 million, but nine-month earnings fell $42 million.
- SCE revenue declined $210 million for the first nine months, reflecting customer rate reductions, lower sales volume from cooler weather, and customer refunds, partly offset by GRC escalation and FERC-related revenue.
- SCE’s cash generation remained strong but declined $115 million year over year, while capital expenditures decreased $374 million.
- Edison International total assets increased to $51.557 billion from $50.229 billion at year-end 2015; total liabilities increased to $37.552 billion from $36.835 billion.
Investor Verification Items
- Track the CPUC’s final decisions on the 2018 GRC, grid-modernization cost recovery, San Onofre settlement review, Long Beach penalties, and energy-efficiency incentives.
- Assess the timing and recoverability of SCE’s $23.3 billion 2016–2020 capital program and the effect of project permitting or scope changes.
- Review Edison Energy Group’s operating losses, cash requirements, acquisition commitments and ability to achieve positive margins.
- Monitor San Onofre arbitration and DOE spent-fuel recoveries, including the portion ultimately retained by shareholders.
- Evaluate wildfire insurance adequacy, environmental remediation exposure, nuclear decommissioning obligations and potential regulatory disallowances.
- Reconcile reported GAAP earnings with management’s non-GAAP core earnings measure and separately evaluate discontinued operations and tax-related items.