Edison International 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is a combined annual report for Edison International and its wholly owned utility subsidiary, Southern California Edison Company (SCE); it is not a standalone 2019 fourth-quarter filing, although quarterly data is included.
Business Context
Edison International is a California holding company whose principal business is SCE, an investor-owned electric utility serving approximately 5.2 million customers across about 50,000 square miles of Southern California. Edison Energy Group provides competitive energy services but remains immaterial as a separate segment. SCE's earnings are primarily regulated by the CPUC and FERC, with rate mechanisms generally decoupling earnings from retail electricity volumes.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Edison International operating revenue | $12.347 billion | $12.657 billion | Down $310 million |
| Operating income | $1.775 billion | $(552) million | Improved $2.327 billion |
| Net income attributable to common shareholders | $1.284 billion | $(423) million | Improved $1.707 billion |
| Diluted EPS | $3.77 | $(1.30) | Improved $5.07 |
| Operating margin | 14.4% | (4.4)% | Improved materially |
| Net margin attributable to common shareholders | 10.4% | (3.3)% | Improved materially |
| Net cash used in operating activities | $(307) million | $3.177 billion | Down $3.484 billion |
| Capital expenditures | $4.877 billion | $4.509 billion | Up $368 million |
| Long-term debt, including current portion | $18.343 billion | $14.711 billion | Up $3.632 billion |
SCE reported operating revenue of $12.306 billion, net income of $1.530 billion and net income available for common stock of $1.409 billion, compared with a 2018 net loss available for common stock of $310 million. SCE's operating margin was approximately 15.0% in 2019 versus negative 3.2% in 2018.
Management reported Edison International core earnings of $1.595 billion in 2019, compared with $1.351 billion in 2018. Core earnings are a non-GAAP measure and exclude significant discrete items, including wildfire charges, impairments, tax items and other unusual items.
Material Changes Versus the Prior Comparable Period
- The 2018 results included approximately $1.825 billion of after-tax wildfire-related charges. The comparable 2019 after-tax wildfire-related charge was $157 million, substantially improving reported earnings.
- 2019 included a $109 million after-tax expense associated with SCE's contributions to the Wildfire Insurance Fund and an $18 million after-tax Edison Energy goodwill impairment.
- The CPUC approved SCE's 2018 General Rate Case in May 2019. SCE recorded a $131 million increase to core earnings from applying the decision retroactively, a $265 million revenue reduction, a $554 million customer refund liability, and a $123 million after-tax impairment for disallowed historical capital expenditures.
- SCE's 2019 operating revenue declined primarily because of lower load from customer departures to community choice aggregators and cooler weather, partly offset by higher authorized CPUC and FERC revenue.
- SCE's purchased power and fuel expense declined $567 million, while operation and maintenance expense increased $234 million, largely due to wildfire mitigation and related activities.
- SCE's year-end rate base increased to $32.6 billion from $29.6 billion. Total capital expenditures rose to $4.8 billion from $4.4 billion.
- Edison International issued approximately $2.4 billion of common equity and contributed $3.25 billion to SCE. SCE issued approximately $2.3 billion of first and refunding mortgage bonds.
Cash Flow, Liquidity and Debt
- SCE generated negative operating cash flow of $91 million in 2019, primarily because of the $2.457 billion cash contribution to the Wildfire Insurance Fund, increased regulatory undercollections and wildfire-related spending.
- SCE provided $4.771 billion of financing cash flow and used $4.678 billion in investing cash flow. Its cash balance was $24 million at year-end.
- SCE had approximately $2.3 billion available under its $3.0 billion revolving credit facility, which matures in May 2024, subject to extension provisions. Edison International Parent had its full $1.5 billion facility available.
- SCE's debt-to-total-capitalization ratio was 0.47 to 1, below its 0.65 covenant limit. Edison International Parent's consolidated ratio was 0.55 to 1, below its 0.70 covenant limit.
- SCE's long-term issuer ratings were Moody's Baa2, Fitch BBB- and S&P BBB, all with stable outlooks. Edison International Parent's ratings were Moody's Baa3, Fitch BBB- and S&P BBB, also with stable outlooks.
- At December 31, 2019, total Edison International contractual obligations were estimated at $67.655 billion, including $36.021 billion of SCE power purchase agreement commitments and $30.958 billion of debt maturities and interest.
Guidance, Outlook and Management Commentary
- SCE forecast capital expenditures of approximately $19.4 billion to $21.2 billion for 2020 through 2023, including substantial wildfire mitigation spending. The 2020 capital expenditure forecast was approximately $5.0 billion.
- SCE's 2021 General Rate Case request, updated after year-end, sought a 2021 revenue requirement of $7.6 billion, approximately $1.1 billion above the updated 2020 authorized requirement. The request was subject to CPUC approval and excluded approximately $1.6 billion of wildfire mitigation capital expenditures required to be financed separately under AB 1054.
- Effective January 1, 2020, SCE's authorized capital structure changed to 52% common equity, 5% preferred equity and 43% long-term debt. The authorized common equity return remained 10.3%; the 2020 weighted average return on rate base was 7.68%.
- SCE expected to finance approximately $1.6 billion of wildfire mitigation capital expenditures through securitized bonds. Future capital spending and recovery remain dependent on regulatory approvals, permitting and reasonableness reviews.
- SCE expects major San Onofre decommissioning activities to begin in 2020, subject to litigation challenging the Coastal Development Permit. The current SCE share of the estimated San Onofre Units 2 and 3 decommissioning cost was $2.5 billion in 2017 dollars, with completion currently estimated in 2051.
Wildfire, Regulatory and Other Risks
- The accrued liability for unpaid claims related to the 2017/2018 Wildfire/Mudslide Events was $4.5 billion at December 31, 2019, representing the low end of management's reasonably estimated range. SCE had remaining expected insurance recoveries of $1.7 billion and expected FERC recoveries of $149 million. Management stated that actual losses could exceed the accrued amount but that an upper range could not reasonably be estimated.
- SCE paid $360 million in 2019 settlements to local public entities related to the 2017/2018 events. Multiple lawsuits remained pending, including claims involving inverse condemnation, negligence, personal injury, wrongful death and property damage.
- AB 1054 established the Wildfire Insurance Fund and a new wildfire prudency standard for fires ignited after July 12, 2019. The fund's effectiveness depends on funding, regulatory administration, SCE's safety certification and the potential participation of PG&E.
- SCE recorded $400 million of regulatory assets for incremental wildfire mitigation expenses and $341 million for incremental wildfire insurance expenses at year-end. Recovery remains subject to regulatory review and is not assured.
- SCE's 2019 wildfire insurance expense was approximately $400 million. Its available wildfire-specific coverage for the June 2019 to June 2020 period was approximately $1.2 billion before co-insurance and self-insured retention.
- Other significant risks include regulatory disallowance, customer departures to community choice aggregators, increased financing needs, wildfire insurance availability and cost, San Onofre decommissioning cost overruns, cybersecurity, extreme weather and potential changes in tax or environmental regulation.
Most Important Facts for Investors to Verify
- Whether the $4.5 billion wildfire liability and related insurance and FERC recoveries adequately reflect ultimate litigation and settlement exposure.
- Whether the CPUC permits recovery of wildfire mitigation, insurance, restoration and other regulatory assets currently recorded by SCE.
- The timing and terms of securitized financing for approximately $1.6 billion of wildfire mitigation capital expenditures.
- The outcome of the 2021 General Rate Case, the 2019 FERC Formula Rate proceeding and the CPUC protest concerning $419 million of Tehachapi Transmission Project costs.
- Whether the Wildfire Insurance Fund remains adequately funded and whether PG&E participates as contemplated under AB 1054.
- Changes in SCE's liquidity, debt maturities, credit ratings and ability to pay dividends to Edison International.
- Actual San Onofre decommissioning costs, spent-fuel disposal timing and the sufficiency of the $2.8 billion nuclear decommissioning trust balance.
- Execution and cost recovery for wildfire mitigation, grid modernization and the new customer service system planned for implementation in 2021.
Audit and controls: PricewaterhouseCoopers LLP issued unqualified opinions on Edison International's consolidated financial statements and internal control over financial reporting. Management concluded that Edison International's and SCE's disclosure controls were effective as of December 31, 2019; SCE was not required to obtain an auditor attestation on internal control effectiveness.