Business Context and Reporting Period
This combined unaudited Form 10-Q covers Edison International and its principal utility subsidiary, Southern California Edison Company (SCE), for the three and nine months ended September 30, 2014. 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 Position
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Edison International operating revenue | $4.356 billion | $3.960 billion | $10.298 billion | $9.638 billion |
| Operating income | $874 million | $789 million | $1.779 billion | $1.212 billion |
| Income from continuing operations | $524 million | $488 million | $1.130 billion | $690 million |
| Net income attributable to common shareholders | $480 million | $438 million | $1.192 billion | $614 million |
| Diluted EPS | $1.46 | $1.34 | $3.62 | $1.87 |
| Operating margin | Approximately 20.1% | Approximately 19.9% | Approximately 17.3% | Approximately 12.6% |
SCE reported Q3 net income of $531 million and net income available for common stock of $503 million, compared with $502 million and $477 million, respectively, in the prior-year quarter. For the nine months, SCE net income available for common stock was $1.072 billion versus $642 million.
- Edison International generated $2.027 billion of operating cash flow in the first nine months, compared with $2.070 billion in 2013. SCE operating cash flow increased to $2.513 billion from $2.163 billion.
- Capital expenditures were $2.856 billion for Edison International and $2.827 billion for SCE in the first nine months. SCE reported total capital expenditures including accruals of approximately $2.6 billion.
- September 30 cash balances were $142 million for Edison International and $49 million for SCE, compared with $146 million and $54 million, respectively, at December 31, 2013.
- Edison International debt, including short-term debt, current maturities and long-term debt, totaled approximately $12.2 billion; SCE debt totaled approximately $10.7 billion.
- SCE had a $2.75 billion revolving credit facility, while Edison International Parent had a $1.25 billion facility with $580 million available. SCE’s debt-to-total-capitalization ratio was 0.45 to 1, and Edison International Parent’s was 0.49 to 1.
- SCE’s common-equity component of total capitalization was 48.3%, limiting additional dividends to Edison International to approximately $78 million at September 30, 2014.
- SCE’s net ERRA fuel and purchased-power undercollection was $1.57 billion at September 30, 2014. Regulatory assets totaled $8.499 billion and regulatory liabilities totaled $7.181 billion.
Material Changes Versus the Prior Comparable Period
- Nine-month Edison International common earnings increased by $578 million, primarily because 2013 included a $575 million pre-tax San Onofre impairment and related charges, while 2014 included lower San Onofre charges and a $146 million after-tax benefit from discontinued operations related to the EME bankruptcy settlement.
- Core earnings, a non-GAAP measure, increased to $1.142 billion from $973 million for the nine months. SCE core earnings increased to $1.168 billion from $1.007 billion, principally from higher authorized revenue associated with rate-base growth, tax benefits, lower severance costs and FERC-related items.
- Revenue increased, but fuel and purchased-power expense increased substantially, reflecting warmer weather, higher electricity and natural-gas prices, and higher hedging losses. These costs are generally subject to regulatory recovery.
- Operating cash flow at SCE increased despite higher working-capital requirements and regulatory-account movements. Financing cash flow declined to $390 million from $1.196 billion, while short-term debt increased to $679 million from $175 million.
- SCE issued $269 million of preference stock, issued $400 million of first and refunding mortgage bonds, and used borrowings to support the ERRA undercollection, capital program and working capital.
- San Onofre-related operation and maintenance costs, revenue and depreciation declined following the permanent retirement of Units 2 and 3. The San Onofre asset retirement obligation declined to $2.960 billion from $3.418 billion after a revised decommissioning estimate.
Outlook, Guidance, Risks and Unusual Items
- SCE requested 2015 ERRA revenue requirements of $5.62 billion assuming CPUC approval of the San Onofre settlement, or $6.41 billion if approval is delayed or denied. SCE expected the ERRA undercollection to decline during 2015, subject to regulatory approvals and market conditions.
- SCE’s revised 2015 general rate case request was $5.775 billion, a $142 million increase over currently authorized base-rate revenue. CPUC parties recommended reductions of approximately $607 million and $412 million, respectively; the ultimate authorized amount and timing were uncertain.
- SCE projected 2014 capital expenditures of $3.6 billion to $4.1 billion and $15.4 billion to $17.4 billion for 2014–2017.
- The CPUC had not yet finally approved the September 2014 San Onofre OII Amended Settlement Agreement. The agreement contemplated approximately $677 million of ratepayer refunds, disallowance of certain steam-generator replacement costs, and recovery of remaining eligible San Onofre investment over generally ten years. The recorded San Onofre regulatory asset was approximately $1.39 billion.
- SCE estimated San Onofre decommissioning costs at $4.4 billion in 2014 dollars, including an SCE share of $3.3 billion; the present value of SCE’s share was approximately $3.0 billion. Decommissioning trust assets were $4.741 billion at fair value.
- SCE was pursuing insurance recoveries and arbitration claims against Mitsubishi Heavy Industries. It sought at least $4 billion in damages, while MHI asserted a $41 million counterclaim. No amounts from these claims had been recognized.
- The EME bankruptcy settlement was completed in April 2014. Edison International paid $225 million initially and recorded notes totaling $418 million, due in September 2015 and September 2016. Edison International expects to realize related tax benefits over a similar period, subject to tax-law changes.
- Other contingencies included IRS tax disputes, environmental remediation, nuclear and wildfire insurance exposure, spent-nuclear-fuel claims, regulatory proceedings and a proposed civil complaint concerning the Shaver Lake dam. California drought conditions increased wildfire, hydroelectric and transmission risks.
Important Facts for Investors to Verify
- Final CPUC action on the San Onofre settlement and the resulting treatment of refunds, regulatory assets and rate recovery.
- Actual timing and amount of recovery of the $1.57 billion ERRA undercollection and the outcome of SCE’s 2015 ERRA forecast.
- Final 2015 general rate case authorization compared with SCE’s $5.775 billion request and intervenor proposals.
- Potential recoveries, limitations and litigation costs related to NEIL insurance and Mitsubishi Heavy Industries claims.
- Actual San Onofre decommissioning costs, trust performance, spent-fuel disposition and CPUC authorization to use trust funds.
- Resolution of IRS examinations and uncertain tax positions, including proposed liabilities and the $189 million tax deposit.
- Funding needs associated with the capital program, ERRA undercollection, EME settlement payments and available credit facilities.
- Changes in wildfire exposure, insurance availability and regulatory treatment of uninsured losses.