EDISON INTERNATIONAL quarterly report, Q3 FY2018

Edison International 2018 Q3 Form 10-Q Summary

Business context and reporting period

This combined Form 10-Q covers Edison International and its wholly owned utility subsidiary, Southern California Edison Company (SCE), for the three and nine months ended September 30, 2018. SCE supplies and delivers electricity across approximately 50,000 square miles of Southern California. Edison Energy Group conducts competitive energy-services activities, which were not material as a separate segment.

Financial performance and key metrics

Metric	Three months ended September 30	Change	Nine months ended September 30	Change
Edison International operating revenue	$4.269 billion vs. $3.672 billion	+$597 million	$9.648 billion vs. $9.100 billion	+$548 million
Operating income	$739 million vs. $553 million	+$186 million	$1.489 billion vs. $1.494 billion	-$5 million
Net income attributable to common shareholders	$513 million vs. $470 million	+$43 million	$1.007 billion vs. $1.110 billion	-$103 million
Diluted EPS	$1.57 vs. $1.43	+$0.14	$3.08 vs. $3.38	-$0.30
SCE net income available for common stock	$536 million vs. $465 million	+$71 million	$1.119 billion vs. $1.121 billion	-$2 million

Edison International operating margin was approximately 17.3% in the quarter versus 15.1% in the prior-year quarter, but approximately 15.4% for the first nine months versus 16.4% in the prior-year period. SCE operating margin was approximately 17.7% in the quarter versus 15.6% and approximately 16.7% year to date versus 17.4%.

• SCE’s quarterly earnings improvement primarily reflected lower operation and maintenance expense from regulatory deferrals for line-clearing and wildfire-insurance costs, Tax Reform benefits, and a $17 million reimbursement for spent nuclear fuel storage costs.
• Year-to-date SCE earnings were broadly stable because higher wildfire-insurance expense and financing costs offset revenue benefits and lower depreciation and amortization.
• Edison International Parent and Other recorded losses of $23 million in the quarter and $112 million year to date, compared with income of $5 million and $11 million, respectively, in the comparable periods. The deterioration reflected the sale of SoCore Energy, Tax Reform effects, and the absence of certain 2017 tax benefits.
• SCE’s effective tax rate was 13.2% for the quarter and 6.1% year to date, compared with negative 7.6% and 2.7% in the corresponding 2017 periods.

Cash flow, liquidity, debt and capital investment

• Edison International generated $2.271 billion of operating cash flow in the first nine months, down from $2.698 billion. Capital expenditures were $3.241 billion, producing $3.013 billion of investing cash outflow and a $1.053 billion net decrease in cash, cash equivalents and restricted cash.
• SCE generated $2.258 billion of operating cash flow, down from $2.801 billion, and used $3.074 billion in investing activities, including $3.223 billion of capital expenditures. SCE ended the period with $39 million of cash and cash equivalents.
• At September 30, 2018, Edison International had $14.708 billion of long-term debt including the current portion; SCE had $12.969 billion. Edison International’s consolidated debt-to-capitalization ratio was 0.51 to 1; SCE’s was 0.46 to 1, within applicable covenants.
• SCE increased its revolving credit facility to $3.0 billion and had approximately $2.63 billion available. Edison International Parent increased its facility to $1.5 billion and had approximately $1.5 billion available.
• Moody’s and Fitch downgraded both SCE and Edison International Parent during the quarter because of wildfire exposure. SCE was rated A3 by Moody’s, BBB+ by Fitch and BBB+ by S&P; S&P’s outlook was negative. Edison International Parent was rated Baa1, BBB+ and BBB+, respectively, with a negative S&P outlook.
• SCE projects approximately $4.2 billion of 2018 capital expenditures. Total capital expenditures for 2018–2020 were forecast at $13.693 billion, including $1.257 billion for grid modernization in 2019–2020.

Material changes versus the prior comparable period

• Third-quarter earnings increased despite higher purchased power and fuel costs, which rose by $523 million at SCE, principally because of higher power and gas prices and volumes.
• Nine-month earnings declined at the consolidated level, primarily because Parent and Other losses increased by $101 million. SCE’s operation and maintenance expense increased by $51 million year to date, principally from wildfire-insurance premiums.
• SCE’s debt increased while short-term debt declined, reflecting substantial mortgage-bond issuance and repayment of commercial paper and other borrowings.
• San Onofre revenue ceased under the Revised San Onofre Settlement Agreement. SCE wrote down the remaining San Onofre regulatory asset and ceased recovery of San Onofre costs in rates after the combined utility regulatory asset balance reached $775 million.
• SCE recorded a $63 million regulatory asset for wildfire-insurance costs as of September 30, 2018, subject to CPUC recovery approval.
• Edison International sold SoCore Energy in April 2018 and recognized a $62 million pretax loss, or $50 million after tax, for the nine-month period.

Guidance, outlook, risks and unusual items

• The 2018–2020 SCE general rate case remained pending. SCE requested revenue requirements of $5.534 billion for 2018, $5.965 billion for 2019 and $6.468 billion for 2020. A decision was expected by year-end 2018, but the final authorized amounts and timing were uncertain.
• SCE expects wildfire-insurance expense, before regulatory deferrals, of approximately $237 million for 2018. Coverage was approximately $1 billion for relevant wildfire events, subject to a $10 million self-insured retention per occurrence and policy limitations.
• Edison International and SCE expect a material loss from the December 2017 Wildfires but could not reasonably estimate a loss range. At October 26, 2018, at least 102 lawsuits involving approximately 2,000 plaintiffs named SCE in connection with the Thomas Fire; 38 also named Edison International.
• Montecito Mudslide litigation remained unresolved. Fifty-five of the Thomas Fire lawsuits alleged that the fire caused or contributed to the mudslides, and 21 of those also named Edison International. Potential liabilities were expected to be material, but no loss range could be estimated.
• California Senate Bill 901 established wildfire risk-mitigation planning and factors for CPUC consideration in future cost-recovery decisions, but did not eliminate inverse-condemnation exposure or provide assurance of recovery for uninsured losses.
• San Onofre spent-fuel transfer operations were suspended after an August 2018 canister-loading incident. No public or worker harm was reported, but the restart date was uncertain. SCE estimated total San Onofre decommissioning costs at $3.4 billion, including $2.6 billion for SCE, and held $2.7 billion in related trust funds at September 30, 2018.
• SCE had posted or potentially required collateral of up to $331 million, including $52 million of incremental collateral that could be required if its credit rating fell below investment grade.

Most important facts for investors to verify

• Progress and ultimate exposure in the December 2017 Wildfires and Montecito Mudslides litigation, including insurance limits and potential CPUC rate recovery.
• The final 2018 GRC decision and its effect on revenue requirements, regulatory assets, dividends and 2019–2020 capital spending.
• Credit-rating actions, refinancing access, collateral requirements and the effect of wildfire liabilities on SCE’s capital structure.
• Actual 2018 wildfire-insurance costs and whether the $63 million regulatory asset is approved for recovery.
• San Onofre decommissioning progress, spent-fuel transfer timing, trust-fund sufficiency and any additional settlement or regulatory charges.
• Reconciliation of GAAP earnings to management’s non-GAAP core earnings, particularly the impact of SoCore Energy’s sale and other non-core items.