EDISON INTERNATIONAL quarterly report, Q2 FY2014

Edison International 2014 Second-Quarter Form 10-Q Summary

Business context and reporting period

Edison International is the parent holding company of Southern California Edison Company (SCE), an investor-owned electric utility serving approximately 50,000 square miles in Southern California. This combined Form 10-Q covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods. Competitive businesses were not material as a separate reportable segment.

Financial performance and key metrics

Metric	Three months ended June 30, 2014	Three months ended June 30, 2013	Six months ended June 30, 2014	Six months ended June 30, 2013
Edison operating revenue	$3,016 million	$3,046 million	$5,943 million	$5,678 million
Edison operating income	$575 million	$(71) million	$906 million	$422 million
Edison income from continuing operations	$382 million	$(82) million	$606 million	$203 million
Net income attributable to Edison common shareholders	$536 million	$(94) million	$712 million	$176 million
Diluted EPS	$1.63	$(0.29)	$2.17	$0.54
Net cash from operating activities	Not separately provided for the quarter	Not separately provided for the quarter	$603 million	$1,261 million

SCE reported six-month operating revenue of $5,938 million, operating income of $935 million, net income of $626 million and net income available for common stock of $570 million, compared with $5,674 million, $442 million, $216 million and $165 million, respectively, in the 2013 period.

For the six months, Edison’s operating margin was approximately 15.2% versus 7.4% in 2013. The improvement primarily reflects the absence of the $575 million 2013 San Onofre impairment charge and lower operation and maintenance expense, partly offset by higher purchased power expense and the $231 million 2014 San Onofre-related charge.

At June 30, 2014, Edison had cash and cash equivalents of $190 million, total assets of $48.864 billion and total liabilities of $36.461 billion. Short-term debt was $1.253 billion, current maturities of long-term debt were $900 million and long-term debt was $9.926 billion. SCE had cash of $71 million, short-term debt of $587 million, current maturities of long-term debt of $900 million and long-term debt of $9.523 billion.

Edison’s six-month capital expenditures were $1.856 billion, including $1.853 billion at SCE. SCE expects 2014 capital expenditures of approximately $3.6 billion to $4.1 billion and 2014–2017 capital expenditures of approximately $15.1 billion to $17.2 billion.

Material changes versus the prior comparable period

Second-quarter net income attributable to Edison common shareholders increased to $536 million from a $94 million loss. Six-month earnings increased to $712 million from $176 million.
SCE core earnings increased by $88 million in the second quarter and $136 million for the six months. Management attributed the improvement primarily to rate-base growth, lower operation and maintenance expense, tax benefits and other income.
Purchased power expense increased by $92 million for the quarter and $384 million for the six months at Edison, driven by warmer weather, higher power and natural gas prices and higher load.
Operation and maintenance expense decreased by $179 million for the quarter and $240 million for the six months, primarily due to lower San Onofre-related costs, lower severance expense and the 2013 sale of Four Corners.
Cash from operations declined to $603 million from $1.261 billion at Edison and to $1.078 billion from $1.325 billion at SCE, primarily because of larger fuel and power procurement undercollections and changes in regulatory and working-capital accounts.
Regulatory assets increased to $8.610 billion at SCE from $7.779 billion at December 31, 2013. Regulatory liabilities increased to $7.060 billion from $5.762 billion.
SCE issued $400 million of 1.125% first and refunding mortgage bonds due in 2017 and issued $269 million of preference stock. Edison International’s and SCE’s commercial paper balances increased materially from year-end.

Guidance, outlook and management commentary

SCE projects 2014 capital expenditures of $3.6 billion to $4.1 billion. Actual spending remains subject to regulatory, permitting, engineering, labor, equipment and other risks.
SCE filed its 2015 ERRA forecast requesting annual revenue requirements of $5.62 billion if the San Onofre settlement is approved in 2014, or $6.41 billion if approval is delayed or denied.
SCE’s fuel and power procurement undercollection was approximately $1.62 billion at June 30, 2014. Delays in rate increases or recovery could adversely affect liquidity.
SCE’s revised 2015 general rate case request was $5.860 billion, or $227 million above currently authorized base-rate revenue. The ultimate revenue requirement and timing of the CPUC decision remain uncertain.
SCE had a $2.75 billion revolving credit facility and Edison International Parent had a $1.25 billion facility. In July 2014, both facilities were extended to July 2019.
At June 30, 2014, SCE’s debt-to-total-capitalization ratio was 0.46 to 1, below its 0.65 covenant limit; Edison International Parent’s ratio was 0.49 to 1.

San Onofre, EME and other unusual items

SCE permanently retired San Onofre Units 2 and 3 in 2013. In March 2014, SCE entered into a proposed CPUC settlement concerning cost recovery, refunds and rate treatment. CPUC approval remained pending and could be conditioned, delayed or denied.
SCE recorded a $231 million pre-tax San Onofre charge, or approximately $96 million after tax, in the first quarter of 2014. Including the 2013 charge, the estimated total settlement impact was $806 million pre-tax, or approximately $461 million after tax.
At June 30, 2014, SCE reported a San Onofre regulatory asset of approximately $1.371 billion and a San Onofre regulatory liability of approximately $483 million. The estimated potential customer refund under the proposed settlement was approximately $483 million.
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 $2.9 billion, while the related asset retirement obligation was approximately $2.2 billion.
SCE is pursuing insurance recoveries and arbitration claims against Mitsubishi Heavy Industries. The MHI arbitration seeks at least $4 billion, while MHI has asserted $41 million of counterclaims. No material recovery had been recognized.
EME’s bankruptcy plan was completed on April 1, 2014 following the sale of substantially all EME assets to NRG Energy. Edison International recorded $184 million of discontinued-operations income in the second quarter.
Edison International paid $225 million to the EME Reorganization Trust in April 2014 and expects two additional payments of approximately $199 million and $210 million, including interest, in 2015 and 2016 based on the initial tax-attribute estimate.
Edison International deposited $189 million with the IRS related to disputed 2003–2006 tax years. Potential federal tax payments described in the filing include approximately $210 million and $102 million for two disputed matters, plus approximately $75 million related to 2007–2009 tax years.

Risks and contingencies

CPUC, FERC and NRC decisions could affect San Onofre cost recovery, customer refunds, regulatory assets, rate base and future earnings.
California’s severe drought increases wildfire risk, potential transmission constraints, hydroelectric generation variability, restoration costs, penalties and insurance exposure.
SCE’s wildfire coverage included up to $547.5 million, subject to a $10 million self-insured retention per occurrence, plus additional coverage that applies above specified claim thresholds. Losses could exceed insurance limits.
SCE had $167 million of collateral posted and estimated $53 million of incremental collateral requirements if its credit rating fell below investment grade.
Environmental remediation liabilities totaled $115 million, including $111 million for 19 material sites. The filing states that reasonably possible costs could exceed recorded liabilities by up to $156 million for material sites and $7 million for immaterial sites.
SCE remains exposed to nuclear insurance assessments, spent nuclear fuel obligations, environmental matters related to Four Corners, regulatory penalties and other legal and tax proceedings.
SCE’s net derivative liability was approximately $885 million at June 30, 2014, compared with $821 million at December 31, 2013. Regulatory mechanisms generally defer the earnings impact of commodity-related derivative changes, but cash flows and collateral requirements may fluctuate.

Most important facts for investors to verify

Whether the CPUC approved, modified or rejected the San Onofre OII Settlement Agreement and the resulting treatment of refunds and regulatory assets.
Actual recovery, if any, from NEIL insurance and Mitsubishi Heavy Industries, including arbitration developments and allocation between customers and shareholders.
Progress in reducing the $1.62 billion ERRA undercollection and the outcome of the 2015 ERRA forecast and general rate case proceedings.
Actual 2014 capital expenditures, financing needs, credit-facility availability and compliance with debt covenants.
Final EME tax-attribute calculations and the 2015 and 2016 settlement payments.
Changes in wildfire insurance availability, drought conditions, regulatory exposure and potential uninsured losses.
Whether reported earnings are being evaluated on a GAAP basis or management’s non-GAAP core earnings measure, particularly given the significant San Onofre and EME items.