Southern California Edison Company (SCE) — Q1 2012 Form 10-Q
Business and period. SCE is a regulated electric utility serving approximately 50,000 square miles in Southern California and a wholly owned subsidiary of Edison International. This unaudited report covers the three months ended March 31, 2012; comparisons are with Q1 2011 unless stated otherwise.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Operating revenue | $2.412 billion | $2.232 billion |
| Operating income | $397 million | $443 million |
| Net income | $201 million | $236 million |
| Net income available for common stock | $182 million | $222 million |
| Operating margin | 16.5% | 19.8% |
| Operating cash flow | $775 million | $672 million |
| Capital expenditures in cash flow statement | $1.189 billion | $1.022 billion |
| Cash and cash equivalents | $63 million | $57 million at Dec. 31, 2011 |
| Short-term and long-term debt | $9.157 billion | $8.850 billion at Dec. 31, 2011 |
| Credit facility availability | $2.403 billion | At March 31, 2012 |
Revenue rose 8.1%, while operating income fell 10.4% and common earnings fell 18.0%. Operating expenses increased to $2.015 billion from $1.789 billion, including higher purchased power, O&M and depreciation. Purchased power expense rose to $615 million from $508 million. The effective tax rate was 33.0%, versus 34.3%.
Cash provided by financing was $500 million; investing used $1.269 billion, leaving a $6 million net increase in cash. Management separately reported capital expenditures, including accruals, of $839 million for the quarter, versus $765 million in Q1 2011; this measure differs from cash capital expenditures in the cash flow statement. The current ratio was approximately 0.87 at March 31, 2012. SCE’s debt-to-total-capitalization ratio was 0.48, below its 0.65 covenant limit.
Material changes and management commentary
- Earnings: Management attributed the $40 million decline in core earnings primarily to the delayed 2012 CPUC General Rate Case (GRC) decision: higher depreciation and net interest costs were not yet reflected in authorized revenue. The eventual GRC revenue requirement was to be effective retroactively from January 1, 2012. Management also cited lower allowance for funds used during construction. Core earnings equaled GAAP common earnings in both periods.
- San Onofre: Both units remained offline for inspections and repairs after steam-generator tube wear and a Unit 3 tube leak. The NRC required permission before restart and continued an augmented inspection. Replacement power costs were about $30 million through March 31 and could be higher in summer if outages continued. SCE’s estimated share of incremental inspection and repair costs was $55–$65 million, but remained uncertain. Steam-generator project costs were $592 million through quarter-end and subject to CPUC review.
- Regulatory proceedings: SCE requested $6.3 billion in 2012 base revenue in its GRC; a decision was expected in Q2 2012. In April, SCE filed a 2013 cost-of-capital application proposing lower authorized financing costs and an estimated $128 million revenue-requirement reduction; it sought a decision by year-end.
- Capital plans: SCE projected 2012 capital expenditures of $4.4–$5.0 billion and $11.8–$13.2 billion for 2012–2014, subject to regulatory, permitting, timing and cost factors.
Liquidity, debt and unusual items
SCE issued $400 million of 4.05% first and refunding mortgage bonds due 2042 and $350 million of 6.25% Series E preference stock in Q1. Proceeds were intended to repay commercial paper and fund the capital program. Commercial paper outstanding was $330 million at a weighted-average 0.40% rate. Credit facilities totaled $2.796 billion, with $2.403 billion available after commercial paper and letters of credit. SCE expected to replace facilities maturing in 2013.
The fair value of commodity derivatives was a net liability of $1.273 billion at March 31, compared with $936 million at year-end, primarily reflecting unrealized losses associated with lower power and gas prices. SCE said regulatory recovery mechanisms mean these derivative gains and losses are not expected to affect earnings, although they may affect cash flows. A downgrade below investment grade could require additional collateral; management reported $140 million of potential incremental collateral for power procurement contracts.
Risks, contingencies and outlook
- The San Gabriel Valley windstorm investigation could result in penalties or significant equipment review costs; SCE could not estimate a loss. In the Malibu pole investigation, the regulator’s staff proposed approximately $50 million in penalties allocated to SCE; SCE disputed the allegations and considered the amount excessive.
- Environmental remediation liabilities totaled $46 million, largely expected to be recovered through regulatory mechanisms. SCE said reasonably possible costs could exceed recorded amounts by up to $219 million in total; cleanup is expected to extend over as long as 30 years.
- A proposed federal tax adjustment relating to repair deductions could result in an approximately $94 million payment, including interest through March 31, 2012; SCE contested it.
- SCE sought approximately $98 million from the DOE for spent-fuel storage costs incurred from 2006 through 2010. Recovery and allocation of any damages remain subject to review.
- Other exposures include wildfire liability and insurance limits, nuclear incident assessments, Four Corners environmental litigation, and regulatory recovery or disallowance risk. SCE identified recovery of costs, regulatory decisions, plant availability, commodity prices, counterparties, financing access, environmental requirements and natural disasters as material risks.
No full-year earnings guidance is stated in the provided filing text. Management’s capital-spending outlook is subject to the uncertainties noted above.
Most important facts for investors to verify
- Timing and outcome of the 2012 GRC, including retroactive revenue recovery and any effect on earnings and cash flows.
- San Onofre inspection findings, NRC requirements, restart timing, replacement-power costs and final repair-cost allocation.
- Progress on the 2013 cost-of-capital application and the proposed $128 million revenue-requirement reduction.
- Execution of the $4.4–$5.0 billion 2012 capital plan, financing needs and refinancing of credit facilities due in 2013.
- Developments in utility investigations and litigation, tax disputes, environmental remediation and DOE spent-fuel claims.
- Changes in derivative fair values, collateral requirements and the continued availability of regulatory cost recovery.