Southern California Edison Company — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2009; comparisons are with the corresponding 2008 periods. Dollar amounts are in millions unless stated otherwise.
Business context and financial performance
SCE is a regulated electric utility, with consolidated variable-interest-entity (VIE) power projects. Much of its fuel, purchased-power and derivative activity is subject to regulatory recovery or refund, so changes in these items can affect reported revenue and cash timing without proportionately affecting earnings.
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Operating revenue | $2,273 | $2,850 | $4,462 | $5,231 |
| Operating income | $423 | $331 | $862 | $675 |
| Operating margin, approximate | 18.6% | 11.6% | 19.3% | 12.9% |
| Net income | $534 | $221 | $766 | $399 |
| Net income available for common stock | $499 | $157 | $707 | $307 |
- Revenue fell 20% in Q2 and 15% year to date. Lower fuel and purchased-power costs, balancing-account collections and reduced resale sales were important factors; retail billed and unbilled revenue increased modestly.
- Operating income rose despite lower revenue, chiefly reflecting reduced fuel and purchased-power expense and higher authorized rates. These costs and revenues are substantially influenced by regulatory mechanisms.
- Net income included a $300 million after-tax benefit from the IRS Global Settlement, primarily related to tax timing differences and interest refunds. The settlement resolved federal tax disputes and claims through 2002; it did not permanently reduce federal income-tax liability.
Cash flow, debt and liquidity
- Six-month operating cash flow was $2,054, up from $789 in 2008. The increase principally reflected an $875 million net tax-allocation payment from Edison International following the settlement, deferred-tax changes, balancing-account cash flows and working-capital timing.
- Capital expenditures were $1,402, versus $1,241. Investing cash outflow was $1,517. Operating cash flow less capital expenditures was approximately $652, compared with approximately negative $452 in 2008.
- Financing cash outflow was $1,694, including $1,893 of net short-term debt repayments. Cash and equivalents declined to $454 from $1,611 at year-end 2008.
- At June 30, long-term debt was $6,489, with $250 due within one year; short-term debt was zero. SCE reported $2,806 available under credit facilities and total available liquidity of approximately $3.26 billion, including cash and short-term investments.
- Debt issuance included $750 of mortgage bonds. SCE reported a 49.6% 13-month weighted-average common-equity share of capitalization, above the CPUC’s 48% threshold, and a 0.46 debt-to-total-capitalization ratio against a 0.65 covenant limit.
Changes, outlook and significant developments
- The CPUC’s 2009 general rate case authorized a $4.83 billion base revenue requirement for 2009, with approximate base requirements of $5.04 billion for 2010 and $5.25 billion for 2011.
- SCE’s proposed FERC transmission-rate settlement would increase the revenue requirement by $136 million to $448 million, subject to FERC approval. SCE had collected $21 million subject to refund; it said the refund would not affect earnings. A further rate filing proposed a $107 million increase effective October 1, 2009.
- No formal earnings guidance is provided in the supplied filing text. SCE’s 2009–2013 capital investment plan was $16.8–$20.4 billion. First-half capital spending was about 22% below forecast, mainly due to timing delays. Management expected 2009 obligations to be met through cash, operating cash flow, financing and credit facilities, while noting capital-market access was not assured.
- Major planned investments include transmission and distribution upgrades, the Tehachapi and Devers-Palo Verde 2 transmission projects, San Onofre steam-generator replacement, smart meters and an approved utility-owned solar program. The solar program permits up to 250 MW; SCE estimated $790 million of spending over 2009–2013.
- SCE said it was unlikely to meet California’s 20% renewable procurement target by 2010, though it may use flexible compliance provisions. Potential penalties under current rules are up to $25 million per year.
- Environmental remediation liabilities were $39 million for 24 identified sites; reasonably possible costs could exceed the recorded amount by up to $178 million. SCE expects regulatory recovery of much of the cost, but estimates remain subject to uncertainty.
- Other material uncertainties include the Navajo Nation litigation, which seeks at least $600 million in damages plus trebling and punitive damages; disputed regulatory charges potentially estimated at $20–$25 million; nuclear-incident insurance assessments; emission-credit availability for generation projects; and evolving environmental and climate regulation.
- After quarter-end, SCE transferred Mountainview assets and liabilities to the utility and recognized a one-time, noncash accounting gain of approximately $46 million in July 2009. Management said the change had no customer economic or cash-flow impact.
Most important facts for investors to verify
- How much of reported earnings and operating cash flow reflects the one-time Global Settlement, and whether the estimated $640 million total cash benefit is realized; state-tax matters and final IRS interest calculations could change estimates.
- FERC and CPUC decisions on pending transmission rates, cost recovery and planned capital investment, including any required customer refunds.
- Funding and regulatory recovery for the $16.8–$20.4 billion capital plan, given first-half spending delays and uncertain capital-market access.
- Whether environmental, litigation, nuclear, emissions-credit and renewable-compliance exposures change materially from the estimates disclosed.
- That SCE’s internal-control evaluation excluded four consolidated VIEs; assess the significance of that limitation alongside the company’s stated effective disclosure controls.