SOUTHERN CALIFORNIA EDISON Co quarterly report, Q3 FY2015

Business context and reporting period

Southern California Edison Company (SCE), a regulated electric utility serving southern California, filed this combined Form 10-Q with parent Edison International for the quarter and nine months ended September 30, 2015. Unless noted, financial figures below are SCE’s and are in U.S. dollars.

Key financial metrics

For the nine months, SCE’s non-GAAP core earnings were $1.079 billion, down $89 million from $1.168 billion. The filing reports SCE income tax expense of $207 million for the nine months, versus $310 million a year earlier; effective tax rates were 15.1% and 21.1%, respectively.

At September 30, SCE reported $38 million cash, $2.2 billion available under its $2.75 billion revolving credit facility, and a debt-to-capitalization ratio of 0.44 against a covenant limit of 0.65. Short-term debt, current maturities and long-term debt totaled approximately $11.0 billion, compared with approximately $10.6 billion at December 31, 2014. Capital expenditures were $3.121 billion for the nine months, versus $2.827 billion in 2014.

Material changes versus the prior comparable period

• Q3 common-stock income fell $114 million year over year, primarily reflecting lower CPUC-related revenue and income tax benefits; higher FERC revenue from rate-base growth partly offset the decline.
• Nine-month common-stock income increased $7 million, but core earnings declined $89 million. Lower CPUC revenue and other income, and lower tax benefits, were partly offset by increased FERC revenue and allowance for funds used during construction.
• SCE recognized estimated customer refunds of $233 million in Q3 and $318 million for the nine months, largely reflecting the proposed 2015 general rate case (GRC) decision.
• Purchased power and fuel costs declined $915 million for the nine months, primarily due to lower power and gas prices and the absence of a 2014 CAISO generation surcharge; lower costs were largely reflected in regulated cost-recovery revenue.
• Depreciation, decommissioning and amortization rose $201 million for the nine months, mainly due to amortization of the San Onofre regulatory asset and increased transmission and distribution depreciation.

Outlook, risks and unusual items

• GRC and rates: The CPUC’s September proposed decision sets a 2015 base revenue requirement of $5.159 billion, $474 million below 2014 authorized revenue excluding San Onofre and $353 million below SCE’s request. The final decision would apply retroactively to January 1, 2015; it was pending and could materially change revenue and customer refunds. SCE also disputes a proposed rate-base adjustment tied to tax repairs; a final adverse decision could reduce revenue and impair some or all of a $380 million regulatory asset.
• Capital plan: SCE forecast 2015–2017 capital spending of $11.6–$11.8 billion, including approximately $3.9 billion in 2015. Recovery of CPUC-jurisdictional investment depends on GRC or other approvals. The forecast excludes the suspended Coolwater-Lugo project. Distribution-resource-plan investment could increase future spending, subject to CPUC guidance and approvals.
• San Onofre: SCE held $3.0 billion in decommissioning trusts at September 30 and said further contributions should not be necessary if estimates and trust performance remain unchanged; trust withdrawals require CPUC approval. SCE received $319 million in August for 2013–2014 decommissioning costs and refunded it primarily through ERRA. In October, the San Onofre owners agreed to a $400 million NEIL insurance settlement, of which SCE’s share is approximately $313 million; under the settlement, net recoveries are allocated 95% to customers and 5% to SCE.
• Regulatory and litigation exposure: An October 26 proposed CPUC decision would impose a $16.74 million penalty over eight ex parte communications; it was not a final decision. Separate petitions seek to reopen or set aside the San Onofre settlement, and federal securities and shareholder derivative suits and government investigations are pending. ORA had sought $648 million in penalties. SCE also seeks at least $4 billion from Mitsubishi Heavy Industries in arbitration; the outcome and recoveries are uncertain.
• Other contingencies: SCE reported July service interruptions and vault fires in Long Beach under investigation, with potential CPUC penalties not estimable. A water board complaint regarding the Shaver Lake Dam project seeks $25 million in civil penalties. Recorded environmental remediation liabilities were $140 million, and SCE said reasonably possible costs could exceed recorded amounts by up to $171 million across identified material and immaterial sites.
• Funding and operations: SCE expects to fund 2015 obligations, capital expenditures and dividends through operating cash flow and, as needed, debt and preferred-equity financing. Potential collateral requirements totaled $361 million under the scenarios disclosed. Approximately 3,900 employees are covered by labor agreements executed in September 2015, expiring December 31, 2017.

Important facts for investors to verify

1. The final 2015 GRC decision, including the revenue requirement, refunds and tax-repair rate-base adjustment.
2. The outcomes and potential financial effects of the San Onofre ex parte proceedings, settlement challenges, investigations and related litigation.
3. Whether NEIL proceeds are received and allocated as described, and the progress and costs of SCE’s MHI arbitration.
4. Actual capital spending and regulatory recovery compared with the $11.6–$11.8 billion 2015–2017 plan.
5. Liquidity, debt and collateral needs, including any effects from market movements, credit-rating changes or regulatory undercollections.