SOUTHERN CALIFORNIA EDISON Co quarterly report, Q2 FY2010

Southern California Edison Company — Q2 2010 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2010. SCE is a rate-regulated electric utility and a wholly owned subsidiary of Edison International. Financial statements are unaudited.

Financial performance and position

Metric	Q2 2010	Q2 2009	Six months 2010	Six months 2009
Operating revenue	$2.247 billion	$2.273 billion	$4.406 billion	$4.462 billion
Operating income	$404 million	$423 million	$784 million	$862 million
Net income	$314 million	$534 million	$491 million	$766 million
Net income available for common stock	$301 million	$499 million	$465 million	$707 million
Core earnings, non-GAAP	$248 million	$199 million	$451 million	$407 million

Calculated operating margin was approximately 18.0% in Q2 2010 versus 18.6% a year earlier, and 17.8% for the first half versus 19.3%.
First-half operating cash flow was $1.095 billion, down from $2.054 billion. Capital expenditures were $1.757 billion, compared with $1.402 billion; cash and equivalents fell to $85 million from $462 million at year-end 2009.
At June 30, SCE reported $7.129 billion of long-term debt and $215 million of short-term debt. It had $2.668 billion available under credit facilities, plus $6 million of short-term investments. Its debt-to-total-capitalization ratio was 0.46, below the 0.65 covenant limit.
Total assets were $34.213 billion and total equity was $8.836 billion. Regulatory assets rose to $5.396 billion from $4.259 billion at year-end.

Changes versus the comparable period

GAAP common earnings declined $198 million in Q2 and $242 million for the first half. The comparison is heavily affected by discrete tax items: the 2009 periods included a $300 million benefit from the federal tax settlement, while 2010 included a $53 million state tax-settlement benefit and a $40 million tax-method benefit. First-half 2010 also included a $39 million noncash charge from health-care legislation.
Excluding identified non-core items, management-reported core earnings increased $49 million in Q2 and $44 million year to date. Management attributed the improvement mainly to authorized revenue supporting rate-base growth, lower tax expense, and, year to date, higher allowance for funds used during construction (AFUDC); higher operating costs partly offset the gains.
Retail billed and unbilled revenue, excluding wholesale sales and balancing-account over/undercollections, increased $57 million in Q2 and $201 million year to date. Higher rates were partly offset by lower sales volume, attributed to milder weather and economic conditions. SCE’s decoupling mechanism limits its volumetric revenue exposure.
Operating cash flow fell substantially, primarily because 2009 included an $875 million net tax-allocation receipt from Edison International related to the Global Settlement, alongside working-capital timing and lower pretax income.
Comparability is also affected by SCE’s January 2010 deconsolidation of four qualifying-facility projects under new variable-interest-entity accounting; management reported no gain or loss on deconsolidation.

Outlook, management commentary, and risks

SCE projected 2010 capital investment of $3.3–$4.0 billion and 2010–2014 spending of $18–$21.5 billion. First-half capital investments, including accruals, were approximately $1.5 billion. Management expected to fund obligations and investment with operating cash, debt and preferred-equity issuance, and available credit facilities.
SCE’s July 2010 notice of intent for its 2012 general rate case proposed a $6.3 billion base-rate revenue requirement, $903 million above projected 2011 base revenue, and additional proposed increases for 2013 and 2014. These are requests, not approved rates; a final decision was anticipated by year-end 2011.
The 2010 FERC rate proposal would raise SCE’s FERC revenue requirement by $107 million, or 24%, and was being litigated. Rates were effective subject to refund; a final decision was expected in the second half of 2011. CWIP collections and certain transmission incentives also remained subject to FERC proceedings and potential refund.
Significant operational and regulatory exposures include possible substantial San Onofre costs or operating effects from once-through-cooling requirements; nuclear-plant performance and regulatory issues; renewable procurement and transmission build-out; and environmental regulation. SCE cautioned that cost recovery from customers is not assured in all cases.
Environmental remediation liabilities were recorded at a $38 million minimum for 23 identified sites; reasonably possible costs could exceed the recorded amount by up to $223 million. SCE said it expects customer-rate recovery for most remediation costs.
The Navajo Nation litigation seeks at least $600 million in damages plus interest and at least $1 billion in punitive damages; SCE said it could not predict the outcome. Separately, a court awarded SCE approximately $142 million for DOE spent-fuel delays through 2005, subject to DOE appeal; any recovery is for ratepayer benefit.
Derivative and collateral exposure bears monitoring: SCE reported a $1.092 billion net derivative liability, largely subject to regulatory recovery or refund mechanisms. Posted collateral was $22 million; a downgrade below investment grade could require an additional $180 million, with further market-related exposure possible.

Most important facts for investors to verify

Whether earnings comparisons are assessed using GAAP results or management’s non-GAAP core earnings, and how the tax-related items affect each period.
Progress and final outcomes of the 2012 CPUC rate case, the 2010 FERC rate case, and refund exposure on interim rates and CWIP collections.
Capital-spending execution, financing needs, and whether operating cash flow can support the announced investment program.
San Onofre outage, compliance, cooling-retrofit, and steam-generator cost recovery developments.
Changes in environmental remediation estimates, Navajo litigation, DOE appeal, and derivative/collateral requirements.