Southern California Edison Company (SCE) — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The combined filing also reports Edison International, SCE’s parent; figures below distinguish the two where relevant. SCE is a regulated electric utility serving Southern California.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| SCE operating revenue | $2.953 billion | $2.768 billion | $5.409 billion | $5.204 billion |
| SCE operating income | $517 million | $429 million | $1.024 billion | $902 million |
| SCE net income available to common | $307 million | $318 million | $656 million | $612 million |
| SCE operating margin | 17.5% | 15.5% | 18.9% | 17.3% |
| SCE operating cash flow | — | — | $1.521 billion | $1.516 billion |
SCE’s Q2 common earnings declined $11 million year over year, primarily due to a revenue reduction reflecting expected refunds of prior customer overcollections. First-half earnings rose $44 million, mainly from the 2015 General Rate Case escalation mechanism and lower operating and maintenance expense, partly offset by that refund and higher financing costs. Operating margin is calculated as operating income divided by operating revenue.
For Edison International consolidated, Q2 net income attributable to common shareholders was $278 million versus $280 million a year earlier; first-half net income was $640 million versus $561 million. First-half diluted EPS was $1.95 versus $1.70.
Liquidity, debt and investment
- At June 30, SCE had $2.48 billion available under its $2.75 billion revolving credit facility; its debt-to-total-capitalization ratio was 0.43, below the 0.65 covenant limit.
- SCE reported $219 million of short-term debt, $179 million of current long-term debt and $10.845 billion of long-term debt. Long-term debt including current maturities was $11.024 billion carrying value.
- First-half SCE capital expenditures were $1.712 billion. SCE forecast $3.780 billion of 2017 capital spending and $18.554 billion for 2017–2020, including $1.795 billion of grid-modernization spending for 2018–2020. The 2017 forecast excludes a separate grid-modernization amount because 2017 spending is included in traditional distribution capital expenditures.
- Operating cash flow nearly matched the prior-year first half, while investing used $1.622 billion and financing provided $101 million. The filing says SCE expects to fund the next 12 months’ obligations, capital spending and dividends with operating cash flow, tax benefits and capital-market financing as needed.
Material developments, outlook and risks
- Regulatory outlook: SCE revised its requested 2018 revenue requirement to $5.859 billion, a $196 million increase over the projected 2017 authorized requirement, and proposed further increases of $480 million in 2019 and $556 million in 2020. Regulators and intervenors proposed reductions to SCE’s request. SCE sought a decision by year-end 2017 but could not predict the approved amount or timing.
- Grid modernization: CPUC approval of a memorandum account to facilitate rate recovery had not been granted. SCE noted that it could not predict the outcome of its grid-modernization spending request.
- San Onofre: SCE carried a $772 million regulatory asset for expected settlement recoveries and continued to judge recovery probable, but not certain. Parties were mediating potential changes to the settlement; the joint report was due August 15, 2017. SCE also recorded a $47 million regulatory liability for its net MHI arbitration recovery and said it would not appeal the award.
- Cost of capital: A July 2017 CPUC decision set SCE’s authorized ROE at 10.30% effective January 1, 2018, reset authorized debt and preferred-stock costs, and extended the next cost-of-capital application deadline to April 2019.
- Parent competitive business: Edison International was reviewing Edison Energy Group, including potential sale opportunities for SoCore Energy. It recorded a $16.5 million goodwill impairment ($10 million after tax) in Q2. The filing said a sale within one year was not probable as of June 30.
- Other exposure: SCE’s commodity derivatives were a net liability of $999 million. Wildfire coverage was approximately $1 billion through May 31, 2018, with a $10 million self-insured retention per occurrence; policy limits and multiple events could leave additional exposure. Environmental cleanup costs could exceed recorded liabilities by up to $150 million at identified material sites and $8 million at immaterial sites.
No full-year earnings guidance is stated in the supplied filing text. Key risks include regulatory cost recovery and rate decisions, San Onofre proceedings, wildfire liability and insurance availability, construction and permitting delays, commodity and counterparty exposure, and access to capital markets.
Important facts for investors to verify
- Whether the CPUC maintained or modified the San Onofre settlement and the recoverability of the $772 million regulatory asset.
- The final 2018–2020 GRC revenue requirement, treatment of grid-modernization investment, and timing of the CPUC decision.
- Actual capital spending, project schedules and costs, especially for major transmission and substation projects.
- Wildfire claims, insurance renewals and coverage limits, alongside SCE’s debt, liquidity and collateral needs.
- Developments in Edison International’s strategic review and any eventual SoCore Energy sale or further impairment.