Business context and reporting period
Southern California Edison Company (SCE), a regulated electric utility serving Southern California, filed this combined Edison International/SCE Form 10-Q for the quarter and six months ended June 30, 2016. Unless noted, amounts below are SCE figures; financial amounts are in millions of dollars.
Key financial metrics
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 | Comparable 2015 period |
|---|---|---|---|
| Operating revenue | $2,768 | $5,204 | $2,901; $5,409 |
| Operating income | $429 | $902 | $536; $1,086 |
| Net income available for common stock | $315 | $601 | $384; $689 |
| Net cash from operating activities | Not stated for quarter | $1,514 | $1,689 for six months |
| Capital expenditures | Not stated for quarter | $1,822 | $2,187 for six months |
Operating margin was approximately 15.5% for the quarter and 17.3% for the six-month period, compared with approximately 18.5% and 20.1%, respectively, in 2015. Six-month operating cash flow less capital expenditures was approximately negative $308 million, versus negative $498 million in 2015.
At June 30, 2016, SCE had $20 million of cash, $2.75 billion of revolving credit capacity with approximately $2.15 billion available, and a debt-to-capitalization ratio of 0.44 against a facility covenant limit of 0.65. Short-term debt was $506 million; current and long-term debt totaled approximately $10.5 billion. SCE’s current assets were $2.47 billion and current liabilities $4.39 billion.
Material changes versus the prior period
- SCE’s common earnings declined $69 million for the quarter and $88 million for the six months. Drivers included the absence of the $100 million 2015 tax benefit from changes in uncertain tax positions, customer refunds of prior-period repair-deduction tax benefits, and higher year-to-date operating and depreciation costs. The 2016 GRC escalation and incremental pole-loading returns partly offset these effects.
- Revenue fell 5% for the quarter and 4% for the six months. Retail billed and unbilled revenue was $2.5 billion and $4.9 billion, respectively, versus $2.8 billion and $5.4 billion in 2015, mainly reflecting rate decreases; six-month sales volume was also lower, partly due to solar generation and energy efficiency. Under SCE’s decoupling mechanism, retail sales changes do not directly affect earnings.
- Six-month operating cash flow decreased $175 million. Capital spending also decreased, by $365 million. Cash flows included balancing-account timing effects and a $122 million federal receipt related to the Department of Energy’s spent-fuel obligations.
Outlook, risks and unusual items
- SCE forecast 2016–2017 capital expenditures of $7.9–$8.1 billion, with $8.058 billion in the detailed estimate, and rate base of approximately $24.9–$25.0 billion for 2016 and $26.4–$26.6 billion for 2017. Licensing delays deferred about $300 million of 2016 spending; roughly $100 million was expected to shift to 2017, with the remainder to be reflected in a later forecast. No earnings guidance was provided.
- Management expects to fund 2016 obligations, investment and dividends through operating cash flow, tax benefits and debt or preferred-equity financing as needed. A preliminary FERC transmission-rate update indicated a proposed $98 million, or 9%, increase for 2017; filing and regulatory approval remained pending.
- The CPUC reopened the record on the San Onofre settlement following a finding concerning undisclosed ex parte communications. SCE could not predict the outcome. In arbitration, SCE and co-owners sought at least $4 billion from Mitsubishi Heavy Industries; hearings concluded in April 2016, but recovery is uncertain.
- Other material proceedings include a proposed $39.9 million customer refund concerning historic energy-efficiency incentives and a CPUC investigation into 2015 Long Beach outages; SCE could not estimate any resulting penalty. The CPUC may impose penalties of $500–$50,000 per day per violation. A separate Shaver Lake matter seeks $25 million in civil penalties; SCE disputes the allegations.
- SCE recorded $134 million of environmental-remediation liabilities and said reasonably possible additional costs could reach $172 million. It expects recovery of a substantial portion through regulatory mechanisms. Wildfire liability and insurance availability, nuclear decommissioning, regulatory cost recovery, project delays, cybersecurity, and growth in distributed generation are identified risks.
- SCE received a $162 million DOE settlement for spent-fuel damages (SCE share $124 million); allocation among customers, shareholders and fuel-related costs is subject to CPUC review. Edison International, the parent, also disclosed a $13 million after-tax charge for buying out an acquisition earn-out and a $214 million final EME settlement payment due September 30, 2016.
Important facts for investors to verify
- Track the CPUC’s reconsideration of the San Onofre settlement, the MHI arbitration outcome and any resulting customer/shareholder allocation.
- Confirm the outcomes and potential financial exposure from the energy-efficiency incentive, Long Beach outage and Shaver Lake proceedings.
- Monitor actual capital spending, transmission-project licensing schedules and the 2018 GRC filing and rate-base assumptions.
- Review SCE’s liquidity, debt maturities, credit-facility availability and collateral requirements; a downgrade below investment grade could require additional collateral.
- Assess wildfire insurance coverage and environmental and nuclear decommissioning liabilities against future costs and regulatory recovery.