Southern California Edison Company (SCE) — Q2 2014 Form 10-Q
Business context and reporting period
SCE is a regulated electric utility serving approximately 50,000 square miles in Southern California. This unaudited report covers the quarter and six months ended June 30, 2014, with comparisons to 2013. The combined filing also reports Edison International; figures below are SCE-specific unless identified otherwise.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $3.014 billion | $3.045 billion | $5.938 billion | $5.674 billion |
| Operating income (loss) | $593 million | ($55 million) | $935 million | $442 million |
| Net income (loss) | $392 million | ($67 million) | $626 million | $216 million |
| Net income available for common stock | $362 million | ($91 million) | $570 million | $165 million |
| Operating cash flow | Not separately stated | Not separately stated | $1.078 billion | $1.325 billion |
| Capital expenditures | Not separately stated | Not separately stated | $1.853 billion | $1.834 billion |
At June 30, 2014, SCE reported cash of $71 million, total assets of $48.305 billion, and total liabilities of $35.605 billion. Debt comprised $587 million short-term debt, $900 million current long-term debt, and $9.523 billion long-term debt. SCE had a $2.75 billion revolving credit facility; its debt-to-total-capitalization ratio was 0.46, versus a covenant maximum of 0.65. Its 13-month average common-equity ratio was 48.5%, near the 48% threshold for dividends to its parent.
Fuel and power procurement costs were undercollected by $1.62 billion at quarter-end. SCE’s reported net regulatory balancing-account position was a $48 million overcollection, compared with $554 million at December 31, 2013. These are distinct regulatory measures. Operating cash flow fell by $247 million year over year, largely reflecting balancing-account and public-purpose program cash-flow changes.
Material changes versus prior period
- Q2 common earnings swung to $362 million from a $91 million loss; six-month common earnings rose to $570 million from $165 million. SCE’s non-GAAP core earnings were $362 million in Q2 versus $274 million, and $666 million for six months versus $530 million.
- The 2013 comparison included a $575 million pre-tax San Onofre impairment charge. SCE recorded a further $231 million pre-tax San Onofre settlement-related charge in Q1 2014; six-month GAAP income includes this item.
- Six-month revenue increased despite slightly lower Q2 revenue. Management cited higher authorized revenues for rate-base growth, while retail billed and unbilled revenue excluding wholesale sales and balancing accounts was unchanged at $5.2 billion for the six-month periods.
- Purchased power expense rose, reflecting warmer-weather load and higher power and gas prices. Six-month operation and maintenance expense declined, including lower San Onofre-related costs and workforce severance.
Outlook, commentary, risks and unusual items
- San Onofre: SCE permanently retired Units 2 and 3 in 2013. A settlement with customer advocates and other parties remained subject to CPUC approval. SCE recorded a $1.371 billion San Onofre regulatory asset and a $483 million regulatory liability for customer refunds; estimates and recovery remain subject to regulatory decisions.
- Rate and cost recovery: SCE’s 2014 ERRA rate increase took effect June 1, 2014. Its 2015 ERRA filing requested a $5.62 billion annual revenue requirement if the San Onofre settlement is approved in 2014, or $6.41 billion if it is not approved or is delayed. SCE’s 2015 general rate case request was revised to $5.860 billion; the outcome and timing were uncertain.
- Capital program: SCE projected 2014 capital expenditures of $3.6–$4.1 billion and $15.1–$17.2 billion for 2014–2017. Actual spending depends on regulatory approvals, permitting, costs and project execution.
- San Onofre exposure: SCE seeks at least $4 billion in arbitration from steam-generator supplier Mitsubishi Heavy Industries; the supplier denies liability and has counterclaimed $41 million. Insurance claims were unrecognized pending insurer response. CPUC settlement approval, third-party recoveries and potential customer refunds are uncertain.
- Other risks: California drought may increase wildfire risk, damage infrastructure, constrain hydroelectric generation and affect reliability. The filing also identifies regulatory, environmental, operational, commodity-price, counterparty, insurance and nuclear decommissioning risks. SCE estimated its share of San Onofre decommissioning costs at $3.3 billion in 2014 dollars.
- Management attributed higher core earnings partly to rate-base growth and tax and other income benefits. Q2 included $29 million of tax benefits from revisions to uncertain tax-position liabilities, $11 million from a FERC formula-rate estimate change, and $9 million related to FERC energy settlements.
Important facts for investors to verify
- Whether the CPUC approved, modified or rejected the San Onofre settlement, and how that affected regulatory assets, customer refunds and future recovery.
- Progress in recovering the $1.62 billion ERRA undercollection and the final CPUC decisions on the 2015 ERRA forecast and general rate case.
- Actual capital spending, operating cash flow, borrowing needs and compliance with SCE’s dividend-related capital structure requirement.
- Developments in the MHI arbitration, NEIL insurance claims, NRC inquiries and San Onofre decommissioning estimates.
- Potential wildfire losses relative to available insurance and the financial effects of drought-related reliability or generation constraints.
The filing states that interim results are not necessarily indicative of full-year results. The document was refiled to correct an inadvertent EDGAR filing-code omission.