Business context and reporting period
This combined Form 10-Q covers Southern California Edison Company (SCE) and parent Edison International for the three and nine months ended September 30, 2014, compared with the same periods in 2013. Although the request metadata says 2014 Q1, the filing is for the third quarter and first nine months of 2014. SCE is a regulated electric utility serving approximately 50,000 square miles in Southern California.
Financial performance and position
Amounts are in millions of dollars unless stated otherwise.
| SCE metric | Three months ended September 30, 2014 | Three months ended September 30, 2013 | Nine months ended September 30, 2014 | Nine months ended September 30, 2013 |
|---|---|---|---|---|
| Operating revenue | 4,338 | 3,957 | 10,276 | 9,631 |
| Operating income | 881 | 804 | 1,815 | 1,246 |
| Net income | 531 | 502 | 1,156 | 717 |
| Net income available for common stock | 503 | 477 | 1,072 | 642 |
| Operating margin | 20.3% | 20.3% | 17.7% | 12.9% |
For the nine months, SCE reported operating cash flow of $2.513 billion, capital expenditures of $2.827 billion, and net cash used in investing activities of $2.908 billion. Cash was $49 million at September 30, 2014, versus $54 million at year-end 2013. SCE had $679 million of short-term debt, $500 million of current long-term debt, and $9.523 billion of long-term debt. Its debt-to-total-capitalization ratio was 0.45, below the 0.65 credit-facility limit. SCE had a $2.75 billion revolving credit facility; the filing does not state SCE’s remaining available amount.
SCE’s total assets were $49.103 billion and total liabilities were $36.028 billion at September 30, 2014. Its net regulatory balancing-account liability was $189 million, compared with $554 million at December 31, 2013; within this, the energy resource recovery account (ERRA) was undercollected by $1.57 billion.
At Edison International, nine-month net income attributable to common shareholders was $1.192 billion versus $614 million; diluted EPS was $3.62 versus $1.87. The improvement included discontinued-operations income associated with the EME restructuring and sale, so it should not be read as solely recurring utility performance.
Material changes versus the prior comparable period
- SCE’s nine-month net income rose $439 million. Management cited rate-base-related authorized revenue growth, higher tax benefits, and lower severance costs. The prior period included a $575 million San Onofre impairment charge; 2014 included a further $231 million San Onofre-related charge.
- Nine-month SCE revenue increased $645 million, while fuel and purchased-power expense rose $745 million, largely reflecting warmer-weather load and higher power and gas prices. These costs are generally subject to regulatory recovery mechanisms.
- SCE operating cash flow increased $350 million to $2.513 billion. Financing cash flow declined to $390 million from $1.196 billion, including lower net short-term borrowing and no preference-stock redemption comparable to 2013.
- SCE’s San Onofre regulatory asset was $1.386 billion and its related regulatory liability for customer refunds was $677 million at quarter-end. The liability and settlement accounting remain subject to CPUC action.
Outlook, commentary, risks and unusual items
- San Onofre: SCE permanently retired Units 2 and 3 in 2013. A September 2014 amended settlement with customer and other parties remained subject to CPUC approval. An October 9 proposed decision recommended approval, but the CPUC retained discretion to approve, reject, or modify it. The settlement contemplates disallowances, refunds, and recovery of eligible remaining investment and costs; SCE estimated a $677 million ratepayer refund if implemented as of September 30. The filing states the recorded settlement effects assume approval.
- The total estimated San Onofre settlement impact was $806 million pre-tax (approximately $461 million after tax), including the 2013 impairment and 2014 charge. SCE estimated its share of decommissioning costs at $3.3 billion in 2014 dollars and the present value at $3.0 billion. The estimates depend on uncertain assumptions, including spent-fuel removal timing.
- SCE is pursuing insurance claims and arbitration claims against steam-generator supplier Mitsubishi Heavy Industries (MHI), seeking at least $4 billion. MHI denies liability and asserts a $41 million counterclaim; the purchase contract includes a disputed $138 million liability limit. No insurance recovery had been recognized. Recovery, timing, and amounts are uncertain.
- ERRA and rates: SCE expected the $1.57 billion ERRA undercollection to decline in 2015, assuming settlement approval, decommissioning-trust reimbursement, and approval of its 2015 ERRA forecast. Its application sought 2015 annual revenue requirements of $5.62 billion if the settlement were approved in 2014, or $6.41 billion otherwise. Delays in rate recovery could pressure liquidity.
- Rate case: SCE’s revised 2015 general rate case request was $5.775 billion, $142 million above then-authorized base revenue, with additional requested increases for 2016 and 2017. Consumer advocates proposed substantial reductions. SCE said the final decision could be delayed beyond 2014 and could not predict the authorized amount.
- Capital program: SCE projected 2014 capital expenditures of $3.6–$4.1 billion and $15.4–$17.4 billion for 2014–2017. Actual spending may be affected by regulatory, permitting, construction, and cost factors.
- Other risks and items: California drought increases wildfire and hydroelectric-supply risks. SCE disclosed wildfire insurance limits and potential coverage constraints. Environmental remediation liabilities totaled $113 million, with reasonably possible costs above recorded liabilities. An October 2014 draft complaint sought civil sanctions over alleged Shaver Lake dam work violations, which SCE disputes. SCE reported effective disclosure controls and no material third-quarter change in internal control over financial reporting.
- EME: EME’s bankruptcy reorganization and sale of substantially all assets to NRG were completed in April 2014. Edison International assumed certain tax and pension liabilities of approximately $342 million and agreed to settlement payments, including $204 million due in 2015 and $214 million due in 2016. The 2014 discontinued-operations results included $168 million of income for the nine months.
Most important facts for investors to verify
- Whether and on what terms the CPUC ultimately approved the San Onofre settlement, including the assumed recovery, disallowance, and refund amounts.
- How the $1.57 billion ERRA undercollection is recovered, and whether the 2015 ERRA forecast and general rate case are approved as requested or modified.
- Whether SCE receives material recoveries from NEIL or MHI, after costs and under the settlement’s allocation provisions.
- Whether San Onofre decommissioning costs, trust performance, and federal spent-fuel timing assumptions change materially.
- SCE’s capital spending, borrowing, and liquidity needs as it funds investment and balances regulatory-account undercollections.
- Exposure to wildfire losses, insurance availability, regulatory penalties, and environmental or legal contingencies.
- The distinction between recurring SCE utility earnings and Edison International’s nonrecurring EME-related discontinued-operations results.