Business context and reporting period
Southern California Edison Company (SCE), an investor-owned regulated electric utility serving Southern California, filed this unaudited Form 10-Q for the three months ended March 31, 2014. Comparisons are with the first quarter of 2013. The combined filing also reports Edison International; figures below are for SCE unless identified otherwise.
Financial performance and condition
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Operating revenue | $2.924 billion | $2.629 billion |
| Operating income | $342 million | $498 million |
| Net income | $234 million | $283 million |
| Net income available for common stock | $208 million | $256 million |
| Operating cash flow | $521 million | $561 million |
| Cash capital expenditures | $939 million | $979 million |
- Operating margin was approximately 11.7%, down from 18.9%; net margin was approximately 8.0%, down from 10.8%.
- Management-reported core earnings, a non-GAAP measure, were $304 million, up $48 million. This excludes the $96 million after-tax San Onofre settlement charge; it is not the GAAP result.
- At March 31, SCE had $46 million of cash. Debt comprised $405 million short-term, $600 million current long-term, and $9.423 billion long-term. Its $2.75 billion revolving credit facility supported $105 million of commercial paper; $141 million of letters of credit were also outstanding under the facility.
- SCE’s debt-to-total-capitalization ratio was 0.46, below the credit-facility limit of 0.65. Its 13-month weighted-average common-equity ratio was 48.9%, above the 48% dividend threshold; estimated additional dividend capacity to Edison International was approximately $192 million.
Material changes versus the prior period
- Revenue increased $295 million, while operating income fell $156 million. Higher authorized revenue associated with rate-base growth was more than offset by a $231 million San Onofre impairment and other charge, lower San Onofre-related revenue, and higher fuel and purchased-power costs.
- Fuel and purchased-power expense rose $290 million, primarily from higher power and gas prices and realized hedge losses, partly offset by the sale of Four Corners.
- Operation and maintenance expense declined $72 million, reflecting lower San Onofre costs, workforce reductions, and the Four Corners sale. The effective tax rate shifted to a 5.4% benefit from 28.4% expense, principally due to lower pre-tax income and San Onofre-related tax benefits.
- Operating cash flow decreased $40 million, mainly because of greater fuel and power undercollections and increased spending or lower funding for certain programs. The ERRA undercollection grew to approximately $1.48 billion from $1.00 billion at year-end.
Outlook, management commentary, and key risks
- San Onofre: SCE permanently retired Units 2 and 3 in June 2013. A March 2014 settlement with regulatory and consumer parties would disallow recovery of specified steam-generator project costs, provide for refunds and allow recovery of other costs. CPUC approval was pending and could be conditioned, rejected, or delayed. SCE recorded a $231 million pre-tax ($96 million after-tax) charge in Q1; the estimated cumulative settlement impact was $806 million pre-tax ($461 million after-tax). At quarter-end, the San Onofre regulatory asset was $1.37 billion and the related refund liability was $371 million.
- The settlement contemplated recovery of eligible remaining investment generally over ten years and recovery of San Onofre-related market power costs through ERRA. SCE estimated those market power costs at about $680 million through retirement. The CPUC’s proposed 2014 ERRA decision included a $1.12 billion rate increase but deferred collection of $467 million of San Onofre-related costs pending the separate proceeding; a final decision was expected in Q2 2014. Delayed rate recovery could pressure liquidity.
- Third-party recoveries are uncertain. SCE sought at least $4 billion from Mitsubishi Heavy Industries in arbitration; the contract’s stated liability limit was $138 million, which SCE disputes. SCE had also submitted approximately $409 million of estimated claims under San Onofre outage insurance through 2013, with no recovery recognized.
- Investment and rates: SCE forecast 2014 capital expenditures of $3.6–$4.1 billion and $15.1–$17.2 billion for 2014–2017. Its revised 2015 general rate case request was $5.86 billion, $227 million above then-authorized base revenue, with additional requests for 2016 and 2017; the ultimate authorized amounts and timing were uncertain.
- Other contingencies: A proposed $24.5 million settlement of windstorm and San Bernardino matters required CPUC approval. SCE recorded $116 million of environmental remediation liabilities and said reasonably possible costs could exceed recorded amounts by up to $168 million. Wildfire exposure, nuclear insurance assessments, regulatory cost disallowances, and ongoing NRC inquiries related to San Onofre were also risks.
- Management identified regulatory cost recovery and timing, commodity prices, access to capital, operational and construction risks, environmental requirements, wildfire exposure, and counterparty credit as factors that could affect results. No full-year earnings guidance is stated in the supplied filing text.
Most important facts for investors to verify
- Whether and on what terms the CPUC approved the San Onofre settlement, and the resulting final disallowances, refunds, and recoverable regulatory asset.
- Timing and amount of ERRA rate increases and recovery of the $1.48 billion undercollection, including the deferred San Onofre costs and liquidity effects.
- Progress and outcomes of SCE’s MHI arbitration and insurance claims; no proceeds were assured or recognized.
- Actual capital spending and the final authorized revenue requirement in the 2015 general rate case.
- How reported GAAP results compare with management’s non-GAAP core earnings, particularly given the unusual San Onofre charge and tax effects.