Southern California Edison Company — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. SCE is an investor-owned electric utility serving Southern California and a wholly owned subsidiary of Edison International. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Operating revenue | 2,446 | 2,247 | 4,678 | 4,406 |
| Operating income | 443 | 404 | 884 | 784 |
| Net income | 226 | 314 | 462 | 491 |
| Net income available for common stock | 211 | 301 | 433 | 465 |
| Operating margin | 18.1% | 18.0% | 18.9% | 17.8% |
Revenue rose 8.9% in the quarter and 6.2% year to date; operating income increased 9.7% and 12.8%, respectively. Common earnings fell 29.9% in Q2 and 6.9% in the first half. Core earnings, a company-defined non-GAAP measure, were $211 million for Q2 (down from $248 million) and $433 million year to date (down from $451 million).
Higher authorized rates, FERC transmission revenue and capital-related revenue supported operating revenue. Higher operation and maintenance and depreciation costs partly offset these gains. Utility cost-recovery items, including fuel and purchased power, generally do not contribute to earnings under SCE’s regulatory framework.
Cash flow, debt and liquidity
- First-half operating cash flow was $1.385 billion, versus $1.095 billion a year earlier; investing cash outflow was $2.091 billion and financing cash inflow was $491 million. Cash declined $215 million to $42 million.
- At June 30, total debt was approximately $8.27 billion: $8.07 billion long-term and $200 million short-term. SCE issued $500 million of 3.875% bonds due 2021 and $125 million of 6.5% Series D preference stock during the first half.
- Cash and short-term investments were approximately $46 million. Credit facilities totaled $2.894 billion, with $2.623 billion available after borrowings and letters of credit. The debt-to-capitalization covenant limit is 0.65; SCE reported 0.47.
- Capital expenditures were $2.019 billion in the cash flow statement. Management separately reported $1.6 billion of capital investment, including accruals, for the first half; investors should reconcile the reported measures.
Material changes and outlook
- Q2 tax expense was $128 million, compared with $5 million in 2010; first-half expense was $251 million versus $134 million. The 2010 comparison included a $53 million tax-settlement benefit and a $40 million benefit from a change in tax accounting for asset-removal costs. The first half of 2010 also included a $39 million charge related to health-care legislation.
- Management projected 2011 capital investment of $3.9–$4.4 billion and 2011–2014 spending of $15.6–$17.5 billion, subject to approvals, permitting and other factors.
- SCE’s pending 2012 CPUC general rate case requested a $6.2 billion base revenue requirement. Intervenors proposed substantial reductions; a final decision was anticipated by year-end 2011. SCE said the ultimate authorized revenue requirement was uncertain.
- In August 2011, FERC accepted a transmission formula rate effective January 2012, subject to procedures, and set a 9.93% base return on equity versus SCE’s requested 11.5%. SCE expected to seek rehearing; the final rate structure and return remained uncertain.
- After the quarter, SCE and other defendants reached a Navajo Nation litigation settlement. The filing does not provide a clear settlement payment amount, but states the settlement would not affect SCE’s results of operations.
Risks, contingencies and unusual items
- Environmental remediation liabilities were $54 million for 24 material sites; reasonably possible costs could exceed recorded amounts by up to $192 million at those sites. SCE expects substantial recovery through customer rates, but estimates remain uncertain.
- Proposed once-through cooling requirements and California policy could entail significant San Onofre costs; SCE could not yet estimate potential entrainment-compliance costs. Nuclear safety reviews following Fukushima could also lead to future operating or capital requirements.
- New California law requires utilities to procure 33% of electricity from renewable resources; implementation details and cost effects remained uncertain. Renewable power purchase commitments include an estimated $1.9 billion for the period after 2015.
- Unrecognized tax benefits totaled $361 million. A disputed IRS adjustment, if sustained, could require approximately $91 million including interest through June 30, 2011.
- Nuclear insurance arrangements could expose SCE to a maximum of approximately $235 million per nuclear incident, generally capped at approximately $35 million in any one year. DOE delays in accepting spent nuclear fuel remain a continuing issue; an award of approximately $142 million for earlier costs was on appeal, and any recovery would benefit ratepayers.
- Commodity derivatives had a net liability fair value of $532 million, up from $207 million at year-end 2010. Regulatory mechanisms are expected to limit earnings effects, but cash flows may be affected. A downgrade below investment grade could trigger additional collateral requirements.
Important facts for investors to verify
- Progress and final outcomes in the CPUC rate case and FERC formula-rate proceedings, including authorized revenue and return on equity.
- Reconciliation of first-half capital investment and cash-flow capital expenditure figures, and delivery against the stated capital plan.
- Developments in environmental compliance costs, particularly once-through cooling at San Onofre, and treatment of remediation costs in rates.
- Final payment and implementation terms for the Navajo Nation settlement, and resolution of the disputed IRS adjustment.
- Liquidity and collateral needs under commodity contracts, alongside the movement in derivative liabilities and available credit capacity.