Business context and reporting period
Southern California Edison Company (SCE), a rate-regulated electric utility and wholly owned subsidiary of Edison International, filed this unaudited Form 10-Q for the three months ended March 31, 2010. Unless otherwise stated, amounts are in millions of dollars.
Financial performance and position
- Revenue and earnings: Operating revenue was $2,159, down 1.4% from $2,189. Operating income was $380 versus $441; net income was $177 versus $233; and net income available for common stock was $164 versus $208.
- Margins: Operating margin was approximately 17.6% versus 20.1%, and net margin approximately 8.2% versus 10.6%, calculated from reported revenue and income. Management’s non-GAAP core earnings were $203 versus $208; the $39 noncash health-care-law tax charge accounts for the difference between 2010 core earnings and GAAP earnings available to common stock.
- Cash flow: Operating cash flow was $313, compared with $406. Investing activities used $922, including $867 of cash capital expenditures. Financing activities provided $305. Cash and equivalents fell to $66 from $462 at year-end.
- Debt and liquidity: Long-term debt was $6,984, versus $6,490 at year-end; short-term debt was $180, versus none. SCE issued $500 of 5.5% mortgage bonds due 2040. Credit facilities totaled $2,894, with $2,632 available after borrowings and letters of credit. SCE reported a debt-to-capitalization ratio of 0.46, below its 0.65 covenant limit.
- Balance sheet: Total assets were $32,975 and total liabilities $24,443. Regulatory assets were $4,978, up from $4,259 at year-end. Pension and benefit liabilities were $1,702.
Material changes versus the prior comparable period
- Common-stock earnings declined $44. Core earnings decreased $5, primarily due to higher operating costs, largely offset by rate-base growth and higher allowance for funds used during construction (AFUDC).
- Operating revenue was nearly flat overall. Retail billed and unbilled revenue increased $145, reflecting a $182 rate increase partly offset by a $37 decline from lower sales volume amid the economic downturn.
- Operating and maintenance expense increased $55. Drivers included higher transmission and distribution spending, generation work, and the comparison with reduced spending in early 2009 before the CPUC rate-case decision.
- Fuel and purchased-power costs together fell $50. Purchased power alone rose $68, including higher qualifying-facility and ISO-related costs and replacement power for the San Onofre Unit 2 outage; lower fuel costs partly offset the increase.
- Effective January 1, 2010, new variable-interest-entity accounting led SCE to deconsolidate four projects (“Big 4”). The change removed $349 of noncontrolling interests from the balance sheet and affected comparability with 2009; it produced no gain or loss.
Outlook, management commentary, risks and contingencies
- Capital program: SCE forecast 2010 capital investments of $3.3 billion to $4.0 billion and cumulative 2010–2014 spending of $18 billion to $21.5 billion. First-quarter capital investments, including accruals, were $640. Projects include transmission and distribution upgrades, renewable-energy transmission, solar installations, San Onofre steam-generator replacement, and smart meters.
- Regulatory matters: Proposed 2010 FERC transmission rates, effective March 1 subject to refund, would raise the revenue requirement by $107 (24%) over 2009 and increase SCE’s overall system average rate by about 1%. Litigation is underway; a final decision was expected in the second half of 2011. An expected $27 energy-efficiency incentive payment remained uncertain, with a decision anticipated in the second half of 2010.
- Operations and environmental policy: San Onofre Unit 2 returned to service April 11, 2010 after an extended outage and additional work. A May 4, 2010 state policy on once-through cooling may require substantial changes at San Onofre and affect other coastal generation, potentially raising costs and affecting reliability. SCE also considered California’s proposed 33% renewable-energy requirement by 2020 ambitious given infrastructure and permitting needs.
- Contingencies: The Navajo Nation litigation seeks at least $600 in damages plus interest and at least $1 billion in punitive damages; SCE said it could not predict the outcome, and no trial date had been set. Environmental remediation liabilities were $38 for 23 identified sites; reasonably possible additional costs could be as much as $171, with recovery expected for much of the cost through regulatory mechanisms. Nuclear incident and insurance arrangements could expose SCE to substantial assessments.
- Other risks: Commodity derivatives had a net liability of $827 at March 31; gains and losses are generally deferred or recovered through rates, but can affect cash flows. SCE reported $97 of collateral posted and $154 of potential incremental collateral if its credit rating fell below investment grade. The filing also highlights regulatory recovery, financing, environmental, nuclear, counterparty, commodity-price, tax and project-execution risks.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. The filing provides no full-year earnings guidance.
Important facts for investors to verify
- Track the final FERC rate-case outcome, refund exposure and timing of any approved rate changes.
- Confirm actual capital spending and financing needs against the $3.3–$4.0 billion 2010 investment forecast.
- Assess San Onofre operating performance, replacement-power costs and the impact of once-through-cooling requirements.
- Monitor the Navajo Nation litigation and environmental-remediation estimates, including potential amounts beyond recorded liabilities.
- Reconcile cash and liquidity trends, debt issuance and potential collateral needs; distinguish recurring core earnings from the $39 noncash tax charge.
- Consider the comparability effects of Big 4 deconsolidation when interpreting year-over-year results.