SOUTHERN CALIFORNIA EDISON Co quarterly report, Q3 FY2009

Business context and reporting period

Southern California Edison Company (SCE), a regulated electric utility, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2009. Amounts below are in millions of dollars unless stated otherwise. Management cautions that interim results are not necessarily indicative of full-year results.

Financial performance and condition

• Revenue declined 12% in Q3 and 13% year to date, while operating income and common-stock earnings increased. Lower fuel and purchased-power costs were major contributors to improved operating income; most such costs are passed through to customers.
• Common earnings included a $300 million after-tax benefit from the Global Settlement in Q2 and a $46 million noncash Mountainview accounting benefit in Q3 2009. Q3 2008 included a $49 million charge related to the CPUC’s performance-based ratemaking decision. Thus, reported year-to-date improvement includes significant unusual items.
• Cash from operations was $3,281 for the first nine months, versus $1,313 in 2008. Capital expenditures were $2,109, versus $1,638; operating cash flow less capital expenditures was approximately $1,172, compared with negative $325 in 2008. Higher operating cash flow reflected, among other items, tax-settlement receipts and changes in regulatory-account collections.
• At September 30, cash and equivalents were $754, down from $1,611 at year-end 2008. Current assets were $3,019 and current liabilities $3,865. Long-term debt, including current maturities, was $6,740, compared with $6,362 at year-end; short-term debt was zero, versus $1,893. Total liabilities were $24,480 and equity $8,674.
• SCE reported approximately $3.5 billion of available liquidity, including $2.8 billion available under credit facilities. Its debt-to-total-capitalization ratio was 0.45, below the 0.65 covenant limit; the 13-month weighted-average common-equity component was 49.5%, versus a 48% regulatory minimum.

Material changes and management commentary

• Retail billed and unbilled revenue rose $109 in Q3 and $184 year to date, reflecting rate increases partly offset by lower sales volumes. SCE attributed lower volumes to the economic downturn and milder weather.
• Fuel expense fell $238 in Q3 and $628 year to date; purchased-power expense fell $301 and $898, respectively. Lower natural-gas prices and reduced power purchases were key factors. Balancing-account deferrals and collections affect reported revenue and cash flows, but generally do not represent equivalent changes in underlying earnings.
• The CPUC’s 2009 General Rate Case authorized a $4.83 billion 2009 base revenue requirement and indicated approximately $5.04 billion for 2010 and $5.25 billion for 2011, subject to regulatory provisions. The 2009 FERC transmission-rate settlement set a $448 million base revenue requirement, $136 million above the previously authorized level.
• FERC accepted SCE’s proposed 2010 base transmission rates subject to refund and settlement procedures, effective March 1, 2010. The proposed requirement is $107 million, or 24%, above 2009, and was expected to increase SCE’s overall average system rate by approximately 1% if approved.
• SCE’s 2009–2013 capital investment plan is $16.8–$19.8 billion. Nine-month capital spending was approximately 20% below forecast, largely due to timing and regulatory delays. Major investments include transmission and distribution, smart meters, San Onofre steam generators, and solar projects; cost recovery and execution depend on approvals, permitting, financing, and construction.

Outlook, risks, and contingencies

• SCE expected to meet 2009 operating and capital requirements through cash, operating cash flows, credit facilities, and capital-market access. It estimated 2009–2013 annual capital expenditures at $2.6–$3.1 billion, $3.3–$3.8 billion, $3.6–$4.2 billion, $3.8–$4.5 billion, and $3.5–$4.2 billion, respectively.
• The Global Settlement resolved federal tax disputes through 2002 and generated an expected positive cash impact of approximately $640 million over time. State tax matters and final IRS interest calculations remained unresolved and could change the estimated impact. The IRS settlement also reduced unrecognized tax benefits by approximately $1.7 billion.
• Potential additional 2009 cash-flow benefits included $125–$175 million from bonus depreciation. SCE had not determined the impact of a proposed tax-method change for certain repair costs.
• Risks include regulatory cost recovery and rate decisions; power and fuel prices, counterparty defaults and collateral needs; access to financing; environmental and greenhouse-gas regulation; nuclear operations and spent-fuel storage; and wildfire insurance and liability. Wildfire coverage renewed at a reduced $500 million limit, with a $10 million self-insured retention per occurrence.
• Environmental remediation liability was $39 million for 24 identified sites; SCE said costs could exceed that amount by up to $178 million. SCE cited significant uncertainty in estimating cleanup costs and expects remediation to extend up to 30 years.
• Other notable proceedings include the Navajo Nation and Hopi Tribe litigation, which seeks substantial damages; pending FERC construction-work-in-progress matters subject to refund; uncertainty over Four Corners capital-cost recovery; and the DOE spent-nuclear-fuel case. SCE could not predict the outcomes of these matters.
• SCE said it was unlikely to meet California’s 20% renewable-procurement target by 2010, though flexible compliance could help; potential penalties under current rules are up to $25 million per year. The filing provides no company-wide earnings guidance.

Important facts for investors to verify

• Separate recurring operating performance from the $300 million tax-settlement benefit, $46 million Mountainview noncash benefit, and prior-year $49 million charge.
• Review the drivers and timing of regulatory balancing-account collections and their effect on operating cash flow and reported revenue.
• Monitor regulatory approval, refund exposure, and customer-rate effects associated with transmission rates and capital-project cost recovery.
• Assess funding needs against the multiyear capital plan, cash balance, credit-facility availability, debt maturities, and dividend capacity.
• Track wildfire insurance availability and exposure, environmental remediation estimates, tax matters, and the cited legal and regulatory proceedings.