SOUTHERN CALIFORNIA EDISON Co quarterly report, Q3 FY2017

Business context and reporting period

Combined Form 10-Q for Southern California Edison Company (SCE) and parent Edison International for the quarter ended September 30, 2017. SCE is a regulated electric utility serving approximately 50,000 square miles in Southern California; Edison International also owns competitive energy businesses. Unless noted, financial amounts below are for SCE.

Financial performance and position

MetricThree months ended September 30, 2017Nine months ended September 30, 2017
Operating revenue$3.652 billion$9.061 billion
Operating income$578 million$1.602 billion
Net income available for common stock$465 million$1.121 billion
Operating margin15.8%17.7%
Net margin on operating revenue12.7%12.4%
Operating cash flowNot presented for the quarter$2.793 billion
Capital expenditures, cash basisNot presented for the quarter$2.596 billion
Cash and cash equivalents at September 30$61 million
Debt at September 30$11.334 billion, including short-term debt and current maturities

SCE had $2.15 billion available under its $2.75 billion revolving credit facility. Its debt-to-total-capitalization ratio was 0.43, below the facility covenant ceiling of 0.65. SCE’s 13-month weighted-average common equity capitalization was 50.2%; the CPUC dividend restriction allows distributions only if it remains at or above 48%.

Changes versus the prior comparable period

  • Third-quarter revenue declined $100 million (2.7%) year over year, while net income available for common stock increased $30 million (6.9%). The earnings increase primarily reflected the 2015 General Rate Case escalation mechanism.
  • For the first nine months, revenue increased $105 million (1.2%) and common net income increased $73 million (7.0%). Higher GRC-related revenue and lower operating and maintenance costs helped earnings; prior overcollection refunds and higher financing costs partly offset those gains.
  • Nine-month operating cash flow was $45 million lower than in 2016. Cash used in investing was $2.432 billion versus $2.443 billion; cash used in financing was $339 million versus $382 million.
  • Debt increased from $11.102 billion at December 31, 2016 to $11.334 billion at September 30, 2017. SCE issued $1.0 billion of 4.00% first and refunding mortgage bonds due 2047, among other financing transactions.

Outlook, regulatory matters, and risks

  • SCE requested a revised 2018 revenue requirement of $5.859 billion, a $196 million increase over its projected 2017 authorized requirement, and proposed further increases of $480 million in 2019 and $556 million in 2020. CPUC approval and timing remained uncertain; management considered a 2017 decision unlikely.
  • The 2017–2020 capital plan totals $18.454 billion, including $1.795 billion requested for grid modernization in 2018–2020. The CPUC had not approved the requested grid-modernization recovery mechanism. SCE planned to prioritize safety and reliability spending and potentially defer much of the spending focused primarily on distributed-energy integration.
  • The CPUC’s review of the San Onofre settlement remained unresolved. A new process was ordered in October 2017; hearings were tentatively scheduled through March 2018. SCE carried a $730 million regulatory asset for expected settlement recoveries and judged recovery probable, but not certain. SCE also recorded a $47 million regulatory liability for its net MHI arbitration recovery.
  • Effective January 1, 2018, the CPUC set SCE’s authorized return on equity at 10.30% and reset authorized debt and preferred-stock costs. The next cost-of-capital application deadline was extended to April 2019.
  • SCE reported approximately $1 billion of wildfire-liability insurance through May 31, 2018, with a $10 million self-insured retention per occurrence. Policy limits and exclusions, multiple fires, future insurance availability, or losses exceeding coverage could leave SCE with unrecovered costs.
  • Other exposures include environmental remediation (a $129 million recorded liability; possible costs above the recorded amount), nuclear decommissioning and spent-fuel storage, and the potential need for collateral if SCE’s credit rating falls below investment grade. Posted and potential collateral requirements totaled $309 million.
  • Edison International recorded a $16.5 million pretax ($10 million after-tax) SoCore Energy goodwill impairment and is evaluating strategic options, including a possible sale. This relates to the parent’s competitive businesses, not SCE’s utility operations.

Most important facts for investors to verify

  1. Outcome and timing of the San Onofre CPUC proceeding, including whether the $730 million regulatory asset remains recoverable and how the MHI award is allocated.
  2. Final 2018 GRC revenue authorization, timing of any effective-date adjustment, and treatment of grid-modernization capital spending.
  3. Whether capital investment, rate recovery, operating cash flow, and financing needs evolve as planned; monitor liquidity, debt levels, and covenant headroom.
  4. Wildfire insurance availability, policy terms, and potential liability beyond insured limits or the self-insured retention.
  5. Actual progress and costs for major transmission projects and the 2017–2020 capital plan, including permitting and construction changes.