SOUTHERN CALIFORNIA EDISON Co quarterly report, Q1 FY2016

Business Context and Reporting Period

Southern California Edison Company (SCE), a regulated electric utility serving Southern California, filed this unaudited Form 10-Q for the three months ended March 31, 2016. The filing also includes Edison International, SCE’s parent; financial figures below are for SCE unless otherwise stated.

Financial Performance and Liquidity

SCE’s operating margin, calculated as operating income divided by operating revenue, was approximately 19.4%, down from 21.9%. SCE’s income tax expense was $50 million, with a 13.6% effective tax rate, versus $107 million and 24.3% a year earlier.

At March 31, SCE reported $10.422 billion of long-term debt, $79 million of current long-term debt and $101 million of short-term debt. Its debt-to-total-capitalization ratio was 0.43, within the credit-facility limit of 0.65. SCE had approximately $2.56 billion available under its $2.75 billion revolving credit facility. It issued $300 million of preference stock and redeemed $125 million of preference stock during the quarter.

Material Changes Versus the Prior Period

• Revenue fell about 3% and net income available for common stock fell about 6%; operating income declined $78 million. Management attributed the earnings decrease mainly to higher operating and maintenance costs, lower incremental tax benefits and the timing of the 2015 General Rate Case (GRC) decision.
• Retail billed and unbilled revenue, excluding wholesale sales and balancing-account effects, was $2.4 billion versus $2.6 billion. Lower rates (about $137 million) and lower sales volume (about $55 million) were cited; cooler weather reduced load. SCE said its decoupling mechanism means changes in retail sales do not affect earnings.
• The 2016 GRC escalation mechanism added approximately $46 million of revenue in the quarter. The 2015 comparison included revenue initially recognized largely using 2014 authorized requirements; SCE later recorded an estimated $451 million customer refund in 2015, including about $35 million attributable to Q1 2015.
• Operating cash flow decreased $84 million. SCE’s first-quarter capital expenditures, including accruals, were $729 million, compared with $825 million a year earlier; cash capital expenditures were $950 million and $1.266 billion, respectively.

Outlook, Risks, Contingencies and Unusual Items

• SCE projected approximately $4 billion of 2016 capital expenditures and expected to fund obligations, capital spending and dividends with operating cash flows, tax benefits and debt or preferred-equity financing as needed. Management noted spending could vary with regulatory, permitting, engineering, labor and supply factors.
• SCE planned to file its 2018 GRC application in September 2016. Its next cost-of-capital application deadline was extended to April 20, 2017; authorized CPUC return and capital structure remain unchanged through December 31, 2017.
• A CPUC staff joint action plan warned that continued unavailability of the Aliso Canyon gas storage facility could put electric reliability at risk during summer 2016 and possibly later. Higher gas prices, procurement costs, regulatory decisions and potential limits on cost recovery could affect liquidity and results.
• SCE sought at least $4 billion in arbitration damages from Mitsubishi Heavy Industries over San Onofre steam generators; the hearing concluded April 29, 2016, with a decision possible by year-end. Recovery is uncertain, and any proceeds are subject to the settlement’s customer/shareholder allocation.
• ORA and TURN proposed that SCE refund $39.9 million of previously awarded energy-efficiency incentives; SCE disputed the request and could not predict the outcome. Potential CPUC penalties related to Long Beach service interruptions were also unestimable. Separately, SCE disclosed a $25 million civil-penalty demand concerning the Shaver Lake Dam project, which it disputes.
• SCE recorded a $133 million minimum liability for 19 material environmental-remediation sites; it said reasonably possible additional costs could reach $165 million. It expects to recover most recorded remediation costs through regulatory mechanisms.
• In April 2016, SCE settled a spent-fuel claim with the Department of Energy for $162 million, of which SCE’s share was $124 million. Distribution of recoveries is subject to CPUC review.
• SCE estimated posted and potential collateral requirements of $171 million, including $26 million if downgraded below investment grade and $14 million from adverse market-price movements. Its commodity derivatives had a reported net liability of approximately $1.2 billion.
• At March 31, SCE’s maximum additional dividend capacity under its CPUC capital-structure restriction was approximately $516 million. It paid a $170 million dividend to Edison International during the quarter.

Important Facts for Investors to Verify

1. Track CPUC and FERC decisions affecting the 2015 GRC, tax-repair deductions, energy-efficiency incentives and transmission projects.
2. Monitor the San Onofre arbitration, related litigation and the timing and allocation of any recovery.
3. Assess Aliso Canyon-related gas supply, price and grid-reliability developments and any effects on procurement costs or collateral needs.
4. Compare actual 2016 capital spending and financing with the approximately $4 billion plan, available liquidity and dividend capacity.
5. Review subsequent developments in the Long Beach and Shaver Lake proceedings, environmental estimates and DOE spent-fuel recovery process.