Business Context and Reporting Period
Southern California Edison Company (SCE), an investor-owned regulated electric utility serving southern California, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The report is jointly filed with parent Edison International; figures below focus on SCE unless identified otherwise. SCE’s authorized rates generally decouple revenue from electricity sales volume.
Financial Performance
| SCE, $ millions except per-share data | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | 2,803 | 2,953 | 5,357 | 5,409 |
| Operating income | 439 | 508 | 853 | 1,006 |
| Net income | 327 | 338 | 643 | 718 |
| Net income available for common stock | 297 | 307 | 583 | 656 |
| Operating cash flow | Not separately presented | Not separately presented | 1,312 | 1,526 |
| Capital expenditures | Not separately presented | Not separately presented | 2,141 | 1,722 |
For the six months, purchased power and fuel costs were $2.038 billion, up $79 million, while operation and maintenance costs increased $90 million to $1.345 billion. The report attributes higher O&M principally to wildfire insurance premiums and increased line clearing. Interest expense rose $32 million to $319 million. SCE reported income tax benefits of $8 million for the first half, versus tax expense of $69 million a year earlier; effective tax rates were negative 1.3% and 8.8%, respectively, reflecting Tax Reform and regulatory tax accounting.
At June 30, SCE had cash and cash equivalents of $25 million, short-term debt of $300 million, current long-term debt of $479 million, and long-term debt of $12.107 billion. Its $3.0 billion revolving facility had approximately $2.60 billion available. The debt-to-capitalization ratio under its credit covenant was 0.46, below the 0.65 limit. Operating cash flow was below capital spending; cash decreased $489 million in the first half. SCE’s credit ratings remained investment grade but were under negative outlook at Moody’s and S&P and negative watch at Fitch.
Material Changes Versus Prior Period
- First-half net income available for common stock fell $73 million, while operating revenue declined $52 million. Lower earnings reflected higher wildfire insurance and line-clearing costs, increased financing costs, and lower revenue associated with San Onofre; lower income taxes partly offset these pressures.
- First-half capital expenditures rose to $2.141 billion from $1.722 billion. SCE reported total capital expenditures, including accruals, of $1.9 billion versus $1.4 billion for the comparable period.
- SCE issued $1.25 billion of mortgage bonds in March and $650 million in June, using proceeds to repay commercial paper and for general corporate purposes. It increased its revolving credit facility from $2.75 billion to $3.0 billion.
- Edison International, the parent, reported first-half net income attributable to common shareholders of $494 million, down from $640 million. It recorded a $46 million after-tax loss related to the sale of SoCore Energy, completed in April.
Outlook, Risks, and Unusual Items
- Wildfires and mudslides: SCE could not reasonably estimate potential losses from the December 2017 wildfires or the Montecito mudslides; losses could be material. Investigations and litigation were ongoing, and claims may involve inverse condemnation, negligence, property damage, personal injury, and wrongful death. SCE reported approximately $1 billion of wildfire insurance for 2017 events, subject to a $10 million retention per occurrence; policy limits may not cover multiple or exceptionally large events. As of July 23, 2018, at least 87 Thomas Fire lawsuits represented approximately 2,000 plaintiffs. Management also said uninsured costs may not be recoverable from customers.
- Insurance costs: SCE anticipated approximately $237 million of 2018 wildfire insurance expense before regulatory deferrals. Coverage was approximately $1 billion for June–December 2018 events and $940 million for December 2018–May 2019 events. SCE sought CPUC approval for mechanisms to track and recover certain premium costs.
- Rate case and capital plan: SCE requested a 2018 test-year revenue requirement of $5.534 billion, with requested requirements of $5.965 billion for 2019 and $6.468 billion for 2020. A final decision was expected later in 2018; authorized amounts and timing remained uncertain. SCE projected approximately $4.2 billion of 2018 capital expenditures. Future spending depends in part on regulatory approvals.
- San Onofre: The revised settlement would end recovery of San Onofre costs after specified conditions and require customer refunds for certain post-cessation collections. On July 26, 2018, the CPUC approved the agreement subject to removal of a proposed $12.5 million greenhouse-gas funding provision; the agreement still required acceptance of that modification by the parties. SCE recorded no San Onofre revenue in 2018 under the revised agreement and reported a $72 million remaining San Onofre regulatory asset.
- Other regulatory exposure: The CPUC had issued proposed decisions denying SCE’s Alberhill System Project application; a final decision was pending. SCE estimated about $30 million of project costs might not be recoverable if the project were cancelled. SCE’s preliminary 2019 FERC transmission revenue update indicated an $131 million, or 11%, decrease from currently authorized amounts, primarily due to the lower federal tax rate; the filing was pending.
- Dividend and financing considerations: SCE paid its parent a $212 million dividend in the second quarter and declared a further $100 million dividend payable by October 19, 2018. Wildfire liabilities, rating actions, access to capital, and regulatory recovery could affect future dividends and financing costs.
Important Facts for Investors to Verify
- Progress and findings of wildfire investigations, litigation, and the Montecito causation claims; potential liability, insurance coverage, and rate-recovery decisions.
- Final CPUC action on the 2018 general rate case and on recovery of wildfire insurance premiums.
- Whether parties accepted the San Onofre settlement modification and the resulting timing and amount of customer refunds and any remaining regulatory asset treatment.
- Updates to the 2018 capital plan, including the Alberhill project and other approvals that may affect capital spending and rate base.
- Changes in SCE’s credit ratings, liquidity, collateral requirements, debt levels, and ability to fund investment while sustaining dividends.