SOUTHERN CALIFORNIA EDISON Co quarterly report, Q1 FY2013

Business context and reporting period

Southern California Edison Company (SCE), a regulated electric utility serving approximately 50,000 square miles in Southern California, filed this unaudited Form 10-Q for the three months ended March 31, 2013. Comparisons are with the first quarter of 2012 unless otherwise noted. Edison International is SCE’s parent; its results also reflect the deconsolidation and discontinued-operations treatment of Edison Mission Energy (EME) following EME’s Chapter 11 filing.

Financial performance and position

Revenue grew about 9% and net income about 41%. Purchased power expense rose to $780 million from $615 million, while operation and maintenance expense declined to $785 million from $851 million. Depreciation, decommissioning and amortization increased to $414 million from $389 million. Operating cash flow fell by $214 million, driven chiefly by less favorable balancing-account and working-capital movements. Cash flow from investing activities was a net outflow of $1.009 billion; financing provided $430 million. SCE reported a current ratio of approximately 0.62. Its $2.75 billion revolving credit facility had $2.225 billion available, and its debt-to-total-capitalization ratio was 0.43 against a maximum covenant ratio of 0.65.

SCE’s $979 million of cash capital expenditures differs from management’s $814 million first-quarter capital-spending figure, which includes accruals and uses a different presentation. SCE issued $400 million of 3.90% mortgage bonds due 2043 and had $800 million of long-term debt due in the first quarter of 2014. It issued $400 million of Series G preference stock and redeemed all Series B and C preference stock.

Material changes versus the prior period

• Management attributed higher SCE earnings mainly to implementation of the 2012 general rate case (GRC), lower operating expenses and tax benefits from repair deductions. The 2012 comparison included an estimated $80 million of GRC-related revenue attributable to Q1 2012, recognized retroactively in Q4 2012.
• Rate-base growth and operating-cost recovery added revenue, partly offset by a lower CPUC-adopted 2013 return on common equity. The approved return on common equity is 10.45%.
• San Onofre-related replacement-power costs contributed to higher purchased-power expense. SCE’s retail billed and unbilled revenue was about $2.3 billion in each period; lower load reduced revenue by $99 million, partly offset by a $85 million rate increase.
• Operating cash flow declined from $775 million to $561 million, while reported cash capital expenditures decreased from $1.189 billion to $979 million.
• For Edison International, consolidated net income was $298 million versus $112 million; common-shareholder net income was $271 million versus $93 million. The comparison includes discontinued operations: Q1 2013 had $12 million of income, while Q1 2012 had an $84 million loss. Edison International’s core earnings, a non-GAAP measure, were $252 million versus $177 million.

Outlook, management commentary and key risks

• San Onofre: Units 2 and 3 remained offline amid steam-generator inspections, repairs and regulatory reviews. SCE proposed a reduced-power restart for Unit 2, but NRC approval was uncertain; the filing gives no assured restart date. Management said a delay beyond summer 2013 could affect plans for both units, and that inability to restart Unit 2 could lead to a decision to retire one or both units before year-end 2013.
• The CPUC investigation tracks San Onofre costs collected in rates subject to refund. Approximately $728 million of authorized revenue requirement was tracked through March 31, 2013. Estimated replacement-power costs under the CPUC proceeding’s methodology were approximately $444 million, net of avoided nuclear fuel costs; the estimate includes about $50 million for planned-outage periods, which SCE disputes. Cost disallowances or customer refunds could materially harm SCE’s financial condition, results and cash flows.
• SCE had spent $602 million on the steam-generator replacement project, which remains subject to CPUC reasonableness review. Incremental inspection and repair costs were $109 million through March 31. SCE submitted $139 million of invoices to supplier MHI; MHI paid $45 million on the first invoice while reserving its rights. SCE’s outage-insurance proofs of loss totaled $234 million for both units, including approximately $183 million attributable to SCE; no insurance recovery had been recognized pending the insurer’s response.
• Capital program: Management projected 2013 capital expenditures of $3.8 billion to $4.2 billion and total 2013–2014 spending of $7.3 billion to $8.2 billion. Spending and timing remain subject to regulatory, permitting, construction and cost factors.
• Liquidity and distributions: SCE expected to fund obligations, capital spending and dividends with operating cash flow and debt or preferred-equity financing as needed. CPUC rules restrict dividends to the parent if SCE’s weighted-average common-equity ratio falls below 48%; it was 48.6% at March 31, and the filing estimated about $113 million of additional dividend capacity under that restriction. SCE paid $120 million to the parent during the quarter.
• EME and tax exposures: Edison International expected to relinquish ownership of EME under a proposed bankruptcy settlement, subject to court approval and conditions. The filing recorded a $150 million estimated loss related to EME retirement-plan and other liabilities; outcomes could differ materially. IRS proposals relating to repair deductions and a prior EME asset sale could result in substantial tax payments if sustained.
• Other uncertainties include CPUC investigations into alleged utility-safety violations, potential penalties, environmental remediation, wildfire liability and insurance availability, nuclear insurance assessments, and regulatory recovery of costs. SCE recorded a $127 million environmental remediation liability; the filing states reasonably possible additional costs could reach $186 million.

Important facts for investors to verify

1. Progress and regulatory decisions on San Onofre restart, repair or retirement; the CPUC’s treatment of tracked costs and replacement-power estimates; and potential refunds.
2. Whether MHI or NEIL pays amounts claimed, and the timing and limits of any recovery.
3. Actual operating cash flow, capital spending and financing needs, especially the $800 million debt maturity in early 2014 and the planned 2013–2014 capital program.
4. EME bankruptcy and settlement outcomes, including the collectability of recorded receivables and the final amount of Edison International’s obligations.
5. Outcomes of IRS disputes, CPUC safety investigations and other legal, environmental, nuclear and wildfire contingencies.