Southern California Edison Company — Q1 2011 Form 10-Q
Business and period: SCE is an investor-owned electric utility serving Southern California and a wholly owned subsidiary of Edison International. This unaudited report covers the three months ended March 31, 2011; comparisons are with Q1 2010 unless otherwise noted. Dollar amounts are in millions.
Key financial results
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Operating revenue | $2,232 | $2,159 |
| Operating expenses | $1,789 | $1,779 |
| Operating income | $443 | $380 |
| Income before income taxes | $359 | $306 |
| Income tax expense / effective tax rate | $123 / 34% | $129 / 42% |
| Net income | $236 | $177 |
| Net income available for common stock | $222 | $164 |
| Net cash provided by operating activities | $672 | $313 |
| Capital expenditures in cash-flow statement | $1,022 | $867 |
Management’s non-GAAP core earnings were $222, up $19 from $203. Reported common earnings in 2010 included a $39 after-tax charge related to federal health-care legislation; excluding that item, core earnings growth was attributed primarily to rate-base growth. The filing does not provide a reported operating-margin figure.
Financial position and liquidity
- At March 31, 2011, cash and cash equivalents were $53, down from $257 at December 31, 2010. Current assets were $2,226 and current liabilities were $3,009.
- Long-term debt was $7,627, unchanged from year-end; short-term debt was $200, versus none at year-end. The short-term borrowing carried a 0.35% weighted-average rate and was supported by SCE’s credit facility.
- SCE reported $2,621 of available capacity under credit facilities after $200 of borrowings and $73 of letters of credit. Its debt-to-total-capitalization ratio was 0.46, below the 0.65 covenant limit.
- Operating cash flow increased by $359, mainly reflecting higher net tax receipts and cash inflows from balancing-account over- and under-collections, as well as working-capital timing. Investing activities used $1,066; financing activities provided $190.
- First-quarter capital investment was $765 including accruals, compared with $640 in Q1 2010. This MD&A capital-investment measure differs from cash capital expenditures reported in the cash-flow statement.
Material changes and management commentary
- Operating revenue rose $73. Management attributed higher utility-earning revenue to authorized rate increases, FERC rates and construction-work-in-progress incentive earnings, and recovery of capital-related requirements. Retail billed and unbilled revenue was $2.1 billion versus $2.0 billion, reflecting a $90 rate increase and $30 from sales volume.
- Operating income increased $63. Utility cost-recovery expenses were largely offset by related revenues. Purchased-power expense fell $100, including lower ISO-related costs, QF and renewable purchases, and bilateral capacity payments. Energy-efficiency program O&M rose $62; depreciation and amortization also increased with capital investment.
- The effective tax rate declined to 34% from 42%; Q1 2010 included the $39 noncash charge reversing tax benefits affected by health-care legislation.
- Management projected 2011 capital investment of $3.9–$4.4 billion and 2011–2014 investment of $15.6–$17.5 billion, subject to regulatory approvals, permitting, market conditions and other factors.
- SCE’s updated 2012 general rate case request reflected bonus-depreciation guidance and reduced base-rate revenue requirements by $38 in 2012, $133 in 2013 and $145 in 2014. After sales-growth effects, the revised request sought incremental customer rate increases of $828, $152 and $514, respectively. A CPUC decision was then anticipated by year-end 2011; requested amounts are not approved outcomes.
Risks, contingencies and unusual items
- Nuclear: Following events in Japan, the NRC planned additional U.S. nuclear safety reviews that could affect SCE’s San Onofre and Palo Verde operations and capital needs. Nuclear insurance arrangements could expose SCE to assessments, including up to approximately $235 per incident under the public-liability sharing program, subject to annual limits.
- Environmental and regulatory: Proposed federal cooling-water standards could entail significant San Onofre costs for entrainment requirements; the company could not yet estimate those costs. California once-through-cooling policy may also require significant investment or affect generation and system reliability. California enacted a 33% renewable-electricity requirement in April 2011, with implementing rules still pending. A court had suspended CARB’s cap-and-trade regulations, subject to possible appeal.
- Environmental remediation: SCE recorded a $52 liability for 24 material sites and said reasonably possible costs could exceed that estimate by up to $190. A $52 regulatory asset was recorded for estimated costs expected to be recovered through customer rates; recovery depends on regulatory treatment.
- Litigation and DOE claim: The Navajo Nation litigation seeks at least $600 in damages plus interest and at least $1 billion in punitive damages; SCE said it could not predict the outcome. A $142 award in SCE’s spent-fuel case against DOE was appealed by the government; any recovery is intended to benefit ratepayers.
- Tax uncertainty: The IRS proposed disallowing part of a repair-allowance deduction. If sustained, the proposed adjustment would require a $90 federal tax payment including interest; SCE protested it. Unrecognized tax benefits totaled $345 at quarter-end.
- Funding and market exposure: SCE’s commodity derivatives had a $310 net liability, compared with $207 at year-end. Commodity and counterparty losses are generally expected to be recoverable through regulatory mechanisms, but may affect cash flows. Posted and potential collateral requirements were $133, potentially increasing by a further $18 under specified adverse market movements. A rating downgrade could increase collateral needs.
- SCE issued $125 of 6.5% Series D preference stock in March. The shares are not mandatorily redeemable and may not be redeemed before March 1, 2016. SCE paid its parent a $115 dividend during the quarter.
- Management stated that disclosure controls and procedures were effective as of quarter-end. The filing presents no full-year earnings guidance.
Important facts for investors to verify
- Whether the CPUC approves SCE’s 2012 general rate case requests, and the timing and final amount of any rate changes.
- Whether projected capital spending is achieved and how it is funded, given first-quarter cash capital expenditures exceeded operating cash flow.
- Regulatory decisions and resulting cost or operating impacts for nuclear safety reviews, cooling-water rules and the new renewable-energy requirement.
- Developments in the Navajo Nation litigation, the DOE spent-fuel appeal and the IRS repair-allowance dispute.
- Changes in available liquidity, debt, collateral requirements and recovery timing through customer rates.
- Environmental remediation estimates and the extent to which costs remain recoverable from customers or other parties.