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 quarter and nine months ended September 30, 2016. The filing also covers parent Edison International; figures below refer to SCE unless identified otherwise. Dollar amounts are in millions except where noted.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | $3,752 | $3,757 | $8,956 | $9,166 |
| Operating income | $721 | $626 | $1,622 | $1,714 |
| Net income available for common stock | $435 | $389 | $1,037 | $1,079 |
| Operating margin | 19.2% | 16.7% | 18.1% | 18.7% |
- Cash flow: Nine-month operating cash flow was $2.836 billion, down $115 million year over year. Investing cash outflow was $2.443 billion, including $2.747 billion of capital expenditures; financing cash outflow was $380 million. Cash increased $13 million to $39 million.
- Debt and liquidity: At September 30, SCE reported $239 million short-term debt, $479 million current long-term debt and $9.987 billion long-term debt. It had $2.35 billion available under its $2.75 billion revolving facility. Debt-to-capitalization covenant ratio was 0.43, below the 0.65 limit. Current assets were $2.443 billion versus current liabilities of $4.238 billion.
- Other balance-sheet items: Total assets were $51.142 billion and total liabilities $36.810 billion. Regulatory assets totaled $8.165 billion, including $899 million related to San Onofre. Environmental remediation liability was $134 million, of which $128 million was recorded as a regulatory asset.
Material changes versus prior comparable periods
- Q3 common-stock earnings rose $46 million, primarily from the timing of the 2015 General Rate Case (GRC) decision and incremental pole-loading rate-base returns; higher income tax expense partly offset the increase.
- Nine-month common-stock earnings fell $42 million. Lower tax benefits, including the absence of a $100 million 2015 benefit from revisions to uncertain-tax-position liabilities, outweighed higher GRC escalation revenue and pole-loading returns.
- Nine-month revenue declined $210 million. Retail billed and unbilled revenue fell to $8.6 billion from $9.7 billion, reflecting rate decreases and lower sales volume associated with cooler weather. SCE’s decoupling mechanism generally means retail sales-volume changes do not directly affect earnings.
- Operating expenses declined $118 million for the nine months, but depreciation, decommissioning and amortization increased $48 million and property taxes increased $14 million. Lower purchased-power and fuel costs and lower program spending contributed to lower costs.
Outlook, risks and unusual items
- Rate case and investment: SCE’s September 2016 application seeks a 2018 revenue requirement of $5.885 billion, $222 million above the projected 2017 authorized requirement, plus $48 million in one-time recoveries. It also seeks increases of $533 million for 2019 and $570 million for 2020. These are requests, not approved rates. SCE forecasts capital expenditures of up to $23.3 billion for 2016–2020, subject to regulatory approvals and recovery mechanisms.
- FERC rates: SCE’s preliminary 2017 transmission-rate update indicated a proposed $98 million, or 9%, increase; filing was expected by December 1, 2016, with proposed rates effective January 1, 2017.
- Regulatory and operating exposure: The CPUC reopened the record concerning the San Onofre settlement following its prior finding of ex parte communication violations; the outcome is uncertain. A CPUC investigation of 2015 Long Beach outages is ongoing. SCE believes penalties are probable but cannot estimate an amount; potential penalties could be significant.
- San Onofre claims and recovery: SCE seeks at least $4 billion from Mitsubishi Heavy Industries in arbitration; a decision could come by year-end 2016 or later, with no assurance of recovery. DOE spent-fuel damages received are subject to CPUC review over allocation among customers, shareholders or related costs.
- Wildfire and environmental risks: SCE had approximately $1 billion of wildfire-liability insurance through May 31, 2017, with a $10 million per-occurrence retention; future coverage and losses are uncertain. Estimated environmental cleanup costs could exceed recorded liabilities by up to $174 million across identified material and immaterial sites, although SCE expects substantial regulatory recovery.
- Other unusual items: SCE refunded $133 million to customers in Q2 2016 for 2012–2014 repair-deduction tax benefits, with no gain or loss recorded. Parent Edison International completed a $214 million final EME settlement payment in September. Its consolidated nine-month common-shareholder net income was $965 million versus $1.099 billion in 2015, including the absence of $43 million of 2015 discontinued-operations income.
Important facts for investors to verify
- Track CPUC decisions on SCE’s 2018 GRC, San Onofre settlement review, Long Beach investigation and requested grid-modernization recovery mechanisms.
- Confirm actual capital spending, project timing and cost recovery, particularly for major transmission and grid-modernization projects.
- Monitor the outcome and potential financial effect of the MHI arbitration and Long Beach penalties; neither amount is established in the filing.
- Assess wildfire insurance availability and limits, environmental remediation exposure, and the CPUC’s treatment of DOE spent-fuel recoveries.
- Distinguish SCE operating results from Edison International parent results and treat management’s core-earnings measure as non-GAAP.