Southern California Edison Company (SCE) — Q3 2018 Form 10-Q
Business context and reporting period. SCE is a regulated electric utility serving Southern California. This combined filing covers the quarter and nine months ended September 30, 2018; amounts below are in U.S. dollars. Edison International is SCE’s parent, and its results are distinguished where relevant.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $4.260B | $3.652B | $9.617B | $9.061B |
| Operating income | $754M | $569M | $1.607B | $1.575B |
| Net income | $567M | $497M | $1.210B | $1.215B |
| Net income available for common stock | $536M | $465M | $1.119B | $1.121B |
| Operating margin | 17.7% | 15.6% | 16.7% | 17.4% |
| Operating cash flow | Not separately provided | Not separately provided | $2.258B | $2.801B |
SCE revenue includes both earnings activities and cost-recovery activities; SCE earns no return on the latter. Higher purchased-power and fuel costs were largely recovered through rates and should not be read as equivalent growth in profit.
Liquidity and debt. At September 30, 2018, SCE had $39M of cash, $2.63B available under its $3.0B revolving credit facility, and a debt-to-capitalization ratio of 0.46 against a 0.65 covenant limit. Short-term debt was $103M; current and long-term debt totaled approximately $12.97B. SCE’s nine-month cash flows were $2.258B provided by operations, $3.074B used in investing, and $340M provided by financing; cash decreased $476M. Capital expenditures were $3.223B for the period.
Material changes versus comparable periods
- Q3 common income rose $71M year over year. SCE cited lower O&M costs from regulatory deferrals for line-clearing and wildfire-insurance costs, tax-reform effects, and spent-nuclear-fuel storage reimbursement.
- Nine-month common income was approximately flat, down $2M. Higher wildfire-insurance expense and financing costs offset higher reimbursement revenue and tax benefits.
- Q3 revenue increased $608M and nine-month revenue increased $556M, principally reflecting higher cost-recovery revenue and costs, including higher power and gas prices and volumes. Purchased-power and fuel expense rose $523M in Q3 and $602M year to date.
- Nine-month operating cash flow declined $543M, partly reflecting working-capital changes and lower net cash provided by regulatory assets and liabilities.
- At September 30, SCE’s net undercollection in the energy resource recovery and new system generation accounts was $592M, up from $267M at year-end 2017, mainly due to higher commodity costs and load than forecast in rates.
Outlook, management commentary and risks
- Wildfires and litigation: SCE expects a material loss related to the December 2017 wildfires but cannot reasonably estimate a loss range. Investigations and litigation remain ongoing. At October 26, 2018, SCE reported at least 102 Thomas Fire lawsuits involving about 2,000 plaintiffs. The company also cannot estimate potential losses from Montecito Mudslides claims, which allege the Thomas Fire contributed to the mudslides.
- Insurance and recovery: SCE reported about $1B of wildfire-specific coverage, subject to a $10M self-insured retention per occurrence and policy limitations. It estimated 2018 wildfire-insurance expense of approximately $237M and had deferred $63M, which it believed probable of recovery. Insurance may not cover all damages, and recovery of uninsured costs in rates is uncertain.
- Regulation: SCE’s 2018–2020 general rate case remained pending. SCE requested a 2018 revenue requirement of $5.534B, with $5.965B for 2019 and $6.468B for 2020; a decision was expected by year-end 2018, but the authorized amounts and timing were uncertain. Until then, 2018 revenue was based on the prior authorized requirement, with a memorandum account for future adjustments.
- Capital program: SCE projected 2018 capital expenditures of about $4.2B; its 2018–2020 forecast totaled $13.693B, subject to regulatory approval and other execution risks. Spending on the Alberhill project was deferred while the CPUC requested additional information. SCE also requested approval for a $582M wildfire safety and resiliency program; approval and timing were uncertain.
- San Onofre: The revised settlement became effective August 2, 2018, resolving issues in the CPUC investigation and ending rate recovery once the combined utility regulatory assets reached the settlement threshold. Spent-fuel transfers were suspended after an August loading incident; SCE could not predict when operations would resume. Estimated decommissioning costs were $3.4B in 2017 dollars, including SCE’s $2.6B share.
- Credit and financing: Moody’s and Fitch downgraded SCE during Q3 because of wildfire exposure; S&P’s outlook was negative. Further downgrades could raise financing costs or affect access to capital and collateral requirements. SCE reported $277M of collateral posted and potential incremental requirements of $54M for a below-investment-grade downgrade and adverse market-price movements.
- Other developments: California SB 901 was enacted in September 2018; it provides factors the CPUC may consider in wildfire cost recovery for fires on or after January 1, 2019, but does not resolve inverse-condemnation exposure. SCE’s FERC preliminary 2019 transmission revenue update indicated a proposed $131M, or 11%, decrease, subject to settlement and refund.
No specific earnings or EPS guidance is stated in the filing text provided. SCE said it expected to fund the next 12 months through operating cash flow, debt and preferred-equity financings as needed, and credit-facility availability.
Important facts for investors to verify
- Progress of wildfire and mudslide investigations, litigation, liability estimates, insurance coverage, and regulatory cost-recovery prospects.
- Final 2018 general rate case decision and resulting authorized revenue requirements and capital-spending levels.
- Available liquidity, credit ratings, borrowing costs, and collateral needs if wildfire exposure or commodity prices worsen.
- Trends in balancing-account undercollections, especially energy and fuel costs, and the timing of customer recovery.
- San Onofre decommissioning costs, trust adequacy, spent-fuel transfer resumption, and implementation of the revised settlement.