Business context and reporting period
Southern California Edison Company (SCE), a regulated electric utility serving Southern California, filed this combined Form 10-Q with parent Edison International for the quarter ended March 31, 2017. Unless identified as Edison International, figures below refer to SCE. Dollar amounts are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2017 | Q1 2016 or comparison |
|---|---|---|
| Operating revenue | $2,456 | $2,435 |
| Operating income | $507 | $472 |
| Net income | $380 | $325 |
| Net income available to common stock | $349 | $295 |
| Operating margin | 20.6% | 19.4% |
| Cash from operations | $931 | $884 |
| Capital expenditures | $929 | $950 |
| Cash and cash equivalents at quarter-end | $100 | $39 at Dec. 31, 2016 |
| Long-term debt, including current portion | $11,422 | $10,333 at Dec. 31, 2016 |
Operating expenses were $1,949, down from $1,963. Interest expense increased to $141 from $131. SCE’s effective tax rate fell to 3.1% from 11.4%, primarily reflecting the ratemaking treatment of the San Onofre tax abandonment. Cash from operations less capital expenditures was approximately $2 million. SCE reported no short-term debt at March 31, versus $769 million at year-end.
SCE had approximately $2.66 billion available under its $2.75 billion revolving credit facility. Its debt-to-capitalization ratio was 0.44, below the 0.65 covenant limit. The common-equity component of capitalization was 50.4%; the filing states approximately $603 million of additional dividends could be paid to Edison International under the applicable restriction.
Material changes versus the prior period
- Common-stock earnings rose $54 million. SCE cited higher authorized revenue under the 2015 general rate case escalation mechanism, lower operation and maintenance costs, and greater tax benefits, partly offset by higher financing costs.
- Operation and maintenance expense declined $33 million; depreciation, decommissioning and amortization increased $22 million, principally with transmission and distribution investment.
- Retail billed and unbilled revenue was $2.4 billion in both periods. A $113 million rate increase was offset by a $79 million sales-volume decrease; the CPUC decoupling mechanism means changes in retail sales do not affect SCE earnings.
- SCE issued $700 million of 4.00% mortgage bonds due 2047, borrowed $300 million under a term loan, and remarketed $135 million of pollution-control bonds. Proceeds supported the capital program, general purposes and repayment of commercial paper.
Outlook, management commentary and risks
- SCE projected 2017 capital expenditures of approximately $4.0 billion, down from its prior projection of $4.2 billion. The revision reflected lack of CPUC approval for a grid-modernization memorandum account and delays to the Mesa Substation project. The filing notes the 2017 plan includes $182 million of grid-modernization spending.
- SCE’s 2018 general rate case requested a $5.885 billion revenue requirement, $222 million above the projected 2017 authorized requirement. In April 2017, ORA recommended a reduction of approximately $208 million, including proposed removal of grid-modernization capital spending. SCE said the final authorized amount and timing were uncertain.
- The CPUC’s proposed decision on cost of capital, which would have set SCE’s authorized ROE at 10.30% beginning in 2018, was withdrawn from the April 2017 agenda; timing of further action was undefined.
- The MHI arbitration produced a final net award to SCE of approximately $47 million, reduced from an initial $52 million determination. SCE will not appeal and recorded the recovery as a regulatory liability because allocation under the San Onofre settlement remains uncertain.
- SCE continued to record an $815 million San Onofre regulatory asset, which management judged probable, though not certain, of recovery. Parties are pursuing mediation over whether the CPUC-approved settlement should be modified or vacated.
- California wildfire claims, including potential inverse-condemnation liability, remain a significant exposure. SCE had approximately $1 billion of wildfire insurance through May 31, 2017, with a $10 million self-insured retention per occurrence; future coverage and losses are uncertain.
- Other disclosed exposures include environmental remediation (a $130 million recorded liability, with possible excess costs), nuclear insurance assessments and spent-fuel storage. SCE’s commodity derivatives were a net liability of approximately $1.2 billion at March 31; regulatory mechanisms generally defer related gains and losses rather than affect earnings.
- Edison International was reviewing its competitive Edison Energy Group businesses; the review could affect recovery of its investments. This is a parent-company matter, not a material separate SCE operating segment.
Important facts for investors to verify
- Track CPUC decisions on the 2018 general rate case, grid-modernization cost recovery and authorized ROE.
- Monitor the San Onofre settlement proceeding, the treatment of the $47 million MHI award and recoverability of the $815 million regulatory asset.
- Assess SCE’s capital spending, project timing and financing needs against operating cash flow and available credit.
- Review wildfire insurance renewal, potential liability beyond coverage, and the status of environmental and nuclear contingencies.
- Distinguish SCE results from Edison International consolidated results; this combined filing also reports parent-company activities.