SOUTHERN CALIFORNIA EDISON Co quarterly report, Q2 FY2015

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 six months ended June 30, 2015. The combined filing also reports Edison International, SCE’s parent; figures below are for SCE unless identified otherwise.

Financial performance and position

Metric	Q2 2015	Q2 2014	Six months 2015	Six months 2014
Operating revenue	$2.901 billion	$3.014 billion	$5.409 billion	$5.938 billion
Operating income	$536 million	$593 million	$1.086 billion	$935 million
Net income available for common stock	$384 million	$362 million	$689 million	$570 million
Net cash provided by operating activities	Not separately stated for the quarter	$1.689 billion	$1.083 billion

• Six-month capital expenditures were $2.187 billion, versus $1.853 billion in 2014. Net cash used in investing activities was $2.213 billion; net cash provided by financing activities was $539 million.
• At June 30, SCE had $53 million in cash, $851 million in short-term debt and $10.654 billion in long-term debt. Available capacity under its $2.75 billion revolving credit facility was $1.78 billion. Its credit-facility debt-to-capitalization ratio was 0.46, against a maximum of 0.65.
• SCE’s total assets were $50.693 billion and total liabilities were $37.025 billion. Its San Onofre regulatory asset was $1.203 billion.

Material changes versus the prior comparable period

• Q2 revenue declined $113 million, while common-stock earnings rose $22 million. Six-month revenue declined $529 million, while common-stock earnings increased $119 million.
• Lower purchased-power and fuel costs—partly reflecting lower power and gas prices, cooler weather and prior-year CAISO items—reduced cost-recovery revenue and expense. SCE states these cost-recovery activities generally do not affect earnings.
• Six-month operating income rose despite lower revenue, in part because 2014 included a $231 million San Onofre impairment and other charge. Higher depreciation and amortization in 2015, including San Onofre regulatory-asset amortization and transmission and distribution investment, partly offset the improvement.
• Q2 2015 included $100 million of income-tax benefits from revisions to uncertain-tax-position liabilities, partly offset by other tax-estimate changes. This materially reduced the quarterly effective tax rate; the filing reports SCE rates of 1.7% for Q2 2015 and 20.0% for Q2 2014.
• Retail billed and unbilled revenue, excluding wholesale sales and balancing-account effects, was $2.8 billion in the first half of 2015 versus $2.6 billion in the first half of 2014. Lower sales volumes due mainly to cooler weather were offset by rate increases; SCE’s decoupling mechanism means retail sales changes do not directly affect earnings.

Outlook, management commentary, risks and unusual items

• Rates and capital spending: SCE’s updated 2015 general rate case request was $5.512 billion, $121 million below currently authorized base revenue, with proposed increases in 2016 and 2017. The CPUC had not issued a final decision; the eventual revenue requirement is uncertain, though an approved memorandum account would make it effective retroactively to January 1, 2015. SCE deferred $85 million of first-half 2015 authorized base revenue pending the proceeding.
• Capital plan: SCE forecast $11.5–$13.1 billion of capital expenditures for 2015–2017, including $3.6–$4.1 billion in 2015, after reducing its forecast by about $325 million. The Coolwater-Lugo project was removed from the forecast after the CPUC dismissed its approval proceeding. Future spending, including distribution-grid modernization, depends on regulatory decisions and project timing.
• San Onofre: SCE had $3.4 billion in decommissioning trust funds. In July 2015, after quarter-end, the CPUC approved access to the trusts to reimburse approximately $340 million of 2013–2014 decommissioning costs; customer refunds through ERRA are required for amounts previously funded through rates. SCE estimated its share of 2015 decommissioning costs at about $230 million, with costs incurred before trust access funded by SCE.
• San Onofre proceedings and claims: The approved settlement remains subject to a pending rehearing request and an appeal of the dismissal of a federal challenge. Parties sought CPUC penalties, including ORA’s $648 million recommendation and A4NR’s $38.2 million recommendation; SCE said it could not predict outcomes. SCE was cooperating with state and federal criminal investigations concerning communications with CPUC decision-makers. SCE’s arbitration claim against Mitsubishi Heavy Industries seeks at least $4 billion; NEIL outage-insurance claims include approximately $339 million attributable to SCE. No NEIL recovery had been recognized, and recoveries from either source are uncertain.
• Other contingencies: SCE recorded a $115 million estimated minimum liability for 19 material environmental-remediation sites; the filing says costs could exceed the recorded amount. Wildfire liability coverage renewed at $610 million, with a $10 million self-insured retention per occurrence, and additional coverage of $390 million for certain claims. SCE also disclosed a $25 million civil-penalty demand concerning the Shaver Lake Dam project, which it disputes.
• Funding and obligations: SCE expected to fund 2015 obligations, capital spending and dividends through operating cash flow and, as needed, debt or preferred-equity financing and credit facilities. Edison International, the parent, separately owes EME settlement payments of $204 million in September 2015 and $214 million in September 2016.
• Other developments: SCE’s labor agreements with most IBEW members were approved June 30, 2015 and include retroactive pay increases and modified benefit plans. Management reported disclosure controls were effective; SCE was transitioning some IT services to third parties and continuing oversight of related financial-reporting controls.

Important facts for investors to verify

1. Track the CPUC’s final 2015 general rate case decision, including the final revenue requirement and the treatment of deferred revenue and repair-tax benefits.
2. Assess the sustainability of earnings apart from the $100 million Q2 tax benefit and the timing of San Onofre regulatory-asset recovery and amortization.
3. Monitor San Onofre investigations, penalty requests, settlement challenges, and the uncertain MHI and NEIL recoveries.
4. Reconcile capital spending and funding needs with operating cash flow, debt maturities, facility availability and SCE’s dividend restriction; the filing reports $11.5–$13.1 billion of planned 2015–2017 capital spending.
5. Review wildfire insurance limits and exclusions, environmental-remediation estimates, and the outcome of the Shaver Lake proceeding.