Regulated Utilities’ Earnings Continue to Roll

By Published On: November 6, 2014

Financial risks of California’s regulated utility income these days aren’t a big concern of the investor community. Wall Street analysts no longer question the solidity of the state’s investor-owned utilities given the constant, and increasing, stream of ratepayer financing for both new and old infrastructure. A decade ago, investors were bailing on California utilities. This quarter’s returns show that the financial community has got its deck shoes solidly back on utilities’ boat, sans shaky sea legs. That goes hand-in-rope with ratepayers’ increasing bills as the California Public Utilities Commission continues approving rate increases for utility investments. For instance, the most recent triennial California general rate case—Pacific Gas & Electric’s—provides increased ratepayer requirements to fund the utility. The rate outcome was not as much as the utility requested, which was $1.16 billion. Instead, the state approved about that amount. Still, the financial community sees the general rate case decision as a plus for investors. Now, analysts appear more focused on accounting measures. Highlights of the third quarter reports are: Edison International—Southern California Edison’s parent company reported $496 million in net income for the third quarter 2014. In the same quarter 2013, the earnings were $463 million. The utility’s net profit for the quarter was $503 million, compared with $477 million in the third quarter last year. The utility provides the income for the parent company, which uses a couple hundred million for its own "needs. While the utility awaits a California Public Utilities Commission decision on refunding ratepayers for some of the San Onofre Nuclear Generating Station’s rates for 2012, Ted Craver, Edison International chief executive officer, explained to the financial community that the latest iteration of the settlement calls for 95 percent of any insurance proceeds the utility is able to procure to go principally to its customers. Shareholders would receive the remaining 5 percent. Edison’s filed for $334 million in claims for the steam generators that failed, leaving the nuclear plant closed since January 2012. Shareholders’ return on the San Onofre investments for the year 2012 would be limited to 2.62 percent. It also calls for a $20 million utility contribution to the University of California that Craver called “philanthropic.” The commission is slated to vote on the settlement Nov. 20. The utility is cutting expenses because operations and maintenance is down at the nuclear facility, but also because it sold its share in the Four Corners coal-fired plant, according to executives. In April, Edison gave notice that it intended to lay off over 400 employees. The company plans to invest $9.2 billion in its distribution infrastructure, and $4.9 billion in new transmission projects. Altogether, that should turn out to be about $4 billion/year, according to executives. Pacific Gas & Electric Corp.—With policy makers approval of its triennial rate case, the utility’s parent posted net income of $811 for this quarter. Last year, the third quarter resulted in gains of $161 million. Unusually, the utility posted lower net income for the quarter at $763 million. In 2013 at this time it was $162 million. PG&E would have had even higher earnings if it received the $1.16 billion increase in its general rate case, but the commission adopted in August an increase of $460 million instead, noted executives (Current, Aug. 15, 2014). Chief executive officer Tony Earley told financial analysts that the utility’s been spending more than authorized in the last couple years “to improve operations.” While not as interesting to shareholders as their returns, financial analysts were concerned about the fallout from ex parte communications between PG&E and the commission in “judge shopping” for its gas transmission and storage rate case. There’s a potential $1 million fine and a prohibition against communications between the company and policy makers in commission proposed decisions. After word leaked about the communications, Earley said, “We took decisive action.” That included sacking top officials. He added that the company’s taking “meaningful steps” towards a “best-in-class” compliance model. He noted that the U.S. Attorney’s Office in San Francisco and the state attorney general’s office indicated they’re investigating the breach of protocol. PG&E aims at “rebuilding trust,” according to Earley. The company still plans to spend $5 billion/year for the next two years on capital investments to replace aging infrastructure. Sempra—The parent company of both SoCal Gas and San Diego Gas & Electric reported $348 million in net profit for the third quarter 2014. Last year at this time profits were lower at $296 million for the quarter. Of that total, SDG&E was up to $157 million for the quarter. In 2013, it provided $129 million in profits. SoCal Gas returned $98 million for the third quarter. This time last year the profits were up slightly at $102 million. Aside from quarterly vagaries, that’s $13 million more than 2013 for the company’s California utilities, according to executives. SoCal Gas is set to invest $1.5 billion in infrastructure, said Debbie Reed, Sempra chair. She added that SDG&E is about to spend $1.1 billion in capital investments. Sempra is disengaging itself from merchant generation, Reed said. Yet, beyond more investments in liquefied natural gas outside the state, executives didn’t say exactly what new ventures the company may consider. At the same time, the company is looking at investing in “petrochemical assets” worldwide, said Joe Householder, chief financial officer. “It’s a broader group that fits in with our strategy.” On the renewables side, Reed said that there is room for development, including adding to the 250 MW Copper Mountain solar plant on the Nevada-California border. She added that there’s also a possibility of expanding wind sites, although none of the company’s wind farms are in California.

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