Business Context and Reporting Period
This combined Form 10-K covers Edison International and its wholly owned regulated utility subsidiary, Southern California Edison Company (SCE), for the fiscal year ended December 31, 2017. SCE supplies and delivers electricity across approximately 50,000 square miles in Southern California and serves approximately 5.1 million customers. Edison Energy Group operates non-material competitive energy-services and distributed-solar businesses.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Edison International operating revenue | $12.320 billion | $11.869 billion | +3.8% |
| Edison International net income attributable to common shareholders | $565 million | $1.311 billion | -$746 million |
| Edison International diluted EPS | $1.72 | $3.97 | -$2.25 |
| SCE operating revenue | $12.254 billion | $11.830 billion | +3.6% |
| SCE net income available for common stock | $1.012 billion | $1.376 billion | -$364 million |
| SCE core earnings | $1.493 billion | $1.376 billion | +$117 million |
| Cash flow from operations: Edison International | $3.587 billion | $3.256 billion | +$331 million |
| Cash flow from operations: SCE | $3.725 billion | $3.523 billion | +$202 million |
| Capital expenditures: Edison International | $3.828 billion | $3.734 billion | +$94 million |
| Capital expenditures: SCE | $3.740 billion | $3.633 billion | +$107 million |
Edison International’s 2017 operating margin was approximately 12.1%, compared with 17.6% in 2016. Net margin attributable to common shareholders was approximately 4.6%, compared with 11.0% in 2016. The deterioration primarily reflects significant non-core charges rather than weaker underlying SCE core earnings.
- Edison International recorded $738 million of impairment and other charges, including a $716 million pre-tax charge related to the Revised San Onofre Settlement Agreement and a $16.5 million goodwill impairment at SoCore Energy.
- The San Onofre charge reduced Edison International earnings by approximately $448 million after tax and SCE earnings by the same amount.
- Tax Reform generated a $433 million deferred-tax remeasurement charge at Edison International Parent and Other and a $33 million charge at SCE. SCE also recorded approximately $5.0 billion of increased regulatory liabilities related to excess deferred taxes expected to be returned to customers over time.
- At December 31, 2017, Edison International reported $1.091 billion of cash and cash equivalents, $14.516 billion of short-term and long-term debt, and $11.671 billion of common shareholders’ equity.
- SCE reported $515 million of cash, $12.145 billion of short-term and long-term debt, and $12.427 billion of common shareholders’ equity.
- SCE had $1.413 billion of credit-facility availability at year-end, while Edison International Parent had $111 million available under its revolving facility. Both facilities mature in July 2022.
Material Changes Versus the Prior Comparable Period
- SCE core earnings increased 8.5% due primarily to higher authorized revenue under the 2015 general rate case escalation mechanism and lower operation and maintenance costs, partly offset by higher financing costs.
- SCE reported lower GAAP earnings because of the San Onofre settlement charge and the Tax Reform-related charge.
- SCE operating revenue increased $424 million. Purchased power and fuel expense increased $346 million, primarily because of higher power and natural-gas prices, while operation and maintenance expense decreased $66 million.
- SCE’s year-end rate base increased to $27.8 billion from $25.9 billion. Total 2017 capital expenditures were $3.8 billion, compared with $3.5 billion in 2016.
- Fourth-quarter Edison International net loss attributable to common shareholders was $545 million, compared with fourth-quarter 2016 net income of $329 million. The quarter included the San Onofre and Tax Reform charges.
- Edison International Parent and Other reported a $447 million loss from continuing operations, compared with a $77 million loss in 2016, primarily because of the $433 million Tax Reform charge. Edison Energy Group revenue increased to $69 million from $42 million, but the competitive businesses remained unprofitable.
- Net cash provided by operating activities increased for both Edison International and SCE, while SCE’s investing cash use increased with higher capital expenditures.
Guidance, Outlook, Commentary, Risks and Unusual Items
- SCE’s 2018 general rate case remained pending. Following Tax Reform, SCE’s updated 2018 revenue requirement request was $5.534 billion. A final CPUC decision was not expected until later in 2018, and the ultimate authorized amount and timing were uncertain.
- SCE forecasts up to $13.7 billion of capital expenditures for 2018–2020, including approximately $12.5 billion of traditional capital spending and $1.3 billion of grid-modernization spending. Management expects rate base to grow, subject to regulatory approval.
- The January 30, 2018 Revised San Onofre Settlement Agreement required CPUC approval. If approved, SCE would cease rate recovery when combined remaining San Onofre regulatory assets reached $775 million and would refund amounts collected after the cessation date.
- December 2017 wildfires caused substantial damage in SCE’s service territory. SCE incurred approximately $35 million of restoration capital expenditures and faced multiple lawsuits and regulatory investigations. As of the filing date, management could not reasonably estimate any potential material loss.
- SCE had approximately $1 billion of wildfire-specific insurance coverage through May 31, 2018, plus approximately $300 million of additional coverage for specified periods. Coverage limitations could leave material uninsured exposure.
- January 2018 Montecito mudslides generated additional claims alleging that the Thomas Fire contributed to the mudslides. Potential losses were not reasonably estimable.
- SCE estimated San Onofre Units 2 and 3 decommissioning costs at $3.4 billion, with an SCE share of $2.6 billion, through estimated completion in 2051. Nuclear decommissioning trusts totaled approximately $2.8 billion at year-end.
- SCE had approximately $39.9 billion of future power-purchase commitments, including $27.1 billion after 2022, and total contractual obligations of approximately $60.9 billion. Edison International’s consolidated contractual obligations totaled approximately $62.3 billion.
- Edison International expects Edison Energy to pursue breakeven earnings run-rate and 5% customer penetration by the end of 2019. The company was evaluating a sale of SoCore Energy and expected to record an approximately $65 million pre-tax loss in the first quarter of 2018 if the contemplated sale proceeded.
- Edison International increased its annual common dividend rate by 11.5%, from $2.17 to $2.42 per share. Future dividends depend substantially on SCE’s ability to upstream cash, maintain regulatory capital requirements and manage wildfire-related costs.
- PricewaterhouseCoopers issued unqualified opinions on Edison International’s and SCE’s financial statements. Edison International’s internal control over financial reporting was also reported effective; SCE was not required to receive an external internal-control attestation.
Most Important Facts for Investors to Verify
- CPUC decisions on the Revised San Onofre Settlement Agreement and the 2018 general rate case.
- Investigative findings, litigation developments, insurance recoveries and potential rate recovery relating to the December 2017 wildfires and Montecito mudslides.
- Whether wildfire liabilities could exceed SCE’s insurance coverage and restrict dividends or require additional financing.
- The sustainability of SCE’s core earnings growth after excluding San Onofre, Tax Reform and other non-core items.
- The approved level and timing of the planned $13.7 billion 2018–2020 capital program and its effect on debt, rate base and customer rates.
- Updates to San Onofre decommissioning estimates, trust-fund performance and CPUC cost-recovery determinations.
- The outcome of the potential SoCore Energy sale and the financial performance of Edison Energy Group.