Edison International 2016 Form 10-K Summary
Business Context and Reporting Period
This combined Form 10-K covers Edison International and its wholly owned utility subsidiary, Southern California Edison Company (SCE), for the fiscal year ended December 31, 2016. SCE supplies and delivers electricity across approximately 50,000 square miles in Southern California and serves approximately 5 million customers. Edison Energy Group pursues competitive energy-services and distributed-solar activities, but remains immaterial as a separate reporting segment.
Financial Performance and Key Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Operating revenue | $11.869 billion | $11.524 billion | +$345 million |
| Operating income | $2.092 billion | $2.008 billion | +$84 million |
| Income from continuing operations | $1.413 billion | $1.082 billion | +$331 million |
| Net income attributable to common shareholders | $1.311 billion | $1.020 billion | +$291 million |
| Diluted EPS | $3.97 | $3.10 | +$0.87 |
| Operating cash flow | $3.256 billion | $4.509 billion | -$1.253 billion |
| Capital expenditures | $3.734 billion | $4.225 billion | -$491 million |
- Consolidated operating margin was approximately 17.6%; net income attributable to common shareholders represented approximately 11.0% of revenue.
- SCE generated $11.830 billion of revenue, $2.217 billion of operating income and $1.376 billion of net income available for common stock. SCE’s operating margin was approximately 18.7%.
- SCE’s rate base increased to $25.9 billion from $24.6 billion at year-end 2015.
- At December 31, 2016, Edison International reported $96 million of cash and cash equivalents, $10.175 billion of long-term debt, $1.307 billion of short-term debt and total assets of $51.319 billion.
- SCE had $1.890 billion available under its $2.75 billion revolving credit facility. Edison International Parent had $712 million available under its $1.25 billion facility.
- SCE’s debt-to-total-capitalization ratio was 0.43 to 1, versus a covenant limit of 0.65 to 1. Edison International Parent’s ratio was 0.47 to 1.
- Edison International declared dividends of $1.9825 per share for 2016 and increased its annualized dividend rate by 13%, from $1.92 to $2.17 per share.
Material Changes Versus the Prior Comparable Period
- Net income attributable to Edison International common shareholders increased 29%, primarily because SCE earnings rose $378 million. SCE’s increase included $370 million of higher non-core earnings and only $8 million of higher core earnings.
- SCE core earnings increased modestly to $1.376 billion from $1.368 billion, benefiting from the 2015 General Rate Case escalation mechanism and lower operations and maintenance costs, partly offset by higher financing and tax costs.
- 2015 included a $382 million after-tax write-down of regulatory assets related to incremental tax repair deductions, $12 million of after-tax NEIL insurance recoveries and $10 million of after-tax income from the Edison Capital affordable-housing portfolio sale. These items did not recur in 2016.
- Edison International Parent and Other generated a $77 million loss in 2016 versus a $13 million loss in 2015. Edison Energy Group’s loss increased by $32 million, including a $13 million after-tax charge for an earn-out buyout, higher development costs and lower solar-system margins.
- Operating cash flow declined primarily because 2015 benefited from substantial regulatory-account cash inflows, while 2016 included lower ERRA overcollections and customer refunds. SCE operating cash flow was $3.523 billion, down from $4.624 billion.
- Capital expenditures decreased but remained substantial. SCE spent approximately $3.633 billion in 2016 and forecasts up to $19.3 billion of capital expenditures for 2017–2020, including $2.284 billion for grid modernization.
Guidance, Outlook, Commentary, Risks and Unusual Items
- SCE requested a 2018 revenue requirement of $5.885 billion, a $222 million increase over projected 2017 authorized revenue, plus proposed revenue requirement increases of $533 million in 2019 and $570 million in 2020. Final CPUC authorization and timing remain uncertain.
- SCE’s proposed transportation-electrification plan has an estimated five-year cost of $554 million, plus approximately $19 million for six pilot projects. These projects are subject to CPUC approval and are excluded from current capital forecasts.
- The CPUC is reviewing whether to modify or vacate the San Onofre OII Settlement Agreement because of concerns regarding untimely reporting of ex parte communications. SCE had $857 million remaining to collect under the settlement at December 31, 2016; recovery is probable according to management but not certain.
- SCE is pursuing at least $4 billion in damages from Mitsubishi Heavy Industries in arbitration related to defective San Onofre replacement steam generators. MHI disputes liability, and no recovery is assured.
- San Onofre decommissioning costs were estimated at $4.4 billion in 2014 dollars, with SCE’s share estimated at $3.3 billion. SCE held $2.8 billion in related trust funds at year-end 2016. The estimate is subject to potential changes in waste disposal, remediation, permitting, execution and spent-fuel assumptions.
- Total Edison International contractual obligations were estimated at $57.148 billion, including $31.199 billion of renewable-energy purchase commitments and $18.801 billion of SCE debt maturities and interest.
- Wildfire liability and insurance availability are material risks. SCE had approximately $1 billion of wildfire liability coverage through May 31, 2017, with a $10 million self-insured retention per occurrence.
- Other principal risks include adverse CPUC, FERC or NRC decisions; delayed cost recovery; financing and interest-rate risk; regulatory disallowances; natural disasters and wildfires; cybersecurity and physical-security events; environmental compliance; and increasing customer-owned generation, storage and community-choice aggregation.
- The filing states that management concluded internal controls over financial reporting were effective as of December 31, 2016, and the independent auditor issued an unqualified opinion.
Important Facts for Investors to Verify
- Track the CPUC’s final decision on SCE’s 2018–2020 General Rate Case and any change to authorized return on equity or revenue requirements.
- Monitor the San Onofre settlement review, the $857 million regulatory asset and the outcome of SCE’s MHI arbitration.
- Assess whether San Onofre decommissioning trusts remain sufficient as contractor estimates and spent-fuel assumptions are updated.
- Reconcile reported GAAP earnings with management’s non-GAAP core earnings, particularly the effect of tax items, regulatory asset recoveries and other non-core items.
- Evaluate funding needs for the $19.3 billion 2017–2020 capital program, including grid modernization projects that lack final regulatory approval.
- Review wildfire insurance limits, self-insured exposure and potential changes in California liability standards.
- Consider Edison International Parent’s reliance on SCE dividends, which are subject to SCE capital-structure and regulatory restrictions.
- Review the extensive power-purchase commitments, regulatory balancing-account overcollections of approximately $1.7 billion, and the potential effects on future rates and liquidity.