Business Context and Reporting Period
Edison International filed a combined Form 10-K with Southern California Edison Company (SCE) for the fiscal year ended December 31, 2013. Edison International is a holding company whose principal operating subsidiary is SCE, a regulated electric utility serving approximately 14 million people and about 5 million customer accounts across Southern California. The filing is an annual report, not a standalone fourth-quarter filing; fourth-quarter data is presented in unaudited quarterly information.
Following Edison Mission Energy’s Chapter 11 filing on December 17, 2012, EME was deconsolidated and presented as discontinued operations. Edison International also acquired SoCore Energy, a distributed solar developer, in August 2013.
Key Financial Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Edison International operating revenue | $12.581 billion | $11.862 billion | Up $719 million |
| Income from continuing operations | $979 million | $1.594 billion | Down $615 million |
| Net income attributable to common shareholders | $915 million | $(183) million | Improved $1.098 billion |
| Diluted EPS, continuing operations | $2.67 | $4.55 | Down $1.88 |
| Diluted total EPS | $2.78 | $(0.56) | Improved $3.34 |
| Net cash provided by operating activities | $3.203 billion | $3.334 billion | Down $131 million |
| Capital expenditures | $3.599 billion | $4.149 billion | Down $550 million |
| Total assets | $46.646 billion | $44.394 billion | Up $2.252 billion |
| Long-term debt, excluding current portion | $9.825 billion | $9.231 billion | Up $594 million |
| Dividends declared per share | $1.3675 | $1.3125 | Up $0.055 |
Edison International’s 2013 operating margin was approximately 13.6%, compared with approximately 19.3% in 2012. Continuing-operations net margin was approximately 7.8%, compared with approximately 13.4% in 2012. The filing does not present a consolidated EBITDA measure.
SCE reported operating revenue of $12.562 billion, net income of $1.000 billion, and net income available for common stock of $900 million in 2013, compared with $11.851 billion, $1.660 billion, and $1.569 billion, respectively, in 2012. SCE’s operating margin was approximately 13.9% in 2013 versus 19.2% in 2012.
SCE generated $3.284 billion of operating cash flow, used $3.783 billion in investing activities, and generated $508 million in financing activities. SCE had $54 million of cash, $2.459 billion of available revolving credit capacity, and a debt-to-total-capitalization ratio of 0.46 to 1. Edison International had $1.216 billion of available revolving credit capacity and a consolidated debt-to-total-capitalization ratio of 0.45 to 1.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily because of authorized rate increases and higher FERC transmission revenue, while fuel and purchased-power costs increased by approximately $752 million in SCE’s cost-recovery activities.
- Continuing-operations earnings declined primarily because of lower tax benefits, the cessation of San Onofre rate-base returns, and a $575 million pre-tax impairment charge related to the permanent retirement of San Onofre Units 2 and 3. The after-tax impairment charge was $365 million.
- SCE’s core earnings declined from $1.338 billion to $1.265 billion. Core earnings are a non-GAAP measure and exclude discontinued operations and significant discrete items.
- Operating cash flow declined because of tax payments, higher ERRA undercollections, increased public-purpose and energy-efficiency spending, and severance payments.
- Capital expenditures declined to $3.5 billion from $3.9 billion, reflecting lower San Onofre and SmartConnect spending and project timing, partly offset by increased distribution investment.
- Long-term debt increased, while SCE issued approximately $1.973 billion of long-term debt and $387 million of preference stock, redeemed $400 million of preference stock, and paid $486 million of common dividends to Edison International.
- Edison International’s 2012 results included a $1.3 billion after-tax charge associated with EME’s deconsolidation and bankruptcy; 2013 included $36 million of discontinued-operations income related primarily to revised tax estimates.
Guidance, Outlook, Commentary, Risks and Unusual Items
- SCE forecast 2014–2017 capital expenditures of approximately $15.1 billion to $17.2 billion, primarily for transmission, distribution, reliability, and infrastructure replacement.
- SCE’s 2015 general rate case requested a base-rate revenue requirement of $6.383 billion after removal of Four Corners costs. The company estimated a $127 million increase over currently authorized base-rate revenue, but the ultimate CPUC-approved amount and timing were uncertain.
- The ERRA balancing account had an approximately $1.0 billion undercollection at December 31, 2013. SCE requested a 2014 revenue-requirement increase of approximately $1.97 billion, subject to CPUC review and potential deferral of San Onofre-related costs.
- SCE recorded a $1.325 billion San Onofre regulatory asset at year-end, based on management’s conclusion that recovery was probable but not certain. Approximately $266 million of estimated customer refunds was recorded against the asset. The CPUC’s San Onofre investigation could result in disallowances or refunds.
- SCE sought at least $4 billion from Mitsubishi Heavy Industries through arbitration concerning the defective San Onofre replacement steam generators. MHI asserted counterclaims of approximately $41 million. No recovery from MHI had been recognized beyond amounts already received.
- SCE had submitted insurance claims relating to San Onofre outage losses, including an estimated $311 million share of claims under accidental outage coverage, but no insurance recovery had been recognized pending a coverage determination.
- San Onofre decommissioning trust funds totaled approximately $3.18 billion at December 31, 2013. The total nuclear decommissioning asset-retirement obligation was approximately $3.3 billion, and management estimated total decommissioning expenditures of approximately $7.1 billion through 2053.
- In February 2014, Edison International, EME, and consenting noteholders entered into a settlement agreement that would extinguish existing EME claims, retain EME tax attributes within the Edison consolidated tax group, and require payments currently estimated at $225 million initially plus approximately $199 million and $210 million in 2015 and 2016. Bankruptcy Court approval was pending and the arrangement was not reflected in the 2013 financial statements.
- Other significant risks include regulatory cost recovery, access to capital markets, commodity prices, environmental compliance, nuclear decommissioning, wildfire liability, cyber and physical security, weather and natural disasters, and potential tax disputes. SCE had $50.774 billion of disclosed contractual obligations, including debt, power-purchase agreements, leases, and other commitments.
Most Important Facts for Investors to Verify
- CPUC decisions in the San Onofre investigation, including potential cost disallowances, customer refunds, and treatment of the $1.325 billion regulatory asset.
- Actual outcomes of the MHI arbitration and NEIL insurance claims, neither of which was assured or fully recognized in the 2013 accounts.
- Bankruptcy Court approval and final implementation of the EME settlement, including the final valuation of EME tax attributes and Edison International’s payment obligations.
- Recovery and timing of the approximately $1.0 billion ERRA undercollection and the outcome of the 2014 ERRA proceeding.
- Funding requirements and regulatory recovery for the $15.1 billion to $17.2 billion 2014–2017 capital program and future decommissioning costs.
- Liquidity after debt maturities, capital spending, dividends, collateral requirements, and any settlement-related payments.
- Exposure to wildfire, nuclear, environmental, tax, cyber-security, and other contingencies disclosed in the filing.