Southern California Edison Company (SCE) — 2018 Form 10-K Summary
Business context and reporting period
This joint Edison International and SCE Form 10-K covers the year ended December 31, 2018, and was filed February 28, 2019. SCE, wholly owned by Edison International, is a regulated electric utility serving about 5.1 million customers across a roughly 50,000-square-mile area of Southern California. The filing also provides fourth-quarter results; it is not a standalone quarterly filing.
Financial performance and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Operating revenue | $12.611 billion | $12.254 billion |
| Operating income (loss) | ($406 million) | $1.547 billion |
| Net income available for common stock | ($310 million) | $1.012 billion |
| Core earnings, a non-GAAP measure | $1.440 billion | $1.493 billion |
| Operating cash flow | $3.191 billion | $3.735 billion |
| Capital expenditures | $4.491 billion | $3.756 billion |
| Cash and cash equivalents at year-end | $21 million | $515 million |
Revenue rose about 3%, mainly reflecting higher purchased-power and fuel costs passed through regulatory mechanisms. Reported earnings reversed sharply, principally because of the wildfire-related accrual. Core earnings declined $53 million, reflecting the 2017 cost-of-capital decision’s effect on revenue, higher wildfire insurance and vegetation-management costs, and higher financing costs, partly offset by tax benefits.
In the fourth quarter, SCE recorded a $2.013 billion operating loss and a $1.429 billion net loss available for common stock. The full-year wildfire accounting charge was $2.534 billion before tax and $1.825 billion after tax; the income statement separately reports $2.669 billion of wildfire-related claims expense, net of insurance recoveries.
At year-end, SCE reported $3.325 billion of current assets and $5.146 billion of current liabilities, including $21 million cash. Debt comprised $720 million of short-term debt, $79 million of current long-term debt, and $12.892 billion of long-term debt. SCE had $2.089 billion available under its $3.0 billion revolving credit facility. Its debt-to-total-capitalization ratio was 0.50 against a 0.65 covenant limit. Credit ratings remained investment grade, but Moody’s had the ratings under review for downgrade and Fitch and S&P had negative outlooks or watch status.
SCE’s year-end rate base was $29.6 billion, up from $27.8 billion. The company had $6.5 billion in regulatory assets and $9.9 billion in regulatory liabilities. Its 37-month average common-equity ratio was 49.7%; the wildfire charge reduced its spot ratio below 47%, prompting a planned request for a limited CPUC waiver.
Material changes versus the prior period
- SCE moved from $1.012 billion of common-stock income in 2017 to a $310 million common-stock loss in 2018, primarily due to the wildfire charge. In 2017, the Revised San Onofre Settlement had generated a separate $716 million pretax impairment charge.
- The $1.440 billion of 2018 core earnings was $53 million below 2017. Higher wildfire insurance premiums and vegetation-management expense, and higher financing costs, contributed to the decline.
- Operating cash flow fell $544 million year over year, while capital spending increased about $735 million. SCE funded investment and other needs with debt issuance and other financing; year-end cash declined substantially.
- Purchased power and fuel expense increased $533 million, mainly due to higher power and gas prices and volumes. These costs are generally subject to regulatory recovery, but affect cash flow timing.
- Wildfire liabilities and related insurance receivables became material balance-sheet items for the first time. The net earnings charge reflects estimated insurance and FERC recoveries, not a final determination of total liability.
Outlook, management commentary, risks and contingencies
- Wildfire exposure: SCE accrued $4.7 billion of estimated losses for the 2017/2018 Thomas Fire, Montecito Mudslides, and Woolsey Fire events, the lower end of its reasonably estimable range. It recorded $2.0 billion of expected insurance recoveries and $135 million of expected recovery through FERC-jurisdictional rates. Management said actual losses could exceed the accrual and that it could not reasonably estimate an upper end. Recovery of uninsured CPUC-jurisdictional costs remains uncertain. Investigations and litigation were ongoing; claims include inverse condemnation, negligence, personal injury, and wrongful death.
- Insurance and mitigation: Wildfire-specific coverage and premiums are subject to limits, retentions, and coinsurance. SCE reported approximately $237 million of wildfire insurance expense in 2018 and anticipated about $321 million in 2019 before regulatory deferrals. Its wildfire mitigation and safety spending plans require regulatory review, and cost recovery is not assured.
- Rates and investment: The 2018–2020 general rate case (GRC) remained pending. SCE requested revenue requirements of $5.534 billion for 2018, $5.965 billion for 2019, and $6.468 billion for 2020; absent a decision, it recognized revenue using the prior authorized requirement adjusted for the cost-of-capital decision and tax reform. Planned capital expenditures were $4.477 billion for 2019 and $4.692 billion for 2020, subject to approvals and the GRC outcome.
- Funding and dividends: SCE expected to fund the next 12 months through operating cash flow, capital-market financing, and available credit. In February 2019 it borrowed $750 million under a term loan, using proceeds to repay commercial paper and for general purposes. It declared a $200 million dividend to Edison International on February 28, 2019; future dividends depend on liquidity, capital needs, regulatory limits, and wildfire outcomes.
- San Onofre: Spent-fuel transfers were suspended after an August 2018 canister-loading incident; SCE could not predict when work would resume. The latest estimate for Units 2 and 3 decommissioning was $3.4 billion in 2017 dollars, of which SCE’s share was $2.5 billion, with completion currently estimated in 2051. SCE held $2.6 billion in related trust funds; cost, permitting, and spent-fuel-storage uncertainty could require additional funding.
- Tax reform and regulation: The federal corporate tax rate fell from 35% to 21%. SCE recorded most deferred-tax remeasurement through regulatory accounts, with customer refunds expected over extended periods. A February 2019 CPUC resolution was expected to produce an approximately $70 million non-core tax benefit in the first quarter of 2019. Commodity-cost recovery, the pending GRC, and FERC transmission-rate proceedings remain important regulatory factors.
- Other business risks: Management highlighted natural disasters and climate-related weather, regulatory cost-recovery decisions, credit-rating deterioration, financing access, customer departures to community choice aggregators and other providers, infrastructure execution, nuclear decommissioning, and cybersecurity and physical security. No explicit earnings guidance was provided in the filing.
Most important facts for investors to verify
- Whether the wildfire investigations, litigation, and settlements ultimately result in losses above the $4.7 billion accrual, and whether expected insurance proceeds are collected.
- Whether the CPUC permits recovery of uninsured wildfire costs and wildfire-mitigation spending, and the timing and amount of the final GRC authorization.
- How wildfire liabilities, additional borrowing, credit-rating actions, and regulatory equity requirements affect liquidity, capital access, and future dividends.
- Whether SCE executes planned capital spending within regulatory approvals and maintains cash flow amid higher power costs and low year-end cash.
- Whether San Onofre fuel transfers resume, permits are obtained, and decommissioning costs remain within estimates and trust-fund capacity.
PricewaterhouseCoopers LLP issued an unqualified opinion on both companies’ financial statements. It also opined that Edison International maintained effective internal control over financial reporting; the filing states that SCE’s internal controls were assessed by management, but were not subject to an auditor attestation.