Southern California Edison Company — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter report; the filing also provides unaudited Q4 results. SCE is a regulated electric utility serving approximately 14 million people in Southern California. Edison International is its parent.
Financial performance and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Operating revenue | $13.380 billion | $12.562 billion |
| Operating income | $2.529 billion | $1.751 billion |
| Net income | $1.565 billion | $1.000 billion |
| Net income available to common shareholder | $1.453 billion | $900 million |
| Operating cash flow | $3.660 billion | $3.048 billion |
| Capital expenditures, including accruals | $3.967 billion | $3.5 billion |
| Cash and cash equivalents at year-end | $38 million | $54 million |
| Long-term debt, including current portion, plus short-term debt | $10.591 billion | $10.197 billion |
- Operating margin was approximately 18.9% in 2014, versus 13.9% in 2013. SCE’s effective income tax rate was 23.2%, up from 21.8%.
- Operating cash flow less reported capital expenditures was approximately negative $197 million; SCE funded investment and liquidity needs through financing and other sources.
- SCE had $2.274 billion available on its $2.75 billion credit facility. Its debt-to-total-capitalization ratio under the credit covenant was 0.44, below the 0.65 limit.
- SCE’s authorized return on common equity was 10.45% for 2015 and 2016, subject to the rate-index trigger mechanism.
Fourth-quarter results
In Q4 2014, SCE reported operating revenue of $3.104 billion, operating income of $715 million, net income of $408 million and net income available for common stock of $380 million. The comparable Q4 2013 amounts were $2.931 billion, $505 million, $283 million and $258 million, respectively. Q4 2014 included a $24 million after-tax reduction in the estimated impact of the San Onofre settlement.
Material changes versus the prior year
- Revenue increased 6.5%; net income available to common stock increased 61%. Management attributed improved core earnings principally to higher authorized revenues supporting rate-base growth, higher income tax benefits and lower severance costs.
- SCE core earnings rose to $1.525 billion from $1.265 billion. This non-GAAP measure excludes significant items; 2014 GAAP common earnings included a $72 million after-tax San Onofre settlement-related charge.
- Purchased power and fuel expense increased $702 million, primarily due to warmer-weather load and higher power and gas prices. These costs are generally tracked for recovery through regulatory mechanisms, but timing differences affect cash flow.
- Capital expenditures were approximately $4.0 billion, compared with $3.5 billion in 2013. Year-end rate base, excluding San Onofre, rose to $23.3 billion from $21.1 billion.
- Cash from operations increased $612 million. Regulatory-account movements, including fuel and power procurement undercollections, continued to affect cash generation.
Outlook, management commentary and significant matters
- Rates and investment: SCE forecast 2015–2017 capital spending of $11.8–$13.4 billion. Its updated 2015 general rate case request was $5.713 billion, $80 million above currently authorized base-rate revenue; proposed post-test-year increases were $286 million for 2016 and $315 million for 2017. A final decision was not expected until later in 2015, and the authorized outcome was uncertain.
- San Onofre: The CPUC-approved settlement resolved key cost-recovery proceedings and was expected to produce approximately $540 million in customer refunds. SCE reported a $1.03 billion ERRA undercollection at year-end. The settlement remains subject to legal challenges, and a requested investigation into an ex parte communication could create regulatory and reputational exposure.
- Decommissioning: The 2014-dollar estimated San Onofre decommissioning cost was $4.4 billion, including SCE’s $3.3 billion share; the trust held $3.4 billion at year-end. SCE estimated about $200 million of its 2015 costs, pending CPUC approval to draw on the trust. Estimates depend on uncertain assumptions, including nuclear-waste disposal and federal spent-fuel removal timing.
- Potential San Onofre recoveries: SCE seeks at least $4 billion in arbitration damages from Mitsubishi Heavy Industries, which denies liability and asserts a $41 million counterclaim. SCE also notified its insurer of claims; estimated outage-insurance claims through August 2014 were about $433 million overall, including approximately $339 million attributable to SCE. No insurance recovery was recorded, and recoveries are uncertain and subject to sharing with customers.
- Funding and dividends: SCE expected to fund 2015 obligations and investment through operating cash flow, tax benefits and debt or preferred-equity financing as needed. Edison International raised its annual common dividend rate from $1.42 to $1.67 per share and stated a longer-term target payout ratio of approximately 45%–55% of SCE earnings. SCE’s upstream distributions are restricted; only about $87 million of additional dividends were available under the year-end capital-structure limitation.
- Other risks and contingencies: SCE disclosed a $25 million proposed civil penalty in the Shaver Lake dam proceeding, disputed by SCE; $108 million of estimated minimum environmental-remediation liability; and risks involving wildfire insurance, nuclear liabilities, regulatory cost recovery, capital-market access, cyber and physical security, and labor negotiations. IBEW agreements had expired at year-end but remained in force during negotiations.
- Unusual reporting item: The filing revised 2013 cash-flow presentation for nuclear-decommissioning trust activity. Management said the correction did not affect balance sheets, income, equity or net change in cash and was not material to prior-period financial statements. The auditors issued unqualified opinions; Edison International and SCE reported effective disclosure controls, and Edison International’s internal-control assessment was audited.
Important facts for investors to verify
- Track the final 2015 GRC decision, resulting rate recovery, and progress in collecting the ERRA undercollection.
- Review challenges to the San Onofre settlement, the ex parte investigation, and any CPUC decisions on access to decommissioning trust funds.
- Monitor actual San Onofre decommissioning costs against estimates and the timing and outcome of MHI arbitration and NEIL insurance claims.
- Assess whether planned capital spending, financing needs, and regulatory approvals support SCE’s liquidity and permitted dividends to Edison International.
- Check whether wildfire coverage remains available on adequate terms and whether environmental, safety, or other proceedings produce penalties, disallowances, or additional costs.