Southern California Edison Company: 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. SCE is a regulated electric utility serving nearly 14 million people across approximately 50,000 square miles of Southern California. Its common stock is wholly owned by Edison International.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Operating revenue | $10.577 billion | $9.983 billion |
| Operating income | $2.123 billion | $1.864 billion |
| Net income | $1.144 billion | $1.092 billion |
| Net income available for common stock | $1.085 billion | $1.040 billion |
| Net cash from operating activities | $3.261 billion | $3.386 billion |
| Capital expenditures | $4.122 billion | $3.780 billion |
| Total assets | $40.315 billion | $35.906 billion |
| Long-term debt, including current portion | $8.431 billion | $7.627 billion |
Operating margin was approximately 20.1%, compared with 18.7% in 2010. Revenue increased 6.0% and operating income increased 13.9%; common earnings rose 4.3%. Management attributed higher core earnings primarily to rate-base growth. The 2010 comparison included a $95 million after-tax Global Settlement benefit and a $39 million after-tax health-care legislation charge; SCE reported 2011 core earnings of $1.085 billion versus $984 million in 2010.
Fourth-quarter 2011 revenue was $2.514 billion, operating income $474 million, net income $262 million, and common earnings $247 million. Fourth-quarter 2010 figures were $2.479 billion, $383 million, $194 million, and $181 million, respectively. SCE notes that results are seasonal, with the third quarter generally strongest.
Cash and cash equivalents were $57 million at year-end, versus $257 million a year earlier. Credit facilities totaled $2.894 billion, with $2.394 billion available after borrowings and letters of credit. SCE reported a debt-to-total-capitalization ratio of 0.48, within its 0.65 covenant limit. Net cash decreased by $200 million during 2011. Net regulatory balancing-account overcollections were $1.2 billion. The balance sheet included $30.357 billion of total liabilities and $9.958 billion of total equity.
Material changes and developments
- Revenue growth reflected authorized rate increases, transmission investment entering rate base, and SCE replacing power previously supplied under CDWR contracts that expired by year-end. Retail billed and unbilled revenue, excluding wholesale sales and balancing-account differences, was approximately $10.0 billion in both 2011 and 2010.
- Operating expenses increased to $8.454 billion from $8.119 billion. Higher depreciation and maintenance costs were partly offset by lower maintenance costs associated with the prior-year San Onofre Unit 3 outage.
- Operating cash flow declined $125 million, while capital spending increased. Investing cash outflow was $4.260 billion; financing provided $799 million, including debt and preference-stock issuance. SCE paid $461 million in common dividends to its parent.
- SCE’s net fair-value liability for commodity derivatives rose to $936 million from $207 million, largely reflecting lower power and natural gas prices. Regulatory mechanisms are expected to pass these fair-value changes through to customers rather than earnings, though cash flows may be affected.
Outlook, management commentary, and risks
- Rates and regulation: SCE requested a 2012 base-rate revenue requirement of $6.3 billion. Regulators and intervenors proposed substantial reductions to the request; a final CPUC decision was expected in the first half of 2012. SCE’s requested incremental base-rate increases were $809 million in 2012, $117 million in 2013, and $513 million in 2014. These were requests, not approved outcomes.
- Capital plan: Forecast capital expenditures for 2012-2014 were $11.8 billion to $13.2 billion. SCE identified reliability, grid expansion, renewable-energy transmission, generation, and smart-meter completion as priorities. Environmental capital expenditures were forecast at $499 million, $534 million, and $576 million for 2012, 2013, and 2014, respectively.
- Project execution: Direct cost estimates increased to $2.5 billion for the Tehachapi transmission project from $2.1 billion, and to $860 million for Devers-Colorado River from $649 million. Permitting, schedule delays, environmental mitigation, aviation marking requirements, and community opposition could add costs or delay completion.
- San Onofre: After year-end, Unit 3 was taken offline on January 31, 2012 following a leak in a newly installed steam-generator tube. Inspections also found isolated wear in Unit 2 tubes, with some removed from service preventively. NRC review and testing were ongoing; restart timing and replacement-power costs were uncertain. SCE expected to submit final steam-generator project costs to the CPUC in late 2012.
- Other material exposures: Risks include timely recovery of costs through regulated rates, extensive capital requirements and access to financing, nuclear safety and spent-fuel storage, wildfire liability and insurance availability, environmental compliance costs, and counterparty, commodity-price, and collateral requirements. Environmental remediation liabilities were $52 million; SCE said reasonably possible additional costs could reach $203 million across identified material and immaterial sites, with regulatory recovery expected for recorded costs.
- Contingencies: A CPUC preliminary report concerning the November 2011 San Gabriel Valley windstorm alleged safety-rule and evidence-preservation issues; SCE could not estimate potential penalties. In the Malibu wildfire proceeding, staff proposed approximately $50 million of penalties for SCE, which disputed the allegations. SCE also faced Four Corners Clean Air Act litigation and greenhouse-gas-related litigation; losses were not estimable for certain matters.
Most important facts for investors to verify
- Final CPUC outcomes for the 2012 General Rate Case and FERC transmission formula rates, including allowed returns, recovery timing, and any disallowances.
- San Onofre inspection findings, NRC actions, repair and restart schedules, replacement-power costs, and the CPUC’s review of steam-generator project costs.
- Updated cost, schedule, and regulatory approvals for Tehachapi and Devers-Colorado River, plus the expected 2012 sale of SCE’s Four Corners interest.
- Whether operating cash flow and available financing will support the capital program, debt maturities, benefit-plan funding, and dividends while maintaining covenant and regulatory capital requirements.
- Potential financial effects of wildfire claims, environmental rules and remediation, renewable procurement obligations, and other contingencies whose outcomes or costs remain uncertain.