Southern California Edison Company — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; filed February 28, 2011. This is an annual report, not a standalone fourth-quarter filing. SCE is a regulated electric utility and a wholly owned subsidiary of Edison International, serving more than 13 million people in Southern California.
Financial performance and position
| Metric | 2010 | 2009 |
|---|---|---|
| Operating revenue | $9.983 billion | $9.965 billion |
| Operating income | $1.864 billion | $1.918 billion |
| Net income | $1.092 billion | $1.371 billion |
| Net income available for common stock | $1.040 billion | $1.226 billion |
| Management-defined core earnings | $984 million | $874 million |
| Cash from operating activities | $3.386 billion | $4.069 billion |
| Capital expenditures | $3.780 billion | $2.999 billion |
| Long-term debt, including current portion | $7.627 billion | $6.740 billion |
Operating margin was approximately 18.7% in 2010 versus 19.3% in 2009, based on operating income and revenue. The effective tax rate rose to 28.7% from 16.3%. At year-end, total assets were $35.906 billion, total equity was $9.207 billion, cash and equivalents were $257 million, and available credit facilities totaled $2.870 billion. SCE’s debt-to-total-capitalization ratio was 0.46, below its 0.65 covenant limit.
Fourth-quarter 2010 revenue was $2.479 billion, operating income $383 million, net income $194 million, and net income available for common stock $181 million. The comparable 2009 figures were $2.434 billion, $361 million, $189 million, and $172 million, respectively.
Changes versus the prior year
- Revenue was nearly flat, while common-stock earnings fell $186 million. The 2010 net income figure included a $95 million after-tax Global Settlement benefit and a $39 million after-tax charge related to health-care legislation; 2009 included a larger $306 million Global Settlement benefit and a $46 million regulatory benefit.
- Core earnings increased $110 million, which management attributed mainly to higher operating income and allowance for funds used during construction, supported by rate-base growth, and lower income-tax expense.
- Operating cash flow declined $683 million, principally because 2009 included $875 million of Global Settlement tax-allocation receipts versus $26 million in 2010.
- Capital expenditures rose to $3.780 billion. SCE adopted new variable-interest-entity accounting and deconsolidated four cogeneration projects effective January 1, 2010; this affects comparability with 2009.
Outlook, management commentary, and material risks
- SCE forecast $15.6–$17.5 billion of capital expenditures for 2011–2014, primarily for distribution and transmission infrastructure, generation, smart meters, and solar. Management expected to fund investment through operating cash flow, tax benefits, debt and preferred-equity financing as needed.
- SCE’s 2012 CPUC rate-case application requested a $6.3 billion base-rate revenue requirement and an $866 million increase in 2012 base-rate revenue after sales-growth effects. The requested increase was not approved in this filing; SCE said the final decision and authorized amount were uncertain.
- A February 2011 FERC-approved settlement set a $490 million transmission base revenue requirement, up $42 million (9.4%); $58 million collected subject to refund was to be returned to customers.
- Bonus-depreciation tax provisions were expected to provide about $550 million of additional 2011 cash flow, primarily by accelerating deductions rather than creating permanent tax savings. SCE expected a federal tax net operating loss for 2010 and 2011.
- San Onofre remained under increased NRC scrutiny for performance and corrective-action issues. Additional management and operating costs were expected; unresolved issues could lead to further action, penalties, or unit shutdown.
- Key operating and regulatory exposures include wildfire liability and insurance availability, potential San Onofre cooling-system capital costs, evolving greenhouse-gas and air-quality rules, and reliability impacts if coastal power plants reduce or cease operations.
- The Navajo Nation litigation sought at least $600 million in damages plus at least $1 billion in punitive damages; SCE said it could not predict the outcome. Environmental remediation liabilities were $50 million for 23 identified material sites, with reasonably possible additional costs estimated up to $200 million for those sites.
- Other notable items: SCE agreed to sell its Four Corners interest for approximately $294 million, subject to approvals and conditions, with closing then estimated for the second half of 2012. The independent auditor issued an unqualified opinion; management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Progress and final authorized revenue recovery in the 2012 CPUC rate case, and execution of the forecast capital program.
- San Onofre operating performance, NRC findings, outage costs, and any required cooling-system investments.
- Liquidity and financing needs as operating cash flow declined and capital spending increased; monitor debt, credit access, and dividend capacity.
- Actual customer-rate treatment and cash timing for regulatory balancing accounts; year-end net overcollections were $1.3 billion, including $516 million expected to be refunded beginning June 2011.
- Resolution of the Navajo Nation litigation, environmental remediation exposures, wildfire insurance adequacy, and the pending Four Corners sale.
- Effects of the VIE deconsolidation and tax-related, non-core items when comparing reported results across periods.