Business context and reporting period
Southern California Edison Company (SCE), wholly owned by Edison International, supplies and delivers electricity to about 5 million customers across roughly 50,000 square miles of Southern California. This combined Form 10-K reports the fiscal year ended December 31, 2015; financial figures below are for SCE unless identified otherwise.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Operating revenue | $11.485 billion | $13.380 billion |
| Operating income | $2.080 billion | $2.529 billion |
| Net income | $1.111 billion | $1.565 billion |
| Net income available for common stock | $998 million | $1.453 billion |
| Net cash from operating activities | $4.624 billion | $3.660 billion |
| Capital expenditures | $4.210 billion | $3.857 billion |
| Cash and cash equivalents at year-end | $26 million | $38 million |
| Long-term debt, excluding current portion | $10.537 billion | $9.624 billion |
SCE had $2.576 billion available on its $2.75 billion revolving credit facility at year-end. Its debt-to-total-capitalization ratio was 0.44 against a credit-facility maximum of 0.65. Net regulatory balancing-account overcollections were approximately $2.0 billion, largely amounts expected to be refunded or otherwise returned to customers. SCE’s year-end assets were $49.872 billion and equity was $13.672 billion.
Material changes versus the prior comparable period
- Common-stock income declined $455 million, or about 31%; management’s non-GAAP core earnings fell to $1.368 billion from $1.525 billion.
- Revenue decreased $1.895 billion, while purchased-power and fuel costs fell $1.327 billion. The revenue and cost-recovery changes largely reflect regulated pass-through mechanisms rather than an equivalent change in underlying earnings.
- The 2015 results include a $382 million write-down of a regulatory asset after the CPUC’s general rate case decision changed treatment of deferred tax benefits tied to 2012–2014 tax repair deductions. Management classified the charge as non-core. SCE also recorded a $212 million regulatory liability for customer refunds related to 2015 tax repair deductions.
- Fourth-quarter SCE net income was a loss of $51 million and income available for common stock was a loss of $80 million, compared with 2014 fourth-quarter income of $408 million and $380 million, respectively; the tax-related regulatory-asset write-down was the principal unusual item.
- Operating cash flow increased $964 million, primarily reflecting changes in regulatory assets and liabilities, including balancing-account movements. Cash flow should therefore be read alongside the timing of customer collections and refunds.
Outlook, management commentary, risks and unusual items
- SCE forecast 2016–2017 capital expenditures of $8.0–$8.3 billion. It reported $3.9 billion of capital expenditures in 2015 on the MD&A basis, including accruals. Planned investment emphasizes distribution and transmission infrastructure.
- The 2015 GRC authorized revenue requirements of $5.182 billion for 2015, $5.391 billion for 2016 and $5.663 billion for 2017. The decision was retroactive to January 1, 2015; SCE expected to refund $451 million to customers beginning in January 2016. SCE planned to fund 2016 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 by 15%, from $1.67 to $1.92 per share, in December 2015. Management described a target payout ratio of 45%–55% of SCE earnings, with increases phased in over time.
- San Onofre Units 2 and 3 are permanently retired. The estimated decommissioning cost for those units was $4.4 billion in 2014 dollars, of which SCE’s share was $3.3 billion; the estimate and timing remain subject to substantial uncertainty. SCE’s San Onofre decommissioning trust funds were approximately $2.9 billion at year-end, and trust access and costs remain subject to regulatory review.
- In December 2015 the CPUC imposed a $16.74 million penalty over ex parte communications and related ethical-rule violations. Petitions seeking to reopen or reverse the San Onofre settlement, appeals, securities and derivative lawsuits, an ERISA action, and state and federal investigations remained unresolved; the companies said outcomes could not be predicted.
- SCE reached a $400 million NEIL insurance settlement for San Onofre steam-generator claims; SCE’s share was approximately $313 million. Under the settlement, proceeds are allocated 95% to customers and 5% to SCE after specified recovery costs. SCE is separately pursuing at least $4 billion in damages from Mitsubishi Heavy Industries in arbitration; recovery is uncertain and MHI disputes liability.
- Other risks include cost recovery and regulatory decisions, major project execution and permitting, wildfire exposure and insurance availability, nuclear decommissioning and spent fuel, cybersecurity, environmental requirements, and potential gas-supply and electric-grid reliability impacts from the Aliso Canyon storage-facility leak.
- PricewaterhouseCoopers issued unqualified audit opinions on the financial statements. Edison International reported effective internal control over financial reporting; SCE management also concluded its controls were effective.
Most important facts an investor should verify
- How much of the earnings and cash-flow changes reflects recurring utility performance versus GRC rate changes, balancing-account timing, tax items and other non-core adjustments.
- The final customer-refund amounts and timing, and the treatment of tax repair deductions under CPUC review and audits.
- Whether the San Onofre settlement remains in force, the outcomes and potential costs of related litigation and investigations, and any recovery from MHI beyond the NEIL settlement.
- Whether the $8.0–$8.3 billion 2016–2017 capital plan is completed on schedule and recovered through authorized rates, particularly for major transmission projects.
- The adequacy and permitted use of nuclear decommissioning trust assets, evolving cost estimates, wildfire insurance limits, and SCE’s ability to maintain financing access while funding capital needs and customer obligations.