SOUTHERN CALIFORNIA EDISON Co annual report, FY2016

Southern California Edison Company — 2016 Form 10-K Summary

Business context and reporting period

Reporting period: fiscal year ended December 31, 2016. SCE, a wholly owned subsidiary of Edison International, supplies and delivers electricity to approximately 5 million customers across roughly 50,000 square miles of Southern California. This combined 10-K includes separate financial statements for SCE and Edison International; the figures below are SCE figures unless otherwise noted.

Financial and operating performance

Metric	2016	2015
Operating revenue	$11.830 billion	$11.485 billion
Operating income	$2.217 billion	$2.080 billion
Net income	$1.499 billion	$1.111 billion
Net income available for common stock	$1.376 billion	$998 million
Operating cash flow	$3.523 billion	$4.624 billion
Cash capital expenditures	$3.633 billion	$4.210 billion
Cash and cash equivalents at year-end	$39 million	$26 million

• Operating margin was approximately 18.7%, versus 18.1% in 2015; net income margin was approximately 12.7%, versus 9.7%.
• Operating revenue includes regulated earning activities and cost-recovery amounts. Retail billed and unbilled revenue, excluding wholesale sales and balancing-account timing, was $10.7 billion, down from $12.2 billion in 2015, primarily reflecting lower authorized rates and cooler-weather-related load.
• SCE’s authorized revenue is generally decoupled from retail sales volume. Cost-recovery mechanisms allow recovery or refund of specified costs, but their balances can materially affect cash flow and do not generally earn SCE a return.
• Year-end rate base was $25.9 billion, up from $24.6 billion. SCE reported $9.754 billion of long-term debt, $579 million of current maturities and $769 million of short-term debt.
• Liquidity included $1.89 billion available under SCE’s $2.75 billion revolving credit facility. SCE’s debt-to-total-capitalization ratio under its credit covenant was 0.43, below the 0.65 limit.
• Net regulatory balancing-account overcollections were approximately $1.7 billion at year-end, primarily expected to be refunded or spent on customer programs. SCE also reported $7.8 billion of regulatory assets and $6.5 billion of regulatory liabilities.

Material changes versus prior year

• Net income available for common stock increased $378 million, or about 38%, to $1.376 billion. Core earnings, a non-GAAP measure, rose only $8 million to $1.376 billion. The larger reported increase chiefly reflects the comparison with the $382 million after-tax regulatory-asset write-down recorded in 2015.
• Revenue increased $345 million. Higher authorized revenue under the 2015 general rate case escalation mechanism and higher FERC-related revenue were partly offset by customer refunds of tax benefits and lower incentive awards.
• Operating and maintenance expense fell $153 million, while depreciation, decommissioning and amortization rose $83 million and interest expense rose $15 million.
• Income tax expense fell $251 million, to $256 million; the 2015 comparison included the regulatory-asset write-down. The effective tax rate was 14.6%, versus 31.3% in 2015.
• Operating cash flow declined $1.101 billion, largely reflecting the reversal of prior-year cash benefits from regulatory balancing accounts and changes in their overcollections. Capital expenditures also decreased from 2015.

Outlook, management commentary and key risks

• SCE forecasts up to $19.3 billion of capital expenditures for 2017–2020, including traditional infrastructure investment and grid modernization. Planned investment depends on regulatory approval, permitting and project execution. Management had no prior approval experience for grid-modernization capital spending and could not predict the CPUC’s decision.
• SCE’s 2018 general rate case requested a 2018 revenue requirement of $5.885 billion, $222 million above the projected 2017 authorized requirement, plus specified one-time recoveries. It also requested further increases for 2019 and 2020. These were requests, not approved outcomes.
• A joint petition filed in February 2017 proposed reducing SCE’s authorized return on equity from 10.45% to 10.30% beginning in 2018, subject to CPUC approval. SCE estimated an annual revenue-requirement reduction of approximately $66 million, or $39 million after tax.
• The CPUC’s review of the San Onofre settlement was reopened amid concerns about untimely reporting of ex parte communications. SCE had $857 million remaining to collect under the settlement at year-end; the settlement could be modified or vacated. Separately, SCE sought at least $4 billion in arbitration damages from Mitsubishi Heavy Industries over the replacement steam generators; recovery was uncertain.
• San Onofre decommissioning is expected to continue over many years. SCE estimated its share of decommissioning costs at $3.3 billion in 2014 dollars and held $2.8 billion in related trust funds at year-end. Estimates depend on costs, trust returns, spent-fuel disposal and other assumptions; a new cost estimate was expected in 2017.
• Other disclosed exposures include wildfire liability and potentially limited insurance, nuclear incident liability, environmental remediation, Long Beach service-interruption penalties, regulatory cost-recovery decisions, construction delays and overruns, and cyber or physical security events. SCE had recorded a liability for estimated Long Beach penalties; resolution remained subject to regulatory review.
• Management described customer-owned generation, storage and other distributed energy resources as reshaping the industry and requiring grid investment. The filing gives no formal SCE earnings guidance. Edison International separately stated a target common-dividend payout ratio of 45%–55% of SCE earnings and announced a 13% increase in its annual dividend rate to $2.17 per share.

Important facts for investors to verify

• Track CPUC outcomes for the 2018 general rate case, proposed cost-of-capital changes, grid-modernization spending and the reopened San Onofre settlement proceeding.
• Review actual capital spending, project schedules and cost-recovery rulings, particularly for Tehachapi and major transmission projects.
• Monitor San Onofre arbitration and decommissioning costs, trust performance, and the timing and amount of DOE spent-fuel damages.
• Assess liquidity and refinancing needs alongside balancing-account movements, debt levels, collateral requirements and SCE’s ability to continue dividends to its parent.
• Compare reported earnings with core earnings and review the effect of tax items and regulatory accounting. Core earnings are non-GAAP and may not be comparable with other companies.

The independent auditor reported that the financial statements present fairly, in all material respects, SCE’s financial position and results in accordance with U.S. GAAP. The filing also states that disclosure controls were effective at year-end.