Southern California Edison Company (SCE) — 2017 Form 10-K
Business context and reporting period. SCE is a regulated electric utility serving approximately 5 million customers across about 50,000 square miles of Southern California. This combined filing covers the fiscal year ended December 31, 2017; the reported fourth-quarter results include significant San Onofre and tax-reform charges. Unless noted, amounts are in U.S. dollars.
Key financial results
| Metric | 2017 | 2016 |
|---|---|---|
| Operating revenue | $12.254 billion | $11.830 billion |
| Operating income | $1.598 billion | $2.217 billion |
| Net income | $1.136 billion | $1.499 billion |
| Net income available for common stock | $1.012 billion | $1.376 billion |
| Core earnings, a non-GAAP measure | $1.493 billion | $1.376 billion |
| Cash provided by operating activities | $3.725 billion | $3.523 billion |
| Capital expenditures, cash-flow statement | $3.740 billion | $3.633 billion |
| Long-term debt, including current portion | $10.907 billion | $10.333 billion |
- GAAP net income available for common stock fell 26%, while core earnings increased 8.5%. The difference primarily reflects the 2017 San Onofre settlement charge and tax-reform effects.
- Operating margin was approximately 13.0% in 2017, versus 18.7% in 2016, including the 2017 impairment and other charges. Purchased power and fuel costs are recovered through regulatory mechanisms and do not generally contribute to earnings.
- Operating cash flow exceeded reported capital expenditures by approximately $0.0 billion; this simple comparison does not account for financing, dividends, or other investing and working-capital movements.
- At year-end, SCE had $515 million of cash and $1.413 billion available under its $2.75 billion revolving credit facility. Its debt-to-capitalization ratio under the facility covenant was 0.45, against a maximum of 0.65.
- Net regulatory balancing-account overcollections were $1.7 billion at year-end, a source of cash that is generally expected to be refunded or otherwise settled with customers.
Material changes and unusual items
- San Onofre: In the fourth quarter, SCE recorded a $716 million pre-tax charge ($448 million after tax) based on the Revised San Onofre Settlement Agreement signed January 30, 2018. CPUC approval remained outstanding. If approved, the utilities would cease San Onofre cost recovery once combined remaining regulatory assets reach $775 million, and refund amounts collected after the specified cessation date. SCE also accrued $143 million for its obligation to SDG&E under a related shareholder agreement.
- Tax reform: The federal corporate tax rate reduction resulted in an approximately $5.0 billion reduction in SCE deferred tax liabilities and a corresponding increase in regulatory liabilities. SCE recorded a separate $33 million charge for shareholder-funded deferred taxes. The timing and implementation of customer refunds remained subject to regulatory processes; SCE estimated most refunds would be spread over roughly 40 years or more.
- Wildfires and mudslides: The December 2017 wildfires caused substantial damage; the Thomas Fire burned more than 280,000 acres. SCE reported about $35 million of restoration-related capital expenditures. Investigations were ongoing, lawsuits had been filed, and the company said it could not reasonably estimate potential losses. SCE had about $1 billion of wildfire-specific insurance, subject to a $10 million per-occurrence retention and policy limitations. January 2018 Montecito mudslide claims alleged a link to the Thomas Fire; potential liability and losses also could not be estimated.
- Revenue and costs: Revenue rose 3.6%, mainly due to authorized revenue escalation and rate changes. Higher purchased power and fuel costs, depreciation, property taxes, and interest expense partly offset lower operations and maintenance expense. SCE’s effective tax rate was negative 2.7%, primarily reflecting the San Onofre charge and tax-related items.
Outlook, investment, and risks
- SCE’s 2018 General Rate Case decision was still pending. Its February 2018 updated request was $5.534 billion for 2018, $139 million below its December update, with proposed 2019 and 2020 revenue requirement reductions of $185 million and $235 million, respectively, versus that earlier update. SCE could not predict the authorized amount or timing; a final decision was expected later in 2018.
- SCE reported $3.8 billion of capital expenditures in 2017 and year-end rate base of $27.8 billion, up from $25.9 billion. Its capital forecast/request for 2018–2020 totaled approximately $13.7 billion, including traditional investment and grid modernization; approval and recovery depend on regulatory decisions.
- Management expects to fund near-term obligations, investment and dividends through operating cash flow, tax benefits, debt and preferred-equity financing as needed, and available credit facilities. Tax reform is expected to reduce customer rates and SCE cash flow in the near term, without a meaningful near-term earnings effect.
- Key risks include wildfire liability and insurance limits, regulatory recovery of costs, pending GRC and San Onofre proceedings, nuclear decommissioning cost and execution uncertainty, capital-market access, commodity-driven cash-flow volatility, and changing customer choice and distributed energy resources.
- San Onofre decommissioning costs for Units 2 and 3 were estimated at $3.4 billion in 2017 dollars, of which SCE’s share was $2.6 billion. The estimate runs through an expected 2051 completion and is subject to revision. SCE held $2.8 billion in San Onofre decommissioning trust funds at year-end.
Important facts for investors to verify
- CPUC outcomes and timing for the Revised San Onofre settlement, including cessation of recovery, customer refunds, and the SDG&E payment.
- Wildfire investigation findings, litigation developments, insurance applicability and limits, and whether any losses become estimable or recoverable from customers.
- The final 2018 GRC authorization and the approved level and timing of capital spending, particularly grid modernization.
- How regulators determine and implement SCE’s customer refunds of excess deferred taxes following tax reform.
- Updated San Onofre decommissioning estimates, trust performance, and any effect on future funding requirements.
- Credit-facility availability, borrowing needs, and the effect of potential wildfire costs or regulatory restrictions on SCE’s ability to pay dividends.