SOUTHERN CALIFORNIA EDISON Co annual report, FY2012

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Business context and reporting period

This combined Form 10-K covers the fiscal year ended December 31, 2012, with quarterly data for the fourth quarter. Southern California Edison Company (SCE), wholly owned by Edison International, is a regulated electric utility serving about 5 million customer accounts across southern California. The filing also reports Edison International parent results; these are distinguished below where relevant.

Financial performance and liquidity

  • SCE revenue: $11.851 billion, up 12.0% from $10.577 billion in 2011. Higher authorized revenue under the 2012 General Rate Case (GRC), and replacement of power formerly supplied under expired California Department of Water Resources contracts, contributed to the increase.
  • SCE earnings: Operating income was $2.279 billion versus $2.123 billion; net income was $1.660 billion versus $1.144 billion; and net income available for common stock was $1.569 billion versus $1.085 billion. Operating margin was approximately 19.2%, compared with 20.1% in 2011; net margin was approximately 14.0%, compared with 10.8%.
  • Costs and taxes: Fuel and purchased power expense rose to $4.139 billion from $3.356 billion, including replacement power costs related to San Onofre and expired CDWR contracts. Operations and maintenance expense increased to $3.544 billion from $3.387 billion. Income tax expense fell to $214 million from $601 million; the effective tax rate was 11.4% versus 34.4%, reflecting GRC-approved tax treatment and other property-related tax items.
  • Cash flow and investment: Operating cash flow was $4.086 billion, up from $3.261 billion. Capital expenditures were $4.149 billion, leaving operating cash flow less capital expenditures of approximately negative $63 million, before other investing items. SCE paid $469 million in dividends to Edison International.
  • Debt and liquidity: Long-term debt was $8.828 billion, up from $8.431 billion; short-term debt was $175 million. SCE had $2.413 billion available under its $2.75 billion revolving facility after borrowings and letters of credit. Its debt-to-total-capitalization ratio was 0.44, below the 0.65 covenant limit. Cash was $45 million at year-end.
  • Balance sheet: Total assets were $44.034 billion and total equity was $11.743 billion. Regulatory assets totaled $6.994 billion and regulatory liabilities $5.750 billion.
  • Parent-company context: Edison International reported a $183 million net loss attributable to common shareholders, including a $1.3 billion after-tax charge associated with EME’s Chapter 11 filing and deconsolidation. SCE’s net income remained positive; EME’s results were reported as discontinued operations by Edison International.

Material changes and fourth-quarter results

  • SCE’s 2012 core earnings, a non-GAAP measure, were $1.338 billion versus $1.085 billion in 2011. Management attributed the increase primarily to rate-base growth and lower income taxes. The $231 million after-tax benefit from GRC treatment of 2009–2011 tax repair deductions was excluded from core earnings.
  • For fourth-quarter 2012, SCE reported revenue of $3.057 billion, operating income of $792 million, and net income of $858 million, compared with $2.514 billion, $474 million, and $262 million, respectively, in fourth-quarter 2011. The filing attributes approximately $500 million of fourth-quarter earnings impact to implementation of the 2012 GRC decision and reports a separate $33 million net earnings benefit from correction of errors, primarily related to deferred taxes.
  • The CPUC’s November 2012 GRC decision authorized approximately $5.7 billion of base-rate revenue requirement for 2012, about $470 million above previously authorized revenue excluding nuclear refueling outage revenue. The decision’s methodology yields estimated authorized requirements of approximately $5.8 billion for 2013 and $6.2 billion for 2014.
  • Capital expenditures were $3.9 billion in both 2012 and 2011. SCE forecast $7.3 billion to $8.2 billion of capital spending for 2013–2014, chiefly for transmission, distribution, and generation infrastructure.

Outlook, risks, contingencies, and unusual items

  • San Onofre: Units 2 and 3 remained offline after steam-generator tube wear and a Unit 3 leak. SCE proposed a Unit 2 restart at 70% power, subject to NRC approval; Unit 3’s restart remained uncertain. Replacement-power costs through year-end were approximately $300 million, net of avoided nuclear fuel costs. SCE’s 2012 tracked San Onofre revenue requirement included $613 million, subject to refund and regulatory review. Future repair and replacement-power costs were not clearly estimable.
  • SCE recorded $102 million of incremental inspection and repair costs through December 2012 before MHI payments, and recorded $36 million of its share of MHI payments as a cost reduction. MHI disputes aspects of SCE’s claims and the contract includes a disputed $138 million liability cap. SCE sought outage insurance recovery, but recognized no insurance proceeds pending the insurer’s response.
  • Regulatory exposure: CPUC and NRC reviews of San Onofre may result in cost disallowances, customer refunds, additional corrective actions, or penalties. The filing states that adverse outcomes could materially affect SCE’s financial condition, results, or cash flows.
  • Other contingencies: SCE faced investigations related to a 2011 windstorm and a 2007 Malibu wildfire; the proposed Malibu penalties allocated to SCE were approximately $50 million, which SCE disputed. Four Corners faced Clean Air Act litigation, and SCE’s proposed sale of its interest remained contingent on a long-term coal supply agreement.
  • Other risks and obligations: Key risks include rate recovery and regulatory timing, large infrastructure-project delays and cost overruns, wildfire liability and insurance availability, environmental compliance costs, cyber and operational risks, and access to capital. SCE’s estimated environmental remediation liability was $106 million; the filing says reasonably possible costs could exceed recorded amounts by up to $186 million.
  • Outlook: The filing provides capital-spending and authorized-revenue estimates, but no clear earnings guidance. The 2013 authorized common-equity return was 10.45%, effective January 1, 2013. A proposed second-phase cost-of-capital decision was expected in March 2013.
  • Both registrants received unqualified audit opinions; Edison International’s auditor also opined that its internal control over financial reporting was effective. Management reported effective disclosure controls and financial-reporting controls for both companies.

Most important facts for investors to verify

  1. Subsequent NRC decisions and actual restart, repair, or retirement plans for San Onofre Units 2 and 3, including future replacement-power costs.
  2. Results of CPUC San Onofre proceedings: recovery of tracked costs, any refunds or disallowances, and treatment of the $613 million 2012 revenue requirement.
  3. Actual MHI and NEIL recoveries, including any dispute over the contract cap, policy coverage, and amounts ultimately credited to customers.
  4. Whether 2013–2014 capital spending stays within the $7.3–$8.2 billion forecast and whether major transmission projects face further cost or schedule changes.
  5. Progress on wildfire and windstorm investigations, Four Corners litigation and sale conditions, and the related potential penalties or liabilities.
  6. That Edison International’s reported loss is driven substantially by EME’s deconsolidation and impairment, while SCE reported $1.569 billion of earnings available for common stock; confirm parent-company liquidity and dividend capacity remain supported by SCE distributions.