SOUTHERN CALIFORNIA EDISON Co annual report, FY2013

Business Context and Reporting Period

Southern California Edison Company (SCE), wholly owned by Edison International, supplies electricity across approximately 50,000 square miles of Southern California, serving nearly 14 million people through about 5 million customer accounts. This combined Form 10-K reports the fiscal year ended December 31, 2013; it also includes unaudited fourth-quarter results. SCE’s business is a regulated electric utility, with revenue and cost recovery largely determined by CPUC and FERC proceedings.

Key Financial Metrics

Revenue increased 6.0% year over year. Operating margin was approximately 13.9% (2012: 19.2%) and net margin approximately 8.0% (2012: 14.0%). The margin decline reflects the San Onofre impairment and other earnings changes described below. SCE’s authorized 2013 return on common equity was 10.45%. Year-end assets were $46.05 billion and common shareholder equity was $10.34 billion.

SCE reported fourth-quarter 2013 revenue of $2.931 billion, operating income of $505 million and net income of $283 million, versus $3.057 billion, $792 million and $858 million, respectively, in fourth-quarter 2012. The prior-year quarter included a substantial benefit from implementation of the 2012 General Rate Case (GRC).

Material Changes Versus the Prior Period

• SCE’s net income fell by $660 million, while management-defined core earnings declined $73 million to $1.265 billion. Core earnings are a non-GAAP measure.
• SCE recorded a $575 million pre-tax ($365 million after-tax) impairment related to permanently retiring San Onofre Units 2 and 3. It stopped recognizing a return on the plant’s rate base and ceased depreciation on the units beginning in June 2013.
• Fuel and purchased-power costs rose $752 million, mainly reflecting higher power and gas prices. These costs are generally subject to regulatory recovery, but timing differences affect cash flow.
• Operating cash flow declined $802 million, notably because ERRA fuel and purchased-power undercollections increased and 2013 included tax payments rather than the prior year’s tax receipts.
• SCE completed the sale of its Four Corners Units 4 and 5 interest for approximately $181 million; the sale benefit was allocated to ratepayers rather than earnings.

Outlook, Commentary and Risks

• Rates and regulatory recovery: At year-end, the ERRA account had an approximately $1.0 billion undercollection, which SCE recorded as a regulatory asset. The CPUC’s outcome on recovery, including San Onofre-related costs and possible customer refunds, remained uncertain.
• Rate requests: SCE requested a 2014 ERRA revenue-requirement increase of approximately $1.97 billion, with a decision expected in the first half of 2014. Its 2015 GRC request was reduced to $6.383 billion, a $127 million increase over authorized base-rate revenue after sales-growth effects; the CPUC decision was expected by year-end 2014. These were requests, not approved guidance.
• Capital program: SCE forecast $15.1–$17.2 billion of capital expenditures for 2014–2017, primarily for transmission, distribution and infrastructure renewal. Recovery of spending beyond 2014 depends on regulatory approvals.
• Liquidity and funding: SCE had $2.459 billion available under its credit facility and a debt-to-capitalization ratio of 0.46 versus a 0.65 covenant limit. The company expected to fund 2014 obligations and investment through operating cash flow and debt or preferred-equity financing as needed. Its cash flow remains exposed to regulatory collection timing and capital-market access.
• San Onofre: SCE recorded a $1.3 billion net regulatory asset at year-end, but recovery is not assured. Approximately $1.25 billion of authorized revenue collected since January 2012 was subject to refund. SCE sought at least $4 billion in arbitration damages from steam-generator supplier Mitsubishi Heavy Industries; recovery, insurance coverage and CPUC cost treatment were unresolved. NRC investigations and potential penalties were also outstanding. The decommissioning trust held $3.18 billion for San Onofre; CPUC approval was needed for most withdrawals.
• Other exposures: Risks include wildfire liability and insurance availability, nuclear decommissioning and spent-fuel costs, environmental regulation, major-project delays and cost overruns, cyber and physical security, pension obligations, and competition from customer self-generation. SCE also faced environmental remediation liabilities and continuing regulatory and legal proceedings.
• Edison International/EME: Edison International’s 2013 consolidated net income attributable to common shareholders was $915 million, versus a $183 million loss in 2012; 2012 included a $1.3 billion after-tax EME impairment. A February 2014 EME settlement and reorganization plan, including an estimated $1.191 billion tax-attribute payment obligation and assumption of certain liabilities, remained subject to Bankruptcy Court approval and was not reflected in 2013 results.

Important Facts for Investors to Verify

• Track CPUC decisions on San Onofre cost recovery, potential refunds, rate-base treatment and the 2014 ERRA request.
• Review whether the San Onofre regulatory asset remains recoverable, and monitor the MHI arbitration, insurance claims and NRC proceedings.
• Compare actual rate-case outcomes and capital spending with SCE’s 2015 GRC request and 2014–2017 capital forecast.
• Monitor ERRA undercollections, operating cash flow, borrowing needs and SCE’s capacity to pay dividends to Edison International.
• Confirm Bankruptcy Court approval and final settlement economics for EME, including tax attributes, assumed liabilities and payment amounts.