Southern California Edison Company — 2009 Form 10-K
Business context and period. SCE is a regulated electric utility serving more than 13 million people across a 50,000-square-mile area of California. This annual filing covers the year ended December 31, 2009; fourth-quarter figures are unaudited. SCE is wholly owned by Edison International.
Financial performance and liquidity
| Metric ($ millions, except percentages) | 2009 | 2008 |
|---|---|---|
| Operating revenue | 9,965 | 11,248 |
| Operating income | 1,918 | 1,653 |
| Net income | 1,371 | 904 |
| Net income available for common stock | 1,226 | 683 |
| Core earnings (non-GAAP) | 874 | 732 |
| Cash provided by operating activities | 4,069 | 1,622 |
| Capital expenditures | 2,999 | 2,267 |
- Revenue declined 11.4%, while operating income rose 16.0%. Consolidated operating margin increased to approximately 19.2% from 14.7%; this ratio includes regulated cost-recovery activity and should be interpreted accordingly.
- Common-stock income rose 79.5%, but included a $306 million after-tax Global Settlement benefit and a $46 million after-tax, non-cash Mountainview rate-base transfer benefit. Management’s non-GAAP core earnings increased 19.4%, from $732 million to $874 million.
- Revenue from retail billed and unbilled sales increased $184 million: a $564 million rate increase was partly offset by a $380 million decline in sales volume, attributed to the economic downturn and milder weather. The larger decline in total revenue primarily reflects lower cost-recovery revenue and related fuel and purchased-power costs.
- Operating cash flow increased by $2.447 billion, supported by tax-settlement cash receipts, regulatory balancing-account movements, tax benefits and higher pre-tax income. It exceeded capital spending, but investing activities used $3.219 billion and financing activities used $1.999 billion; cash and equivalents fell to $462 million from $1.611 billion.
- At year-end, long-term debt including current maturities was $6.740 billion; short-term debt was zero. Total assets were $32.474 billion, total liabilities $23.759 billion and total equity $8.715 billion. The debt-to-capitalization covenant limit was 0.65; the reported ratio was 0.45.
- SCE reported approximately $2.882 billion available under credit facilities, with no borrowings and $12 million of letters of credit. The MD&A also reports approximately $3.3 billion of available liquidity, but its wording does not clearly reconcile that figure with the balance-sheet cash and short-term investment balances.
- Interest expense, net of capitalized amounts, was $420 million versus $407 million. The effective income tax rate fell to 16.3% from 31.8%, principally reflecting the Global Settlement and other tax items.
Fourth-quarter comparison
For the quarter ended December 31, 2009, revenue was $2.434 billion, operating income $361 million, net income $189 million and common-stock income $172 million. In fourth-quarter 2008, the corresponding figures were $2.551 billion, $316 million, $163 million and $141 million.
Material changes and outlook
- The 2009 CPUC general rate case authorized a $4.83 billion revenue requirement for 2009, up $512 million from 2008, and indicated approximately $5.04 billion for 2010 and $5.25 billion for 2011. A FERC settlement effective March 1, 2009 set a $448 million transmission revenue requirement, $136 million above the prior authorization.
- Management forecast 2010 capital expenditures of $3.3–$4.0 billion and 2010–2014 capital investment of $18–$21.5 billion. Projects include grid reliability and transmission expansion, renewable integration, smart meters, rooftop solar and San Onofre steam-generator replacement. The filing provides no company-wide earnings guidance.
- The proposed 2010 FERC rate case sought a $107 million, or 24%, increase in transmission revenue requirements, subject to refund and settlement procedures; negotiations were ongoing. Recovery of future capital spending remains subject to regulatory approvals and rate cases.
- The $306 million after-tax Global Settlement benefit resolved federal tax disputes through 2002. SCE estimated a positive cash impact of approximately $646 million over time. A repair-cost tax-accounting change generated a $192 million cash benefit in fourth-quarter 2009 but did not affect 2009 earnings; the ultimate deduction and recovery of future tax costs remained subject to review.
Risks, contingencies and unusual items
- Regulation and cost recovery: Results and liquidity depend on timely recovery of costs through CPUC and FERC rates. Cost-recovery amounts remain subject to reasonableness review. Regulatory assets were $4.259 billion and liabilities $3.695 billion at year-end; changes in expected recovery could affect earnings and cash flow.
- Environmental requirements: Potential greenhouse-gas controls, once-through cooling rules, air-pollution controls and coal-waste regulations could require substantial investment or constrain operations. SCE could not reliably estimate the impact of several proposed requirements, including cooling-water rules and Four Corners controls.
- Nuclear and operating risks: The NRC identified San Onofre performance and compliance issues; SCE was implementing corrective plans, while the NRC continued to affirm the plant was being operated safely. The DOE had not begun accepting spent nuclear fuel; SCE reported interim storage sufficient for current license periods and had a damages claim pending against the DOE.
- Wildfire and insurance: Wildfire liability may be subject to California inverse-condemnation principles. Renewed coverage provided up to $500 million for wildfire liabilities, with a $10 million self-insured retention per occurrence; policy limitations and future availability or cost of coverage remain risks.
- Litigation and remediation: The Navajo Nation and Hopi Tribe litigation seeks at least $600 million in damages, trebling and punitive damages of at least $1 billion; SCE could not predict the outcome. For 23 identified remediation sites, SCE recorded a $39 million minimum liability and disclosed reasonably possible additional costs of up to $178 million. Certain site costs are eligible for 90% recovery through rates.
- Capital and market exposure: SCE relies on capital markets to fund investment and refinancing. Commodity-price and counterparty events may create cash-flow volatility even where regulatory recovery is expected. A downgrade below investment grade could trigger additional collateral; disclosed posted and potential collateral was $283 million, with a further $62 million possible under specified adverse market movements.
Important facts for investors to verify
- Separate recurring performance from the $306 million tax-settlement benefit and $46 million Mountainview accounting benefit; reconcile GAAP common earnings with management’s non-GAAP core earnings.
- Reconcile reported available liquidity with year-end cash, short-term investments and the $2.882 billion undrawn credit capacity; assess upcoming facility maturities and funding needs.
- Track the outcome of the 2010 FERC rate case and future CPUC proceedings, including recovery of the capital program and balancing-account amounts.
- Monitor project timing, permitting and costs for transmission, smart-meter, solar and San Onofre work, alongside the $18–$21.5 billion five-year investment range.
- Assess potential costs and operating effects of environmental rules, San Onofre regulatory matters, wildfire exposure, spent-fuel obligations and the Navajo Nation litigation.