Business Context and Reporting Period
Company: Southern California Edison Company (SCE)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 2009
Business Overview: SCE operates as a rate-regulated electric utility in California, with a small segment of non-rate-regulated Variable Interest Entities (VIEs) involved in gas-fired power generation. The company's operations are heavily influenced by regulatory decisions from the California Public Utilities Commission (CPUC) and the Federal Energy Regulatory Commission (FERC).
Key Financial Metrics
| Metric (in millions) | Q1 2009 | Q1 2008 |
|---|---|---|
| Operating Revenue | $2,189 | $2,379 |
| Operating Income | $441 | $345 |
| Net Income | $233 | $179 |
| Net Income Available for Common Stock | $208 | $150 |
| Operating Cash Flow | $406 | $458 |
| Cash and Equivalents (End of Period) | $1,177 | $282 |
| Total Debt (Short-term + Long-term) | $8,297 | N/A |
| Available Liquidity | $2,401 | N/A |
Note: Total Debt calculated as Short-term debt ($1,558) + Long-term debt due within one year ($250) + Long-term debt ($6,489). Available Liquidity includes cash/equivalents ($1,177) and available credit facilities ($1,224).
Material Changes vs. Prior Period
- Revenue Decline: Operating revenue decreased by $190 million (8.0%) compared to Q1 2008. This was primarily driven by a decline in electrical demand and lower kWh sales due to the economic downturn, despite the implementation of the 2009 General Rate Case (GRC) effective January 1, 2009.
- Profitability Increase: Net income available for common stock increased by $58 million (38.7%) to $208 million. This improvement was driven by the 2009 GRC decision and lower fuel and purchased power costs.
- Cost Reductions:
- Fuel Expense: Decreased $151 million to $199 million, largely due to lower natural gas costs at the Mountainview plant and VIEs.
- Purchased Power: Decreased $153 million to $540 million due to lower bilateral energy purchases, lower QF costs, and reduced ISO-related costs.
- Cash Flow: Net cash provided by operating activities decreased by $52 million to $406 million. This was primarily due to a net $150 million cash outflow related to balancing account activities and higher margin/collateral deposits compared to 2008.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Plan: SCE revised its 2009–2013 capital investment plan to range between $16.7 billion and $20.2 billion. Key projects include the Devers-Palo Verde II transmission line, Tehachapi transmission project, and the EdisonSmartConnect smart meter deployment.
- Tax Settlement Impact: On May 5, 2009, SCE finalized a "Global Settlement" with the IRS resolving tax disputes for years 1986–2002. SCE expects to record after-tax earnings of approximately $275 million to $300 million in Q2 2009 and a positive cash impact of $625 million to $650 million over time.
- Dividends: The company paid a $100 million dividend to Edison International in January 2009. Future dividends depend on capital expenditures, operating cash flows, and earnings.
Risks and Contingencies
- Regulatory Risk: Recovery of capital expenditures and costs is subject to CPUC and FERC approvals. The outcome of the 2009 FERC Rate Case and the Solar Photovoltaic Program proceeding remains uncertain.
- Environmental Remediation: Recorded liability is $41 million, but costs could exceed this by up to $173 million. The company expects to recover 90% of cleanup costs at certain sites through rates.
- Legal Proceedings:
- Navajo Nation Litigation: A lawsuit seeking damages of at least $600 million (plus treble damages) regarding coal supply agreements remains active, though a related Supreme Court decision in April 2009 ruled against the Navajo Nation in a separate case.
- Catalina Island Emissions: A settlement regarding NOx emissions violations requires equipment installation by December 2011 or a $3 million fine.
- Market Risk: Exposure to commodity price volatility (natural gas/electricity) is managed through hedging, but unhedged portions are passed to ratepayers. Credit risk exposure to counterparties is $538 million net.
Investor Verification Checklist
- Tax Settlement Timing: Verify the actual recognition of the $275–$300 million earnings impact from the IRS Global Settlement in the Q2 2009 filing.
- Capital Expenditure Execution: Monitor Q2 and Q3 capital spending against the revised $16.7–$20.2 billion plan, specifically for the Tehachapi and DPV2 transmission projects.
- Regulatory Approvals: Track the final CPUC decision on the Solar Photovoltaic Program (expected Q2 2009) and the outcome of the 2009 FERC Rate Case regarding transmission revenue requirements.
- Liquidity and Credit Ratings: Confirm maintenance of investment-grade credit ratings (currently A2/A/A+) to avoid triggering additional collateral requirements ($148 million potential exposure) on derivative contracts.
- Environmental Costs: Review future filings for updates on the $173 million potential upside risk to environmental remediation liabilities.