Business Context and Reporting Period
Company: Southern California Edison Company (SCE)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: SCE is a public utility incorporated in California, supplying electric energy to a 50,000-square-mile area serving over 13 million people. It operates under the regulation of the California Public Utilities Commission (CPUC) for retail operations and the Federal Energy Regulatory Commission (FERC) for wholesale operations. As of December 31, 2006, all common stock was held by its parent, Edison International.
Key Financial Metrics
Assets and Equity:
- Consolidated Assets: $26.1 billion
- Total Shareholder's Equity: $6.4 billion
Revenue Composition (2006):
- Commercial: 41%
- Residential: 37%
- Industrial: 7%
- Other Electric Revenue: 5%
- Public Authorities: 5%
- Resale Sales: 4%
- Agricultural and Other: 1%
Debt and Liquidity:
- First and Refunding Mortgage Bonds Outstanding (as of Feb 28, 2007): Approximately $4.5 billion
- Liquidity depends on cash flow and access to capital markets; specific cash flow figures for the period are incorporated by reference and not explicitly detailed in the provided text.
Uncollectible Accounts (Schedule II):
- Total Balance at End of Period (2006): $28.5 million
- Additions Charged to Costs and Expenses: $12.0 million
- Deductions (Write-offs): $16.2 million
Material Changes and Operational Updates
Generating Capacity and Operations:
- Mohave Generating Station: Ceased operations on December 31, 2005. In June 2006, SCE announced the decision not to return Mohave to service.
- Mountainview Power Plant: Acquired in 2004; Unit 1 commenced operations in December 2005, and Unit 2 in January 2006. Total capacity is 1,050 MW.
- Hydroelectric: Operated at a 50% capacity factor in 2006 due to water availability, though plants were operationally available 91% of the year.
- Nuclear: San Onofre Units 2 and 3 operated at a 98% capacity factor in 2005.
Power Sources (2006):
- Purchased Power: 44.6%
- California Department of Water Resources (CDWR): 25.6%
- SCE-Owned Generation: 29.8% (16.9% Nuclear, 6.8% Coal, 6.1% Hydro)
Legal and Regulatory:
- Navajo Nation Litigation: Ongoing issues regarding title defects and easements for the Four Corners generating station.
- Clean Water Act: Received a Notice of Violation in 2004 regarding wetlands; a study concluded no federally regulated wetlands were present, and the Corps of Engineers indicated no further action was likely pending new policies.
Guidance, Risks, and Contingencies
Regulatory Risks:
- SCE's financial viability depends on the timely recovery of costs through CPUC-approved rates.
- General rate cases occur every three years; cost of capital proceedings occur annually.
- Exposure to changes in environmental regulations, specifically regarding CO2 emissions, mercury (CAMR), and regional haze rules.
Market and Operational Risks:
- Energy Procurement: Exposure to volatility in natural gas and electricity market prices. Many power purchase contracts are tied to natural gas prices.
- Nuclear Fuel: The U.S. Department of Energy has defaulted on its obligation to accept spent nuclear fuel. Insufficient storage capacity could hinder plant operations.
- Insurance: Federal law limits public liability from a nuclear incident to $10.8 billion. SCE holds $300 million in private primary insurance per site. Under-insured incidents could result in additional assessments.
- Climate Change: Potential future legislation mandating GHG reductions could impose substantial costs.
Forward-Looking Statements:
The filing contains forward-looking statements regarding future events, including regulatory outcomes and market conditions, which involve risks and uncertainties that could cause actual results to differ materially.
Investor Verification Checklist
- Rate Recovery Status: Verify the status of current CPUC general rate cases and cost of capital proceedings to assess the ability to recover fuel and operational costs.
- Environmental Compliance Costs: Review the MD&A for specific cost estimates related to new environmental regulations (CAMR, Regional Haze, CO2) impacting the Four Corners coal plant.
- Nuclear Fuel Storage: Confirm the current status of spent fuel storage arrangements at San Onofre and Palo Verde given the DOE default.
- Debt Refinancing: Assess the impact of the $4.5 billion in mortgage bonds and the company's ability to access capital markets given current interest rate environments.
- Legal Proceedings: Monitor the resolution of the Navajo Nation litigation regarding Four Corners title and the Clean Water Act notice of violation.