SCE-PG

Business Context and Reporting Period

Company: Southern California Edison Company (SCE)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2004
Business Overview: SCE is an investor-owned utility regulated by the California Public Utilities Commission (CPUC) and the Federal Energy Regulatory Commission (FERC), providing electricity to retail customers in central, coastal, and southern California.

Key Financial Metrics

Note: Q1 2003 figures include discontinued operations related to the sale of oil storage and pipeline facilities.

Material Changes vs. Prior Period

• Revenue Decline: Operating revenue decreased by $118 million (6.5%) primarily due to the implementation of a CPUC-approved customer rate reduction plan effective August 2003 and the absence of surcharge revenue recognized in 2003. A decrease in sales volume due to increased energy provision by the California Department of Water Resources (CDWR) also contributed.
• Expense Fluctuations:
  • Purchased Power: Increased by $128 million due to higher ISO costs and an increase in gas bilateral contracts, offset by the expiration of gas hedging gains in 2003.
  • Fuel: Decreased by $10 million due to lower coal expenses from a scheduled overhaul.
  • Other O&M: Increased by $92 million driven by transmission access charges, bark beetle infestation removal costs, and San Onofre Unit 2 refueling outage costs.
• Cash Flow: Net cash provided by operating activities dropped significantly to $436 million from $758 million, attributed to timing differences in working capital receipts and disbursements.
• Debt and Financing: Long-term debt increased by $1.1 billion. SCE issued approximately $1.6 billion in new debt (including first and refunding mortgage bonds and pollution-control bonds) to refinance maturing debt and fund the Mountainview acquisition. Short-term debt was fully repaid.
• Accounting Changes: Effective March 31, 2004, SCE consolidated four variable interest entities (VIEs) partially owned by a related party, adding $401 million in net assets to the balance sheet.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

• General Rate Case (GRC): A CPUC commissioner issued an alternate proposed decision on the 2003 GRC that could increase authorized base rate revenue by approximately $107 million (after SCE identified calculation errors). A final decision is expected in Q2 2004. If the full request is not granted, earnings per share could be 6 cents lower annually.
• Capital Expenditures: Projected 2004 capital expenditures are $1.9 billion, including the Mountainview project.
• Liquidity: SCE maintains investment-grade credit ratings. It holds $528 million in cash and equivalents and has a $700 million credit facility (largely unused).

Material Risks and Contingencies

• Mohave Generating Station: Uncertainty regarding post-2005 coal and water supplies prevents $1.1 billion in investments (SCE share: $605 million). A temporary shutdown of at least three years is likely even if supply issues are resolved. Evidentiary hearings are scheduled for June 2004.
• Regulatory Investigations:
  • Performance Incentives: An internal investigation confirmed that employees altered customer satisfaction survey data. SCE committed to refunding improperly earned rewards ($28 million recorded for 1998-2000; $20 million pending for 2001-2003).
  • Line Maintenance: CPUC imposed a $656,000 penalty for 30 accidents involving noncompliant maintenance practices.
• Legal Proceedings:
  • Navajo Nation Litigation: Lawsuit regarding coal supply agreements seeks damages of at least $600 million plus treble damages and punitive damages. The outcome remains uncertain.
  • Market Manipulation Refunds: SCE is seeking refunds from market manipulators (e.g., El Paso, Williams, Dynegy/NRG). Settlements totaling approximately $74 million are proposed for SCE, subject to regulatory approval. 90% of realized refunds are generally refunded to customers.
• Environmental Remediation: Recorded liability is $87 million, but costs could exceed this by up to $186 million. Most costs are expected to be recovered through customer rates.

Investor Verification Checklist

• Rate Case Outcome: Verify the final CPUC decision on the 2003 General Rate Case and its impact on future revenue requirements.
• Mohave Station Viability: Monitor the resolution of coal and water supply negotiations and the potential financial impact of a permanent or temporary shutdown post-2005.
• Refund Recoveries: Track the approval status of market manipulation settlements (El Paso, Williams, Dynegy) and the actual cash recovery amounts.
• Internal Control Remediation: Assess the effectiveness of new controls implemented following the customer satisfaction survey data manipulation investigation.
• Debt Refinancing: Review the terms of new debt issuances and the company's ability to service increased long-term debt obligations.