Business Context and Reporting Period
Company: Southern California Edison Company (SCE)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended June 30, 2007
Business Overview: SCE is an investor-owned utility regulated by the California Public Utilities Commission (CPUC) and the Federal Energy Regulatory Commission (FERC). It provides electricity to retail customers in central, coastal, and southern California. The company operates a rate-regulated electric utility segment and consolidates certain Variable Interest Entities (VIEs) consisting of gas-fired power plants.
Key Financial Metrics
| Financial Metric (in millions) | Three Months Ended June 30, 2007 |
Three Months Ended June 30, 2006 |
Six Months Ended June 30, 2007 |
Six Months Ended June 30, 2006 |
|---|---|---|---|---|
| Operating Revenue | $2,460 | $2,521 | $4,682 | $4,739 |
| Operating Income | $392 | $536 | $768 | $869 |
| Net Income | $157 | $247 | $351 | $380 |
| Net Income Available for Common Stock | $144 | $234 | $325 | $355 |
| Operating Cash Flow (Six Months) | $1,283 | $767 | ||
| Total Assets (as of June 30, 2007) | $27,062 | |||
| Total Liabilities (as of June 30, 2007) | $19,820 | |||
| Shareholders' Equity (as of June 30, 2007) | $6,825 | |||
| Long-Term Debt (including current maturities) | $5,429 | |||
| Cash and Equivalents | $91 |
Note: Operating margins are not explicitly stated as percentages in the filing text; however, operating income decreased significantly year-over-year.
Material Changes vs. Prior Period
- Revenue Decline: Operating revenue decreased by $61 million (2.4%) for the quarter and $57 million (1.2%) for the six-month period compared to 2006. This was primarily driven by rate changes and the impact of the tiered rate structure due to warmer weather in late Q2 2006, which increased volumes sold at higher rates in the prior year.
- Earnings Decrease: Net income available for common stock fell by $90 million (38.5%) for the quarter and $30 million (8.5%) for the six-month period. The decline was largely attributed to an $81 million one-time benefit recorded in 2006 related to the resolution of a state income tax issue (2001-2003 revenue collection) that did not recur in 2007.
- Expense Fluctuations:
- Purchased Power: Increased $60 million for the quarter due to higher Qualifying Facility (QF) costs and ISO-related purchases, but decreased $637 million year-to-date due to significant unrealized gains on economic hedging activities ($89 million gain in 2007 vs. $342 million loss in 2006).
- Fuel: Increased $48 million for the quarter and $47 million year-to-date, driven by higher natural gas prices and nuclear fuel expenses.
- Effective Tax Rate: The effective tax rate decreased to 28% (quarter) and 25% (six months) in 2007 from 37% and 38% in 2006. This reduction was caused by decreases in income tax reserves related to IRS administrative appeals and state tax settlements.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Rate Cases: SCE filed its 2009 General Rate Case (GRC) Notice of Intent, requesting a base rate revenue increase of approximately $856 million over 2008 projections. A decision is expected by December 2008.
- Capital Expenditures: The Board approved a 2007-2011 capital investment plan totaling up to $17.3 billion. Capital spending for the first six months of 2007 was $1.0 billion.
- Smart Metering: The CPUC approved $45 million for Phase II of the EdisonSmartConnect project. Phase III deployment (5.3 million meters) is expected to begin in 2008.
- Renewable Resources: SCE met renewable goals for 2004-2006 and projects meeting targets for 2007 and 2008, though a potential deficit is projected for 2009.
Risks and Contingencies
- Performance Incentive Investigation: The CPUC is investigating misconduct regarding customer satisfaction surveys and employee injury reporting. Potential refunds and penalties range from $52 million to $388 million. SCE has accrued the lower end of this range.
- FERC Refund Proceedings: SCE is pursuing refunds from sellers who manipulated markets during the 2000-2001 energy crisis. While a settlement with Enron affiliates yielded $12 million in 2007, recovery from governmental power sellers remains uncertain due to litigation.
- Environmental Remediation: Recorded liability is $74 million, but costs could exceed this by up to $127 million. SCE expects to recover 90% of costs at certain sites through rates.
- Nuclear Operations: Palo Verde Unit 1 experienced an outage in 2006. Recent NRC inspections identified violations requiring corrective actions, estimated to increase O&M costs by at least $22 million annually through 2009.
- Regulatory Risk: The Arizona Corporation Commission denied approval for the Devers-Palo Verde II transmission project; SCE plans to appeal.
Investor Verification Checklist
- Tax Reserve Adjustments: Verify the sustainability of the lower effective tax rate (25-28%) and the status of the IRS administrative appeals regarding environmental remediation costs.
- CPUC Investigation Outcome: Monitor the CPUC's final decision on the Performance-Based Ratemaking (PBR) investigation, specifically the potential penalties ranging up to $388 million.
- 2009 Rate Case Approval: Track the CPUC's decision on the requested $856 million revenue increase, which is critical for funding infrastructure and capital plans.
- FERC Refund Litigation: Assess the likelihood of recovering additional funds from governmental power sellers following the Ninth Circuit remand.
- Capital Expenditure Execution: Confirm the ability to fund the $17.3 billion capital plan without diluting equity or increasing debt ratios beyond covenant limits (currently 0.44 to 1).