Business Context and Reporting Period
Company: Southern California Edison Company (SCE)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended September 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 rate-regulated electric utility segments and consolidated Variable Interest Entities (VIEs) consisting of gas-fired power plants.
Key Financial Metrics
| Financial Metric (in millions) | 3 Months Ended Sep 30, 2007 | 3 Months Ended Sep 30, 2006 | 9 Months Ended Sep 30, 2007 | 9 Months Ended Sep 30, 2006 |
|---|---|---|---|---|
| Operating Revenue | $3,214 | $3,079 | $7,897 | $7,818 |
| Operating Income | $639 | $673 | $1,408 | $1,540 |
| Net Income | $275 | $276 | $625 | $656 |
| Net Income Available for Common Stock | $262 | $263 | $587 | $618 |
| Operating Cash Flow (9 Months) | $2,368 | $2,063 | ||
| Total Assets (Sep 30, 2007) | $27,584 | |||
| Total Liabilities (Sep 30, 2007) | $20,058 | |||
| Long-Term Debt (Sep 30, 2007) | $5,117 (plus $220 current maturities) | |||
| Cash and Equivalents (Sep 30, 2007) | $115 |
Margins: Operating margin for the nine months ended September 30, 2007, was approximately 17.8% ($1,408 / $7,897). The effective tax rate for the nine-month period was 30%, down from 39% in the prior year, largely due to tax reserve reductions and flow-through items.
Material Changes vs. Prior Period
- Revenue: Operating revenue increased by $135 million (quarter) and $79 million (year-to-date) compared to 2006. Increases were driven by balancing account over-collections and sales for resale, partially offset by rate decreases resulting from the redesign of the tiered rate structure and lower natural gas prices.
- Operating Income: Decreased by $34 million (quarter) and $132 million (year-to-date). The decline was primarily due to higher purchased-power expenses and operational costs, offset by revenue increases.
- Purchased Power Expense: Increased by $248 million for the quarter but decreased by $388 million year-to-date. The year-to-date decrease was driven by lower realized and unrealized losses on economic hedging activities ($88 million in 2007 vs. $630 million in 2006) and lower ISO-related energy costs.
- Income Taxes: Effective tax rate decreased significantly (30% vs. 39% for the nine-month period) due to reductions in income tax reserves related to an IRS administrative appeal on environmental remediation costs and a state tax settlement.
- Capital Expenditures: Net cash used for investing activities was $1.87 billion for the nine months ended September 30, 2007, compared to $1.69 billion in 2006, reflecting continued investment in transmission and distribution infrastructure.
Guidance, Outlook, Risks, and Contingencies
Regulatory and Legal Contingencies
- Performance Incentives Investigation: On October 1, 2007, a Presiding Officer's Decision (POD) ordered SCE to refund $136 million (plus interest) and pay a $40 million penalty related to misreporting of customer satisfaction and employee safety data (1997-2003). SCE appealed this decision on October 31, 2007. Potential total exposure ranges from $52 million to $388 million.
- Tax Disputes: SCE is subject to IRS examinations for tax years 1994-present. A Notice of Proposed Adjustment regarding balancing account over-collections could result in earnings and cash flow increases of $70-$80 million and $300-$325 million, respectively, if resolved favorably.
- FERC Refund Proceedings: Ongoing litigation regarding refunds from governmental power sellers for the 2000-2001 energy crisis. A recent FERC order vacated previous refund orders against governmental sellers, though civil lawsuits remain an alternative remedy.
- Navajo Nation Litigation: A lawsuit seeking damages of at least $600 million (plus trebling and punitive damages) regarding coal supply royalties for the Mohave plant remains stayed pending negotiations.
Outlook and Guidance
- 2009 General Rate Case: SCE expects to file in November 2007, requesting a base rate revenue requirement increase of approximately $856 million over 2008 levels to fund infrastructure replacement and growth.
- Renewable Portfolio Standards: SCE projects meeting 2007 and 2008 renewable goals but notes a potential deficit in 2009, though flexible compliance rules may mitigate this.
- Energy Efficiency Incentives: A new CPUC mechanism allows SCE to earn up to $146 million pre-tax over three years (2006-2008) if energy efficiency goals are met.
- Capital Plan: Total capital spending for 2007-2011 is projected at up to $17.3 billion. The EdisonSmartConnect smart meter project is estimated to cost $1.7 billion.
Investor Verification Checklist
- Regulatory Penalty Outcome: Monitor the appeal of the CPUC Presiding Officer's Decision regarding the $176 million (plus interest) penalty and refund order for performance incentive misreporting.
- Tax Resolution Timing: Verify the status of the IRS administrative appeal regarding environmental remediation costs and the potential $300+ million cash flow impact.
- Rate Case Approval: Track the CPUC's decision on the 2009 General Rate Case, specifically the authorized revenue requirement increase and its impact on future earnings.
- Renewable Compliance: Assess the risk of penalties (up to $25 million/year) if SCE fails to meet 2009 renewable procurement targets.
- FERC Litigation: Follow the status of civil lawsuits against governmental power sellers for energy crisis refunds, as FERC's administrative authority in this area was limited by recent court rulings.