Business Context and Reporting Period
Company: Southern California Edison Company (SCE)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: SCE is a rate-regulated electric utility serving central, coastal, and southern California. It is regulated by the California Public Utilities Commission (CPUC) and the Federal Energy Regulatory Commission (FERC). The company operates a regulated electric utility segment and consolidated variable interest entities (VIEs) consisting of gas-fired power plants.
Key Financial Metrics
| Financial Metric (in millions) | Three Months Ended Sept 30, 2006 |
Three Months Ended Sept 30, 2005 |
Nine Months Ended Sept 30, 2006 |
Nine Months Ended Sept 30, 2005 |
|---|---|---|---|---|
| Operating Revenue | $3,079 | $3,084 | $7,818 | $7,195 |
| Operating Income | $673 | $568 | $1,540 | $1,285 |
| Net Income | $276 | $287 | $656 | $586 |
| Net Income Available for Common Stock | $263 | $280 | $618 | $572 |
| Operating Cash Flow (9 Months) | $2,091 | $2,014 | ||
| Total Assets (Sept 30, 2006) | $26,018 | |||
| Total Liabilities (Sept 30, 2006) | $19,321 | |||
| Long-Term Debt (Sept 30, 2006) | $4,991 | |||
| Cash and Equivalents (Sept 30, 2006) | $158 |
Margins: Operating margin for the nine months ended Sept 30, 2006, was approximately 19.7% ($1,540 / $7,818).
Liquidity: As of September 30, 2006, SCE had $1.5 billion available under its $1.7 billion senior secured credit facility. The company maintains a debt-to-total capitalization ratio of 0.44 to 1, well below its covenant limit of 0.65 to 1.
Material Changes vs. Prior Period
- Revenue: Operating revenue increased $623 million (8.7%) for the nine months ended Sept 30, 2006, compared to 2005. This was driven by rate changes implemented in 2006 and increased sales volume due to record heat conditions in the third quarter. Revenue for the three-month period decreased slightly by $5 million due to balancing account overcollections.
- Expenses: Purchased power expense increased significantly by $1.2 billion year-to-date, primarily due to net unrealized losses on hedging transactions ($630 million) compared to gains in 2005. Fuel expense decreased due to the shutdown of the Mohave Generating Station.
- Income: Net income available for common stock increased $46 million year-to-date. This increase was driven by higher net revenue from the 2006 General Rate Case (GRC) decision and earnings from the Mountainview plant, partially offset by higher income tax expenses. The 2005 period included a $61 million one-time tax benefit from an IRS settlement not present in 2006.
- Regulatory Gains: The company recorded a pre-tax gain of $135 million related to the resolution of a state income tax issue from the 2001-2003 period, recognized in the nine-month 2006 period.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Rate Cases: The CPUC authorized a $274 million increase in base rate revenue retroactive to January 12, 2006. Residential rate increases were deferred to January 1, 2007, to mitigate impact during record heat.
- Capital Projects: SCE is pursuing the construction of up to five combustion turbine peaker plants (approx. $250 million) to meet reliability needs for summer 2007. The company also expects to spend approximately $115 million on its share of steam generator replacements at the Palo Verde Nuclear Generating Station.
- Mohave Shutdown: SCE announced it will not return the Mohave Generating Station to service. The company expects to recover unamortized costs through future rates, subject to CPUC approval.
Risks and Contingencies
- Performance Incentive Investigation: The CPUC is investigating potential refunds and penalties regarding customer satisfaction and employee injury reporting. Potential refunds and penalties range from $32 million to $396 million.
- Environmental Remediation: Recorded minimum liability is $84 million, but costs could exceed this by up to $116 million. New California greenhouse gas legislation (AB 32) may require significant future capital expenditures.
- Legal Proceedings: Ongoing litigation includes the Navajo Nation complaint seeking damages of at least $600 million (plus treble and punitive damages) related to the Mohave coal supply agreement. FERC refund proceedings regarding the 2000-2001 energy crisis continue, with potential for additional recoveries or refunds.
- Market Risk: Fluctuations in commodity prices and counterparty credit risk are managed through hedging, but fair value changes can impact cash flows. Net unrealized losses on derivatives were $351 million for the nine months ended Sept 30, 2006.
Key Facts for Investor Verification
- Regulatory Recovery: Verify the CPUC's final decision on the recovery of unamortized costs for the Mohave Generating Station and the outcome of the performance incentive investigation (potential $32M-$396M impact).
- Derivative Exposure: Monitor the impact of net unrealized losses on hedging transactions ($351 million YTD) on future cash flows and the Energy Resource Recovery Account (ERRA) status, which was overcollected by $449 million as of Sept 30, 2006.
- Capital Expenditures: Track the progress and cost recovery of the $250 million peaker plant project and the $115 million Palo Verde steam generator replacement.
- Legal Liabilities: Assess the status of the Navajo Nation litigation and FERC refund proceedings, which could result in significant refunds to customers or additional recoveries.
- Accounting Changes: Note the adoption of SFAS No. 123(R) for stock-based compensation, which increased recognized expenses starting in 2006.