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, 2005
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. The company operates rate-regulated electric utility segments and consolidated variable interest entities (VIEs).
Key Financial Metrics
| Financial Metric (in millions) | 3 Months Ended Sept 30, 2005 |
3 Months Ended Sept 30, 2004 |
9 Months Ended Sept 30, 2005 |
9 Months Ended Sept 30, 2004 |
|---|---|---|---|---|
| Operating Revenue | $3,084 | $2,655 | $7,195 | $6,527 |
| Operating Income | $568 | $682 | $1,285 | $1,511 |
| Net Income | $287 | $260 | $586 | $604 |
| Net Income Available for Common Stock | $280 | $259 | $572 | $600 |
| Operating Cash Flow (9 Months) | $2,014 | $1,852 | ||
| Cash and Equivalents (Sept 30, 2005) | $484 | |||
| Total Debt (Long-term + Current Maturities) | $5,335 | |||
| Effective Tax Rate (9 Months) | 24% | 40% (2004) |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased by $429 million (16%) for the quarter and $668 million (10%) for the nine-month period compared to 2004. Increases were driven by rate changes from the 2003 General Rate Case (GRC), higher sales volumes, and consolidation of VIEs.
- Operating Income Decline: Despite revenue growth, operating income decreased by $114 million (17%) for the quarter and $226 million (15%) for the nine-month period. This was primarily due to higher fuel and purchased power expenses, partially offset by regulatory adjustments.
- Net Income Stability: Net income increased slightly for the quarter ($27 million) but decreased for the nine-month period ($18 million). The 2005 results included a significant $61 million tax benefit from an IRS settlement regarding 1991-1993 tax years, which lowered the effective tax rate to 24% (vs. 40% in 2004).
- Expense Drivers:
- Fuel Expense: Increased $42 million (quarter) and $267 million (nine months), largely due to VIE consolidation.
- Purchased Power: Decreased $413 million (quarter) and $389 million (nine months) due to net realized/unrealized gains on economic hedging and lower ISO purchases, offset by higher firm energy costs.
- Regulatory Adjustments: Provisions for regulatory adjustment clauses increased significantly ($800 million quarter; $875 million nine months) due to unrealized gains on hedging and balancing account overcollections.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- 2006 General Rate Case: SCE filed for a 2006 base rate revenue requirement of $3.96 billion (revised from $4.06 billion). A final CPUC decision is expected in January 2006.
- Capital Expenditures: Approved a $10.1 billion capital budget for 2005-2009. Projected capital expenditures are $1.8 billion for 2005, $1.9 billion for 2006, and $2.1 billion for 2007.
- Resource Adequacy: New CPUC rules require 15-17% planning reserve margins starting June 2006. SCE expects to meet these requirements but faces penalties of 150% of new capacity costs for non-compliance in 2006.
- Renewable Procurement: Risk of non-compliance with statutory renewable obligations for 2003-2006 due to CPUC rulings on geothermal facilities. Maximum penalty is $25 million per year.
Risks and Contingencies
- Performance Incentive Investigations: Ongoing CPUC investigations into customer satisfaction and employee injury reporting data integrity. SCE has accrued $29 million in potential refunds/penalties ($9 million for customer satisfaction, $20 million for safety). A $26 million penalty for system reliability was accrued in Q3 2005.
- Mohave Generating Station: Probable temporary shutdown at end of 2005 due to unresolved coal and water supply issues. Permanent shutdown remains possible. Costs are expected to be recovered in future rates.
- San Onofre Nuclear: Proposed decision allows steam generator replacement at a cost cap of $680 million. Final decision expected early 2006.
- Legal Proceedings:
- Navajo Nation Litigation: Claims regarding coal supply agreements seek damages of at least $600 million plus treble damages. Case is stayed pending negotiations.
- Wholesale Market Settlements: Settlements with Mirant ($68 million cash), Enron (pending allocation), and Reliant ($130 million expected share) are being refunded to ratepayers, with a 10% shareholder incentive retained.
- Environmental Remediation: Recorded liability of $81 million; reasonably possible that costs could exceed this by up to $115 million.
Unusual Items
- Tax Benefit: $61 million net earnings benefit in Q3 2005 from IRS settlement on 1991-1993 tax years.
- Energy Efficiency Incentives: $14 million recognized in Q3 2005 from a CPUC-approved settlement regarding 1994-2004 performance claims.
Investor Verification Checklist
- Regulatory Outcomes: Monitor the final CPUC decision on the 2006 General Rate Case (expected Jan 2006) and the 2006 ERRA forecast approval.
- Performance Incentive Resolution: Verify the final determination of penalties and refunds related to the customer satisfaction and safety reporting investigations.
- Mohave Status: Confirm the operational status of the Mohave Generating Station post-2005 and the associated cost recovery mechanisms.
- Renewable Compliance: Track the California Energy Commission's certification of "incremental" geothermal production to assess potential penalties for non-compliance.
- San Onofre Costs: Review the final CPUC decision on the $680 million steam generator replacement cost cap and recovery terms.
- Market Settlements: Confirm the final allocation and FERC approval of the Reliant and Enron settlement proceeds.