Business Context and Reporting Period
Company: Southern California Edison Company (SCE)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 2008
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 variable interest entities (VIEs) consisting of non-rate-regulated gas-fired power plants.
Key Financial Metrics
| Financial Metric (in millions) | Q1 2008 | Q1 2007 |
|---|---|---|
| Operating Revenue | $2,349 | $2,222 |
| Operating Income | $345 | $374 |
| Net Income | $163 | $193 |
| Net Income Available for Common Stock | $150 | $180 |
| Operating Cash Flow | $458 | $688 |
| Capital Expenditures | ($588) | ($560) |
| Total Assets | $27,634 | $27,477 |
| Total Liabilities | $20,012 | $19,874 |
| Long-Term Debt | $5,316 | $5,081 |
| Cash and Equivalents | $282 | $252 |
Liquidity: As of March 31, 2008, SCE had $282 million in cash and equivalents. The company maintains a $2.5 billion credit facility with $1.88 billion available for liquidity purposes after supporting $400 million in short-term debt and $217 million in letters of credit.
Material Changes vs. Prior Period
- Revenue Increase: Operating revenue increased by $127 million (5.7%) compared to Q1 2007. This was driven primarily by a $158 million increase in balancing account over/under collections and $118 million from sales for resale. These gains were partially offset by an $84 million decrease due to rate changes and a $29 million decrease due to lower sales volumes.
- Profit Decline: Net income available for common stock decreased by $30 million (16.7%) to $150 million. The primary driver was a $31 million tax benefit recognized in Q1 2007 related to environmental remediation costs that did not recur in 2008. Net interest expense decreased by $10 million in 2008, partially offsetting the decline.
- Expense Variations:
- Purchased Power: Increased by $174 million due to higher bilateral energy purchases, higher qualifying facility (QF) costs, and higher ISO-related energy costs, partially offset by $149 million in net realized and unrealized gains on economic hedging activities.
- Fuel Expense: Increased by $40 million due to higher generation and gas costs at the Mountainview plant.
- Regulatory Adjustment Clauses: Decreased by $117 million, reflecting net unrealized gains on hedging and the full repayment of rate reduction notes in late 2007.
- Cash Flow: Operating cash flow decreased by $230 million to $458 million, primarily due to lower revenue collections resulting from rate changes effective in February 2007 and timing differences in working capital.
Guidance, Outlook, Risks, and Unusual Items
Regulatory Developments
- 2009 General Rate Case: SCE filed an application requesting a $726 million increase in base rate revenue. The Division of Ratepayer Advocates (DRA) recommended a significantly lower increase of $7 million, citing reductions in depreciation, O&M, and executive compensation. A final decision is expected prior to year-end 2008.
- FERC Transmission Incentives: FERC approved a mechanism allowing SCE to include 100% of construction work in progress (CWIP) in rate base for three major transmission projects (DPV2, Tehachapi, Rancho Vista). This was implemented on March 1, 2008, subject to refund on the reasonableness of the return on equity (ROE).
- Energy Resource Recovery Account (ERRA): The ERRA was overcollected by $293 million as of March 31, 2008. The CPUC authorized a refund to customers, which began in April 2008.
Legal and Contingencies
- CPUC Performance Incentives Investigation: A Presiding Officer's Decision (POD) ordered SCE to refund $136 million and pay a $40 million statutory penalty related to misreporting of customer satisfaction and employee safety data. SCE has appealed this decision. Potential refunds and penalties range from $52 million to $388 million. SCE has accrued the lower end of this range.
- Navajo Nation Litigation: The Navajo Nation and Hopi Tribe have sued SCE regarding coal supply agreements for the Mohave Generating Station, seeking damages of at least $600 million plus treble damages and punitive damages. The case was reinstated to the active calendar in March 2008.
- Tax Disputes: SCE is under examination by the IRS for tax years 1994 and forward. Unrecognized tax benefits totaled $1,985 million as of March 31, 2008. Resolution of certain issues could increase earnings by $70 million to $80 million.
Environmental and Operational Risks
- Climate Change: SCE faces potential litigation regarding greenhouse gas emissions (e.g., Kivalina case) and is subject to California's AB 32 cap-and-trade regulations, which may require significant capital expenditures.
- Nuclear Operations: The NRC completed a supplemental inspection of the Palo Verde Nuclear Generating Station. SCE estimates O&M costs will increase by approximately $23 million over 2008-2009 due to corrective actions.
Investor Verification Checklist
- Rate Case Outcome: Monitor the CPUC's final decision on the 2009 General Rate Case, as the DRA's recommendation is significantly lower than SCE's request, potentially impacting future revenue.
- CPUC Penalty Appeal: Track the outcome of the appeal regarding the $136 million refund and $40 million penalty order related to performance incentive misreporting.
- Tax Resolution: Assess the status of ongoing IRS examinations and the potential impact of the $1.985 billion in unrecognized tax benefits on future earnings.
- Capital Expenditures: Verify the execution of the $2.3 billion projected capital expenditures for 2008, particularly regarding the Solar Photovoltaic Program and transmission projects.
- Regulatory Recovery: Confirm the ability to recover costs associated with environmental remediation, nuclear inspections, and potential climate change regulations through customer rates.