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, 2006
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.
Key Financial Metrics
| Financial Metric (in millions) | Three Months Ended June 30, 2006 |
Three Months Ended June 30, 2005 |
Six Months Ended June 30, 2006 |
Six Months Ended June 30, 2005 |
|---|---|---|---|---|
| Operating Revenue | $2,521 | $2,203 | $4,739 | $4,110 |
| Operating Income | $536 | $388 | $869 | $715 |
| Net Income | $247 | $166 | $380 | $298 |
| Net Income Available for Common Stock | $234 | $161 | $355 | $292 |
| Net Cash Provided by Operating Activities | N/A | N/A | $767 | $939 |
| Capital Expenditures | N/A | N/A | ($1,089) | ($774) |
| Cash and Equivalents (Balance Sheet) | $90 | N/A | $90 | N/A |
| Total Debt (Short-term + Long-term) | $5,817 | N/A | $5,817 | N/A |
Note: Total Debt calculated as Short-term debt ($518M) + Long-term debt due within one year ($247M) + Long-term debt ($5,052M) as of June 30, 2006.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased by $318 million (14.4%) for the quarter and $629 million (15.3%) for the six-month period compared to 2005. Increases were driven by rate changes (including the 2006 Energy Resource Recovery Account decision), higher sales volumes due to warmer weather, and the implementation of the 2006 General Rate Case (GRC).
- Profitability: Net income available for common stock rose 45% for the quarter and 22% for the six-month period. Key drivers included a $135 million pre-tax gain from the resolution of a state income tax issue, higher revenue from the 2006 GRC, and returns on the Mountainview plant investment.
- Expense Variance: Purchased power expense increased significantly ($652 million year-to-date) due to higher net realized/unrealized losses on economic hedging transactions and higher firm energy purchases. Fuel expense decreased for the quarter due to the shutdown of the Mohave Generating Station.
- Tax Rate: The effective tax rate increased to 37% (quarter) and 38% (six months) from 26% and 29% in 2005, primarily because 2005 included non-recurring reductions to the income tax reserve.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- 2006 General Rate Case: The CPUC authorized a $274 million increase in base rate revenue (net of credits, $134 million), retroactive to January 12, 2006. This decision approved capital investment programs for infrastructure replacement.
- Mohave Generating Station: SCE announced it will not return the Mohave plant to service due to unresolved coal/water supply challenges and cost-effectiveness concerns. The plant ceased operations on December 31, 2005. SCE expects to recover unamortized costs through a balancing account but faces uncertainty regarding CPUC approval.
- Renewable Resources: SCE faces potential deficits in meeting renewable procurement obligations for 2003-2006 due to regulatory changes regarding geothermal facility certification. Penalties could reach $25 million per year if deficits are not made up by 2007.
Risks and Contingencies
- Performance-Based Ratemaking (PBR) Investigation: The CPUC has instituted a formal investigation into SCE's PBR rewards for customer satisfaction and employee safety. The CPUC staff recommended refunds and penalties totaling up to $105 million ($14M + $35M + $56M) plus unquantified fines. Evidentiary hearings are scheduled for Q4 2006.
- Legal Proceedings: Ongoing litigation includes the Navajo Nation lawsuit regarding Mohave coal royalties (seeking over $1 billion in damages) and FERC refund proceedings regarding market manipulation (SCE retains 10% of refunds as shareholder incentive).
- Environmental Remediation: Recorded liability is $82 million, but costs could exceed this by up to $117 million depending on site conditions and regulatory changes.
- Accounting Changes: SCE adopted fair value accounting for stock-based compensation in Q1 2006, resulting in the recognition of expenses previously not recorded.
Investor Verification Checklist
- Regulatory Recovery: Verify the CPUC's final stance on the recovery of unamortized Mohave Generating Station costs ($77 million regulatory asset) and the outcome of the PBR investigation regarding potential refunds and penalties.
- Renewable Compliance: Monitor SCE's ability to meet 2005 and 2006 renewable procurement targets and the potential assessment of penalties up to $25 million per year.
- Debt and Liquidity: Review the $5.8 billion total debt load and the utilization of the $1.7 billion credit facility ($946 million available as of June 30, 2006) to ensure sufficient liquidity for capital expenditures and dividend payments.
- Tax Position: Assess the impact of the new FASB interpretation on uncertain tax positions (effective Jan 1, 2007) and the status of ongoing IRS audits.
- FERC Settlements: Track the realization of additional refunds from FERC proceedings following the Ninth Circuit's August 2006 decision broadening the scope of recoverable refunds.