# SOUTHERN CALIFORNIA EDISON Co: Form 10-Q for the period ended Sep 30, 2011

- Company: [SOUTHERN CALIFORNIA EDISON Co](/companies/sce-pg.md) (CIK 92103)
- Form: 10-Q
- Filed: 2011-11-02
- Accepted by EDGAR: Nov 2, 2011, 09:52 ET
- Period: 2011-09-30
- Accession: 0000092103-11-000005
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/92103/000009210311000005/sce9301110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/92103/000009210311000005/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Operating income | 3 months, 2011-07-01 to 2011-09-30 | $764.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2011-01-01 to 2011-09-30 | $1.65bn | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2011-07-01 to 2011-09-30 | $116.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2011-01-01 to 2011-09-30 | $344.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2011-07-01 to 2011-09-30 | $245.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2011-01-01 to 2011-09-30 | $496.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-07-01 to 2011-09-30 | $406.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2011-01-01 to 2011-09-30 | $838.0m | us-gaap:NetIncomeLoss |
| Operating cash flow | 9 months, 2011-01-01 to 2011-09-30 | $2.27bn | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2011-01-01 to 2011-09-30 | $3.01bn | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2011-09-30 | $65.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-09-30 | $2.83bn | us-gaap:AssetsCurrent |
| Total assets | at 2011-09-30 | $38.12bn | us-gaap:Assets |
| Current liabilities | at 2011-09-30 | $3.64bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2011-09-30 | $28.29bn | us-gaap:Liabilities |
| Long-term debt | at 2011-09-30 | $8.03bn | us-gaap:LongTermDebtNoncurrent |
| Short-term borrowings | at 2011-09-30 | $550.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2011-09-30 | $9.83bn | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 45,909 characters.

### FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect SCE's current expectations and projections about future events based on SCE's knowledge of present facts and circumstances and assumptions about future events and include any statement that does not directly relate to a historical or current fact. Other information distributed by SCE that is incorporated in this report, or that refers to or incorporates this report, may also contain forward-looking statements. In this report and elsewhere, the words "expects," "believes," "anticipates," "estimates," "projects," "intends," "plans," "probable," "may," "will," "could," "would," "should," and variations of such words and similar expressions, or discussions of strategy or of plans, are intended to identify forward-looking statements. Such statements necessarily involve risks and uncertainties that could cause actual results to differ materially from those anticipated. Some of the risks, uncertainties and other important factors that could cause results to differ from those currently expected, or that otherwise could impact SCE, include, but are not limited to:

- ability of SCE to recover its costs in a timely manner from its customers through regulated rates;
- decisions and other actions by the CPUC, the FERC and other regulatory authorities and delays in regulatory actions;
- possible customer bypass or departure due to technological advancements or cumulative rate impacts that make self-generation or use of alternative energy sources economically viable;
- risks associated with the operation of transmission and distribution assets and nuclear and other power generating facilities including: nuclear fuel storage issues, public safety issues, failure, availability, efficiency, output, cost of repairs and retrofits of equipment and availability and cost of spare parts;
- environmental laws and regulations, both at the state and federal levels, or changes in the application of those laws, that could require additional expenditures or otherwise affect the cost and manner of doing business;
- cost of capital and the ability to borrow funds and access to capital markets on reasonable terms;
- cost and availability of electricity including the ability to procure sufficient resources to meet expected customer needs in the event of significant counterparty defaults under power purchase agreements;
- changes in the fair value of investments and other assets;
- changes in interest rates and rates of inflation, including those rates which may be adjusted by public utility regulators;
- governmental, statutory, regulatory or administrative changes or initiatives affecting the electricity industry, including the market structure rules applicable to each market and price mitigation strategies adopted by Independent System Operators and Regional Transmission Organizations;
- availability and creditworthiness of counterparties and the resulting effects on liquidity in the power and fuel markets and/or the ability of counterparties to pay amounts owed in excess of collateral provided in support of their obligations;
- cost and availability of labor, equipment and materials;
- ability to obtain sufficient insurance, including insurance relating to SCE's nuclear facilities and wildfire-related liability, and to recover the costs of such insurance;
- ability to recover uninsured losses in connection with wildfire-related liability;
- effects of legal proceedings, changes in or interpretations of tax laws, rates or policies, and changes in accounting standards;
- potential for penalties or disallowances caused by non-compliance with applicable laws and regulations;
- cost and availability of natural gas and nuclear fuel, and related transportation to the extent not recovered through regulated rate cost escalation provisions or balancing accounts;
- cost and availability of emission credits or allowances for emission credits;
- transmission congestion in and to each market area and the resulting differences in prices between delivery points;
- ability to provide sufficient collateral in support of hedging activities and power and fuel purchased;
- weather conditions and natural disasters;
- risks inherent in transmission and distribution infrastructure replacement and expansion projects, including those related to project site identification, construction, permitting, and governmental approvals; and
- risks that competing transmission systems will be built by merchant transmission providers in SCE's territory.

Additional information about risks and uncertainties, including more detail about the factors described above, is contained throughout this MD&A and in SCE's 2010 Form 10-K, including the "Risk Factors" section in Part I, Item 1A. Readers are urged to read this entire report, including the information incorporated by reference, as well as the 2010 Form 10-K, and carefully consider the risks, uncertainties and other factors that affect SCE's business. Forward-looking statements speak only as of the date they are made and SCE is not obligated to publicly update or revise forward-looking statements. Readers should review future reports filed by SCE with the U.S. Securities and Exchange Commission.

This MD&A for the three- and nine-month periods ended September 30, 2011 discusses material changes in the consolidated financial condition, results of operations and other developments of SCE since December 31, 2010 and as compared to the three- and nine-month periods ended September 30, 2010. This discussion presumes that the reader has read or has access to SCE's MD&A for the calendar year 2010 (the "year-ended 2010 MD&A"), which was included in the 2010 Form 10-K.

### MANAGEMENT OVERVIEW

### Highlights of Operating Results

*(in millions)*

|  | Three months ended September 30, 2011 | 2010 | Change | Nine months ended September 30, 2011 | 2010 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net income available for common stock | $406 | $394 | $12 | $838 | $858 | $(20) |
| Less: Non-Core Earnings (Loss) |  |  |  |  |  |  |
| Global settlement | — | 42 | (42) | — | 95 | (95) |
| Tax impact of health care legislation | — | — | — | — | (39) | 39 |
| Core Earnings | $406 | $352 | $54 | $838 | $802 | $36 |

SCE's earnings are prepared in accordance with generally accepted accounting principles used in the United States. Management uses core earnings for financial planning and for analysis of performance. Core earnings are also used when communicating with analysts and investors regarding SCE's earnings results to facilitate comparisons of the performance from period to period. Core earnings are a non-GAAP financial measure and may not be comparable to those of other companies. Core earnings are defined as earnings attributable to SCE less income or loss from significant discrete items that management does not consider representative of ongoing earnings, such as: settlement of certain tax, regulatory or legal matters or proceedings.

SCE's 2011 core earnings increased $54 million and $36 million for the quarter and year-to-date, respectively. Core earnings in both periods increased due to rate base growth. The quarterly core earnings increase was also attributable to lower income taxes. The year-to-date increase was partially offset by higher income tax expense, including a $40 million benefit in the second quarter of 2010 from a change in tax accounting for asset removal costs primarily related to SCE's infrastructure replacement program. In October 2011, the CPUC authorized SCE to recover legal costs incurred between 2004 and 2009 in support of SCE's efforts to obtain generator refunds. As a result, SCE expects to record revenue of approximately $25 million in the fourth quarter of 2011.

Non-core items included:

- An earnings benefit of $95 million recorded in 2010 relating to the California impact of the federal Global Settlement, including $53 million in the second quarter resulting from acceptance by the Franchise Tax Board of the tax positions finalized with the IRS in 2009 and $42 million in the third quarter resulting from receipt of the final interest determination from the Franchise Tax Board.
- An after-tax earnings charge of $39 million recorded in the first quarter of 2010 to reverse previously recognized federal tax benefits eliminated by federal health care legislation enacted in 2010. The health care law eliminated the federal tax deduction for retiree health care costs to the extent those costs are eligible for federal Medicare Part D subsidies.

### Capital Program

During the first nine months of 2011, SCE's capital investment program focused on upgrading and expanding SCE's transmission and distribution system; replacing generation asset equipment; and installing smart meters. Total capital expenditures (including accruals) were $2.5 billion during the first nine months of 2011 compared to $2.4 billion during the same period in 2010.

As discussed under "Liquidity and Capital Resources—Capital Investment Plan" in the year-ended 2010 MD&A, SCE continues to project that 2011 capital expenditures will be in the range of $3.9 billion to $4.4 billion and that 2011 - 2014 total capital expenditures will be in the range of $15.6 billion to $17.5 billion. Actual capital spending will be affected by: changes in regulatory, environmental and engineering design requirements; permitting and project delays; cost and availability of labor, equipment and materials; and other factors.

SCE is currently completing the final engineering design for the Tehachapi Transmission Project and anticipates an increase in its 2011-2014 expenditures for this project as a result of cost pressures associated with engineering design and scope changes, environmental mitigation work, and regulatory and permit delays. The project may be further impacted by the CPUC's response to SCE's petition to modify the 2009 decision approving the project for the purpose of obtaining authorization to install aviation marking and lighting. In October 2011, the CPUC staff notified SCE that the constructed portions of the project could be marked and lighted as required, but instructed SCE to defer completion of remaining project components that may require aviation marking or lighting pending CPUC review of the petition to modify. Community opposition to portions of the project continues and requests for reconsideration of the CPUC's 2009 decision are pending. Once final engineering is complete, SCE will file a revised cost estimate with the CPUC. As with all transmission investments, cost recovery will be subject to future rate proceedings.

In July 2011, the FERC adopted new rules that remove incumbent public utility transmission owners' federally-based right of first refusal to construct certain new transmission facilities. The rules direct regional entities, such as ISOs, to create new processes that would allow other providers to develop new transmission projects. The new processes will not become effective until approved by the FERC, which is expected in late 2012. The majority of SCE's 2011 – 2014 transmission capital forecast relates to transmission projects that have been approved by the CAISO and barring a re-evaluation under the new rules, will not be subject to the new processes. SCE does not expect these projects to be re-evaluated. The impact of the new rules on future transmission projects will depend on the processes ultimately implemented by regional entities.

### 2012 CPUC General Rate Case

As discussed in the year-ended 2010 MD&A, SCE filed its GRC application in November 2010. In October 2011, SCE submitted updated testimony to reflect changes in escalation rates, known changes due to governmental actions and changes in the timing of recovery for nuclear refueling outages, which taken together changed its requested 2012 base rate revenue requirement to $6.3 billion. SCE's updated request, after considering the effects of sales growth, would result in incremental customer base rate increases of $824 million, $136 million and $532 million in 2012, 2013 and 2014, respectively. The updated request also reflects a previously submitted base revenue requirement reduction of $38 million, $133 million and $145 million in 2012, 2013 and 2014, respectively, primarily due to a reduction in rate base from inclusion of higher deferred income taxes resulting from bonus depreciation deductions under the 2010 Tax Relief Act.

The Division of Ratepayer Advocates ("DRA") recommended that SCE's requested 2012 base rate revenue requirement be decreased by approximately $850 million, comprised of approximately $630 million in operation and maintenance expense reductions and approximately $220 million in capital-related revenue requirement reductions. The Utility Reform Network or TURN and other intervenors recommended an additional $610 million revenue requirement reduction, beyond the DRA adjustments, primarily capital-related in nature, as well as disallowances of recorded capital costs for specific projects. Intervenors have also recommended changes to SCE's proposed post test year ratemaking methodology to be used for 2013 and 2014.The current schedule anticipates a final decision on SCE's 2012 GRC by the end of 2011, but the Administrative Law Judge handling the GRC has indicated that a final decision is not expected before year-end. To the extent that a final decision is delayed beyond the end of 2011, the CPUC has authorized the establishment of a GRC memorandum account, which will make the revenue requirement ultimately adopted by the CPUC effective as of January 1, 2012. SCE cannot predict the revenue requirement the CPUC will ultimately authorize or the timing of the final 2012 GRC decision.

### FERC Formula Rates

In August 2011, the FERC accepted, subject to refund and settlement procedures, SCE's request to implement a formula rate effective January 1, 2012, to determine SCE's FERC transmission revenue requirement, including its construction work in progress ("CWIP") revenue requirement that was previously recovered through a separate mechanism. The FERC reduced SCE's proposed base ROE request from 11.5% to 9.93%. SCE estimates its total 2012 FERC weighted average ROE will be 11.1%, including the previously authorized 50 basis point incentive for CAISO participation and individual authorized project incentives. The actual weighted average ROE is dependent upon the amount and timing of capital expenditures among FERC incentive and non-incentive projects. SCE's request proposed the adoption of a specific formula to calculate a forecast revenue requirement that is used to establish rates and is trued-up annually to allow SCE to recover its actual revenue requirement, including its actual cost of service, actual rate base and the authorized return on investment. SCE's request also allows SCE to make single-issue rate filings requesting changes to certain elements of the formula, including the base ROE, depreciation rates and the retail rate structure. SCE and the other parties to the proceeding are currently in settlement negotiations. SCE does not expect a final decision until 2012 and cannot predict the formula rate structure that the FERC will ultimately authorize.

In September 2011, SCE reduced its forecasted 2012 transmission revenue requirement for the lower ROE by $49 million to $722 million. SCE had requested a rehearing of the adopted base ROE, however the FERC denied such request in October 2011. SCE is evaluating and must decide by December 2011 whether to appeal the FERC order at the DC Circuit Court. Separately, in October 2011, the FERC issued an order denying SCE's request for rehearing of its 2008 and 2011 CWIP proceedings which adopted a base ROE of 9.54% and 10.3%, respectively, compared to SCE's request of 11.5%. The reduced ROE in these proceedings did not have a material impact on SCE's financial statements.

### Nuclear Industry and Regulatory Response to Events in Japan

As discussed in the 2010 Form 10-K under the heading "Nuclear Power Plant Regulation," SCE is subject to the jurisdiction of the NRC with respect to its ownership interest in San Onofre and Palo Verde. In light of the significant safety events at the Fukushima Daiichi nuclear plant in Japan resulting from the March 2011 earthquake and tsunami, the NRC has been performing and plans to continue to perform additional operational and safety reviews of nuclear facilities in the United States. The NRC's Near Term Task Force ("NTTF") conducted a systematic review of U.S. NRC processes and regulations to determine whether additional improvements to the existing nuclear regulatory system are warranted in light of the events in Japan. The NTTF concluded that a sequence of events like the Fukushima accident is unlikely to occur in the U.S., and that continued operation of U.S. reactors does not pose an imminent risk to public health and safety. The NTTF Report proposed changes to regulations applicable to protection against natural phenomena, including earthquakes and flooding and emergency preparedness, and the NTTF made a number of recommendations as to actions that the NRC might implement. The timing and prioritization of these recommendations must be voted on by the NRC and the nuclear industry will have an opportunity to comment on the timing and scope of these recommendations prior to their implementation. If implemented, the recommendations may impact future operations and capital requirements at United States nuclear facilities, including the operations and capital requirements of SCE's nuclear facilities.

### Environmental Developments

For a discussion of environmental regulation developments regarding Greenhouse Gas Regulation, Greenhouse Gas Litigation Developments and Once-Through Cooling Issues, see "SCE Notes to Consolidated Financial Statements—Note 10. Regulatory and Environmental Developments."

### RESULTS OF OPERATIONS

SCE's results of operations are derived mainly through two sources:

- Utility earning activities – representing CPUC and FERC-authorized base rates, including the opportunity to earn the authorized return; and
- Utility cost-recovery activities – representing CPUC and FERC-authorized balancing accounts which allow for recovery of costs incurred or provide for mechanisms to track and recover or refund differences in forecasted and actual amounts.

Utility earning activities include base rates that are designed to recover forecasted operation and maintenance costs, certain capital-related carrying costs, interest, taxes and a return, including the return on capital projects recovered through CPUC- authorized mechanisms outside the GRC process. Differences between authorized amounts and actual results impact earnings. Also, included in utility earning activities are revenues or penalties related to incentive mechanisms, other operating revenue, and regulatory charges or disallowances, if any.

Utility cost-recovery activities include rates that provide for recovery (with no return), subject to review of reasonableness or compliance with upfront standards, of fuel costs, purchased power costs, public purpose related-program costs (including energy efficiency and demand-side management programs), certain operation and maintenance expenses, and depreciation expense related to certain projects.

The following tables summarize SCE's results of operations for the periods indicated. The presentation separately identifies utility earning activities and utility cost-recovery activities.

### Three Months Ended September 30, 2011 versus September 30, 2010

*(in millions)*

|  | Three months ended September 30, 2011 Utility Earning Activities | Utility Cost- Recovery Activities | Total Consolidated | Three months ended September 30, 2010 Utility Earning Activities | Utility Cost- Recovery Activities | Total Consolidated |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Operating revenue** | $1,697 | $1,689 | $3,386 | $1,601 | $1,497 | $3,098 |
| Fuel and purchased power | — | 1,374 | 1,374 | — | 1,218 | 1,218 |
| Operations and maintenance | 541 | 278 | 819 | 541 | 262 | 803 |
| Depreciation, decommissioning and amortization | 323 | 35 | 358 | 300 | 16 | 316 |
| Property taxes and other | 69 | 2 | 71 | 64 | 1 | 65 |
| **Total operating expenses** | 933 | 1,689 | 2,622 | 905 | 1,497 | 2,402 |
| **Operating income** | 764 | — | 764 | 696 | — | 696 |
| Net interest expense and other | (98) | — | (98) | (84) | — | (84) |
| **Income before income taxes** | 666 | — | 666 | 612 | — | 612 |
| Income tax expense | 245 | — | 245 | 205 | — | 205 |
| **Net income** | 421 | — | 421 | 407 | — | 407 |
| Dividends on preferred and preference stock | 15 | — | 15 | 13 | — | 13 |
| Net income available for common stock | $406 | $— | $406 | $394 | $— | $394 |
| Core Earnings1 |  |  | $406 |  |  | $352 |
| Non-Core Earnings: |  |  |  |  |  |  |
| Global Settlement |  |  | — |  |  | 42 |
| Total SCE GAAP Earnings |  |  | $406 |  |  | $394 |

1 See use of Non-GAAP financial measures in “Management Overview-Highlights of Operating Results.”

### Utility Earning Activities

Utility earning activities were primarily affected by the following:

- Higher operating revenue of $96 million primarily due to the following:
- $50 million increase primarily due to a 4.35% increase in 2011 authorized revenue approved in the 2009 CPUC GRC decision.
- $25 million increase in FERC-related revenue primarily due to CWIP incentive revenue for the Tehachapi transmission project.
- $15 million increase related to capital-related revenue requirements primarily related to the steam generator replacement project and EdisonSmartConnectTM.
- Higher depreciation, decommissioning and amortization expense of $23 million primarily related to increased

transmission and distribution investments.

- Higher net interest expense and other of $14 million primarily due to higher outstanding balances on long-term debt.
- Higher income taxes primarily due to a benefit recorded in 2010 related to the Global Settlement. See "—Income Taxes" below for further information.

### Utility Cost-Recovery Activities

Utility cost-recovery activities were primarily affected by the following:

- Higher purchased power expense of $146 million primarily driven by the cost to replace CDWR contracts that expired in 2011.
- Higher operation and maintenance expense of $16 million resulting primarily from increased energy efficiency program costs.
- Higher depreciation, decommissioning and amortization expense of $19 million primarily related to the steam generator replacement project and the EdisonSmartConnectTM project.

### Nine Months Ended September 30, 2011 versus September 30, 2010

*(in millions)*

|  | Nine months ended September 30, 2011 Utility Earning Activities | Utility Cost- Recovery Activities | Total Consolidated | Nine months ended September 30, 2010 Utility Earning Activities | Utility Cost- Recovery Activities | Total Consolidated |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Operating revenue** | $4,442 | $3,621 | $8,063 | $4,175 | $3,329 | $7,504 |
| Fuel and purchased power | — | 2,691 | 2,691 | — | 2,612 | 2,612 |
| Operations and maintenance | 1,619 | 831 | 2,450 | 1,598 | 674 | 2,272 |
| Depreciation, decommissioning and amortization | 964 | 94 | 1,058 | 905 | 40 | 945 |
| Property taxes and other | 212 | 5 | 217 | 193 | 2 | 195 |
| Gain on sale of assets | — | — | — | — | (1) | (1) |
| **Total operating expenses** | 2,795 | 3,621 | 6,416 | 2,696 | 3,327 | 6,023 |
| **Operating income** | 1,647 | — | 1,647 | 1,479 | 2 | 1,481 |
| Net interest expense and other | (269) | — | (269) | (244) | (2) | (246) |
| **Income before income taxes** | 1,378 | — | 1,378 | 1,235 | — | 1,235 |
| Income tax expense | 496 | — | 496 | 338 | — | 338 |
| **Net income** | 882 | — | 882 | 897 | — | 897 |
| Dividends on preferred and preference stock | 44 | — | 44 | 39 | — | 39 |
| Net income available for common stock | $838 | $— | $838 | $858 | $— | $858 |
| Core Earnings1 |  |  | $838 |  |  | $802 |
| Non-Core Earnings: |  |  |  |  |  |  |
| Global Settlement |  |  | — |  |  | 95 |
| Tax impact of health care legislation |  |  | — |  |  | (39) |
| Total SCE GAAP Earnings |  |  | $838 |  |  | $858 |

1 See use of Non-GAAP financial measures in “Management Overview-Highlights of Operating Results.”

### Utility Earning Activities

Utility earning activities were primarily affected by the following:

- Higher operating revenue of $267 million primarily due to the following:
- $130 million increase primarily due to a 4.35% increase in 2011 authorized revenue approved in the 2009 CPUC GRC decision.
- $90 million increase in FERC-related revenue primarily due to CWIP incentive revenue for the Tehachapi transmission project and the implementation of the 2010 FERC rate case effective March 1, 2010.
- $50 million increase related to capital-related revenue requirements primarily related to the steam generator replacement project and EdisonSmartConnectTM.
- Higher depreciation, decommissioning and amortization expense of $59 million primarily related to increased transmission and distribution investments.
- Higher net interest expense and other of $25 million primarily due to higher outstanding balances on long-term debt.
- Higher income taxes primarily due to benefits recorded in 2010 related to the Global Settlement. See "—Income Taxes" below for more information.

### Utility Cost-Recovery Activities

Utility cost-recovery activities were primarily affected by the following:

- Higher purchased power expense of $85 million primarily driven by the cost to replace CDWR contracts that expired in 2011 and higher average prices from a shift to renewable contracts. The increase was partially offset by increased purchased power in 2010 during the outages at San Onofre and Four Corners.
- Higher operation and maintenance expense of $157 million resulting primarily from increased energy efficiency program costs.
- Higher depreciation, decommissioning and amortization expense of $54 million primarily related to the steam generator replacement project and the EdisonSmartConnectTM project.

### Supplemental Operating Revenue Information

SCE's retail billed and unbilled revenue (excluding wholesale sales and balancing account over/undercollections) was $3.3 billion and $7.8 billion for the three- and nine-month periods ended September 30, 2011, respectively, compared to $3.4 billion and $7.8 billion for the respective periods in 2010. The quarterly decrease reflects a rate decrease of $186 million and a sales volume increase of $103 million. The $186 million rate decrease primarily reflects lower generation rates for 2011 due to the refunding of prior period purchased power overcollections in 2011. The $103 million sales volume increase was primarily due to serving generation load that was previously served by CDWR contracts which expired in 2011. As a result of a CPUC-authorized decoupling mechanism, SCE does not bear the volumetric risk or benefit related to retail electricity sales (see "Item 1. Business—Overview of Ratemaking Mechanisms" in the 2010 Form 10-K).

SCE remits to CDWR and does not recognize as revenue the amounts that SCE bills and collects from its customers for electric power purchased and sold by the CDWR to SCE's customers, CDWR bond-related costs and a portion of direct access exit fees. The amounts collected and remitted to CDWR were $319 million and $873 million for the three- and nine-month periods ended September 30, 2011, respectively, and $315 million and $896 million for the respective periods in 2010. The CDWR-related rates in 2011 continue to reflect an approximately $585 million refund of operating reserves that CDWR can release as their contracts terminate. Total customer rates are expected to increase as CDWR operating reserves are fully refunded. The power contracts that CDWR allocated to SCE will terminate by the end of 2011; however, the refund of operating reserves is expected to continue through 2012. SCE's revenue and related purchased power expense is expected to increase as these CDWR contracts are replaced by power purchase agreements entered into by SCE.

### Income Taxes

The table below provides a reconciliation of income tax expense computed at the federal statutory income tax rate to the income tax provision.

*(in millions)*

|  | Three months ended September 30, 2011 | 2010 | Nine months ended September 30, 2011 | 2010 |
| --- | ---: | ---: | ---: | ---: |
| Income before income taxes | $666 | $612 | $1,378 | $1,235 |
| Provision for income tax at federal statutory rate of 35% | $233 | $214 | $482 | $433 |
| Increase (decrease) in income tax from: |  |  |  |  |
| Items presented with related state income tax, net |  |  |  |  |
| Global settlement related1 | — | (42) | — | (95) |
| Change in tax accounting method for asset removal costs2 | — | — | — | (40) |
| State tax – net of federal benefit | 31 | 26 | 61 | 47 |
| Health care legislation3 | — | — | — | 39 |
| Property-related and other | (19) | 7 | (47) | (46) |
| Total income tax expense | $245 | $205 | $496 | $338 |
| Effective tax rate | 37% | 33% | 36% | 27% |

1 During the nine months ended September 30, 2010, SCE recognized a $95 million earnings benefit relating to the California impact of the federal Global Settlement, including $53 million in the second quarter resulting from the acceptance by the California Franchise Tax Board of the tax positions finalized with the IRS in 2009 and $42 million in the third quarter resulting from receipt of the final interest determination for the Franchise Tax Board.

2 During the second quarter of 2010, the IRS approved SCE's request to change its tax accounting method for asset removal costs primarily related to its infrastructure replacement program. As a result, SCE recognized a $40 million earnings benefit (of which $28 million relates to asset removal costs incurred prior to 2010) from deducting asset removal costs earlier in the construction cycle. These deductions are recorded on a flow-through basis.

3 During the first quarter of 2010, SCE recorded a $39 million non-cash charge to reverse previously recognized federal tax benefits eliminated by the federal health care legislation enacted in March 2010. The health care law eliminated the federal tax deduction for retiree health care costs to the extent those costs are eligible for federal Medicare Part D subsidies.

For a discussion of the status of Edison International's income tax audits, see "SCE Notes to Consolidated Financial Statements—Note 7. Income Taxes."

### Repair Deductions

As discussed in the year ended 2010 MD&A, in 2009, Edison International made a voluntary election to change its tax accounting method for certain repair costs incurred on SCE's transmission, distribution and generation assets. The change in tax accounting method resulted in a $192 million cash benefit realized in the fourth quarter of 2009. In August of 2011 the IRS issued guidance on repair deductions and changes in accounting method related to transmission and distribution assets. Based on this guidance SCE will file a second change in tax accounting method in 2011 for all prior years. SCE does not expect any cash impact in 2011 due to its current net operating loss carry forward position. Regulatory treatment for the incremental deductions taken after the voluntary election to change SCE's tax accounting method for certain repair costs will be addressed in SCE's 2012 GRC. Due to the pending regulatory treatment SCE has not recognized an earnings benefit or regulatory asset related to this method change and incremental deductions taken in 2009, 2010 and 2011.

### LIQUIDITY AND CAPITAL RESOURCES

SCE's ability to operate its business, complete planned capital projects, and implement its business strategy are dependent upon its cash flow and access to the capital markets to finance its activities. SCE's overall cash flows fluctuate based on, among other things, its ability to recover its costs in a timely manner from its customers through regulated rates, changes in commodity prices and volumes, collateral requirements, dividend payments made to Edison International, and the outcome of tax and regulatory matters.

SCE expects to fund its continuing obligations, projected capital expenditures for 2011 and dividends to Edison International through cash and equivalents on hand, operating cash flows, tax benefits (including bonus depreciation) and capital market financings of debt and preferred equity, as needed. SCE also has availability under its credit facilities if additional funding and liquidity are necessary to meet operating and capital requirements.

### Available Liquidity

SCE had two credit facilities: a $2.4 billion five-year credit facility that matures in February 2013, with four one-year options to extend by mutual consent, and a $500 million three-year credit facility that matures in March 2013.

*(in millions)*

|  | Credit Facilities |
| --- | ---: |
| Commitment | $2,894 |
| Outstanding borrowings supported by credit facilities | (550) |
| Outstanding letters of credit | (83) |
| Amount available | $2,261 |

### Debt Covenant

SCE has a debt covenant in its credit facilities that limits its debt to total capitalization ratio to less than or equal to 0.65 to 1. At September 30, 2011, SCE's debt to total capitalization ratio was 0.47 to 1.

### Dividend Restrictions

The CPUC regulates SCE's capital structure and limits the dividends it may pay Edison International. In SCE's most recent cost of capital proceeding, the CPUC set an authorized capital structure for SCE which included a common equity component of 48%. SCE may make distributions to Edison International as long as the common equity component of SCE's capital structure remains at or above the 48% authorized level on a 13-month weighted average basis. At September 30, 2011, SCE's 13-month weighted-average common equity component of total capitalization was 50.5% resulting in the capacity to pay $436 million in additional dividends.

During the first nine months of 2011, SCE made $345 million in dividend payments to its parent, Edison International. Future dividend amounts and timing of distributions are dependent upon several factors including the actual level of capital expenditures, operating cash flows and earnings.

### Regulatory Proceedings

### Energy Efficiency Shareholder Risk/Reward Mechanism

As discussed in the 2010 Form 10-K under the heading "Overview of Ratemaking Mechanisms—Energy Efficiency Shareholder Risk/Reward Mechanism," the CPUC intended to review the framework of the Energy Efficiency Mechanism and to establish a mechanism applicable to performance during the 2010 - 2012 energy efficiency program cycle. In September 2011 the CPUC requested comments from SCE and other interested parties on an Energy Efficiency Mechanism applicable to the 2010-2012 program cycle. SCE recommended using the remainder of 2011 and 2012 for development of a new mechanism that would focus on reliability, affordability, and benefits to the environment that would be applicable for 2013 and beyond.

### Cost of Capital

As discussed in the 2010 Form 10-K under the heading "Overview of Ratemaking Mechanisms—CPUC Base Rates," the CPUC extended through 2012 a multi-year cost of capital mechanism which set SCE's authorized rate of return on equity at 11.5%, subject to annual adjustments if certain thresholds are reached. The 2012 measurement period (October 2010 - September 2011) did not trigger an annual adjustment and therefore the 11.5% authorized rate of return on equity will remain in effect through 2012. In April 2012, SCE is scheduled to file a new cost of capital mechanism at the CPUC that, once approved, will establish SCE's authorized rate of return for 2013. If the current interest rate environment continues, SCE's 2013 authorized rate of return could decrease from 11.5%.

### Margin and Collateral Deposits

Certain derivative instruments, power procurement contracts and other contractual arrangements contain collateral requirements. The table below provides the amount of collateral posted by SCE to its counterparties as well as the potential collateral that would be required as of September 30, 2011.

*(in millions)*

|  |  |
| --- | ---: |
| Collateral posted as of September 30, 20111 | $106 |
| Incremental collateral requirements for power procurement contracts resulting from a potential downgrade of SCE's credit rating to below investment grade | 135 |
| Posted and potential collateral requirements2 | $241 |

1 Collateral provided to counterparties and other brokers consisted of $14 million which was offset against net derivative liabilities and $92 million, which consisted of $9 million in cash reflected in “Other current assets” on the consolidated balance sheets and $83 million in letters of credit.

2 Total posted and potential collateral requirements may increase by an additional $2 million based on SCE's forward positions as of September 30, 2011 due to adverse market price movements over the remaining lives of the existing power procurement contracts using a 95% confidence level.

### Workers Compensation Self-Insurance Fund

SCE is self-insured for workers compensation claims. SCE assesses workers compensation claims that have been asserted and those that have been incurred but not reported to determine the probable amount of losses that should be recorded. The Department of Industrial Relations for the State of California requires companies that are self-insured for workers compensation to post collateral (in the form of cash and/or letters of credits) based on the estimated workers' compensation liability if a company's bond rating were to fall below "B." As of September 30, 2011, if SCE's bond rating were to fall below a "B" rating, SCE would be required to post $202 million for its workers compensation self-insurance plan.

### Historical Consolidated Cash Flows

### Condensed Consolidated Statement of Cash Flows

The table below sets forth condensed historical cash flow information for SCE.

*(in millions)*

|  | Nine months ended September 30, 2011 | 2010 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $2,272 | $2,656 |
| Net cash provided by financing activities | 672 | 622 |
| Net cash used by investing activities | (3,136) | (2,883) |
| Net increase (decrease) in cash and cash equivalents | $(192) | $395 |

#### Net Cash Provided by Operating Activities

Net cash provided by operating activities decreased $384 million in the first nine months of 2011 compared to the first nine months of 2010. The decrease reflects net cash outflows related to regulatory balancing account activities and higher net tax receipts in 2010 primarily resulting from the impacts of the Global Settlement. As a result of the Global Settlement, SCE received net tax allocation payments from Edison International of approximately $295 million in 2010. These decreases were partially offset by higher receipts from customers due to increases in authorized revenue. The operating cash flows were also impacted by the timing of cash receipts and disbursements related to working capital.

#### Net Cash Provided by Financing Activities

Net cash provided by financing activities for the first nine months of 2011 was $672 million consisting of the following significant events:

- Issued $500 million of 3.875% first and refunding mortgage bonds due in 2021. The proceeds from these bonds were used to repay commercial paper borrowings and to fund SCE's capital program.
- Issued $550 million of commercial paper supported by SCE's line of credit to fund interim working capital requirements.
- Issued $125 million of 6.5% Series D preference stock. The proceeds from the issuance were used for general corporate purposes.
- Paid $345 million of dividends to Edison International.
- Purchased $86 million of its variable rate tax-exempt bonds.

Net cash provided by financing activities for the first nine months of 2010 was $622 million consisting of the following significant events:

- Issued $1 billion of first refunding mortgage bonds due in 2040 to fund SCE's capital program.
- Reissued $144 million of tax-exempt pollution control bonds due in 2035 to fund SCE's capital program.
- Repaid $250 million of senior unsecured notes.
- Paid $200 million in dividends to Edison International.

#### Net Cash Used by Investing Activities

Cash flows from investing activities are driven primarily by capital expenditures and funding of nuclear decommissioning trusts. Capital expenditures were $3.0 billion and $2.7 billion for the nine months ended September 30, 2011 and 2010, respectively, primarily related to transmission and distribution investments. Net purchases of nuclear decommissioning trust investments and other were $146 million and $133 million for the nine months ended September 30, 2011 and 2010, respectively.

### Contractual Obligations and Contingencies

### Contractual Obligations

SCE has power purchase commitments and firm transmission commitments which are discussed in "SCE Notes to Consolidated Financial Statements—Note 9. Commitments and Contingencies—Third-Party Power Purchase Agreements."

### Contingencies

SCE has contingencies related to an Order Instituting Investigation ("OII") related to a 2007 wildfire in Malibu, California, nuclear insurance and spent nuclear fuel, which are discussed in "SCE Notes to Consolidated Financial Statements—Note 9. Commitments and Contingencies."

#### Environmental Remediation

As of September 30, 2011, SCE had 24 identified material sites for remediation and recorded an estimated minimum liability of $51 million. SCE expects to recover 90% of its remediation costs at certain sites. See "SCE Notes to Consolidated Financial Statements—Note 9. Commitments and Contingencies" for further discussion.

### MARKET RISK EXPOSURES

SCE's primary market risks include fluctuations in interest rates, commodity prices and volumes, and counterparty credit. Fluctuations in interest rates can affect earnings and cash flows. Fluctuations in commodity prices and volumes and counterparty credit losses may temporarily affect cash flows, but are not expected to affect earnings due to expected recovery through regulatory mechanisms. SCE uses derivative instruments, as appropriate, to manage its market risks. For a further discussion of SCE's market risk exposures, including commodity price risk, credit risk and interest rate risk, see "SCE Notes to Consolidated Financial Statements—Note 6. Derivative and Hedging Activities" and "Note 4. Fair Value Measurements" and see "Market Risk Exposures—Commodity Price Risk" in the year-ended 2010 MD&A.

### Commodity Price Risk

The fair value of outstanding derivative instruments used to mitigate SCE's exposure to commodity price risk was a net liability of $641 million and $207 million at September 30, 2011 and December 31, 2010, respectively. For further discussion of fair value measurements and the fair value hierarchy, see "SCE Notes to Consolidated Financial Statements—Note 4. Fair Value Measurements."

### Credit Risk

Credit risk exposure from counterparties for power and gas trading activities is measured as the sum of net accounts receivable (accounts receivable less accounts payable) and the current fair value of net derivative assets (derivative assets less derivative liabilities) reflected on the consolidated balance sheets. SCE enters into master agreements which typically provide for a right of setoff. Accordingly, SCE's credit risk exposure from counterparties is based on a net exposure under these agreements. SCE manages the credit risk on the portfolio for both rated and non-rated counterparties based on credit ratings using published ratings of counterparties and other publicly disclosed information, such as financial statements, regulatory filings, and press releases, to guide it in the process of setting credit levels, risk limits and contractual agreements, including master netting agreements. As of September 30, 2011, the amount of balance sheet exposure as described above, by the credit ratings of SCE's counterparties, was as follows:

*(in millions)*

| S&P Credit Rating1 | September 30, 2011 Exposure2 | Collateral | Net Exposure |
| --- | ---: | ---: | ---: |
| A or higher | $98 | $— | $98 |
| Not rated3 | 5 | (1) | 4 |
| Total | $103 | $(1) | $102 |

1 SCE assigns a credit rating based on the lower of a counterparty's S&P or Moody's rating. For ease of reference, the above table uses the S&P classifications to summarize risk, but reflects the lower of the two credit ratings.

2 Exposure excludes amounts related to contracts classified as normal purchases and sales and non-derivative contractual commitments that are not recorded on the consolidated balance sheets, except for any related net accounts receivable.

3 The exposure in this category relates to long-term power purchase agreements. SCE's exposure is mitigated by regulatory treatment.

The credit risk exposure set forth in the table above is composed of $2 million of net accounts receivable and $101 million representing the fair value, adjusted for counterparty credit reserves, of derivative contracts.

### CRITICAL ACCOUNTING ESTIMATES AND POLICIES

For a discussion of SCE's critical accounting estimates and policies, see "Critical Accounting Estimates and Policies" in the year ended 2010 MD&A.

### NEW ACCOUNTING GUIDANCE

New accounting guidance is discussed in "SCE Notes to Consolidated Financial Statements—Note 1. Summary of Significant Accounting Policies—New Accounting Guidance."

## Market risk

As filed, 142 characters.

Information responding to this item is included in the MD&A under the heading "Market Risk Exposures" and is incorporated herein by reference.

## Controls and procedures

As filed, 966 characters.

### Disclosure Controls and Procedures

SCE's management, under the supervision and with the participation of the company's President and Chief Financial Officer, has evaluated the effectiveness of SCE's disclosure controls and procedures (as that term is defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on that evaluation, the President and Chief Financial Officer have concluded that, as of the end of the period, SCE's disclosure controls and procedures are effective.

### Internal Control Over Financial Reporting

There were no changes in SCE’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) or 15d-1(f) under the Exchange Act) during the period to which this report relates that have materially affected, or are reasonably likely to materially affect, SCE’s internal control over financial reporting.

Filed Nov 2, 2011.
Source: SEC EDGAR, the filing index for accession 0000092103-11-000005. Last ingested by Listed: Nov 8, 2026, 13:04 ET. No prices; not investment advice.