# SOUTHERN CALIFORNIA EDISON Co: Form 10-Q for the period ended Mar 31, 2011

- Company: [SOUTHERN CALIFORNIA EDISON Co](/companies/sce-pg.md) (CIK 92103)
- Form: 10-Q
- Filed: 2011-05-02
- Accepted by EDGAR: May 2, 2011, 08:59 ET
- Period: 2011-03-31
- Accession: 0001047469-11-004334
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/92103/000104746911004334/a2203477z10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/92103/000104746911004334/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Operating income | 3 months, 2011-01-01 to 2011-03-31 | $443.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2011-01-01 to 2011-03-31 | $111.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2011-01-01 to 2011-03-31 | $123.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-01-01 to 2011-03-31 | $222.0m | us-gaap:NetIncomeLoss |
| Operating cash flow | 3 months, 2011-01-01 to 2011-03-31 | $672.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2011-01-01 to 2011-03-31 | $1.02bn | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2011-03-31 | $53.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-03-31 | $2.23bn | us-gaap:AssetsCurrent |
| Total assets | at 2011-03-31 | $36.34bn | us-gaap:Assets |
| Current liabilities | at 2011-03-31 | $3.01bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2011-03-31 | $26.91bn | us-gaap:Liabilities |
| Long-term debt | at 2011-03-31 | $7.63bn | us-gaap:LongTermDebtNoncurrent |
| Short-term borrowings | at 2011-03-31 | $200.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2011-03-31 | $9.44bn | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 30,398 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;

risks associated with the operation of transmission and distribution assets and nuclear and other power generating facilities including: nuclear fuel storage 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;

the 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 coal, natural gas, fuel oil, 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 the development of generation projects and 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 months ended March 31, 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 months ended March 31, 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 March 31, 2011 | 2010 | Change |
| --- | ---: | ---: | ---: |
| Net Income available for common stock | $222 | $164 | $58 |
| Non-Core Items |  |  |  |
| Tax impact of health care legislation | — | (39) | 39 |
| Core Earnings | $222 | $203 | $19 |

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.

The increase in core earnings of $19 million was primarily due to rate base growth. Non-core items included an after-tax earnings charge of $39 million recorded in 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 quarter, SCE's capital investment program focused on upgrading, maintaining and expanding SCE's transmission and distribution system; maintaining and replacing generation asset equipment; and installing smart meters. Total capital expenditures (including accruals) were $765 million during the first quarter of 2011 compared to $640 million during the same period in 2010.

SCE continues to project that 2011 capital investments will be in the range of $3.9 billion to $4.4 billion and that 2011 – 2014 total capital investment spending will be in the range of $15.6 billion to $17.5 billion. Actual capital spending will be affected by regulatory approval, permitting, market and other factors as discussed further under "SCE: Liquidity and Capital Resources—Capital Investment Plan" in the year-ended 2010 MD&A.

### 2012 CPUC General Rate Case

As discussed in the year-ended 2010 MD&A, SCE is required to update its 2012 GRC application to reflect, among other things, the impacts of governmental and legislative actions. In April 2011, the IRS issued guidance for determining bonus depreciation enacted in the 2010 Tax Relief Act. On April 28, 2011, SCE submitted an update of its 2012 GRC application primarily to reflect bonus depreciation deductions under the 2010 Tax Relief Act, reducing its base rate revenue requirement by $38 million, $133 million and $145 million in 2012, 2013 and 2014, respectively. The decrease in base rate revenue requirement is due to a reduction in rate base from inclusion of higher deferred income taxes resulting from bonus depreciation. SCE's revised request, after considering the effects of sales growth, would result in incremental customer rate increases of $828 million, $152 million and $514 million in 2012, 2013 and 2014, respectively.

The current schedule anticipates a final decision on SCE's 2012 GRC by the end of 2011. To the extent a final decision is delayed, 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.

### 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 recent earthquake and tsunami, the NRC plans to perform additional operational and safety reviews of nuclear facilities in the United States. The lessons learned from the Japanese events and NRC reviews 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 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-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 reasonableness review, 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.

### Electric Utility Results of Operations

The following table is a summary of SCE's results of operations for the periods indicated. The presentation below separately identifies utility earning activities and utility cost-recovery activities.

*(in millions)*

|  | Three months ended March 31, 2011 Utility Earning Activities | Utility Cost- Recovery Activities | Total Consolidated | Three months ended March 31, 2010 Utility Earning Activities | Utility Cost- Recovery Activities | Total Consolidated |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Operating revenue** | $1,363 | $869 | $2,232 | $1,265 | $894 | $2,159 |
| Fuel and purchased power | — | 584 | 584 | — | 689 | 689 |
| Operations and maintenance | 528 | 256 | 784 | 519 | 194 | 713 |
| Depreciation, decommissioning and amortization | 317 | 27 | 344 | 300 | 9 | 309 |
| Property taxes and other | 75 | 2 | 77 | 68 | — | 68 |
| **Total operating expenses** | 920 | 869 | 1,789 | 887 | 892 | 1,779 |
| **Operating income** | 443 | — | 443 | 378 | 2 | 380 |
| Net interest expense and other | (84) | — | (84) | (72) | (2) | (74) |
| **Income before income taxes** | 359 | — | 359 | 306 | — | 306 |
| Income tax expense | 123 | — | 123 | 129 | — | 129 |
| **Net income** | 236 | — | 236 | 177 | — | 177 |
| Dividends on preferred and preference stock | 14 | — | 14 | 13 | — | 13 |
| Net income available for common stock | $222 | $— | $222 | $164 | $— | $164 |
| Core Earnings1 |  |  | $222 |  |  | $203 |
| Non-Core Earnings: |  |  |  |  |  |  |
| Tax impact of health care legislation |  |  | — |  |  | (39) |
| Total SCE GAAP Earnings |  |  | $222 |  |  | $164 |

1

See use of Non-GAAP financial measures in "Management Overview—Highlights of Operating Results."

### Utility Earning Activities

#### 2011 vs. 2010

Utility earning activities were primarily affected by the following:

Higher operating revenue of $98 million primarily due to the following:

$45 million increase primarily due to a 4.35% increase in 2011 authorized revenue compared to the 2010 revenue requirement approved in the CPUC 2009 GRC decision.

$40 million increase in FERC-related revenue due to the implementation of the 2010 FERC rate case effective March 1, 2010 and construction work in progress ("CWIP") incentive earnings for the Tehachapi transmission project.

$15 million increase related to capital-related revenue requirements recovered through CPUC-authorized mechanisms outside of the GRC process primarily related to the steam generator replacement project and the EdisonSmartConnect™ project.

Higher depreciation, decommissioning and amortization expense of $17 million primarily related to increased capital expenditures, including capitalized software costs.

See "—Income Taxes" below for more information on lower income taxes during 2011 compared to the same period in 2010.

### Utility Cost-Recovery Activities

#### 2011 vs. 2010

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

Lower purchased power expense of $100 million related to: lower net ISO-related costs of $55 million primarily due to higher replacement power costs in 2010 related to the San Onofre Unit 2 extended outage and lower market prices in 2011; lower QF and renewable purchased power expense of $30 million primarily related to lower purchases due to expiration of a contract and lower natural gas prices; and lower bilateral energy purchase expense of $25 million primarily due to lower capacity payments as a result of expiring tolling contracts.

Higher operation and maintenance expense of $62 million for energy efficiency programs.

Higher depreciation, decommissioning and amortization expense of $18 million primarily related to the steam generator replacement project and the EdisonSmartConnect™ project.

### Supplemental Operating Revenue Information

SCE's retail billed and unbilled revenue (excluding wholesale sales and balancing account over/undercollections) was $2.1 billion and $2.0 billion for the three months ended March 31, 2011 and 2010, respectively. The increase reflects a rate increase of $90 million and a sales volume increase of $30 million. The rate increase reflects higher system average rates for 2011 compared to the same period in 2010, primarily due to the implementation of rates authorized in the CPUC 2009 GRC decision and the 2010 FERC rate case. As a result of the CPUC-authorized decoupling mechanism, SCE does not bear the volumetric risk 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 $275 million and $296 million for the three months ended March 31, 2011 and 2010, respectively. 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. 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 March 31, 2011 | 2010 |
| --- | ---: | ---: |
| Income before income taxes | $359 | $306 |
| Provision for income tax at federal statutory rate of 35% | 125 | 107 |
| Increase (decrease) in income tax from: |  |  |
| State tax – net of federal benefit | 12 | 9 |
| Health care legislation1 | — | 39 |
| Property-related and other | (14) | (26) |
| Total income tax expense | $123 | $129 |
| Effective tax rate | 34% | 42% |

1

See "Management Overview—Highlights of Operating Results" for a discussion of the $39 million non-cash charge related to the federal health care legislation enacted in March 2010.

The decreased benefit provided by property-related and other items was primarily due to lower deductions for asset removal costs and internally developed software in the first quarter of 2011 compared to the respective period in 2010.

### 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 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

As of March 31, 2011, SCE had approximately $53 million of cash and equivalents. 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 | (200) |
| Outstanding letters of credit | (73) |
| Amount available | $2,621 |

### 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 March 31, 2011, SCE's debt to total capitalization ratio was 0.46 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 March 31, 2011, SCE's 13-month weighted-average common equity component of total capitalization was 50.8% resulting in the capacity to pay $471 million in additional dividends.

During the first quarter of 2011, SCE made a $115 million dividend payment 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.

### Margin and Collateral Deposits

### Derivative Instruments and Power Procurement Contracts

Certain derivative instruments and power procurement contracts under SCE's power and natural gas hedging activities 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 March 31, 2011.

*(in millions)*

|  |  |
| --- | ---: |
| Collateral posted as of March 31, 20111 | $80 |
| Incremental collateral requirements for power procurement contracts resulting from a potential downgrade of SCE's credit rating to below investment grade | 53 |
| Posted and potential collateral requirements for derivative instruments and power procurement contracts2 | $133 |

1

Collateral provided to counterparties and other brokers consisted of $4 million which was offset against net derivative liabilities and $76 million (consisting of $4 million in cash reflected in "Other current assets" on the consolidated balance sheets and $72 million in letters of credit).

2

Total posted and potential collateral requirements may increase by an additional $18 million, based on SCE's forward positions as of March 31, 2011, due to adverse market price movements over the remaining life 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 March 31, 2011, if SCE's bond rating were to fall below a "B" rating, SCE would be required to post $209 million for its workers compensation self-insurance plan.

### Historical Consolidated Cash Flows

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

### Condensed Consolidated Statement of Cash Flows

*(in millions)*

|  | Three months ended March 31, 2011 | 2010 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $672 | $313 |
| Net cash provided by financing activities | 190 | 305 |
| Net cash used by investing activities | (1,066) | (1,014) |
| Net decrease in cash and cash equivalents | $(204) | $(396) |

#### Net Cash Provided by Operating Activities

Net cash provided by operating activities increased $359 million in the first quarter of 2011 compared to the first quarter of 2010 primarily reflecting higher net tax receipts of $104 million in 2011 compared to 2010 related to accelerated depreciation benefits and net cash inflows related to balancing account over- and under-collections. The 2011 change was also due to the timing of cash receipts and disbursements related to working capital items.

#### Net Cash Provided by Financing Activities

Net cash provided by financing activities for the first quarter of 2011 was $190 million consisting of the following significant events:

Issued $200 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.

Paid a $115 million dividend to Edison International.

Net cash provided by financing activities for the first quarter of 2010 was $305 million consisting of the following significant events:

Issued $500 million of first refunding mortgage bonds due in 2040. The bond proceeds were used to repay commercial paper borrowings and for general corporate purposes.

Issued $180 million of commercial paper supported by SCE's line of credit to fund interim working capital requirements.

Repaid $250 million of senior unsecured notes.

Paid a $100 million dividend 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 $1.0 billion and $867 million for the three months ended March 31, 2011 and 2010, respectively, primarily related to transmission and distribution investments. Net purchases of nuclear decommissioning trust investments and other were $47 million and $49 million for the three months ended March 31, 2011 and 2010, respectively.

### Contractual Obligations and Contingencies

### Contractual Obligations

For a discussion of power purchase commitments, see "SCE Notes to Consolidated Financial Statements—Note 9. Commitments and Contingencies—Third-Party Power Purchase Agreements."

### Contingencies

SCE has contingencies related to the Navajo Nation Litigation, 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 March 31, 2011, SCE had 24 identified material sites for remediation and recorded an estimated minimum liability of $52 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 at SCE to mitigate its exposure to commodity price risk was a net liability of $310 million and $207 million at March 31, 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 March 31, 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 | March 31, 2011 Exposure2 | Collateral | Net Exposure |
| --- | ---: | ---: | ---: |
| A or higher | $151 | $— | $151 |
| A- | 14 | — | 14 |
| Not rated3 | 122 | (50) | 72 |
| Total | $287 | $(50) | $237 |

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 two long-term power purchase agreements with special purpose entities for which the underlying power plants have yet to be constructed. Prior to the start date of power deliveries, SCE's recourse is limited to the collateral posted for damages associated with a contract termination. SCE's exposure is mitigated by regulatory treatment.

The credit risk exposure set forth in the table above is composed of $7 million of net accounts receivable and $280 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, 147 characters.

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

## Controls and procedures

As filed, 621 characters.

### Disclosure Controls and Procedures

SCE's management, under the supervision and with the participation of the company's Chief Executive Officer 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 Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period, SCE's disclosure controls and procedures are effective.

Filed May 2, 2011.
Source: SEC EDGAR, the filing index for accession 0001047469-11-004334. Last ingested by Listed: Nov 4, 2026, 20:44 ET. No prices; not investment advice.