SCE Southern California Edison Companys 10-Q and Y2K

Excerts from the greater Los Angeles areas power utility and companys Y2K and related issue comments. Sorry for the long post, Y2K specific info towards the end. -- Diane

http://www.edgar-online.com/bin/showglimpse/index_new.pl?choice=2-1165922&glm=1&nad=0 SOUTHERN CALIFORNIA EDISON CO [SEC 10-Q] Filed on Nov 2 1998

Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Earnings

Southern California Edison Company's (SCE) earnings...The earnings decreases were due to lower authorized revenue, which resulted from reduced authorized returns on generating assets and a lower earning asset base resulting from the accelerated recovery of investments and divestiture of gas- and oil-fueled generation assets...

[Note: divestiture of gas- and oil-fueled generation assets]

...Since April 1, 1998, SCE is required to sell all of its generated power to the power exchange (PX)...

Operating Expenses

Fuel expense decreased 85%, 66% and 54%, respectively, for the three, nine and twelve months ended September 30, 1998, respectively, compared to the same periods in 1997. The decreases resulted from the sale of the gas- and oil-fueled generation plants...

...Since April 1, 1998, SCE is required to purchase all of its power from the PX for distribution to its retail customers. SCE is continuing to purchase power from certain nonutility generators (known as qualifying facilities) and under existing inter-utility contracts. This purchased power is sold to the PX. SCE is required under federal law to purchase power from certain qualifying facilities even though energy prices under these contracts are generally higher than other sources...

[Hummm. SCE is required under federal law to purchase power ... even though energy prices ... are generally higher. That one sucks. Who pays that bill ya all?]

...Depreciation, decommissioning and amortization expense increased for the quarter ... primarily due to the further acceleration of San Onofre Nuclear Generating Station Units 2 and 3 and the Palo Verde Nuclear Generating Station units and the amortization of the loss on plant sales...

...Loss (gain) on sale of utility plant resulted from the sale of SCE's 12 gas- and oil-fueled generation plants in 1998. Gain on sales of the gas- and oil-fueled plants was used to reduce stranded costs. Loss on sales will be recovered from customers over the transition period...

Other Income and Deductions

...Interest and dividend income increased 66%, 91% and 82%, respectively ... The increases reflect higher investment balances due to the sale of the gas- and oil-fueled generation plants, as well as increases in interest earned on higher balancing account undercollections...

[Wonder what they consider their primary profit-making business is?]

Financial Condition

SCE's liquidity is primarily affected by debt maturities, dividend payments and capital expenditures. Capital resources include cash from operations and external financings.

Edison International's Board of Directors has authorized the repurchase of up to $2.8 billion (increased from $2.3 billion in July 1998) of its outstanding shares of common stock...

Cash Flows from Financing Activities

[The below is enclosed for the money watchers in the crowd].

At September 30, 1998, SCE had available lines of credit of $1.3 billion, with $735 million for general purpose short-term debt and $515 million for the long-term refinancing of its variable-rate pollution-control bonds. These unsecured lines of credit are at negotiated or bank index rates and expire in 2002.

Short-term debt is used to finance fuel inventories and general cash requirements. Long-term debt is used mainly to finance capital expenditures. External financings are influenced by market conditions and other factors, including limitations imposed by SCE's articles of incorporation and trust indenture. As of September 30, 1998, SCE could issue approximately $12.0 billion of additional first and refunding mortgage bonds and $4.5 billion of preferred stock at current interest and dividend rates.

California law prohibits SCE from incurring or guaranteeing debt for its nonutility affiliates. Additionally, the CPUC regulates SCE's capital structure, limiting the dividends it may pay Edison International. At September 30, 1998, SCE had the capacity to pay $800 million in additional dividends and continue to maintain its authorized capital structure.

In December 1997, SCE Funding LLC, a special purpose entity (SPE), of which SCE is the sole member, issued approximately $2.5 billion of rate reduction notes to Bankers Trust Company of California, as certificate trustee for the California Infrastructure and Economic Development Bank Special Purpose Trust SCE-1 (Trust), which is a special purpose entity established by the State of California...

...The rate reduction notes have maturities ranging from one to 10 years, and bear interest at rates ranging from 5.98% to 6.42%. The rate reduction notes are secured solely by the transition property and certain other assets of the SPE, and there is no recourse to SCE or Edison International...

...Although the SPE is consolidated with SCE in the financial statements, as required by generally accepted accounting principles, the SPE is legally separate from SCE, the assets of the SPE are not available to creditors of SCE or Edison International, and the transition property is legally not an asset of SCE or Edison International...

[Interesting accounting/accountability.]

Cash Flows from Investing Activities

Cash flows from investing activities are affected by additions to property and plant, proceeds from the sale of plant (see discussion in "Competitive Environment Divestiture") and funding of nuclear decommissioning trusts. Decommissioning costs are accrued and recovered in rates over the term of each nuclear generating facility's operating license through charges to depreciation expense. SCE estimates that it will spend approximately $12.7 billion between 2013-2070 to decommission its nuclear facilities ... Any plan to decommission San Onofre Unit 1 prior to 2013 is not expected to affect SCE's annual contributions to the decommissioning trusts...

Market Risk Exposures

SCE's primary market risk exposures arise from fluctuations in energy prices and interest rates. SCE's risk management policy allows the use of derivative financial instruments to manage its financial exposures, but prohibits the use of these instruments for speculative or trading purposes...

As a result of the rate freeze established in the restructuring statute, SCE's transition costs are recovered as the residual component of rates once the costs for distribution, transmission, public purpose programs, nuclear decommissioning and the cost of supplying power to its customers through the PX and ISO have already been recovered. Accordingly, more revenue will be available to cover transition costs when market prices in the PX and ISO are low than when PX and ISO prices are high. Market prices in the PX and ISO to date have generally been reasonable, though some irregular price spikes have occurred. The ISO has responded to price spikes in the market for reliability services (referred to as ancillary services) by imposing a price cap of $250/MW on the market for such services until certain actions have been completed to improve the functioning of those markets ... During the upcoming year, the ISO will be considering removing these price caps, which could increase the risk of high market prices. SCE's exposure to high electricity prices is also partially mitigated by hedges against high natural gas prices, since increases in natural gas prices tend to raise the price of electricity purchased from the PX.

... A 10% increase in natural gas prices would result in a $25 million increase in the fair market value of gas call options...

[So, how will increased costs for Y2K remediation impact energy prices next year, and what will happen to energy prices after the year 2000?]

Competitive Environment

SCE currently operates in a highly regulated environment in which it has an obligation to deliver electric service to customers in return for an exclusive franchise within its service territory. This regulatory environment is changing. The generation sector has experienced competition from nonutility power producers and regulators are restructuring California's electric utility industry.

California Electric Utility Industry Restructuring

Restructuring Decision The CPUC's December 1995 decision on restructuring California's electric utility industry started the transition to a new market structure; competition and customer choice began on April 1, 1998. Key elements of the CPUC's restructuring decision included: creation of the PX and ISO; availability of customer choice for electricity supply and certain billing and metering services; PBR for those utility services not subject to competition; voluntary divestiture of at least 50% of utilities' gas-fueled generation; and implementation of the CTC...

...Restructuring Statute In September 1996, the State of California enacted legislation to provide a transition to a competitive market structure...

...Rate Reduction Notes In December 1997, after receiving approval from both the CPUC and the California Infrastructure and Economic Development Bank, a limited liability company created by SCE issued approximately $2.5 billion of rate reduction notes. Residential and small commercial customers, whose 10% rate reduction began January 1, 1998, are repaying the notes over the expected 10-year term through non-bypassable charges based on electricity consumption...

...Beginning January 1, 1998, SCE's rates were unbundled into separate charges for energy, transmission, distribution, the CTC, public benefit programs and nuclear decommissioning...

...The CPUC is considering unbundling SCE's cost of capital based on major utility function...

...Divestiture In November 1996, SCE filed an application with the CPUC to voluntarily divest, by auction, all 12 of its gas-and oil-fueled generation plants ... SCE has sold and transferred ownership of all 12 of its gas- and oil-fueled generation plants. The total sales price of the 12 plants was $1.2 billion, over $500 million more than the combined book value...

...If during the transition period events were to occur that made the recovery of these generation-related regulatory assets no longer probable, SCE would be required to write off the remaining balance of such assets (approximately $2.5 billion, after tax, at September 30, 1998) as a one-time, non-cash charge against earnings.

If events occur during the restructuring process that result in all or a portion of the CTC being improbable of recovery, SCE could have additional write-offs associated with these costs if they are not recovered through another regulatory mechanism. At this time, SCE cannot predict what other revisions will ultimately be made during the restructuring process in subsequent proceedings or implementation phases, or the effect, after the transition period, that competition will have on its results of operations or financial position...

[If events occur? Gee, what other events besides competition could they be thinking of?]

Environmental Protection

SCE is subject to numerous environmental laws and regulations, which require it to incur substantial costs to operate existing facilities, construct and operate new facilities, and mitigate or remove the effect of past operations on the environment...

As further discussed in Note 10 to the Consolidated Financial Statements, SCE records its environmental liabilities when site assessments and/or remedial actions are probable and a range of reasonably likely cleanup costs can be estimated...

...SCE's recorded estimated minimum liability to remediate its 50 identified sites is $177 million. One of SCE's sites, a former pole-treating facility, is considered a federal Superfund site and represents 40% of its recorded liability. The ultimate costs to clean up SCE's identified sites may vary from its recorded liability due to numerous uncertainties inherent in the estimation process. SCE believes that, due to these uncertainties, it is reasonably possible that cleanup costs could exceed its recorded liability by up to $247 million. The upper limit of this range of costs was estimated using assumptions least favorable to SCE among a range of reasonably possible outcomes. SCE has sold all of its gas- and oil-fueled generation plants and has retained some liability associated with the divested properties...

...SCE's identified sites include several sites for which there is a lack of currently available information, including the nature and magnitude of contamination, and the extent, if any, that SCE may be held responsible for contributing to any costs incurred for remediating these sites. Thus, no reasonable estimate of cleanup costs can be made for these sites...

Year 2000 Issue

Many of SCE's existing computer systems were originally programmed to represent any date by using six digits (e.g., 12/31/99) rather than eight digits (e.g., 12/31/1999). Accordingly, such programs could fail or create erroneous results when attempting to process information containing dates after December 31, 1999. This situation has been referred to generally as the Year 2000 Issue.

SCE has a comprehensive program in place to address potential Year 2000 impacts. SCE divides its Year 2000 activities into five phases: inventory, impact assessment, remediation, testing and implementation. SCE's plan for the Year 2000 readiness of critical systems is to be 75% complete by year-end 1998, and 100% complete by July 1999. A critical system is defined as those applications and systems, including embedded processor technology, which if not appropriately remediated, may have a significant impact on customers, the revenue stream, regulatory compliance, or the health and safety of personnel.

The scope of this program includes three categories: mainframe computing, distributed computing and physical assets (also known as embedded processors). For mainframe financial systems, Year 2000 remediation was completed in the fourth quarter of 1997. Remediation for the material management system was completed in the second quarter of 1998. The customer information and billing system is scheduled to be replaced by the first quarter of 1999 with a system designed to be Year 2000-ready. Distributed computing assets include operations and business information systems. The critical operations information systems include outage management, power management, and plant monitoring and access retrieval systems. Business information systems include a data acquisition system for billing, the computer call center support system, credit support and maintenance management. The physical asset portfolio includes systems in the generation, transmission, distribution, telecommunications and facilities areas. SCE has completed the inventory and impact assessment phases. Remediation, testing and implementation activities are in progress for each of the three categories. SCE is on schedule to have its mainframe computing, distributed computing and physical assets Year 2000-ready within the timeframe discussed above.

The other essential component of the SCE Year 2000 readiness program is to identify and assess vendor products and business partners (external parties) for Year 2000 readiness, as these external parties may have the potential to impact SCE's Year 2000 readiness. SCE has a process in place to identify and contact vendors and business partners to determine their Year 2000 status, and is evaluating the responses. SCE's general policy requires that all newly purchased products be Year 2000-ready or otherwise designed to allow SCE to determine whether such products present Year 2000 issues. SCE is also working to address Year 2000 issues related to all ISO and PX interfaces, as well as joint ownership facilities. SCE also intends to exchange Year 2000 readiness information (including, but not limited to, test results and related data) with certain external parties as part of SCE's internal Year 2000 readiness efforts.

The current estimate of the costs to complete these modifications, including the cost of new hardware and software application modification, is $80 million, about half of which is expected to be capital costs. SCE's Year 2000 costs expended through September 30, 1998, were $20 million. SCE expects current rate levels for providing electric service to be sufficient to provide funding for these modifications.

Although SCE is confident that its critical systems will be fully Year 2000-ready prior to year-end 1999, SCE believes that prudent business practices call for the development of contingency plans. Such contingency plans shall include developing strategies for dealing with the most reasonably likely worst case scenario concerning Year 2000-related processing failures or malfunctions due to SCE's internal systems or from external parties. As noted above, SCE is currently in the remediation and testing phases for many of its internal systems and is assessing risks posed by external parties. SCE is working with certain industry groups, including the North American Electric Reliability Council and the Electric Power Research Institute, in an effort to help define a reasonably likely worst case scenario and in the development of contingency plans. SCE's contingency plans are expected to be completed by March 1999; therefore, these risk factors are not yet fully known, and SCE's reasonably likely worst case scenario also is unknown at this time. SCE does not expect the Year 2000 issue to have a material adverse effect on its results of operation or financial position; however, if not effectively remediated, negative effects from Year 2000 issues, including those related to internal systems, vendors, business partners, the ISO, the PX or customers, could cause results to differ.

Forward-looking Information

In the preceding Management's Discussion and Analysis of Results of Operations and Financial Condition and elsewhere in this quarterly report, the words estimates, expects, anticipates, believes, and other similar expressions are intended to identify forward-looking information that involves risks and uncertainties. Actual results or outcomes could differ materially as a result of such important factors as ... the effects of the Year 2000 Issue ... and other unforeseen events.

-- Diane J. Squire (sacredspaces@yahoo.com), November 21, 1998

Answers

Another energy company that is WAYYYYY behind the curve. The most telling figure in all these reports is the ratio of money spent to money budgeted for Y2K. For Diane's example, this ratio is 0.25. My local company is PECO and their ratio is 0.10 !!! In my opinion, if a company's ratio is less than 0.6, they are in trouble. And remember, most companies will UNDERESTIMATE the real cost so the ratio is even worse (see Citibank).

Perhaps we should use that ratio as a formal term when referring to these reports. I would suggest calling it S/B (for Spent/Budgeted). Of course, it could be called SOB (er, Spent Over Budgeted).....

-- R. D..Herring (drherr@erols.com), November 21, 1998.

Quoting above:

<< SCE is required under federal law to purchase power from certain qualifying facilities even though energy prices under these contracts are generally higher than other sources...

[Hummm. SCE is required under federal law to purchase power ... even though energy prices ... are generally higher. That one sucks. Who pays that bill ya all?] >>

These are the so-called "cheap energy" sources like solar, wind, aux generators and by-product generators that the fed tax laws and EPA require companies subside. Possible some electric car money also going in their "pot".

Deal is, fed's require the local electric compnies to buy electricity from these politically correct sources, regardless of real cost or hookup/regulatory/monitoring costs. Also, several of these politically correct power sources (like geothermal) also give off substantial polution themselves. many get tax breaks, refunds, and subsidies themselves.

-- Robert A. Cook, P.E. (Kennesaw, GA) (cook.r@csaatl.com), November 21, 1998.

I live in Orange County, and receive SC Edison's electricity. About 2 1/2 months ago, I gave a lot of printed information about Y2K to the wife of a major big wig @ Edison. She is a fairly good acquaintance. Anyway, a few days later I talked to her about it...She said, "Oh, I didn't realize you were trying to talk to me about Y2K, my husband says we'll be fine, but in Northern Calif. the lights are probably going to go out". I hope she and her husband are right, that we'll have electricity here in So. Calif., however, I guess I'm just a doubting Thomas and just continued on with my preparedness..... PS~ She said, we've been working on Y2K for YEARS at Edison, WE'LL be ready.... we'll see... or, maybe not be able to..

-- Carmel (Carmel_77@hotmail.com), November 23, 1998.

Additional SCE related info. -- Diane

www.msnbc.com/news/216779.asp De-bugging the worlds plants Nuclear power reactors around the world are behind the curve on the Y2K problem

By Kari Huus MSNBC Nov. 22, 1998

Excerpt...

NO SOLUTION IS FOOLPROOF

... Getting on top of the problem is expensive and time consuming  and unfinished even for companies that got an early start. Take San Onofre Nuclear Generating Station in California, located 40 miles south of Los Angeles. San Onofre is considered to be an industry frontrunner in updating for the Year 2000. The plant, owned by Southern California Edison, started four years ago with the conversion of its mainframe system, which handled a variety of business-related functions, to server-client systems, all of which were Y2K ready.

I have no concerns that the plant would shut down safely, because it would,  BOB HAVERCAMP Project manager, San Onofre, Nuclear Generating Station Then last year it started evaluating the plant operation systems, using a team of 45 specialists, including former staffers hired back from retirement who were around when the systems were new. From an inventory of 180,000 parts, it took this team three months to narrow the list of digital components that may be date-sensitive to 400. And now, after six months, the power company says it has corrected 75 percent of the mission critical problems  replacing not only software, but embedded electronic parts that are date-dependent and that could affect the safe shutdown or continued operation of the plant. In some cases, that requires tracking down specifications from parts vendors that no longer exist.

San Onofre expects to have a clean bill of health on all its systems by Jan. 1, 2000. But even then  after spending two years and $10 million  the company doesnt claim the fix is foolproof. The worst case scenario, is not being able to generate power... that we missed something in turbine control system, or a secondary system  and that would mean lost revenue and power, says Bob Havercamp, project manager at San Onofre. But, he says, I have no concerns that the plant would shut down safely, because it would ...

And ...

San Francisco Chronicle http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/ 1998/11/20/BU63368.DTL

MCI Ordered to Pay $2 Million to Pac Bell, Pay-Phone Owners Chronicle staff Friday, November 20, 1998

Excerpt ...

Y2K PENALTIES: California's utilities must fix the Year 2000 problem by Nov. 1, 1999, or face penalties from state regulators. The California Public Utilities Commission said the state's telecommunications, energy, transportation and water companies need to make sure their computer systems are updated and immune to the Y2K problem before the end of next year and to begin making quarterly reports on their Year 2000 compliance.

-- Diane J. Squire (sacredspaces@yahoo.com), November 23, 1998.