Southern California Edison Company (SCE) — Q2 2020 Form 10-Q
Business context and period: SCE is a regulated electric utility serving Southern California. This combined Edison International and SCE filing reports the quarter and six months ended June 30, 2020; comparisons below are with the same periods in 2019. Unless stated otherwise, amounts are in millions of dollars. The quarter’s results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $2,980 | $2,800 | $5,760 | $5,616 |
| Operating income | $548 | $513 | $864 | $871 |
| Net income available for common stock | $381 | $419 | $600 | $712 |
| Management-defined core earnings, non-GAAP | $413 | $542 | $674 | $763 |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $683 | $673 |
For the six months, capital expenditures were approximately $2.5 billion and net cash used in investing activities was $2.384 billion. SCE reported $254 million of cash at June 30, 2020. Debt comprised $475 million of short-term debt, $1.029 billion of current long-term debt and $16.107 billion of long-term debt. SCE’s debt-to-total-capitalization ratio was 0.48, within its covenant limit of 0.65. It had approximately $2.9 billion available under its $3.0 billion revolving credit facility; additional undrawn facilities included $800 million and $1.5 billion revolving facilities.
Material changes versus prior periods
- Q2 common net income fell $38 million and six-month common net income fell $112 million. Core earnings declined $129 million and $89 million, respectively.
- Revenue increased, largely reflecting the 2018 General Rate Case (GRC) escalation mechanism and the different timing of the GRC decision’s recognition in 2019. Higher operating and maintenance and depreciation costs, wildfire insurance fund expense, and interest expense weighed on results.
- The 2019 comparison included a $170 million impairment related to disallowed historical capital expenditures and GRC-related tax benefits. In 2020, SCE recorded a $167 million wildfire insurance fund expense for the first half and a gain on the sale of San Onofre nuclear fuel.
- COVID-19-related customer uncollectibles and other incremental costs contributed to expense pressure. SCE recorded $49 million in regulatory assets for incremental pandemic costs as of June 30.
Outlook, risks and unusual items
- Capital and rate base: SCE forecast $19.4–$21.2 billion of capital expenditures for 2020–2023 and weighted-average 2020 rate base of $33.5 billion. Management expected to execute the 2020 capital program substantially as planned, while noting potential pandemic, permitting, supply-chain and labor constraints.
- Rates and regulation: SCE revised its requested 2021 GRC revenue requirement to $7.5 billion, excluding approximately $1.6 billion of AB 1054 excluded capital expenditures. Intervenors proposed materially lower spending and revenue requirements; SCE could not predict the CPUC’s final decision, expected in Q1 2021. A proposed FERC formula-rate settlement would set a 10.30% total ROE, subject to FERC approval, and could result in customer refunds of excess amounts previously billed.
- Wildfire exposure: SCE reported $4.528 billion of accrued liabilities for the 2017/2018 wildfire and mudslide events, with $1.637 billion of expected insurance recoveries and $77 million remaining in a FERC recovery account. The company said actual losses could exceed the accrual and it could not reasonably estimate the upper end of potential losses. Recovery of uninsured costs through customer rates remains uncertain and subject to regulatory approval. SCE also recorded $549 million of regulatory assets for incremental wildfire mitigation expenses and $484 million for incremental wildfire insurance expenses; recovery is not assured.
- Insurance and Wildfire Insurance Fund: SCE forecast approximately $450 million of 2020 wildfire insurance expense before regulatory deferrals. Contributions to the Wildfire Insurance Fund are not recoverable through electric rates. The fund’s availability, regulatory implementation and SCE’s safety certification are material credit and recovery considerations.
- COVID-19: Potential effects include customer payment delays, higher uncollectibles, reduced commercial electricity use, project delays, supply constraints and more costly or constrained access to capital markets. Regulatory deferral mechanisms may allow recovery of certain costs, subject to review.
- Other contingencies: Wildfire litigation, environmental remediation, nuclear decommissioning and spent-fuel obligations remain risks. SCE delayed major San Onofre decommissioning work because of pandemic-related restrictions. SCE also disclosed an environmental investigation into unpermitted grading and discharges; it did not expect any resulting fines to be material.
Important facts for investors to verify
- Progress, settlement costs and any changes in SCE’s wildfire and mudslide liability estimates, insurance recoveries and rate-recovery prospects.
- CPUＣ decisions on the 2021 GRC, wildfire mitigation cost reviews, insurance-cost recovery and the FERC formula-rate settlement.
- Whether SCE can recover recorded wildfire and COVID-19 regulatory assets, and the timing of customer collections or refunds.
- Actual capital spending, project execution and funding needs, including financing of AB 1054 excluded expenditures.
- Customer payment trends, credit ratings, borrowing costs and liquidity as pandemic effects evolve.
The filing provides no specific full-year earnings guidance.