SOUTHERN CALIFORNIA EDISON Co annual report, FY2019

Business context and reporting period

Southern California Edison Company (SCE), a wholly owned subsidiary of Edison International, supplies and delivers electricity to about 5.15 million customers across approximately 50,000 square miles of Southern California. This combined Form 10-K reports the fiscal year ended December 31, 2019; figures below focus on SCE unless identified otherwise.

Key financial results

Revenue fell about 2.4%, while operating income and net income returned to positive results, principally because 2018 included substantially larger wildfire-related charges. Core earnings increased 18%, reflecting the 2018 General Rate Case (GRC) decision, higher FERC transmission revenue and rate-base growth, partly offset by higher wildfire mitigation and operating costs. Operating margin was approximately 15.0%, versus negative 3.2% in 2018, calculated from reported operating income and revenue.

Operating cash flow declined sharply, in significant part because SCE contributed approximately $2.4 billion to the Wildfire Insurance Fund and had increased regulatory-account undercollections. Financing cash flow was $4.771 billion; SCE received $3.250 billion in parent equity contributions and issued $2.306 billion of mortgage bonds. At year-end, cash was $24 million, short-term debt was $550 million, and approximately $2.3 billion remained available on SCE’s $3.0 billion revolving credit facility. Its debt-to-total-capitalization covenant ratio was 0.47 against a 0.65 maximum.

Material changes and notable items

• Wildfire claims: SCE reported a $4.541 billion accrued liability for unpaid claims from the 2017–2018 wildfire and mudslide events, at the low end of its estimated range. It also reported $1.710 billion of remaining expected insurance recoveries and $149 million of expected FERC rate recoveries. Management said actual losses could exceed the accrual but could not estimate an upper bound. SCE paid $360 million to settle claims by local public entities in 2019.
• 2019 wildfire charges: SCE recorded $255 million of wildfire-related claims expense, net of expected recoveries, and $152 million of Wildfire Insurance Fund expense. The fourth-quarter charge included $23 million of costs, primarily self-insured retentions, for 2019 fires.
• Regulatory decision: The CPUC’s May 2019 2018 GRC decision set authorized revenue requirements of $5.1 billion for 2018, $5.5 billion for 2019 and $5.9 billion for 2020. It disallowed certain historical capital costs, resulting in a $170 million impairment charge, and led to customer refunds that SCE expected to complete by December 2020.
• Wildfire Insurance Fund and capital structure: SCE contributed about $2.4 billion to the fund; the contribution is not recoverable through electric rates. AB 1054 provides a fund and a new wildfire-cost prudency standard for qualifying fires ignited after July 12, 2019, but the fund can be exhausted and eligibility depends on conditions including a valid safety certification. The CPUC increased SCE’s authorized common-equity component from 48% to 52%, effective January 1, 2020, and kept authorized ROE at 10.3% for 2020–2022.

Outlook, risks and contingencies

SCE requested a $7.6 billion 2021 revenue requirement, $1.1 billion above the 2020 authorized requirement; including lower forecast sales and one-time account recoveries, the filing estimated an 11.4% increase over 2020 rates. It also requested further revenue-requirement increases of $423 million in 2022 and $514 million in 2023. These are proposals, not approved guidance. SCE forecast 2020–2023 capital spending of approximately $19.4–$21.2 billion, including substantial wildfire mitigation investment.

Key uncertainties include wildfire litigation and insurance recoveries, whether regulators will permit recovery of deferred mitigation and insurance costs, the availability and durability of the Wildfire Insurance Fund, and regulatory review of SCE’s capital spending. The filing also identifies financing and credit-rating exposure, customer departures to community choice aggregators, project permitting and execution, San Onofre decommissioning and spent-fuel storage, and cybersecurity and physical security risks. SCE’s 2017–2018 wildfire liability estimate is especially judgment-sensitive; the filing provides no reliable upper loss estimate.

SCE had $7.1 billion of regulatory assets and $9.4 billion of regulatory liabilities at year-end; recovery of some deferred costs remains subject to regulatory review. The auditor issued an unqualified opinion on SCE’s financial statements. The filing does not provide a company earnings forecast.

Important facts for investors to verify

• Updates to wildfire claims, settlements, insurance collections and the potential for losses above the $4.541 billion accrued liability.
• Regulatory decisions on recovery of wildfire mitigation and insurance costs, the 2021 GRC request, and the FERC formula-rate proceedings.
• Funding and availability of the AB 1054 Wildfire Insurance Fund, including PG&E’s participation and SCE’s continuing safety certification.
• Cash generation, borrowing needs, capital spending and dividend capacity amid large investment requirements and wildfire-related obligations.
• San Onofre decommissioning costs, permitting, spent-fuel transfer progress and sufficiency of the $2.8 billion trust for Units 2 and 3.