Business context and reporting period
Southern California Edison Company (SCE), a regulated electric utility serving Southern California, filed this combined Form 10-Q with its parent, Edison International. The reporting period is the three months ended March 31, 2023; comparisons are with the first quarter of 2022. Unless noted otherwise, amounts below refer to SCE.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 or comparison |
|---|---|---|
| Operating revenue | $3.950 billion | $3.961 billion; down 0.3% |
| Operating income | $608 million | $275 million |
| Operating margin | 15.4% | 6.9% |
| Net income | $399 million | $173 million |
| Net income available for common stock | $370 million | $147 million |
| Operating cash flow | $(20) million | $827 million |
| Capital expenditures | $1.324 billion | $1.207 billion |
Revenue from regulated earning activities declined $34 million, while cost-recovery revenue was broadly stable. Higher earnings primarily reflected lower wildfire-related claims expense and lower operation and maintenance costs, partly offset by higher interest, depreciation, purchased-power and fuel costs, and property taxes. Purchased power and fuel costs increased $281 million, mainly due to higher power and gas prices. Interest expense rose $85 million. SCE’s effective tax rate was 6.8%, versus negative 30.1% in Q1 2022, primarily reflecting higher pretax income and utility ratemaking treatment of certain tax differences.
Operating cash flow fell by $847 million year over year, mainly due to working-capital outflows, including lower payables and $171 million of cash outflow for margin and collateral deposits, and changes in regulatory balances. Financing activities provided $1.249 billion; investing activities used $1.305 billion. At March 31, SCE had $690 million cash and approximately $2.5 billion available on its revolving credit facility. Debt-to-capitalization under its credit agreement was 0.57, within the 0.65 covenant limit. Short- and long-term debt totaled approximately $28.8 billion, based on reported balance-sheet categories.
Material changes versus the prior comparable period
- Net income available for common stock increased $223 million to $370 million; operating income more than doubled.
- Wildfire-related claims expense declined to $96 million from $425 million. Operation and maintenance expense declined to $1.081 billion from $1.466 billion, partly because prior-year deferred expenses were recognized in 2022.
- Interest expense increased to $300 million from $213 million, primarily because of increased borrowing and higher interest rates.
- Capital expenditures increased to $1.324 billion from $1.207 billion; management reported total capital expenditures of approximately $1.3 billion in each first quarter.
- Moody’s upgraded SCE to Baa1 during the quarter; Fitch upgraded it to BBB in April. Both outlooks were stable, as was S&P’s BBB rating.
Outlook, management commentary, risks and unusual items
- Funding and investment: SCE expects to fund the next 12 months through operating cash flow, bank and capital-market financings, and parent equity contributions as needed. It expects additional debt issuance, including to finance future wildfire-claim payments. SCE plans to file its 2025 General Rate Case in May 2023. In April, SCE Recovery Funding LLC issued $775 million of securitized bonds; SCE used the proceeds to repay a $730 million term loan.
- Wildfire and mudslide exposure: SCE recorded a $90 million increase in estimated 2017/2018 wildfire and mudslide losses in Q1, with $6 million of expected FERC-rate recovery. Through March 31, it had accrued $8.8 billion of losses, recorded $2.0 billion of expected insurance recoveries and $382 million of expected FERC recoveries, and paid $7.8 billion under executed settlements. After settlement obligations, management’s best estimate of remaining alleged and potential claims was $988 million. SCE expects to seek approximately $6 billion of CPUC rate recovery, including about $2 billion in a targeted third-quarter 2023 filing, but says recovery of uninsured CPUC-jurisdictional costs for pre-AB 1054 fires is not currently probable. Losses could materially exceed accrued amounts; the upper end of reasonably possible losses cannot be estimated.
- Later wildfires: SCE reported $681 million of estimated remaining losses for post-2018 wildfires, with $473 million of expected insurance recoveries and $166 million of expected electric-rate recoveries. Investigations and claims continue, and additional material losses are possible. The filing specifically identifies ongoing exposures involving the Bobcat, Coastal and Fairview fires; it says a material loss is reasonably possible for the Saddle Ridge Fire, but no charge was accrued and the range could not be estimated.
- Storage project: In April, the contractor reported damage to equipment at a 225 MW storage project and asserted a potential force majeure event. SCE believes the project may not be in service for summer peak reliability needs; the contractor expected the other two projects in the 537.5 MW portfolio to be in service before August 2023.
- Other regulatory and cost uncertainties: A CPUC proposed decision would expand customer-funded wildfire self-insurance, subject to approval. An April CPUC decision authorized recovery of up to $596 million of ERRA undercollections over 12 months beginning June 1, 2023. A proposed decision on wildfire insurance costs would authorize $207 million of the $215 million sought. SCE accrued $30 million for estimated San Onofre decommissioning-cost disallowances; intervenors had recommended approximately $115 million in disallowances.
- Risks: Key uncertainties include wildfire liability and rate recovery, regulatory prudency decisions, insurance availability and cost, extreme weather, interest rates, inflation and supply-chain constraints, collateral needs, project delays, and access to financing. SCE said the proposed self-insurance changes would reduce current revenue requirements by $80 million in 2023 and, subject to adjustment, $160 million in 2024.
- Other outlook items: SCE expects to be subject to the Inflation Reduction Act’s corporate alternative minimum tax on its stand-alone federal return beginning in 2024. No specific earnings guidance for 2023 is provided in the supplied filing text.
Most important facts for investors to verify
- Progress, amounts, and timing of SCE’s planned CPUC wildfire cost-recovery applications, and the regulator’s prudency determinations.
- Changes in wildfire claim estimates, settlement payments, insurance recoveries, and potential exposure from post-2018 fires.
- Whether the damaged 225 MW storage project meets reliability needs and whether the other storage projects enter service on schedule.
- Cash generation, collateral requirements, debt issuance, liquidity, and compliance with debt covenants as capital spending and claim payments continue.
- Final CPUC actions on self-insurance, wildfire insurance recovery, ERRA collections, and the 2025 General Rate Case.