SOUTHERN CALIFORNIA EDISON Co quarterly report, Q1 FY2021

Southern California Edison Company (SCE) — Q1 2021 Form 10-Q

Business context and period. SCE is a regulated electric utility serving approximately 50,000 square miles in Southern California. This combined filing covers the three months ended March 31, 2021; comparisons are with Q1 2020. Amounts below are in U.S. dollars. The quarter’s results are unaudited and are not necessarily indicative of full-year results.

Financial performance and condition

Metric	Q1 2021	Q1 2020
Operating revenue	$2.953 billion	$2.780 billion
Operating income	$411 million	$316 million
Net income	$323 million	$249 million
Net income available for common stock	$296 million	$219 million
Operating cash flow	$48 million	$334 million
Cash capital expenditures	$1.357 billion	$1.267 billion

Revenue increased about 6%, operating income about 30%, and common-stock income about 35% year over year. Operating margin, calculated as operating income divided by revenue, was approximately 13.9%, versus 11.4%.
Management’s non-GAAP SCE core earnings were $338 million, up from $261 million. The filing identifies lower wildfire-mitigation and employee-benefit expenses and higher equity AFUDC income as key contributors. Core earnings exclude designated non-core items and may not be comparable across companies.
Operating cash flow declined by $286 million. The filing cites $618 million of cash outflow for wildfire-related claims, partly offset by insurance recoveries, as well as working-capital movements. SCE used $1.282 billion in investing activities and received $1.204 billion from financing activities.
At March 31, SCE reported cash of $25 million, total assets of $70.145 billion, total liabilities of $50.623 billion, and equity of $19.522 billion. Debt comprised $2.520 billion short-term, $909 million current long-term, and $17.031 billion long-term debt.
SCE had $3.706 billion available under credit facilities, against $5.3 billion of commitments, $1.474 billion of borrowings, and $120 million of letters of credit. Its debt-to-total-capitalization ratio was 0.51, within the 0.65 covenant limit. SCE’s ratings were Baa2 (Moody’s), BBB- (Fitch), and BBB (S&P); S&P’s outlook was negative.

Material changes and operating drivers

Earning-activity revenue rose $26 million. Operation and maintenance expense in earning activities fell $96 million, including lower wildfire-mitigation, employee-benefit, and other expenses. Depreciation and amortization rose $41 million, while other income rose $15 million, primarily from higher equity AFUDC.
Cost-recovery revenue rose with higher power and gas costs. Purchased-power and fuel expense increased $87 million, primarily due to higher prices during February’s extreme winter weather. These balancing-account activities are generally recoverable subject to regulatory review and do not earn SCE a return.
Wildfire Insurance Fund expense decreased $31 million to $53 million, reflecting a revised estimate of the fund’s life and longer amortization period. The company’s reported results also included $42 million of after-tax non-core expenses, principally Wildfire Insurance Fund expense and $4 million after tax for prior wildfire/mudslide events.

Outlook, risks and contingencies

Wildfire liability: Through March 31, SCE and Edison International had recorded $6.2 billion of pretax charges for the 2017/2018 wildfire and mudslide events. SCE had paid $2.4 billion under settlements and had $1.8 billion remaining to pay under executed settlements. The best estimate of losses for remaining alleged and potential claims was $2.0 billion; this estimate excludes potential fines and penalties, which cannot currently be estimated. Recovery of uninsured costs through CPUC rates is uncertain. SCE reported $666 million of remaining expected insurance recoveries, relating to the Woolsey Fire, and expects that coverage to be exhausted after expected settlement recoveries.
SCE reported $118 million of estimated losses and $75 million of expected insurance recoveries for 2019/2020 wildfires. A potentially material Saddle Ridge loss could not be estimated and was not accrued. The Bobcat Fire has an accrued charge, but the filing does not provide its amount.
SCE has approximately $1.0 billion of wildfire-specific coverage for July 2020 through June 2021, subject to retentions, co-insurance, and policy limitations; estimated net coverage is about $870 million. Coverage for the next policy year was being procured. SCE warns that insurance may be costly or unavailable at reasonable levels.
Regulatory recovery: SCE had recognized $901 million of regulatory assets for incremental wildfire-mitigation expenses, $397 million for wildfire and drought restoration, and $241 million for incremental wildfire insurance. Recovery depends on regulatory approval; the filing says there is no assurance all deferred amounts will be collected.
Rate case: SCE requested a 2021 test-year revenue requirement of $7.6 billion, about $1.3 billion above the 2020 authorized requirement, with requested increases of $452 million in 2022 and $524 million in 2023. The final authorized amount and timing were uncertain; until a decision, SCE was recognizing revenue based on the 2020 authorized requirement.
COVID-19: SCE had recognized $231 million of incremental costs, including increased uncollectibles; $87 million was deferred to memorandum accounts and $144 million transferred to balancing accounts, pending review or recovery. SCE planned to seek approval to securitize $112 million of incremental residential uncollectibles.
Funding and investment: SCE expected to meet cash needs over the following 12 months with operating cash flow, capital-market financing, parent equity contributions as needed, and credit facilities. It issued $338 million of recovery bonds in February for eligible wildfire-mitigation capital expenditures. In April, after quarter-end, it issued additional mortgage bonds; proceeds were intended to fund wildfire claims and repay related commercial paper. SCE’s reported capital expenditures, including accruals, were $1.1 billion in Q1 2021.
Other notable exposure includes the CPUC’s pending review of the Upstream Lighting Program. Consumer advocates sought refunds, fines, and other remedies; SCE accrued a charge, but the filing does not state its amount. SCE also faces wildfire-related litigation, potential regulatory penalties, environmental remediation obligations, and nuclear decommissioning and spent-fuel risks.

Important facts for investors to verify

Progress, settlements, and any estimate changes for the remaining 2017/2018 wildfire and mudslide claims, including the timing and amount of the Woolsey settlement payments and insurance recoveries.
CPUC decisions on SCE’s 2021 general rate case, wildfire-mitigation cost recovery, securitization requests, and COVID-19-related costs.
Renewal, pricing, and limits of wildfire insurance, and the continuing availability and condition of the AB 1054 Wildfire Insurance Fund.
Cash generation and funding needs relative to wildfire payments, capital expenditures, debt maturities, credit-facility availability, and SCE’s investment-grade ratings.
Outcomes of the Bobcat, Saddle Ridge, and Upstream Lighting matters, including potential losses or penalties not quantified in the filing.