Southern California Edison Company (SCE) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. SCE is a regulated electric utility serving Southern California; this combined filing also reports Edison International, SCE’s parent. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $4.635bn | $3.732bn | $10.395bn | $9.348bn |
| Operating income (loss) | $(364)m | $649m | $500m | $1.520bn |
| Net income (loss) available for common stock | $(264)m | $503m | $336m | $1.215bn |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1.162bn | $(639)m |
| Capital expenditures | Not stated for quarter | Not stated for quarter | $3.894bn | $3.495bn |
Revenue increased about 24% in Q3 and 11% year to date. The quarter’s common-stock loss principally reflects a $1.213bn pre-tax wildfire-related charge after $84m of expected FERC customer recoveries ($874m after tax). Management’s non-GAAP SCE core earnings, which exclude designated non-core items, were $656m in Q3 versus $551m, and $1.330bn for nine months versus $1.314bn. Revenue growth reflected the 2018 General Rate Case escalation mechanism, wildfire-related FERC recoveries, and authorized cost-recovery activity. The filing does not present a single consolidated operating-margin measure.
At September 30, SCE reported $30m cash, $68.453bn total assets, and $50.274bn total liabilities. Short- and long-term debt, including current maturities, totaled approximately $18.606bn. SCE had $2.2bn available under its $3bn revolving facility, $146m available under an $800m facility, and an undrawn $1.5bn facility; availability is subject to facility terms. Its debt-to-total-capitalization ratio under the applicable covenant was 0.51, within the 0.65 limit. Nine-month financing cash flow was $2.530bn. SCE’s nine-month cash flow improved year over year, partly because it did not repeat its $2.363bn initial Wildfire Insurance Fund contribution made in 2019.
Material changes and notable items
- Wildfire claims: Estimated liabilities for the 2017/2018 wildfire and mudslide events were $5.801bn at September 30, comprising $1.192bn of fixed settlement payments and $4.609bn estimated for remaining claims. Expected insurance recoveries were about $1.637bn, with a further $125m of FERC-related recovery assets. Actual costs may differ, and the estimates exclude potential fines and penalties.
- Settlements: SCE paid $1.2bn in October 2020 under a settlement with insurance subrogation plaintiffs and agreed to additional payments tied to claims paid through July 15, 2023, subject to a cap. It also agreed to approximately $73m in settlements with individual plaintiffs during 2020.
- COVID-19: SCE recognized $166m of net pandemic-related costs through September 30, mainly for customer uncollectibles, employee arrangements at essential locations, and response activities. It recorded $107m as regulatory assets and deferred another $6m for FERC collection. Decoupling mechanisms insulate earnings from changes in retail electricity sales, but not all pandemic costs or cash-flow effects.
- Regulatory cost recovery: SCE reported $1.061bn of wildfire-related regulatory assets, of which $119m had been approved; the balance remained subject to review. The CPUC approved recovery of $478m in wildfire insurance premiums and related financing costs, with a $505m revenue requirement collected over two years beginning October 2020.
- Debt and capital structure: SCE redeemed $120m of preferred stock and $180m of Series G preference stock in Q3. Edison International contributed $1.107bn to SCE during the first nine months. SCE expected to need additional debt and approximately $1bn of parent equity issuance to fund future wildfire claims and support investment-grade ratings.
Outlook, management commentary and risks
- SCE forecast 2020 capital expenditures of $4.9bn–$5.1bn; spending for the first nine months was $3.7bn including accruals. The forecast could rise with wildfire restoration work. Management’s weighted-average rate-base forecast was $33.6bn for 2020 and $41.2bn for 2023, excluding specified AB 1054-excluded expenditures and certain unapproved programs.
- SCE requested a $7.6bn 2021 revenue requirement in its rate case. Intervenors proposed requirements of approximately $6.9bn and $6.7bn. SCE expected a decision in Q1 2021, but said the outcome and timing were uncertain. The filing provides no formal earnings guidance.
- SCE held approximately $1.0bn of wildfire-specific insurance for July 2020–June 2021, subject to co-insurance and a self-insured retention, for estimated net coverage of about $870m. Policy limits and multiple events could leave material uninsured costs.
- SCE obtained a 12-month safety certification in September 2020. Its 2020–2022 wildfire mitigation plan had conditional approval; a draft CPUC resolution proposed an update by February 5, 2021. Wildfire risk, litigation outcomes, cost-recovery decisions, insurance availability, and potential regulatory penalties remain material uncertainties.
- Credit-rating outlooks from S&P were negative for SCE, while Moody’s and Fitch outlooks were stable as of September 2020. COVID-19 could affect customer payments, work execution, liquidity, and financing costs. SCE also cited supply-chain, permitting, extreme-weather, and wildfire-mitigation execution risks.
Important facts for investors to verify
- Whether actual wildfire claim payments and recoveries remain within the $5.801bn recorded liability and $1.637bn expected insurance recovery, and the effect of the settlement’s future-payment formula.
- Whether regulators authorize recovery of deferred wildfire mitigation, insurance, pandemic, and other balancing-account costs, and on what schedule.
- The final 2021 GRC revenue requirement, including the treatment of wildfire mitigation spending and proposed reductions.
- Whether SCE can fund planned capital investment and wildfire settlements while maintaining investment-grade ratings, covenant compliance, and dividend capacity.
- Developments in wildfire investigations and litigation, including the Bobcat Fire, potential fines, insurance limits, and implementation or depletion of the AB 1054 Wildfire Insurance Fund.