Southern California Edison Company (SCE) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. This is a combined filing by SCE and parent Edison International; the operating and balance-sheet figures below are primarily for SCE unless noted. Amounts are in U.S. dollars.
Business context and results
SCE is a regulated electric utility serving Southern California. Its earnings largely reflect CPUC- and FERC-authorized revenue requirements; specified fuel and other costs are passed through balancing accounts and generally do not earn a return.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $3.732bn | $4.260bn | $9.348bn | $9.617bn |
| Operating income | $649m | $754m | $1.520bn | $1.607bn |
| Net income available for common stock | $503m | $536m | $1.215bn | $1.119bn |
| Core earnings, non-GAAP | $551m | $529m | $1.314bn | $1.112bn |
Core earnings are management’s non-GAAP measure and exclude designated non-core items; they are not directly comparable across companies. SCE’s Q3 2019 non-core items included a $67m pre-tax charge ($48m after tax) for amortization of contributions to the Wildfire Insurance Fund. Nine-month non-core items also included a $170m pre-tax impairment ($123m after tax) for historical spending disallowed in the 2018 GRC, partly offset by a $69m tax benefit related to deferred-tax allocation.
Financial position, cash flow and liquidity
- Cash flow: SCE used $639m of operating cash in the first nine months of 2019, compared with $2.258bn provided in 2018. The 2019 figure includes the $2.363bn cash contribution to the Wildfire Insurance Fund. Investing activities used $3.336bn, including $3.495bn of capital expenditures; financing activities provided $4.039bn, including $3.050bn of parent contributions.
- Debt and liquidity: At September 30, SCE had $15.208bn of long-term debt including current maturities, no short-term debt, and $86m of cash. Approximately $2.8bn was available under its $3.0bn revolving credit facility. SCE’s debt-to-capitalization ratio was 0.46, below its 0.65 covenant limit.
- Wildfire-fund contributions: SCE’s initial $2.4bn contribution was funded with approximately $1.2bn of parent equity and $1.2bn of SCE debt. SCE also committed to ten annual contributions of about $95m beginning January 2020; these contributions are not recoverable through electric rates.
- Credit ratings: SCE’s ratings were Moody’s Baa2, Fitch BBB- and S&P BBB, each with a stable outlook at quarter-end. Ratings had been downgraded earlier in 2019; the agencies moved the outlook to stable following AB 1054.
Material changes and drivers
- Q3 revenue fell $528m year over year, while common-stock net income declined $33m. Lower purchased-power and fuel costs—down $598m—largely reflect lower load associated with customer departures to community choice aggregators and cooler weather; these costs are generally pass-through items.
- Nine-month revenue decreased $269m, but common-stock net income rose $96m and core earnings increased $202m. Drivers included implementation of the 2018 GRC decision, higher FERC revenue associated with a pending formula-rate settlement, and timing of wildfire-insurance cost deferrals; higher mitigation and maintenance costs were offsets.
- Retail billed and unbilled revenue was $3.5bn in Q3 versus $4.0bn, and $8.6bn for nine months versus $9.0bn. SCE stated that its decoupling mechanism means changes in retail electricity sales do not directly affect earnings.
- SCE’s initial 2018 GRC decision authorized revenue requirements of $5.116bn for 2018, $5.451bn for 2019 and $5.863bn for 2020. The decision was retroactive and resulted in a $554m customer refund liability, expected to be refunded through December 2020.
Outlook, regulatory matters and risks
- Rate-case requests: SCE’s 2021 GRC application requested a $7.601bn 2021 revenue requirement and increases of $400m for 2022 and $531m for 2023. The filing describes these as requests, not approved rates. SCE cited wildfire mitigation and other grid investment as major drivers. Its 2021 request includes a stated 12.7% increase over 2020 rates, including anticipated lower sales and one-time memorandum-account recoveries.
- Capital plan: Capital expenditures were $3.3bn for the first nine months of 2019. SCE forecast $23.8bn–$25.6bn of capital expenditures for 2019–2023, including $4.2bn of estimated wildfire-mitigation capital expenditures in the higher case. The forecast depends partly on requested or pending regulatory approvals.
- Wildfire exposure: SCE retained a $4.7bn liability for the 2017–2018 wildfire and mudslide events, accrued in 2018, and recorded $2.0bn of expected insurance recoveries plus $135m of expected FERC-rate recovery. The accrual is the lower end of the estimated range; SCE said actual losses could be higher and it could not reasonably estimate an upper bound. Recovery of uninsured CPUC-jurisdictional costs for pre-AB 1054 fires remains uncertain.
- Investigations and litigation: Government agencies found SCE equipment caused the Koenigstein Fire. Agencies also attributed the Thomas Fire to SCE lines, but SCE said it had not determined whether its equipment caused that fire and disputed the reported timing. A non-final redacted Woolsey Fire report attributed ignition to SCE equipment; SCE said it believed its equipment was likely associated with ignition, subject to further review. Numerous lawsuits and investigations remain pending. The October 2019 Saddle Ridge Fire was also under investigation; SCE said it could not yet determine whether it would incur a material loss.
- AB 1054: SCE obtained an initial safety certification valid for 12 months. The legislation created a wildfire insurance fund and a new prudency standard for qualifying fires, but the fund may be exhausted; eligibility and protection depend on matters including maintaining certification and regulatory findings. SCE’s initial liability cap was approximately $2.5bn, subject to statutory conditions. A federal lawsuit challenging AB 1054 was pending.
- Other risks: The filing identifies possible credit-rating pressure, increased wildfire insurance costs, regulatory recovery uncertainty, capital-market access, and a customer-service system implementation whose cost exceeded SCE’s earlier estimate and may not be fully recoverable if found imprudent. SCE also planned to begin major San Onofre decommissioning activities in 2020, subject to permitting and possible legal challenges.
Important facts for investors to verify
- Progress and final outcomes of wildfire investigations, litigation, insurance claims and any revisions to the $4.7bn accrued liability or expected recoveries.
- Whether SCE can recover deferred wildfire-insurance and mitigation costs through rates, and whether the Wildfire Insurance Fund remains adequately funded and available.
- CPUC decisions on the 2021 GRC and 2020 cost-of-capital application, and FERC approval or adjustment of the formula-rate settlements, including potential customer refunds.
- Actual funding needs, debt issuance and cash generation relative to SCE’s substantial capital plan and annual Wildfire Insurance Fund contributions.
- Whether SCE maintains its safety certification and investment-grade ratings, and any effect on borrowing costs, collateral requirements or dividend capacity.