Southern California Edison Company (SCE) — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The filing is a combined report for Edison International and SCE; figures below are for SCE unless identified otherwise. SCE is a regulated electric utility serving Southern California.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $2.800 billion | $2.803 billion | $5.616 billion | $5.357 billion |
| Operating income | $513 million | $439 million | $871 million | $853 million |
| Net income | $449 million | $327 million | $772 million | $643 million |
| Net income available for common stock | $419 million | $297 million | $712 million | $583 million |
| Operating margin, approximate | 18.3% | 15.7% | 15.5% | 15.9% |
| Net cash from operating activities | — | $673 million | $1.312 billion |
Management-reported SCE core earnings, a non-GAAP measure, were $542 million in Q2 and $763 million for the first six months, compared with $297 million and $583 million, respectively, in 2018. Q2 earnings included a $170 million pretax impairment ($123 million after tax) for historical capital spending disallowed in the 2018 General Rate Case (GRC). The filing attributes stronger core earnings primarily to the GRC decision, timing of wildfire-related regulatory deferrals and recoveries, and higher FERC formula-rate revenue; higher wildfire mitigation costs partly offset the six-month improvement.
Financial position, cash flow and investment
- At June 30, SCE reported $26 million in cash, $213 million in short-term debt, $79 million in current long-term debt and $13.946 billion in long-term debt. Total debt on these balance-sheet lines was approximately $14.238 billion.
- SCE had approximately $2.6 billion available under its $3.0 billion revolving credit facility, extended to May 2024. Its debt-to-capitalization ratio was 0.48, below the 0.65 covenant limit. Long-term credit ratings remained investment grade, but outlooks were negative or on negative watch.
- First-half operating cash flow fell to $673 million from $1.312 billion. SCE used $2.135 billion in investing activities, including $2.234 billion of capital expenditures, and generated $1.467 billion from financing activities, including a $1.2 billion parent capital contribution. Management cites regulatory-asset and liability movements and $431 million in wildfire insurance premium payments among cash-flow factors.
- The 2019–2020 capital expenditure forecast is approximately $9.3–$9.5 billion, including estimated wildfire-mitigation capital spending of $387 million in 2019 and $500–$700 million in 2020.
Material changes and regulatory developments
- In May 2019, the CPUC approved SCE’s 2018 GRC, retroactive to January 1, 2018. Authorized revenue requirements are $5.116 billion for 2018, $5.451 billion for 2019 and $5.863 billion for 2020. The decision drove a $170 million impairment for disallowed historical expenditures and a $554 million regulatory liability for customer refunds, which SCE expects to pay through December 2020.
- The GRC decision also authorized escalation mechanisms for 2019 and 2020 and disallowed certain historical spending, largely pole replacements the CPUC considered premature. SCE recorded a $131 million increase to core earnings from applying the decision to revenue, depreciation and taxes, alongside the impairment and revenue adjustments.
- First-half retail billed and unbilled revenue, excluding wholesale sales, increased to $5.2 billion from $5.0 billion. SCE’s decoupling mechanism means earnings are not directly affected by changes in retail electricity sales.
- SCE’s first-half operating cash flow declined despite higher net income; financing included new debt and parent contributions, while capital expenditures increased to $2.234 billion from $2.141 billion.
Outlook, risks and unusual items
- Wildfires and litigation: SCE and Edison International have accrued $4.7 billion for the 2017–2018 wildfire and mudslide events and recorded $2.0 billion of expected insurance recoveries and $135 million of expected FERC-rate recovery. SCE says actual losses could exceed the accrual and it cannot reasonably estimate an upper end of the potential-loss range. Recovery of uninsured CPUC-jurisdictional costs remains uncertain. Government investigations and litigation continue; SCE disputes or has not determined responsibility for certain events. The Thomas Fire and Koenigstein Fire lawsuits include claims connected to the Montecito Mudslides.
- AB 1054: California enacted the wildfire legislation on July 12, 2019, after the quarter. SCE committed to contribute approximately $2.4 billion initially by September 10, 2019, plus about $95 million annually for ten years, to the proposed insurance fund. The initial contribution is not recoverable through rates; SCE and its parent anticipated funding it with approximately $1.2 billion of Edison International equity and $1.2 billion of SCE long-term debt. The accounting impact was still under evaluation and could include a material charge. SCE obtained an initial 12-month safety certification on July 25, 2019. The fund’s establishment, availability and protections depend on statutory conditions and funding; a lawsuit challenging AB 1054 had been filed.
- For wildfires ignited before July 12, 2019, SCE says the CPUC’s prior cost-recovery precedent creates substantial uncertainty about recovery of uninsured costs. For future qualifying fires, AB 1054’s insurance fund and liability protections are conditional, and the fund could be exhausted.
- SCE’s current wildfire-specific insurance coverage for June 2019–June 2020 is approximately $1.2 billion gross, with co-insurance and retention leaving about $1 billion net coverage. SCE anticipates approximately $400 million of 2019 wildfire insurance expense before regulatory deferrals and cautions that coverage may be insufficient or costly.
- SCE’s 2020 cost-of-capital application requests a 16.60% CPUC return on common equity, versus the current 10.30%, and a 52% common-equity capital structure. These are requests, not approved rates. SCE estimates its proposal would increase 2020 revenue requirements by about $1.2 billion versus revenue then included in rates.
- SCE requested a 17.12% base ROE in its 2019 FERC formula-rate filing, including a 6% wildfire-risk increment. FERC accepted the filing for hearing and settlement procedures, subject to refund; if adopted as proposed, SCE projects a roughly $290 million increase in its 2020 retail base transmission revenue requirement.
- SCE expects to implement a new customer service system in 2020. Implementation, billing, cybersecurity and cost-recovery risks could adversely affect operations, customers and financial results.
Most important facts for investors to verify
- Whether the AB 1054 insurance fund was established, SCE made its required initial contribution, and the planned equity and debt financing was completed; assess any resulting earnings charge and funding cost.
- Actual wildfire and mudslide claims, litigation outcomes, insurance receipts and regulatory decisions on recovery of uninsured costs compared with the $4.7 billion accrual.
- Execution of the $554 million customer refund obligation and the effect of the 2018 GRC on authorized revenues, disallowed costs and future earnings.
- CPUC and FERC decisions on SCE’s requested returns, capital structure and transmission rates, and any effect on customer rates and earnings.
- Cash generation, capital spending, credit ratings and access to financing as wildfire funding obligations and the capital program proceed.