SOUTHERN CALIFORNIA EDISON Co quarterly report, Q1 FY2020

Business context and reporting period

Southern California Edison Company (SCE), a regulated electric utility serving Southern California, filed this combined Form 10-Q with parent Edison International for the three months ended March 31, 2020. Comparisons are with the first quarter of 2019; financial amounts are in U.S. dollars.

Key financial metrics

SCE reported total net income of $249 million, before $30 million of preferred and preference stock dividends. Management’s non-GAAP core earnings for SCE were $261 million, up from $221 million; reported common earnings included $42 million of non-core expense in 2020.

At March 31, SCE had $451 million cash, approximately $2.8 billion available under its $3.0 billion revolving credit facility, and $16.9 billion of long-term debt including its current portion. Short-term debt was $475 million. Its debt-to-capitalization ratio was 0.49, within the 0.65 covenant limit. Cash capital expenditures were $1.267 billion; reported capital expenditures including accruals were $1.0 billion.

Material changes versus the prior period

• SCE common earnings declined $74 million. Higher core earnings were more than offset by $114 million of higher non-core losses, including an $84 million expense amortizing SCE’s Wildfire Insurance Fund contributions.
• Operating income fell $42 million as revenue decreased $36 million and operating expenses increased modestly. Revenue from earning activities rose with the 2018 General Rate Case decision, but cost-recovery revenue declined.
• Interest expense increased $16 million at SCE, primarily due to increased borrowing.
• Operating cash flow increased $87 million, while investing cash outflow increased $288 million. Financing cash flow included $1.719 billion of bond issuance and a $475 million term loan.

Outlook, risks and unusual items

• COVID-19: Effects remained uncertain. SCE cited potential work and supply-chain delays, reduced commercial electricity use, customer payment difficulties, higher bad debt and financing costs. The pandemic increased the estimated allowance for uncollectible accounts by $8 million in the quarter; uncollectible expense was $17 million. SCE suspended customer disconnections and offered flexible payment plans. It expects to seek regulatory recovery of eligible incremental costs and excess bad debt, but recovery is not assured.
• Wildfire claims: SCE and Edison International carried approximately $4.5 billion of accrued liabilities for the 2017/2018 wildfire and mudslide events, with $1.7 billion of expected insurance recoveries and $113 million of FERC-rate recoveries. The accrual is at the lower end of the estimated loss range; management said actual losses could be higher and could not estimate an upper bound. CPUC recovery of uninsured costs remains uncertain.
• Investigations and litigation: Investigators attributed the Koenigstein Fire to SCE equipment. SCE disputed whether its equipment caused the Thomas Fire and said it was likely associated with the Woolsey Fire, based on a non-final report. Numerous lawsuits remain pending; COVID-19 disrupted scheduled bellwether trials. SCE reported settlements with local public entities, including $150 million for Thomas/Koenigstein and Montecito claims and $210 million for Woolsey claims.
• Wildfire mitigation and insurance: SCE recorded $434 million of regulatory assets for incremental wildfire mitigation costs and $375 million for incremental wildfire insurance costs; recovery is subject to regulatory review. It also had $164 million of incremental expenses subject to reasonableness review. SCE’s 2021 GRC filing sought review of $302 million of incremental capital spending and $509 million of incremental operating costs.
• Funding and plans: SCE expects to fund the next 12 months with operating cash, capital-market financing, parent contributions as needed, and credit facilities. It expects to finance approximately $1.6 billion of wildfire-mitigation capital expenditures excluded from rate base through securitized bonds. SCE issued $600 million of bonds in April 2020 to finance customer-recoverable balancing-account undercollections. No formal earnings guidance is provided in the filing.
• Other exposures: SCE’s wildfire insurance coverage for the period beginning July 2020 was still being procured, amid higher premiums and potential capacity constraints. Major San Onofre decommissioning work was delayed by COVID-19 restrictions. A CPUC protest asserted that $419 million of Tehachapi Transmission Project costs were imprudent; the outcome was unresolved.

Most important facts for investors to verify

1. Progress and eventual outcomes of wildfire investigations, litigation, settlements, and any change in the $4.5 billion accrual or related insurance recoveries.
2. Whether regulators permit recovery of wildfire mitigation, insurance, COVID-19, and other deferred costs, and the timing of decisions in SCE’s rate proceedings.
3. COVID-19 effects on customer collections, bad debt, project execution, operating cash flow, and access to financing.
4. Availability and cost of future wildfire insurance, status of the Wildfire Insurance Fund, and SCE’s ability to maintain its safety certification.
5. Debt, liquidity, dividend capacity, and execution of planned securitized financing for AB 1054 excluded capital expenditures.