SOUTHERN CALIFORNIA EDISON Co quarterly report, Q1 FY2019

Business context and reporting period

Southern California Edison Company (SCE), an investor-owned regulated electric utility serving Southern California, filed this combined Form 10-Q with parent Edison International (EIX). The reporting period is the three months ended March 31, 2019; amounts below are in U.S. dollars. Edison Energy Group’s competitive energy-services activities were not material as a separate segment.

Key financial results

SCE’s calculated operating margin fell to approximately 12.7% from 16.2%. SCE core earnings, a non-GAAP measure, were $221 million versus $286 million; Q1 2019 included $72 million of non-core income, primarily a $69 million tax benefit following a CPUC resolution on deferred-tax remeasurement. EIX reported core earnings of $206 million versus $262 million.

SCE cash from operations declined chiefly because of $413 million in wildfire-insurance premium payments and changes in regulatory-account cash flows. At March 31, SCE had $297 million of cash and cash equivalents and approximately $2.8 billion available under its $3.0 billion revolving credit facility. Short- and long-term debt, including current maturities, totaled approximately $14.8 billion, versus $13.7 billion at year-end 2018. Its debt-to-total-capitalization ratio was 0.52, below the 0.65 covenant limit. SCE’s issuer ratings remained investment grade, but each agency outlook was negative.

Material changes and developments

• Revenue increased mainly from higher cost-recovery activity, including wildfire-insurance costs and higher purchased-power and fuel costs. Operating expenses rose, including $80 million more in earning-activity O&M, largely from wildfire mitigation, and $138 million more in cost-recovery O&M.
• The 2018 General Rate Case remained unresolved at quarter-end. A CPUC proposed decision issued in April 2019 would set base revenue requirements of $5.102 billion for 2018, $5.422 billion for 2019 and $5.823 billion for 2020, if adopted. It could produce up to a $257 million pre-tax impairment of historical capital expenditures and an estimated $130 million increase in core earnings from retroactive adjustments. SCE said the final decision could differ materially.
• SCE spent $856 million on capital expenditures, including accruals, during Q1. Its 2019–2020 capital forecast is $8.896 billion–$9.096 billion, including $846 million–$1.046 billion for wildfire mitigation. The forecast depends in part on regulatory approval and recovery.
• At EIX, the improvement in reported earnings reflected the absence of the prior-year SoCore Energy impairment and lower parent/competitive-business losses. SCE’s core earnings declined despite higher reported common earnings, reflecting wildfire-mitigation expenses and higher financing costs, partly offset by the prior-year customer refund.

Outlook, risks and contingencies

• Wildfire and mudslide exposure: SCE and EIX retained a $4.7 billion liability recorded in Q4 2018, at the lower end of the estimated loss range, and $2.0 billion of expected insurance recoveries. SCE stated actual losses could exceed the accrual but that it could not reasonably estimate an upper end. Recovery of uninsured CPUC-jurisdictional costs through rates is uncertain; $135 million of FERC-jurisdictional recovery was recorded as a regulatory asset.
• Investigators reported that SCE equipment caused the Koenigstein Fire. Their report attributed the Thomas Fire to SCE power lines, but SCE disputed the timing and said it had not determined whether its equipment caused that fire. SCE’s review of the Woolsey Fire and the Montecito Mudslides remained ongoing. Extensive litigation and investigations were pending.
• SCE said about 35% of its service territory is in areas it identifies as high fire risk. Insurance availability and cost, potential liability, rate recovery, regulatory decisions and credit downgrades could affect earnings, liquidity, borrowing costs and dividends. SCE’s ratings had been downgraded in March 2019; a further downgrade could trigger additional collateral requirements.
• In April 2019, SCE sought a 10.60% CPUC base ROE for 2020 plus an additional 6% wildfire-risk ROE, and proposed raising the common-equity component of its authorized capital structure from 48% to 52%. It also requested a revised FERC transmission ROE, including a 6% wildfire-risk addition. These were requests, not approved outcomes.
• For the next 12 months, SCE expected to rely on operating cash flow, debt-market financing, its credit facility and parent equity contributions as needed. In April, EIX borrowed $1.0 billion and contributed $750 million to SCE; SCE used that contribution to repay its February term loan. EIX also anticipated issuing up to $1.5 billion in registered common shares. These transactions occurred after quarter-end.
• No full-year earnings guidance is stated in the supplied filing text. Management noted that quarterly results are not necessarily indicative of full-year results.

Important facts for investors to verify

• How the CPUC’s final 2018 GRC decision compares with the proposed decision, including any impairment, retroactive revenue changes and authorized rate base.
• Whether SCE equipment is ultimately found to have caused the Thomas, Koenigstein or Woolsey Fires, and the extent of any liability tied to the Montecito Mudslides.
• Whether wildfire losses exceed the $4.7 billion accrual, insurance proceeds are collected as expected, and regulators permit recovery of uninsured costs through rates.
• Whether requested CPUC and FERC returns, rate increases and wildfire-mitigation cost recovery are approved, and how those decisions affect customer bills and SCE’s financing needs.
• Credit-rating changes, collateral needs, SCE’s capital structure and dividend capacity, and execution of the forecast capital and wildfire-mitigation programs.