10-Q: Edison International and Southern California Edison Company Report Second Quarter 2024 Results

Edison International and Southern California Edison Company (SCE) have released their financial results for the second quarter of 2024, showing a mix of increased core earnings and significant non-core wildfire-related expenses.

Summary

• Edison International's second quarter 2024 earnings increased by $85 million compared to the same period in 2023, primarily driven by a $103 million increase in SCE's earnings.
• SCE's core earnings increased due to higher revenue authorized in Track 4, an increase in the authorized rate of return, and recognition of previously unrecognized return on rate base related to wildfire restoration efforts, partially offset by higher interest expense.
• Edison International's earnings for the six months ended June 30, 2024, decreased by $236 million compared to the same period in 2023, mainly due to a $202 million decrease in SCE's earnings.
• SCE's lower net income for the six months was primarily due to $309 million of higher losses in non-core items, partially offset by $107 million of higher core earnings.
• Non-core items for the six months ended June 30, 2024, included charges of $478 million for 2017/2018 Wildfire/Mudslide Events claims, $121 million for Other Wildfires claims, and $73 million from the amortization of SCE's contributions to the Wildfire Insurance Fund.
• SCE's 2025 General Rate Case (GRC) application requests a test year 2025 revenue requirement of approximately $10.5 billion, a 23% increase over the 2024 revenue requirement.
• SCE forecasts total capital expenditures ranging from $32.2 billion to $37.5 billion for 2024-2028.
• SCE has accrued estimated losses of $9.9 billion, recoveries from insurance of $2.0 billion, and expected recoveries through FERC electric rates of $440 million related to the 2017/2018 Wildfire/Mudslide Events claims through June 30, 2024.
• SCE expects to seek CPUC-jurisdictional rate recovery of approximately $6.9 billion of uninsured claims related to the 2017/2018 Wildfire/Mudslide Events.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with positive core earnings growth offset by significant wildfire-related expenses and uncertainties regarding cost recovery. The forward-looking statements also highlight several risks and challenges, leading to a somewhat negative sentiment.

Positives

• SCE's core earnings increased due to higher authorized revenue and rate of return.
• SCE extended its credit facility through May 2028, enhancing financial flexibility.
• The CPUC approved interim rate recovery for wildfire mitigation costs.
• SCE is actively pursuing cost recovery for wildfire-related expenses through regulatory filings.
• SCE's customer-funded wildfire self-insurance program is extended through the 2025 GRC period.

Negatives

• Edison International's earnings decreased by $236 million for the six months ended June 30, 2024, compared to the same period in 2023.
• SCE recorded significant non-core charges related to wildfire claims and expenses.
• There is substantial uncertainty regarding the CPUC's interpretation of the prudency standard for wildfire cost recovery.
• SCE may incur material losses in excess of amounts accrued for wildfire-related claims.
• SCE's 2025 GRC application requests a substantial increase in revenue requirement, which may face regulatory challenges.
• SCE faces potential delays in the in-service dates of its utility-owned storage projects.
• SCE's credit ratings may be affected by regulatory actions and the depletion of the Wildfire Insurance Fund.

Risks

• SCE faces risks related to the recovery of wildfire-related costs through regulated rates.
• Regulatory or legislative restrictions could limit SCE's ability to implement wildfire mitigation measures.
• The Wildfire Insurance Fund's longevity and the CPUC's interpretation of AB 1054 pose risks.
• SCE faces operational risks associated with electrical facilities and the potential for wildfires.
• The decommissioning of San Onofre carries risks related to safety, permitting, and cost overruns.
• SCE's capital investment program faces risks related to project site identification, public opposition, and permitting.
• Changes in tax laws and interest rates could impact SCE's financial performance.
• Extreme weather events and natural disasters could cause operational issues and unanticipated costs.
• SCE's credit ratings could be downgraded, increasing borrowing costs and impacting contract terms.
• SCE faces risks related to cost allocation and customer departure for other electricity providers.

Future Outlook

SCE expects to file its 2025 annual update with the FERC by December 1, 2024, with the proposed rates effective January 1, 2025. SCE also targets the third quarter of 2024 for the filing of its application to seek CPUC-jurisdictional rate recovery of approximately $5 billion of uninsured claims related to the Woolsey Fire. SCE expects to construct projects representing at least $2.0 billion of expenditures, most of which will be incurred beyond 2028.

Management Comments

• Management uses core earnings (loss) internally for financial planning and for analysis of performance.
• Management believes that the CPUC's interpretation and application of the prudency standard to SDG&E creates substantial uncertainty regarding how that standard will be applied to an investor-owned utility in wildfire cost-recovery proceedings for fires ignited prior to July 12, 2019.

Industry Context

The report highlights the ongoing challenges faced by California utilities due to increased wildfire activity and the complexities of cost recovery through regulatory mechanisms. The focus on wildfire mitigation and the implementation of customer-funded self-insurance programs reflects a broader industry trend towards managing wildfire risks and associated liabilities. The discussion of the 2025 GRC and the need for significant capital investments also underscores the ongoing need for infrastructure upgrades and grid modernization in the face of increasing demand and climate change.

Comparison to Industry Standards

• The document references the SDG&E Decision as a directly comparable precedent for wildfire cost recovery, highlighting the uncertainty in how the CPUC will apply its prudency standard.
• SCE's capital expenditure forecasts of $32.2 billion to $37.5 billion for 2024-2028 are substantial, reflecting the significant investments required for grid modernization and wildfire mitigation, which is consistent with other large California utilities.
• The reliance on customer-funded self-insurance for wildfire-related costs is a unique approach, reflecting the specific challenges faced by California utilities, and is not a standard practice in other regions.
• The document notes that SCE's credit ratings may be affected by regulatory actions and the depletion of the Wildfire Insurance Fund, which is a common concern for utilities facing significant wildfire liabilities.
• The discussion of the 2025 GRC and the requested 23% increase in revenue requirement highlights the ongoing tension between the need for infrastructure investment and the affordability of customer rates, a challenge faced by many utilities.

Legal Proceedings

• Multiple lawsuits related to the 2017/2018 Wildfire/Mudslide Events and other wildfires have been initiated against SCE and Edison International.
• SCE is involved in litigation related to the Thomas, Koenigstein, Woolsey, Creek, Bobcat, Coastal, and Fairview Fires.
• The CPUC's Safety and Enforcement Division (SED) is conducting investigations into some of the wildfires.
• SCE has entered into settlements with various plaintiffs, but some claims remain outstanding.

Related Party Transactions

• SCE purchased wildfire liability insurance from EIS, a wholly-owned subsidiary of Edison International, for premiums of $273 million for the period to June 30, 2023.

Stakeholder Impact

• Shareholders are impacted by the financial performance, wildfire liabilities, and regulatory uncertainties.
• Customers are impacted by potential rate increases to cover wildfire-related costs and infrastructure investments.
• Employees are impacted by the operational challenges and safety concerns related to wildfire mitigation.
• Creditors are impacted by SCE's credit ratings and ability to access capital markets.
• Suppliers are impacted by SCE's capital investment plans and procurement activities.

Next Steps

• SCE will file its 2025 annual update with the FERC by December 1, 2024.
• SCE targets the third quarter of 2024 for the filing of its application to seek CPUC-jurisdictional rate recovery of approximately $5 billion of uninsured claims related to the Woolsey Fire.
• SCE will continue to pursue settlements with plaintiffs in the 2017/2018 Wildfire/Mudslide Events litigation.
• SCE will continue to evaluate the probability of recovery of wildfire-related costs based on available evidence.
• SCE will continue to work on the construction of its transmission and utility-owned storage projects.

Key Dates

Keywords

Edison International, Southern California Edison, Wildfires, Rate Case, Capital Expenditures, Regulatory Proceedings, Financial Results, Core Earnings, Wildfire Insurance Fund, Decommissioning, Transmission Projects, Cost Recovery