8-K: Edison International Subsidiary Reaches $1.6 Billion Settlement for Wildfire Costs

Southern California Edison has reached a settlement to recover approximately $1.6 billion of costs related to the 2017/2018 Thomas Fire, Koenigstein Fire, and Montecito Mudslides.

Summary

• Southern California Edison (SCE) has reached a settlement agreement with the California Public Advocates Office to recover costs related to the Thomas Fire, Koenigstein Fire, and Montecito Mudslides (TKM Events).
• The settlement allows SCE to recover 60%, or approximately $1.6 billion, of approximately $2.7 billion in losses, including uninsured claims and legal costs paid as of May 31, 2024, and estimated financing costs.
• SCE will also be authorized to recover approximately $55 million of approximately $65 million in restoration costs.
• SCE has agreed to $50 million of shareholder-funded wildfire and public safety-related system enhancements.
• The settlement agreement is subject to approval by the California Public Utilities Commission (CPUC).
• SCE plans to finance the authorized amounts through the issuance of securitized bonds, subject to CPUC approval.
• The company anticipates receiving the securitized bond proceeds by the end of 2025.

Sentiment

Score: 7

Explanation: The settlement is a positive development for SCE, allowing for significant cost recovery and reducing uncertainty. However, the partial recovery and shareholder-funded enhancements temper the overall positive sentiment.

Positives

• The settlement allows SCE to recover a significant portion of its losses related to the TKM Events.
• The use of securitized bonds for financing is expected to reduce costs for customers.
• The settlement is expected to improve SCE's financial strength.
• The agreement includes a permanent exclusion of after-tax charges to equity associated with disallowed costs.
• The settlement reduces overall costs to customers by avoiding excess financing costs.

Negatives

• SCE will not recover the full amount of its losses, with approximately $1.1 billion being disallowed.
• The settlement includes $50 million in shareholder-funded enhancements, which will impact shareholders.
• The settlement is subject to CPUC approval, which introduces uncertainty.
• There is a potential for other parties to oppose the settlement agreement.

Risks

• The settlement agreement is subject to approval by the CPUC, and other parties may oppose it.
• The recovery of costs through securitized bonds is subject to CPUC approval.
• There is a risk that the CPUC may not approve the settlement or the financing plan.
• The company faces risks related to the operation of electrical facilities, including wildfires and public safety issues.
• The company is exposed to risks related to regulatory and legislative actions.
• The company is exposed to risks related to extreme weather events and natural disasters.
• The company is exposed to risks related to cost and availability of labor, equipment and materials.

Future Outlook

SCE anticipates receiving securitized bond proceeds by the end of 2025 after CPUC approval of the settlement and the bond issuance application. The company expects the settlement to improve its financial strength and reduce costs for customers.

Management Comments

• Members of Edison International management will use the information in the presentation furnished as Exhibit 99.1 regarding the settlement in meetings with institutional investors and analysts and at investor conferences.

Industry Context

This settlement is significant for the utility industry in California, which has faced increasing challenges related to wildfire liabilities. The agreement provides a framework for cost recovery and highlights the ongoing regulatory scrutiny of utility operations and wildfire mitigation efforts. The use of securitized bonds for financing is a common practice in the industry to manage large liabilities.

Comparison to Industry Standards

• The 60% recovery rate is within the range of what other utilities have achieved in similar wildfire cost recovery cases, but it is not a full recovery.
• The use of securitized bonds is a common method for utilities to finance large liabilities, similar to how PG&E has managed its wildfire liabilities.
• The $50 million shareholder-funded enhancements are a unique aspect of this settlement, indicating a shared responsibility for wildfire mitigation.
• Compared to other utilities, SCE's settlement is a positive step towards resolving its wildfire liabilities, but it also highlights the ongoing financial risks associated with operating in high-risk wildfire areas.

Stakeholder Impact

• Shareholders will bear the cost of $50 million in wildfire and public safety-related system enhancements.
• Customers will benefit from reduced costs due to the use of securitized bonds and the recovery of costs.
• The settlement provides clarity for investors regarding SCE's financial outlook.
• The settlement reduces the financial risk for creditors.

Next Steps

• Parties to the proceeding have 30 days to comment on the settlement agreement.
• SCE anticipates a proposed decision within 36 months after the comment period.
• Following final approval, SCE will file a separate application to issue securitized bonds, which is expected to take 6 months for CPUC approval.

Key Dates

Keywords

settlement, wildfire, cost recovery, securitized bonds, California Public Utilities Commission, Edison International, Southern California Edison, TKM Events, Thomas Fire, Koenigstein Fire, Montecito Mudslides, regulatory approval, financial strength