MANAGEMENT OVERVIEW Highlights of Operating ResultsEdison International is the parent holding company ofSCE and Edison Energy Group . SCE is an investor-owned public utility primarily engaged in the business of supplying and delivering electricity to customers in an approximately 50,000 square mile area of southernCalifornia .Edison Energy Group is a holding company for Edison Energy which is engaged in the competitive business of providing energy services to commercial and industrial customers. Edison Energy's business activities are currently not material to report as a separate business segment. Except when otherwise stated, references to each ofEdison International , SCE, orEdison Energy Group mean each such company with its subsidiaries on a consolidated basis. References toEdison International refer to the consolidated group ofEdison International and its subsidiaries. References to Edison International Parent and Other refer to Edison International Parent and its competitive subsidiaries. Unless otherwise described, all the information contained in this report relates to both filers. Three months ended June 30, Six months ended June 30, (in millions) 2020 2019 Change 2020 2019 Change
Net income (loss) attributable to
SCE$ 381 $ 419 $ (38) $ 600 $ 712 $ (112) Edison International Parent and Other (63) (27) (36) (99) (42) (57) Edison International 318 392 (74) 501 670 (169) Less: Non-core items SCE Wildfire Insurance Fund expense (60) - (60) (120) - (120) 2017/2018 Wildfire/Mudslide expenses (9) - (9) (9) - (9) Disallowed historical capital expenditures in SCE's 2018 GRC decision - (123) 123 - (123) 123 Sale of San Onofre nuclear fuel 37 - 37 37 3 34 Re-measurement of uncertain tax positions related to tax years 2010 - 2012 - - - 18 - 18 Re-measurement of deferred taxes - - - - 69 (69) Edison International Parent and Other Goodwill impairment (25) - (25) (25) - (25) Re-measurement of uncertain tax positions related to tax years 2010 - 2012 - - - (3) - (3) Total non-core items (57) (123) 66 (102) (51) (51) Core earnings (losses) SCE 413 542 (129) 674 763 (89) Edison International Parent and Other (38) (27) (11) (71) (42) (29) Edison International$ 375 $ 515 $ (140) $ 603 $ 721 $ (118) Edison International's earnings are prepared in accordance with GAAP. Management uses core earnings (losses) internally for financial planning and for analysis of performance. Core earnings (losses) are also used when communicating with investors and analysts regardingEdison International's earnings results to facilitate comparisons of the company's performance from period to period. Core earnings (losses) are a non-GAAP financial measure and may not be comparable to those of other companies. Core earnings (losses) are defined as earnings attributable toEdison International shareholders less non-core items. Non-core items include income or loss from discontinued operations and income or loss from significant discrete items that management does not consider representative of ongoing earnings, such as write downs, asset impairments and other 3 -------------------------------------------------------------------------------- income and expense related to changes in law, outcomes in tax, regulatory or legal proceedings, and exit activities, including sale of certain assets and other activities that are no longer continuing.Edison International's second quarter 2020 earnings decreased$74 million from the second quarter of 2019, resulting from a decrease in SCE's earnings of$38 million and an increase in Edison International Parent and Other's losses of$36 million . SCE's lower earnings consisted of$91 million of lower non-core losses and$129 million of lower core earnings.Edison International's earnings for the six months endedJune 30, 2020 decreased$169 million from the six months endedJune 30, 2019 , resulting from a decrease in SCE's earnings of$112 million and an increase in Edison International Parent and Other's losses of$57 million . SCE's lower earnings consisted of$23 million of higher non-core losses and$89 million of lower core earnings. The decrease in SCE's core earnings for both periods was primarily due to the adoption of the 2018 GRC decision in the second quarter of 2019, the timing of wildfire mitigation activities and the timing of customer uncollectible, labor and other expenses resulting from the COVID-19 pandemic and SCE's response to it, partially offset by higher CPUC-related revenue due to the escalation mechanism as set forth in the 2018 GRC decision. As further discussed below, SCE has several regulatory mechanisms that allow it to seek recovery of prudently incurred wildfire mitigation and COVID-19 related costs. SCE defers costs as regulatory assets that are probable of future recovery from customers. SCE performs its assessment of future recovery after its year-to-date spending exceeds the amounts authorized for the full calendar year under its current revenue requirement. Edison International Parent and Other's increased net loss for the three months and six months endedJune 30, 2020 was due to higher core losses of$11 million and$29 million , respectively, and higher non-core losses of$25 million and$28 million , respectively.Edison International's increase in core losses was primarily due to higher interest expense. Consolidated non-core items for the six months endedJune 30, 2020 and 2019 primarily included: •A charge of$167 million ($120 million after-tax) recorded in 2020 from the amortization of SCE's contributions to theWildfire Insurance Fund . See "Notes to Consolidated Financial Statements-Note 12. Commitments and Contingencies" for further information. •A gain of$52 million ($37 million after-tax) recorded in 2020 and$4 million ($3 million after-tax) recorded in 2019 for SCE's sale of San Onofre nuclear fuel. •A goodwill impairment charge of$34 million ($25 million after-tax) recorded in 2020 for Edison International Parent and Other related to Edison Energy stemming from the economic impact of COVID-19. •Expenses of$12 million ($9 million after-tax) recorded in 2020 for SCE's legal costs related to 2017/2018 Wildfire/Mudslide events. •An income tax benefit of$18 million and income tax expense of$3 million recorded in 2020 for SCE and Edison International Parent and Other, respectively, due to re-measurement of uncertain tax positions related to the 2010 - 2012 California state tax filings currently under audit. •An impairment charge of$170 million ($123 million after-tax) recorded in 2019 for SCE related to disallowed historical capital expenditures in SCE's 2018 GRC decision. •Income tax benefits of$69 million recorded in 2019 for SCE related to changes in the allocation of deferred tax re-measurement between customers and shareholders as a result of a CPUC resolution issued inFebruary 2019 to provide guidance on the implementation of Tax Reform. The resolution determined that customers are only entitled to excess deferred taxes which were included when setting rates and other deferred tax re-measurement belongs to shareholders. See "Results of Operations" for discussion ofSCE and Edison International Parent and Other results of operations. COVID-19Southern California began experiencing the impacts of the COVID-19 pandemic in the first quarter of 2020. The total impacts of the pandemic are still emerging and will vary depending on the severity of impacts on society and the economy of the US andCalifornia , but it may have a material impact on SCE's ability to execute its planned work, including wildfire mitigation and capital projects and on the liquidity, cash flows and results of operations ofEdison International and SCE. Factors that may increase in severity or that may emerge to cause these impacts include lack of availability of company and contractor employees to perform their job functions, supply chain disruptions, stop-work orders and limitations on the ability to obtain permits for work from local governments, reduced electricity usage by commercial and industrial customers 4 -------------------------------------------------------------------------------- partially offset by increased electricity usage by residential customers, non-payment due to the economic impacts on the customers served by SCE and narrower access to, or increased costs of accessing, bank and capital markets. Decoupling revenue mechanisms allow for differences in revenue resulting from actual and forecast volumetric electricity sales to be collected from or refunded to ratepayers and therefore insulate SCE's earnings from reductions in electricity usage. InMarch 2020 , the governor ofCalifornia announced a statewide emergency as part of the state's response to address the COVID-19 pandemic. As a result SCE established memorandum accounts with CPUC approval, effectiveMarch 2020 , to track incremental costs associated with the emergency for recovery, subject to CPUC reasonableness reviews. As a direct result of the pandemic, SCE has incurred$49 million above amounts authorized in the 2018 GRC primarily related to customer uncollectibles, sequestering certain SCE employees at essential work locations and coordination of SCE's response to the emergency. As ofJune 30, 2020 , SCE had recorded regulatory assets for these incremental costs. For further information see "Notes to the Consolidated Financial Statements-Note 11. Regulatory Assets and Liabilities" and "Risk Factors." The pandemic has also affected the operations ofEdison International and SCE with all employees who, in the companies' assessment, can work remotely and perform their job functions effectively, directed to do so. Some employees and contract workers continue to work at SCE facilities or in the field to maintain operations and perform critical work to protect public safety and reduce the risk of wildfires. Regulatory Proceedings 2021General Rate Case InAugust 2019 , SCE filed its 2021 GRC application for the three-year period 2021 - 2023. Following amendments and other revisions to the application inNovember 2019 andFebruary 2020 , SCE had requested a revenue requirement of$7.6 billion . In April andMay 2020 , intervenors to the 2021 GRC proceeding, including the CPUC Public Advocates Office ("Cal Advocates") and The Utility Reform Network ("TURN"), submitted testimony in response to SCE's revised application. Cal Advocates proposed reductions to 2021 operation and maintenance spending of$423 million or 15% of the total, and reductions to 2021 capital spending of$445 million or 9% of the total. TURN proposed reductions to 2021 operation and maintenance spending of$556 million or 17% of the total, and reductions to 2021 capital spending of$714 million or 14% of the total. The reductions to capital expenditures proposed by both parties included significant proposed reductions to SCE's Wildfire Covered Conductor Program. If adopted, the proposals of Cal Advocates and TURN would result in a 2021 revenue requirement of approximately$6.9 billion and$6.7 billion , respectively. InJune 2020 , in its rebuttal testimony, SCE revised its requested 2021 revenue requirement to$7.5 billion , a$1.1 billion increase over the 2020 revenue requirement authorized in the 2018 GRC as updated for anticipated post test-year ratemaking changes. The rebuttal testimony proposed post test-year increases in 2022 and 2023 of$434 million and$500 million respectively. SCE's request excludes the revenue requirement associated with the approximately$1.6 billion of AB 1054 Excluded Capital Expenditures. SCE expects a final decision on the application for the 2021 test year in the first quarter of 2021. If the final decision is received afterJanuary 1, 2021 , SCE will request the CPUC to approve establishment of a memorandum account making the authorized revenue requirement changes effectiveJanuary 1, 2021 . SCE cannot predict the revenue requirement the CPUC will ultimately authorize or forecast the timing of a final decision. The CPUC amended the proposed schedule for the proceeding inApril 2020 by adding a fourth phase referred to as track 4, to address a third attrition year, 2024, introduced by aJanuary 2020 decision of the CPUC in a separate proceeding. SCE is scheduled to submit its testimony for track 4 inMay 2022 . For more information on other tracks of the 2021 GRC see "-Wildfire Mitigation and Wildfire Insurance Expenses-2021General Rate Case Wildfire Mitigation Memorandum Account Balances." FERC Formula Rate 2019 FERC Formula Rate Settlement InJune 2020 , SCE filed a settlement on its formula rates for the 2019 Formula Rate case ("2019 Formula Rate Settlement") that, if approved by theFERC , will establish SCE'sFERC transmission revenue requirement for the 2019FERC Settlement Period. SCE may seek to implement a new formula rate after the 2019 FERC Settlement Period. The settlement provides for a total ROE of 10.30% inclusive of CAISO and transmission incentive adders. The settlement also provides that SCE's capital 5 -------------------------------------------------------------------------------- structure for purposes of its formula rate will reflect the higher of SCE's actual equity ratio or 47.50%. The transmission revenue requirement and rates that have been billed to customers prior to the implementation of the 2019 Formula Rate Settlement utilized a base ROE of 11.97%. SCE expects to true-up the excess amounts billed to customers through the operation of the Formula Rate in 2021 and 2022. SCE had been recognizing revenue based on the expected outcome of this settlement and the impact of recording the settlement was not material. InDecember 2019 , the CPUC filed a protest with theFERC alleging that$419 million of costs associated withSCE's Tehachapi Transmission Project are imprudent and should be disallowed from SCE'sFERC rate base because these costs exceeded the maximum reasonable costs identified by the CPUC when it granted the project's certificate of public convenience and necessity. As part of the 2019 Formula Rate Settlement, the CPUC withdrew its protest effective as ofJuly 27, 2020 . 2021 FERC Formula Rate Annual Update InJuly 2020 , SCE provided its preliminary 2021 annual transmission revenue requirement update to interested parties. The update reflects an increase in SCE's transmission revenue requirement of$123 million or 12.8% higher than amounts included in the 2020 annual rates. The increase is primarily due to the impact of the 2019 FERC Formula Rate Settlement, which excluded certain refunds from the TO2018 settlement and growth in rate base. SCE expects to file its 2021 annual update with theFERC byDecember 1, 2020 with the proposed rates effectiveJanuary 1, 2021 . Phase I Decision in Residential Rates OIR InJune 2020 , the CPUC issued a final decision on the first phase of the ongoing proceeding Order Instituting Rulemaking to Consider New Approaches to Disconnections and Reconnections to Improve Energy Access and Contain Costs ("Residential Rates OIR"). This decision applies only to SCE's residential customers and requires the creation of an arrearage management program to forgive a portion of certain low income customers' past arrears as long as they remain current on monthly billing, prohibits use of establishment of credit or reestablishment of service deposits, and caps SCE's disconnection rate. SCE's disconnection rate will be capped at 8% in 2020 and will reduce by 1% each year until 2024. The decision requires SCE to establish a two-way balancing account to reflect the actual costs of disconnections in customer rates and to establish a memorandum account to track the costs of implementing the decision. Wildfire Mitigation and Wildfire Insurance Expenses In response to the increase in wildfire activity, and faster progression of and increased damage from wildfires across SCE's service territory and throughoutCalifornia , SCE is currently incurring wildfire mitigation and wildfire insurance related spending at levels significantly exceeding amounts authorized in its 2018 GRC. Several regulatory mechanisms, including but not limited to the GS&RP memorandum account, the FHPMA, the WMP memorandum account and the WEMA, exist to allow SCE to track and seek recovery of these incremental costs. In accordance with the accounting standards applicable to rate-regulated enterprises, SCE defers costs as regulatory assets that are probable of future recovery from customers. For certain wildfire mitigation and wildfire insurance expenses SCE performs its assessment of future recovery after its year to date spending exceeds the amounts authorized for the full calendar year under its current revenue requirement. As ofJune 30, 2020 , SCE has recognized$549 million of regulatory assets related to incremental wildfire mitigation expenses, including depreciation expense from$1.1 billion of total incremental capital expenditures, and$484 million of regulatory assets related to incremental wildfire insurance expenses in the WEMA. While SCE believes such costs are probable of future recovery, there is no assurance that SCE will collect all amounts currently deferred as regulatory assets. SCE has recorded a further$165 million of incremental wildfire mitigation expenses, including$1 million in the quarter endingJune 30, 2020 , that are subject to reasonableness reviews through the GS&RP and the 2021 GRC proceedings. Grid Safety and Resiliency Program InApril 2020 , the CPUC approved a settlement agreement between SCE and certain parties to SCE's GS&RP proceeding. Under the settlement, SCE is authorized to spend approximately$526 million ($407 million capital) in 2018 dollars between 2018 and 2020. SCE will include the authorized revenue requirement in rates and establish a balancing account to track the difference between actual GS&RP costs and amounts authorized. If spending is less than authorized, SCE will refund those amounts to customers. If spending is in excess of forecasted amounts, or in excess of 115% of forecasted amounts for certain activities, SCE will present those costs for reasonableness review in the 2021 GRC. Additionally, SCE's recovery of tree removal costs is capped at a specific average authorized unit cost and a total volume of trees. 6 -------------------------------------------------------------------------------- ThroughJune 30, 2020 , SCE has incurred$617 million of capital expenditures, of which$142 million will be subject to a reasonableness review, and$86 million of operations and maintenance expenses, all of which is within the amount authorized in the settlement agreement. InJuly 2020 , SCE applied for an irrevocable order from the CPUC to finance$337 million , comprised of AB 1054 Excluded Capital Expenditures incurred in connection with GS&RP and prudently incurred financing costs, through the issuance of securitized bonds. 2021 General Rate Case Wildfire Mitigation Memorandum Account Balances For purposes of evaluating SCE's recovery of 2018 - 2020 wildfire mitigation costs, the CPUC has incorporated additional tracks into the 2021 GRC proceeding. Under the adopted schedule, most incremental wildfire mitigation costs from 2018 and 2019 are to be reviewed in track 2. InMarch 2020 , SCE made its 2021 GRC track 2 filing with the CPUC for review and approval of$302 million of capital expenditures and$509 million of operation and maintenance expenses incremental to amounts authorized in SCE's 2018 GRC and not associated with SCE's GS&RP application. The GRC track 2 expenditures predominantly related to enhanced overhead inspections, an expanded vegetation management program and expert consultant contract labor costs supporting SCE's wildfire mitigation activities. The majority of these expenditures are recorded in the WMP memorandum account and the FHPMA. The capital revenue requirement recorded in memorandum accounts mainly represents depreciation expense, taxes, and return. After flow through tax effects and excluding the revenue requirement associated with AB 1054 Excluded Capital Expenditures, the GRC track 2 filing resulted in an additional requested revenue requirement of$500 million . Incremental wildfire mitigation costs from 2020, and all GS&RP costs above settled amounts, are to be reviewed in track 3 of the 2021 GRC proceeding, which will be filed inMarch 2021 . The schedule for SCE's 2021 GRC includes proposed decisions on track 2 and track 3 in the first quarters of 2021 and 2022, respectively. Southern California Wildfires and Mudslides Multiple factors have contributed to increased wildfire activity, and faster progression of and increased damage from wildfires across SCE's service territory and throughoutCalifornia . These include the buildup of dry vegetation in areas severely impacted by years of historic drought, lack of adequate clearing of hazardous fuels by responsible parties, higher temperatures, lower humidity, and strongSanta Ana winds. At the same time that wildfire risk has been increasing inSouthern California , residential and commercial development has occurred and is occurring in some of the highest-risk areas. Such factors can increase the likelihood and extent of wildfires. SCE has determined that approximately 27% of its service territory is in areas identified as high fire risk. Over the past several years, wind-driven wildfires impacted portions of SCE's service territory, with wildfires inDecember 2017 andNovember 2018 causing loss of life, substantial damage to both residential and business properties, and service outages for SCE customers. Several wind-driven wildfires have originated inSouthern California subsequent to 2018, however, SCE does not expect any of these fires to have a material adverse effect on its financial condition, results of operations or cash flows. 2017/2018 Wildfire/Mudslide Events The investigating government agencies, the VCFD andCAL FIRE , have determined that the largest of the 2017 fires originated onDecember 4, 2017 , in theAnlauf Canyon area ofVentura County (the investigating agencies refer to this fire as the "Thomas Fire"), followed shortly thereafter by the Koenigstein Fire. While SCE continues to review the progression of these two fires, theDecember 4, 2017 fires eventually burned substantial acreage in bothVentura andSanta Barbara Counties. The largest of theNovember 2018 fires, known as the Woolsey Fire, originated inVentura County and burned acreage in bothVentura andLos Angeles Counties. InMarch 2019 , the VCFD andCAL FIRE jointly issued separate reports finding that the Thomas Fire and the Koenigstein Fire were each caused by SCE equipment. At this time, based on available information, SCE has not determined whether its equipment caused the Thomas Fire. Based on publicly available radar data showing a smoke plume in theAnlauf Canyon area emerging in advance of the start time of the Thomas Fire indicated in the Thomas Fire report, SCE believes that the Thomas Fire started at least 12 minutes prior to any issue involving SCE's system and at least 15 minutes prior to the start time indicated in the report. SCE has previously disclosed that SCE believed its equipment was associated with the ignition of the Koenigstein Fire. SCE is continuing to assess the progression of the Thomas and Koenigstein Fires and the extent of damages that may be attributable to each fire. 7 -------------------------------------------------------------------------------- SCE has received a non-final redacted draft of a report from the VCFD subject to a protective order in the litigation related to the Woolsey fire and, other than the information disclosed in this Form 10-Q, is not authorized to release the report or its contents to the public at this time. The draft report states that the VCFD investigation team determined that electrical equipment owned and operated by SCE was the cause of the Woolsey Fire. Based on information received at hearings in the Woolsey Fire litigation, SCE anticipates that the VCFD will release its final report regarding the Woolsey Fire in the fourth quarter of 2020. Absent additional evidence, SCE believes that it is likely that its equipment was associated with the ignition of the Woolsey Fire. Multiple lawsuits related to the Thomas and Koenigstein Fires and the Woolsey Fire have been initiated against SCE andEdison International . Some of the Thomas and Koenigstein Fires lawsuits claim that SCE andEdison International have responsibility for the damages caused by the Montecito Mudslides based on a theory alleging that SCE has responsibility for the Thomas and/or Koenigstein Fires and that the Thomas and/or Koenigstein Fires proximately caused the Montecito Mudslides. SCE's internal review into the facts and circumstances of each of the 2017/2018 Wildfire/Mudslide Events is ongoing, and SCE expects to obtain and review additional information and materials in the possession of third parties during the course of its internal reviews and the litigation processes. Final determinations of liability for the 2017/2018 Wildfire/Mudslide Events, including determinations of whether SCE was negligent, would only be made during lengthy and complex litigation processes. Even when investigations are still pending or liability is disputed, an assessment of likely outcomes, including through future settlement of disputed claims, may require a liability to be accrued under accounting standards. Based on information available to SCE and consideration of the risks associated with litigation,Edison International and SCE expect to incur a material loss in connection with the 2017/2018 Wildfire/Mudslide Events. In the second quarter of 2020, SCE entered into settlements with an immaterial number of individual plaintiffs in the 2017/2018 Wildfire/Mudslide Events litigation under which it agreed to pay an aggregate of approximately$16 million to those individual plaintiffs. SCE continues to explore settlement opportunities with other plaintiffs in the 2017/2018 Wildfire/Mudslide Events litigation. At bothJune 30, 2020 andDecember 31, 2019 ,Edison International's and SCE's balance sheets include accrued liabilities of$4.5 billion for the 2017/2018 Wildfire/Mudslide Events. The accrued liability corresponds to the lower end of the reasonably estimated range of expected losses that may be incurred in connection with the 2017/2018 Wildfire/Mudslide Events and is subject to change as additional information becomes available. Each reporting period, management reviews its loss estimates for remaining alleged and potential claims related to the 2017/2018 Wildfire/Mudslide Events. The process for estimating losses associated with wildfire litigation claims requires management to exercise significant judgment based on a number of assumptions and subjective factors, including, but not limited to: estimates of known and expected claims by third parties based on currently available information, opinions of counsel regarding litigation risk, the status of and developments in the course of litigation, and prior experience litigating and settling wildfire litigation claims.Edison International and SCE will seek to offset any actual losses realized in connection with the 2017/2018 Wildfire/Mudslide Events with recoveries from insurance policies in place at the time of the events and, to the extent actual losses exceed insurance, through electric rates. As ofJune 30, 2020 ,Edison International and SCE have remaining expected recoveries from insurance of$1.6 billion and throughFERC electric rates of$77 million on their consolidated balance sheets related to the 2017/2018 Wildfire/Mudslide Events. SCE believes that, in light of the CPUC's decision in a cost recovery proceeding involving SDG&E arising from several 2007 wildfires in SDG&E's service area, there is substantial uncertainty regarding how the CPUC will interpret and apply its prudency standard to an investor-owned utility in future wildfire cost-recovery proceedings for fires ignited prior toJuly 12, 2019 . Accordingly, while the CPUC has not made a determination regarding SCE's prudency relative to any of the 2017/2018 Wildfire/Mudslide Events, SCE is unable to conclude, at this time, that uninsured CPUC-jurisdictional wildfire-related costs are probable of recovery through electric rates.Edison International and SCE continue to pursue regulatory and legal strategies, and anticipate pursuing legislative strategies in the longer term, to address the application of a strict liability standard to wildfire-related property damages without the guaranteed ability to recover resulting costs in electric rates. Current Wildfire Insurance Coverage SCE has$1.0 billion of wildfire-specific insurance coverage for events that may occur during the periodJuly 1, 2020 throughJune 30, 2021 , subject to up to$80 million of co-insurance and$50 million of self-insured retention, which results in net coverage of approximately$870 million . Various coverage limitations within the policies that make up SCE's wildfire insurance coverage could result in additional material self-insured costs in the event of multiple wildfire occurrences during a policy period or with a single wildfire with damages in excess of the policy limits. SCE believes that its insurance coverage 8 -------------------------------------------------------------------------------- for theJuly 1, 2020 throughJune 30, 2021 period meets its obligation to maintain reasonable insurance coverage under AB 1054. 2019 Wildfire Legislation InJuly 2019 , AB 1054 was signed by the governor ofCalifornia and became effective immediately. The summary of the wildfire legislation in this report is based on SCE's interpretation of the legislation and is qualified in its entirety by, and should be read together with, AB 1054 and companion Assembly Bill 111.Wildfire Insurance Fund AB 1054 provided for theWildfire Insurance Fund to reimburse utilities for payment of third-party damage claims arising from certain wildfires that exceed, in aggregate in a calendar year, the greater of$1.0 billion or the utility's insurance coverage.The Wildfire Insurance Fund was established inSeptember 2019 and is available for claims related to wildfires ignited afterJuly 12, 2019 that are determined by the responsible government investigatory agency to have been caused by a utility. SCE and SDG&E collectively made their initial contributions totaling approximately$2.7 billion to theWildfire Insurance Fund inSeptember 2019 . Upon its emergence from bankruptcy, onJuly 1, 2020 , PG&E made its initial contribution of approximately$4.8 billion to theWildfire Insurance Fund . PG&E, SCE and SDG&E are also collectively expected to make aggregate contributions of approximately$3.0 billion to theWildfire Insurance Fund through annual contributions to the fund over a 10-year period, of which they have made their initial annual contributions totaling approximately$300 million . In addition to PG&E's, SCE's and SDG&E's contributions to theWildfire Insurance Fund , PG&E, SCE and SDG&E are expected to collect$6.1 billion ,$6.1 billion and$1.3 billion , respectively, from their customers over a 15-year period through a dedicated rate component. The amount collected from customers may be directly contributed to theWildfire Insurance Fund or used to support the issuance of up to$10.5 billion in bonds by theCalifornia Department of Water Resources , the proceeds of which would be contributed to the fund. In addition to funding contributions to theWildfire Insurance Fund , the amount collected from utility customers will pay for, among other things, any interest and financing costs related to any bonds that are issued by theCalifornia Department of Water Resources to support the contributions to theWildfire Insurance Fund . SCE made an initial contribution of approximately$2.4 billion to theWildfire Insurance Fund inSeptember 2019 and has committed to make ten annual contributions of approximately$95 million per year to the fund, by no later thanJanuary 1 of each year. SCE made its first annual contribution to theWildfire Insurance Fund inDecember 2019 .Edison International supported SCE's initial contribution to theWildfire Insurance Fund by raising$1.2 billion from the issuance ofEdison International equity. SCE raised the remaining$1.2 billion from the issuance of long-term debt. SCE's contributions to theWildfire Insurance Fund will not be recoverable through electric rates and will be excluded from the measurement of SCE's CPUC-jurisdictional authorized capital structure. SCE will also not be entitled to cost recovery for any borrowing costs incurred in connection with its contributions to theWildfire Insurance Fund . Participating investor-owned utilities will be reimbursed from theWildfire Insurance Fund for eligible claims, subject to the fund administrator's review. SCE will reimburse the fund for any withdrawn amounts if SCE receives payment of such amounts under an indemnification agreement or from an insurance provider or other third-party. SCE will also be required to reimburse the fund for withdrawn amounts that the CPUC disallows subject, in some instances, to the AB 1054 Liability Cap. A utility will not be eligible for the AB 1054 Liability Cap if it does not maintain a valid safety certification or its actions or inactions that resulted in the wildfire are found to constitute conscious or willful disregard of the rights and safety of others. Based on SCE's 2020 rate base and using the equity portion of SCE's CPUC authorized capital structure of 52%, SCE's requirement to reimburse theWildfire Insurance Fund for eligible claims disallowed in 2020 would be capped at approximately$3.0 billion . SCE will not be allowed to recover borrowing costs incurred to reimburse the fund for amounts that the CPUC disallows.The Wildfire Insurance Fund and, consequently, the AB 1054 Liability Cap will terminate when the administrator determines that the fund has been exhausted. AB 1054 Prudency Standard As a result of the establishment of theWildfire Insurance Fund, AB 1054 created a new standard that the CPUC must apply when assessing the prudency of a utility in connection with a request for recovery of wildfire costs for wildfires ignited afterJuly 12, 2019 . Under AB 1054, the CPUC is required to find a utility to be prudent if the utility's conduct related to the ignition was consistent with actions that a reasonable utility would have undertaken under similar circumstances, at the relevant point in time, and based on the information available at that time. Utilities with a valid safety certification will be presumed to have acted prudently related to a wildfire ignition unless a party in the cost recovery proceeding creates serious doubt as to the reasonableness of the utility's conduct, at which time, the burden shifts back to the utility to prove its conduct 9 -------------------------------------------------------------------------------- was reasonable. If a utility does not have a valid safety certification, it will have the burden to prove, based on a preponderance of evidence, that its conduct was prudent. The new prudency standard will survive the termination of theWildfire Insurance Fund . Utilities participating in theWildfire Insurance Fund are not required to reimburse the fund for amounts withdrawn from the fund that the CPUC finds were prudently incurred and can recover such prudently incurred wildfire costs through electric rates if the fund has been exhausted.Safety Certification and Wildfire Mitigation Plan Under AB 1054, SCE can obtain an annual safety certification upon the submission of certain required safety information, including an approved wildfire mitigation plan. OnJuly 25, 2019 , SCE obtained its initial safety certification that is valid for 12 months. Notwithstanding its 12-month term, if SCE requests a new safety certification prior to the expiration of its initial safety certification, then its initial safety certification will remain valid until the CPUC acts on its request for a new safety certification. SCE submitted its request for a new safety certification inJune 2020 . InJune 2020 , the CPUC ratified the WSD conditional approval of SCE's 2020 - 2022 WMP. The approval is conditioned on SCE providing requested information to the WSD, including additional descriptions of how SCE is implementing, and will implement, certain requirements imposed by the WSD. The CPUC's ratification of the WSD's conditional approval of SCE's 2020 - 2022 WMP satisfies the AB 1054 requirement that SCE must have an approved WMP to receive a safety certification. Capital Expenditure RequirementUnder AB 1054, approximately$1.6 billion of spending by SCE on wildfire risk mitigation capital expenditures made afterAugust 1, 2019 cannot be included in the equity portion of SCE's rate base. SCE can apply for irrevocable orders from the CPUC to finance these AB 1054 Excluded Capital Expenditures, including through the issuance of securitized bonds, and can recover any prudently incurred financing costs. InJuly 2020 , SCE applied for an irrevocable order from the CPUC to finance$337 million , comprised of AB 1054Excluded Capital Expenditures incurred in connection with GS&RP and prudently incurred financing costs, through the issuance of securitized bonds. As ofJune 30, 2020 , SCE has spent$811 million on AB 1054 Excluded Capital Expenditures. SCE expects to seek additional irrevocable orders from the CPUC to finance the remaining AB 1054 Excluded Capital Expenditures. For further information, see in the 2019 Form 10-K "Notes to Consolidated Financial Statements-Note 1. Summary of Significant Accounting Policies-Initial and annual contributions to the wildfire insurance fund established pursuant to California Assembly Bill 1054" and in this report "Notes to Consolidated Financial Statements-Note 12. Commitments and Contingencies-Contingencies-Southern California Wildfires and Mudslides" and "Legal Proceedings." Capital Program Total capital expenditures (including accruals) were$2.3 billion and$2.0 billion for the first six months of 2020 and 2019, respectively. SCE forecasts capital expenditures in the range of$19.4 billion to$21.2 billion for 2020 - 2023, which includes SCE's revised capital request reflected in the 2021 GRC rebuttal testimony. SCE forecasts weighted average annual rate base of$33.5 billion for 2020. The 2020 actual capital spending may be affected by changes in regulatory, environmental and engineering design requirements, permitting and project delays, cost and availability of labor, equipment and materials and other factors. SCE has taken steps to minimize outages for customers subject to stay-at-home orders. SCE has assessed the impact of this and the broader potential impacts of the COVID-19 pandemic on its ability to execute the 2020 capital program and expects to execute the capital program substantially as planned. For further information regarding the COVID-19 pandemic see "- COVID-19." For further information regarding the capital program see "Liquidity and Capital Resources-SCE-Capital Investment Plan." 10 --------------------------------------------------------------------------------
RESULTS OF OPERATIONSSCE SCE's results of operations are derived mainly through two sources: •Earning activities - representing revenue authorized by the CPUC andFERC , which is intended to provide SCE a reasonable opportunity to recover its costs and earn a return on its net investment in generation, transmission and distribution assets. The annual revenue requirements are comprised of authorized operation and maintenance costs, depreciation, taxes and a return consistent with the capital structure. Also, included in earnings activities are revenue or penalties related to incentive mechanisms, other operating revenue, and regulatory charges or disallowances. •Cost-recovery activities - representing CPUC- andFERC - authorized balancing accounts, which allow for recovery of specific project or program costs, subject to reasonableness review or compliance with upfront standards. Cost-recovery activities include rates which provide recovery, subject to reasonableness review of, among other things, fuel costs, purchased power costs, public purpose related-program costs (including energy efficiency and demand-side management programs) and certain operation and maintenance expenses. SCE earns no return on these activities. Impact of 2018 GRC InMay 2019 , the CPUC approved a decision in SCE's 2018 GRC. The revenue requirements in the 2018 GRC decision were retroactive toJanuary 1, 2018 . SCE recorded the prior period impact of the 2018 GRC decision in the second quarter of 2019 including an increase to earnings of$131 million from the application of the decision to revenue, depreciation expense and income tax expense, of which$65 million was attributable to 2018 and$66 million was attributable to first quarter of 2019 and an impairment of utility property, plant and equipment of$170 million ($123 million after-tax) related to disallowed historical capital expenditures. 11
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The following table is a summary of SCE's results of operations for the periods indicated. Three months endedJune 30, 2020 versusJune 30, 2019
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