MANAGEMENT OVERVIEW
Highlights of Operating Results
Edison International is the parent holding company of SCE 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 southern California. 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 of Edison
International, SCE, or Edison Energy Group mean each such company with its
subsidiaries on a consolidated basis. References to Edison International refer
to the consolidated group of Edison 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 Edison International



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 regarding Edison 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 to Edison 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
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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 ended June 30, 2020 decreased $169 million from the six months ended
June 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 ended June 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 ended June 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 the Wildfire 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 in February 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 of SCE and Edison International
Parent and Other results of operations.
COVID-19
Southern 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 and California, 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 of Edison 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
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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.
In March 2020, the governor of California 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, effective March 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 of June 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 of Edison 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
2021 General Rate Case
In August 2019, SCE filed its 2021 GRC application for the three-year period
2021 - 2023. Following amendments and other
revisions to the application in November 2019 and February 2020, SCE had
requested a revenue requirement of $7.6 billion.
In April and May 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.
In June 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 after January 1, 2021,
SCE will request the CPUC to approve establishment of a memorandum account
making the authorized revenue requirement changes effective January 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 in April 2020 by
adding a fourth phase referred to as track 4, to address a third attrition year,
2024, introduced by a January 2020 decision of the CPUC in a separate
proceeding. SCE is scheduled to submit its testimony for track 4 in May 2022.
For more information on other tracks of the 2021 GRC see "-Wildfire Mitigation
and Wildfire Insurance Expenses-2021 General Rate Case
Wildfire Mitigation Memorandum Account Balances."
FERC Formula Rate
2019 FERC Formula Rate Settlement
In June 2020, SCE filed a settlement on its formula rates for the 2019 Formula
Rate case ("2019 Formula Rate Settlement") that, if approved by the FERC, will
establish SCE's FERC transmission revenue requirement for the 2019 FERC
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
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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.
In December 2019, the CPUC filed a protest with the FERC alleging that $419
million of costs associated with SCE's Tehachapi Transmission Project are
imprudent and should be disallowed from SCE's FERC 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 of July 27,
2020.
2021 FERC Formula Rate Annual Update
In July 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 the FERC by December 1, 2020 with the proposed rates
effective January 1, 2021.
Phase I Decision in Residential Rates OIR
In June 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 throughout
California, 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 of June 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 ending June 30, 2020, that are subject to reasonableness
reviews through the GS&RP and the 2021 GRC proceedings.
Grid Safety and Resiliency Program
In April 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.
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Through June 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.
In July 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. In March 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 in March 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 throughout California. 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 strong Santa Ana winds. At the same time that wildfire risk has
been increasing in Southern 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 in December 2017 and November 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 in Southern 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 and CAL FIRE, have determined
that the largest of the 2017 fires originated on December 4, 2017, in the Anlauf
Canyon area of Ventura 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, the December 4, 2017
fires eventually burned substantial acreage in both Ventura and Santa Barbara
Counties. The largest of the November 2018 fires, known as the Woolsey Fire,
originated in Ventura County and burned acreage in both Ventura and Los Angeles
Counties.
In March 2019, the VCFD and CAL 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 the Anlauf 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.
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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 and Edison International. Some of the
Thomas and Koenigstein Fires lawsuits claim that SCE and Edison 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 both June 30, 2020 and December 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 of June 30, 2020, Edison
International and SCE have remaining expected recoveries from insurance of $1.6
billion and through FERC 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 to July 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 period July 1, 2020 through June 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
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for the July 1, 2020 through June 30, 2021 period meets its obligation to
maintain reasonable insurance coverage under AB 1054.
2019 Wildfire Legislation
In July 2019, AB 1054 was signed by the governor of California 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 the Wildfire 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 in September
2019 and is available for claims related to wildfires ignited after July 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 the Wildfire Insurance Fund in September 2019.
Upon its emergence from bankruptcy, on July 1, 2020, PG&E made its initial
contribution of approximately $4.8 billion to the Wildfire Insurance Fund. PG&E,
SCE and SDG&E are also collectively expected to make aggregate contributions of
approximately $3.0 billion to the Wildfire 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 the Wildfire 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 the Wildfire Insurance Fund or used to support the issuance of up
to $10.5 billion in bonds by the California Department of Water Resources, the
proceeds of which would be contributed to the fund. In addition to funding
contributions to the Wildfire 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 the California Department of Water
Resources to support the contributions to the Wildfire Insurance Fund.
SCE made an initial contribution of approximately $2.4 billion to the Wildfire
Insurance Fund in September 2019 and has committed to make ten annual
contributions of approximately $95 million per year to the fund, by no later
than January 1 of each year. SCE made its first annual contribution to the
Wildfire Insurance Fund in December 2019. Edison International supported SCE's
initial contribution to the Wildfire Insurance Fund by raising $1.2 billion from
the issuance of Edison International equity. SCE raised the remaining $1.2
billion from the issuance of long-term debt. SCE's contributions to the Wildfire
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 the Wildfire Insurance
Fund.
Participating investor-owned utilities will be reimbursed from the Wildfire
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 the Wildfire 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 the Wildfire 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 after July 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
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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 the
Wildfire Insurance Fund.
Utilities participating in the Wildfire 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. On July 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 in June 2020.
In June 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 Requirement
Under AB 1054, approximately $1.6 billion of spending by SCE on wildfire risk
mitigation capital expenditures made after August 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. In July 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. As of June 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."
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RESULTS OF OPERATIONS
SCE
SCE's results of operations are derived mainly through two sources:
•Earning activities - representing revenue authorized by the CPUC and FERC,
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- and FERC- 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
In May 2019, the CPUC approved a decision in SCE's 2018 GRC. The revenue
requirements in the 2018 GRC decision were retroactive to January 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.
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The following table is a summary of SCE's results of operations for the periods
indicated.
Three months ended June 30, 2020 versus June 30, 2019

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