Derivative Instruments

12 Months Ended

Dec. 31, 2023

Derivative Instruments

Derivative Instruments

Note 6.Derivative Instruments

Derivative financial instruments are used to manage exposure to commodity price risk. These risks are managed in part by entering into forward commodity transactions, including options, swaps and futures. To mitigate credit risk from counterparties in the event of nonperformance, master netting agreements are used whenever possible, and counterparties may be required to pledge collateral depending on the creditworthiness of each counterparty and the risk associated with the transaction.

Commodity Price Risk

Commodity price risk represents the potential impact that can be caused by a change in the market value of a particular commodity. SCE's electricity price exposure arises from energy purchased from and sold to wholesale markets as a result of differences between SCE's load requirements and the amount of energy delivered from its generating facilities and PPAs. SCE's natural gas price exposure arises from natural gas purchased for the Mountainview power plants, Peaker plants and Qualifying Facilities contracts where pricing is based on a monthly natural gas index and PPAs in which SCE has agreed to provide the natural gas needed for generation, referred to as tolling arrangements.

Credit and Default Risk

Credit and default risk represent the potential impact that can be caused if a counterparty were to default on its contractual obligations and SCE would be exposed to spot markets for buying replacement power and natural gas or selling excess power and natural gas. In addition, SCE would be exposed to the risk of non-payment of accounts receivable, primarily related to the sales of excess power and natural gas and realized gains on derivative instruments.

Certain power and gas contracts contain master netting agreements or similar agreements, which generally allow counterparties subject to the agreement to offset amounts when certain criteria are met, such as in the event of default. The objective of netting is to reduce credit exposure. Additionally, to reduce SCE's risk exposures, counterparties may be required to pledge collateral depending on the creditworthiness of each counterparty and the risk associated with the transaction.

Certain power and gas contracts contain a provision that requires SCE to maintain an investment grade rating from the major credit rating agencies that have credit ratings for SCE, referred to as a credit-risk-related contingent feature. If SCE's credit rating were to fall below investment grade, SCE may be required to post additional collateral to cover derivative liabilities and the related outstanding payables. The net fair value of all derivative liabilities with these credit-risk-related contingent features was less than $1 million as of December 31, 2023 and 2022, for which SCE posted no collateral and collateral of $24 million to its counterparties for its outstanding payables as of December 31, 2023, and 2022, respectively. If the credit-risk-related contingent features underlying these agreements were triggered on December 31, 2023, SCE would be required to post $5 million of collateral, most of which is related to outstanding payables.

Fair Value of Derivative Instruments

SCE presents its derivative assets and liabilities, recorded at fair value, on a net basis on its consolidated balance sheets when subject to master netting agreements or similar agreements. Derivative positions are also offset against margin and cash collateral deposits. In addition, SCE has provided collateral in the form of letters of credit. Collateral requirements can vary depending upon the level of unsecured credit extended by counterparties, changes in market prices relative to contractual commitments and other factors. See Note 4 for a discussion of fair value of derivative instruments. The following table summarizes the gross and net fair values of SCE's commodity derivative instruments:

	December 31, 2023
	Derivative Assets		Derivative Liabilities
(in millions)	Short-Term1		Short-Term2
Commodity derivative contracts
Gross amounts recognized	$	94	$	77
Gross amounts offset in the consolidated balance sheets		(3)		(3)
Cash collateral posted		—		(74)
Net amounts presented in the consolidated balance sheets	$	91	$	—

	December 31, 2022
	Derivative Assets		Derivative Liabilities
(in millions)	Short-Term1		Short-Term2
Commodity derivative contracts
Gross amounts recognized	$	459	$	120
Gross amounts offset in the consolidated balance sheets		(119)		(119)
Cash collateral received		(99)		—
Net amounts presented in the consolidated balance sheets	$	241	$	1

1 Included in "Other current assets" on SCE's consolidated balance sheets.

2 Included in "Other current liabilities" on SCE's consolidated balance sheets.

At December 31, 2023, SCE posted and accrued $121 million of cash collateral, of which $74 million was offset against derivative liabilities and $47 million was reflected in "Other current assets" on the consolidated balance sheets.

Financial Statement Impact of Derivative Instruments

SCE recognizes realized gains and losses on derivative instruments as purchased power expense and expects that such gains or losses will be part of the purchased power costs recovered from customers. As a result, realized gains and losses do not affect earnings, but may temporarily affect cash flows. Due to the expected future recovery from customers, unrealized gains and losses are recorded as regulatory assets and liabilities and therefore, also do not affect earnings. The remaining effects of derivative activities and related regulatory offsets are reported in cash flows from operating activities in SCE's consolidated statements of cash flows.

The following table summarizes the gains/(losses) of SCE's economic hedging activity:

		Years ended December 31,
(in millions)		2023		2022		2021
Realized	$	(14)	$	178	$	200
Unrealized		(322)		310		(75)

Notional Volumes of Derivative Instruments

The following table summarizes the notional volumes of derivatives used for SCE's economic hedging activities:

		Economic Hedges
	Unit of	December 31,
Commodity	Measure	2023	2022
Electricity options, swaps and forwards	Gigawatt hours	3,494	1,022
Natural gas options, swaps and forwards	Billion cubic feet	31	42
Congestion revenue rights	Gigawatt hours	35,011	44,028