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Edison International (EIX) Q1 2019 Earnings Call Transcript

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Edison International  (NYSE: EIX)
Q1 2019 Earnings Call
April 30, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Edison International First Quarter 2019 Financial Teleconference. My name is Michelle, and I will be your operator today. (Operator Instructions) Today's call is being recorded.

I would now like to turn the call over to Mr. Sam Ramraj, Vice President of Investor Relations. You may begin, sir. Thank you.

Sam Ramraj -- Vice President of Investor Relations

Thank you, Michelle, and welcome, everyone. Our speakers today are President and Chief Executive Officer, Pedro Pizarro; and Executive Vice President and Chief Financial Officer, Maria Rigatti. Also here are other members of the management team.

Materials supporting today's call are available at www.edisoninvestor.com. These include our Form 10-K, prepared remarks from Pedro and Maria and the teleconference presentation. Tomorrow, we will distribute our regular business update presentation.

During this call, we will make forward-looking statements about the outlook for Edison International and its subsidiaries. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our SEC filings. Please read these carefully.

The presentation includes certain outlook assumptions as well as reconciliation of non-GAAP measures to the nearest GAAP measure.

Operator

(Operator Instructions) I will now turn the call over to Pedro.

Pedro J. Pizarro -- President and Chief Executive Officer

Thank you, Sam. Before I begin my business remarks, I want to pause to mourn the loss of one of our directors, Ellen Tauscher, who passed away last night. Ellen accomplished so much. She was one of the first and youngest women, at 25, to hold a seat on the New York Stock Exchange, a talented congresswoman who built bridges across the aisle, a nuclear arms nonproliferation leader who truly made our world safer, a thoughtful director on the boards of multiple companies and national labs and unstoppable cancer survivor who then led national efforts to help others.

An inspiring mother for her daughter Katherine, and above all, a deeply caring individual whom I and all of us at Edison will miss deeply. Well, knowing Ellen, I can sense that she is hearing me and smiling from a better place, but also telling me to get back to work. So let me turn to our quarterly update. First quarter core earnings were $0.63 per share, which was $0.17 below the first quarter last year, largely driven by increased wildfire mitigation costs.

As we have mentioned before, year-over-year comparisons are not particularly meaningful because SCE did not receive the proposed decision in its 2018 General Rate Case until April 12 of this year. Since our policy is to account for regulatory decision in the period in which it is received, SCE recognized revenues from CPUC activities for both the first quarter 2018 and 2019 largely based on 2017 authorized base revenue requirements, with reserves taken for known items, including the 2017 cost of capital decision and tax reform.

If adopted, the GRC PD would result in base rate revenue requirements of $5.1 billion in 2018, $5.4 billion in 2019 and $5.8 billion in 2020. This is lower than our request. The primary drivers are lower depreciation, capital authorization lower than requested levels in the areas of infrastructure placement, grid modernization and corporate real estate, and reductions in operating expenses for incentive compensation. Maria's remarks will cover the proposed decision in more detail, our financial performance for the quarter and other financial topics, but let me first give you a few policy observations.

We have reviewed the GRC PD and have serious concerns in a few areas that will further erode the California regulatory framework if not corrected. First, there are several areas where the PD attempts to shift standard cost of service items unfairly to shareholders. Also, over the past 15 months, we have managed our business in the absence of a GRC decision. That required us to make pragmatic choices for expenditures and programs based on our assessment of the most effective way to deliver safe, reliable and affordable energy to our customers.

Receiving a very late proposed decision that does not acknowledge this is truly challenging. There are critical principles at stake, and our comments will focus on the need to ensure a durable and predictable process, one that leads to timely decisions and gives us sufficient guidance and assurance of first cost recovery for reasonable management decisions. Turning to the California wildfire crisis.

We first remain focused on mitigating catastrophic wildfire risk and impacts on our communities. Governor Newsom has recognized the need for urgent action and initiated steps to strengthen California's emergency preparedness and response capabilities and build community preparedness and resilience. Importantly, the governor recently declared a state of emergency and directed his administration to expedite forest management projects to protect California's most wildfire-vulnerable communities.

Governor Newsom also announced additional funding for public awareness campaigns to inform residents about local emergency action plans, aircraft acquisitions for firefighting, improved evacuation planning and technology upgrades for fire prevention, preparedness and response.

The governor's April 12 strike force report was comprehensive in addressing key areas related to wildfire risks and issues, climate change and California's energy sector. The report sets out a road map to reduce the incidence and severity of wildfires, renews the state's commitment to clean energy and outlines actions to hold utilities accountable for their conduct related to wildfires.

The report acknowledges the important role of California's investor-owned utilities play in helping the state meet its green energy and greenhouse gas emission reduction goals and identifies potential measures to ensure the financial health of IOUs. The strike force report notes that any successful approach for allocating wildfire cost responsibility among stakeholders should be based on several principles, including maintaining safe and affordable power, treating wildfire victims fairly and requiring equitable stakeholder contributions.

The report also acknowledges the uncertainty surrounding cost recovery of wildfire liabilities, including the significant liquidity impact this can have on a utility. This uncertainty can and has resulted in lower credit ratings and higher financing costs, which in turn leads to higher rates paid by utility customers. We are encouraged by the broad scope and sense of urgency of the governor's strike force report.

It appropriately reflects the need to address wildfire liability through legal and regulatory reform, the need to restore confidence in California's regulatory compact, and the importance of financially healthy IOUs to support the state's policy goals.

Governor Newsom has pointed to the Commission on Catastrophic Wildfire Cost and Recovery as an important implementation vehicle. SB 901 tasked this commission with making recommendations to the legislature on the equitable distribution of catastrophic wildfire costs and damages. In its first 3 meetings, the commission heard testimony on several topics, including climate risk, CAL FIRE's prevention efforts, customer rates, the existing wildfire liability regime, the state of the insurance markets for utilities and homeowners, utility risk financing options and community needs around wildfire damages.

The commission held its fourth meeting yesterday and established 3 workgroups to assess: First, utility wildfire liability and cost recovery standards; second, a wildfire fund and/or other funding mechanisms; and third, homeowners' insurance availability and affordability, and household and community wildfire mitigation and protection. The commission is expected to submit its final report by the statutory July 1 deadline or sooner as requested by the governor.

On the judicial front, we continue to challenge the application of inverse condemnation in the courts. We have pending motions challenging inverse in 2 cases arising out of the Liberty Fire. We argue that the fact that an IOU cannot broadly socialize costs runs directly counter to the rationale underlying the application of inverse condemnation. Whatever the ultimate vehicle, whether executive, legislative or judicial action, we believe 3 major components are needed in a comprehensive statewide plan. The first is enhanced prevention.

We continue to reduce the risk of electrical equipment igniting wildfires and go beyond long-standard industry practices to address the new conditions we are facing. This includes hardening the grid to significantly reduce potential fire ignitions, bolstering situational awareness capabilities, and expanding operational practices such as enhanced overhead inspections, vegetation management and emergency response protocols.

We have detailed our actions in several recent SCE regulatory filings. We are also expanding the use of public safety power shutoffs when high wildfire risks conditions warrant targeted circuit shutdowns to protect the safety of our communities. The second component reestablishes a fair regulatory compact for IOUs to recover prudently incurred costs in rates.

A new framework must directly connect cost recovery following a wildfire to compliance with objective standards, like the CPUC-approved wildfire mitigation plans. If an IOU complies with its approved wildfire mitigation plan, the CPUC must find the company a prudent operator for purposes of cost recovery to remove financial uncertainty and support investment-grade credit ratings. Compliance with an approved wildfire mitigation plan is an appropriate standard to judge a utility's wildfire risk management and mitigation operations, since perfection is an unreasonable and unrealistic standard, regardless of the industry in question.

In the Wildfire Mitigation Plan proposed decisions issued yesterday, the CPUC interpreted their ability to do this under existing legislation more narrowly than we would. The legislature should clarity that the CPUC should deny cost recovery for utility wildfire claims only if a utility's noncompliance with its wildfire mitigation plan was a significant cause of a wildfire and its damages, and any such denial should be in proportion to the noncompliance's contribution to damages relative to other factors that contributed to the wildfire and its impacts.

A similar standard led the state and its utilities out of the energy crisis through AB 57 passed by legislature and enacted into law in 2001. Such as a framework defining prudency through compliance with a detailed plan approved by the CPUC is a necessary component to restore the regulatory compact on a go-forward basis.

The third component is a viable wildfire cost recovery fund covering third property damage in excess of utility insurance with broad risk and cost sharing. A fund would benefit property owners by providing relief quickly and with more certainty. SCE and other utilities play a key role in helping the state achieve its ambitious climate change and other environmental goals while providing safe, reliable, affordable and clean energy service to customers.

Investor-owned utilities must therefore remain financially healthy to attract capital and invest in the important infrastructure needed for this essential role. Related to that, SCE submitted its CPUC cost of capital application and updated FERC return on equity filing earlier this month. In both proceedings, we are requesting a 6% adder to compensate investors for risks related to wildfire liability and significant regulatory uncertainties. I want to be clear, we do not consider this wildfire-related increase to be a long-term solution.

This is not an efficient or effective way to resolve the wildfire issue. It is a temporary necessity until the state implements a comprehensive solution that addresses wildfire risk. In the CPUC cost of capital application, SCE is also requesting changes to its authorized capital structure to increase its common equity to 52% from 48% and reduce its preferred equity. The change will bring SCE more in line with other utilities in California and in other jurisdictions, which is especially important in the current business environment. To address these capital structure changes and the ongoing significant needs at SCE for infrastructure replacements and enhancement.

We are implementing a new financing plan at EIX. This includes and at-the-market or ATM program. Between that and turning on internal programs, we plan to issue up to $1.5 billion of EIX equity to fund the increased equity layer at SCE. This will be the first EIX equity issuance since 1993. Since that time, our rate base has essentially tripled, while our system average rate has grown less than the rate of inflation.

We do not take new equity issuance lightly and believe that SCE's growth opportunities to support California's clean energy pathway merit this constructive step to optimize our capital structure. Maria will address this plan in more detail. Let me now turn to updates on December 2017 fires. There are no significant updates on the 2018 events. As we have mentioned previously, we believe the evidence shows there were at least 2 separate ignitions that led to 2 fires that together, we have referred to in the past as the Thomas Fire, one in the Anlauf Canyon area and another near Koenigstein Road.

The Ventura County Fire Department or VCFD and CAL FIRE released a joint report on March 13 regarding the origin and cause of the fire that ignited in Anlauf Canyon, which they and now we are referring to as the Thomas Fire. We will continue to refer to the fire that resulted from the Koenigstein Road ignition as the Koenigstein fire. In their March 13 report, the 2 agencies concluded the Thomas Fire was started by SCE power lines coming into contact during high winds, resulting in molten metal falling to the ground. However, the report does not state that molten metal was found on the ground in a location during the investigation. SCE has been unable to determine the ignition of the Thomas Fire involved SCE equipment.

In fact, SCE has evidence from publicly available data, which shows smoke in the air, that the ignition of 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 March 13 report. SCE believes the Thomas Fire was independently responsible for a portion of the damages from the Thomas and the Koenigstein fires.

On March 20, VCFD and CAL FIRE released a report finding that SCE equipment was the cause of the Koenigstein fire. The company previously is closed in October of 2018 that witnesses reported a fire ignited along Koenigstein Road near an SCE power pole, and SCE believes its equipment was associated with this ignition.

These 2 investigative reports do not provide a final resolution as to cause or responsibility. The courts will ultimately needs to make that determination after a full review of all the evidence. Let me conclude by saying that the safety of our customers, communities and employees is our top priority and a core value of Edison.

Our employees work vigilantly year-round to strengthen our system and protect the public and themselves against a variety of natural and man-made threats under all working conditions. We are taking substantial steps to reduce the risk of wildfires in our service territory and continue to look for ways to enhance our operational practices and infrastructure. We are also actively engaging with state leaders on comprehensive policies to collaboratively address statewide wildfire risks and establish a durable financial and operating framework for utilities.

At the same time, we continue to invest in grid hardening and resiliency as well as the other capital programs that support California's world-leading clean energy goals. We also continue our relentless focus on improving our operational execution capabilities across the board. From our ongoing work to strengthen our safety culture, to our bridge funding program building out electric vehicle charging infrastructure, to improved technology driving more streamlined customer interactions, to promising work applying machine learning to a smart meter data to detect downed wires within minutes, we will not lose sight of the many important aspects of our business.

While we are keenly focused on mitigating wildfire risk and reestablishing sound policy, these other elements are the foundation of our business for the long-term, and we will continue to deliver on them for both our customers and our investors.

With that, Maria will provide her financial report.

Maria Rigatti -- Executive Vice President and Chief Financial Officer

Thank you, Pedro, and good afternoon, everyone. My comments today will cover first quarter results for 2019 compared to the same period a year ago, plus comments on the proposed decision in our General Rate Case, our updated capital expenditure and rate base forecasts and other financial updates for SCE and EIX.

As we have said, year-over-year comparisons are difficult given the timing of the GRC. Through the first quarter, we continued to recognize revenues from CPUC activities largely based on 2017 authorized base revenue requirements, with reserves taken for known items including the 2017 cost of capital decision and tax reform. SCE will account for the impacts of the final decision in the 2018 GRC in the period in which that decision is received.

Please turn to Page 2. For the first quarter of 2019, Edison International reported core earnings of $0.63 per share, a decline of $0.17 from the same period last year. From the table on the right-hand side, you will see that SCE had a negative $0.20 core EPS variance year-over-year there are a few items that account for the bulk of this variance. To begin, higher revenues had a positive impact of $0.08, including $0.06 at the CPUC and $0.02 at FERC. Higher CPUC revenues primarily relate to customer refunds in 2018 for prior over-collection and incremental return on rate case reported to the pole loading balancing account. FERC revenues were higher primarily due to higher operating costs.

There was a negative impact $0.18 due to higher O&M primarily due to wildfire mitigation costs, including enhanced overhead inspections and other preventative maintenance costs. Through our grid safety and resiliency program and 2019 wildfire mitigation plan filings, we have regulatory mechanisms in place to track and request recovery of these increased costs. Through the course of the year, we will begin to defer incremental costs associated with wildfire mitigation, but this will not occur until the costs incurred exceed the total authorized in GRC. The timing of the expenditures and the point at which the deferrals begin drive year-over-year variances. I will speak more about this in a few minutes.

Finally, we had a negative impact of $0.07 from higher financing costs due to increased borrowing and higher interest expense on balancing accounts over-collections. For the quarter, EIX Parent and Other had a positive $0.03 core earnings variance due to lower corporate expenses and lower losses at the competitive business.

Please turn to Page 3. As Pedro mentioned earlier, we received a proposed decision on our 2018 GRC on April 12. The PD, if adopted, would authorize $5.1 billion in 2018 revenue requirements, which is $432 million or 7.8% lower than our request. A significant portion of the reduction or about $150 million is associated with the -- recovery of lower depreciation expense.

Additionally, approximately $100 million is related to O&M reductions in incentive compensation for our employees and executives, a reduction that we have experienced in prior GRCs as well. The third driver of the revenue requirement reduction is related to the lower capital authorized by the PD. If this PD is adopted by the CPUC, SCE's revenue requirement will increase by $320 million in 2019 and an additional $401 million in 2020.

The PD also identifies changes to certain balancing accounts, including expansion of the Tax Accounting Memo Account, or TAMA to include the impacts of all differences between forecast and recorded tax expense. The PD would also disallow certain historical spending largely related to a number of infrastructure replacement programs and corporate real estate. I will address capital spending and rate base in a moment.

We will be filing formal comments on May 2. As Pedro noted, we have significant policy concerns in a few areas and are conducting meetings with the commission to discuss these concerns. Slide 4 has a summary of the key topics that SCE will be addressing when we file comments in a few days.

Please turn to Page 5 for SCE's capital expenditures forecast. The capital expenditures forecast reflects the proposed decision as well as other capital spending needs. The GRC PD approved CPUC capital spending of $2.8 billion for 2018 compared to our request of $3.6 billion. Overall, the PD authorizes 86% of the traditional capital expenditure program and 34% of the grid modernization capital relative to our request.

As we have mentioned before, as we waited for the GRC decision, we developed our capital expenditure plans to meet our business objectives while still maintaining flexibility. Specifically, these plans allow SCE to execute its capital spending program over the 3-year GRC period, that is 2018 through 2020, to meet what is ultimately authorized in the decision while minimizing the associated risk of unauthorized spending. We believe we will be able to reasonably balance our total capital spending over this time frame.

We also have significant capital programs outside of the GRC, particularly related to wildfire mitigation. In 2019, we have approximately $350 million of wildfire-related spending as discussed last quarter. For 2020, we expect wildfire mitigation capital expenditures in a range of $500 million to $700 million. We have approved memo account to track these costs and requested a balancing account for our GSR spend. To the extent not recovered through balancing accounts, we expect that wildfire mitigation spending will be addressed in future GRCs.

On Page 6, we have updated our rate base forecast to reflect the 2018 GRC proposed decision. The PD process 2018 CPUC GRC jurisdictional rate base of $22.6 billion. This corresponds to the total 2018 rate base of $28.4 billion. We expect to update the forecast when we receive a final decision. I would note that our current rate base forecast does not include any of our wildfire mitigation-related capital spending.

On Page 7, you will see our financial assumptions for 2019. We will provide 2019 earnings guidance after we get a final decision on the GRC. In the meantime, we have laid out some additional information for your consideration as you model 2019 and beyond. This includes other items that reflect some considerations outside of the simplified rate base model and noted on the bottom right-hand side.

During the quarter, SCE secured additional wildfire insurance, bringing total coverage to $1.2 billion for the period June 2019 through June 2020. These policies are subject to $115 million of co-insurance. SCE expects its coverage for this period to also be subject to an initial self-insured retention of $10 million per occurrence, but based on policies currently in place, SCE's coverage for the period is subject to self-insured retention of $50 million per occurrence. Based on the current levels of co-insurance and self-insured retention, SCE has approximately $1 billion of insurance after adjusting for this item. SCE may obtain additional wildfire insurance for this time period in the future. Based on policies currently in effect and prior to any regulatory deferral, the cost in 2019 is $399 million.

We have a memo account that was utilized in 2018 to record incremental insurance costs. Similar to 2018, we believe the incremental 2019 costs will be probable of recovery and so subject to deferral. However, the deferral of these costs will not begin until we have recorded amounts equal to the levels authorized for 2019. This is similar to the accounting treatment I noted earlier related to wildfire mitigation O&M costs. There too we have memo accounts that are utilized to track incremental wildfire mitigation costs, which we believe will be probable of recovery.

However, until we reach authorized levels, we will continue to expense costs as they are incurred. Given these mechanisms, full year results are more representative and we will provide guidance and additional information regarding deferrals when we have a final GRC decision.

For EIX Parent and Other, we expect an earnings drag of $0.30 to $0.35 per share. Included in this is approximately $0.01 per share per month related to EIX operating expenses. The overall increase from last year is primarily due to higher forecasted interest expense driven by higher long-term debt issuances and interest rates. At Edison Energy, we continue to work toward our target of achieving a breakeven run rate for earnings by the end of this year.

Please turn to Page 8. I would now like to discuss the recent FERC and CPUC filings that address regulatory cost of capital and authorized capital structure. As Pedro noted earlier, on April 11, SCE submitted revisions to its transmission owner tariff filing with FERC. SCE has requested an overall return on equity of 18.4%, consisting of a conventional ROE of 11.12%, CAISO and project-based incentive adders of approximately 1.28% and a wildfire-associated ROE component of 6% to compensate for this unique risk.

More recently, on April 22, SCE submitted its CPUC cost of capital application. In this filing, SCE is requesting an overall return on equity of 16.6%, which reflects a base ROE of 10.6% and the additional 6% ROE related to wildfire risks similar to the FERC filing.

California is a leader in addressing climate change and air pollution, with both the legislature and CPUC advancing the effort toward a clean energy future. Investor-owned utilities support and enable these objectives, but challenges and risks arise that do not exist in other jurisdictions at the scale we find them in California. We can manage these risks given our experience and understanding of the issues, but these are still differentiators.

These include the efforts related to the state's aggressive clean energy goals, such as the use of more varied, earlier stage and more expensive technologies; proliferation of distributed energy resources and the need to design and manage a grid to accommodate this; and various investment needs, including replacing the aging infrastructure. The increasingly deliberate nature of the regulatory process is also something that must be reflected in cost of capital given the risks introduced by this regulatory lag. Beyond these challenges, we face the additional risk imposed by the dramatic increase in catastrophic wildfires combined with uncertainty regarding cost recovery should a utility's equipment be a substantial cause of a wildfire's ignition.

We have discussed the drivers for this risk before, and Pedro has outlined the structures and solutions needed for a more appropriate allocation of this risk. However, until a reasonable framework is implemented, the return on equity needs to reflect this additional risk. To be clear, we do not want a never-ending series of ROE adders related to wildfire risk. The solution must be structural, but until that happens, we need to include this additional element in our cost of capital to reflect fairly the risks being underwritten by our investors. In addition to cost of capital changes, we have also requested a change to our authorized capital structure.

Currently, our authorized capital structure reflects 48% common equity, 9% preferred equity and 43% debt. This will change to 52% common equity, 5% preferred equity and 43% debt, if approved. This change is more aligned with capital structures across California and in other jurisdictions. Importantly, it also provides support for our credit ratings as we continue to invest in the infrastructure needed to safely and reliably serve our customers.

SCE is also proposing to maintain the current cost of capital trigger mechanism, which provides for an automatic modification of ROE during the 3-year cycle based on fluctuations in interest rates as measured by changes in the Moody's utility bond index.

We understand the customer cost impact of our proposed cost of capital and capital structure, in particular the impact of the wildfire-related ROE component. However, this is necessary in order to address these unique risks as we continue to make the investments that support our customers' needs and help California meet its environmental objectives. We will continue to work with stakeholders on a structural remedy to appropriately allocate this risk, and when that happens, we will file to modify the risk adder included in our cost of capital.

Please turn to Page 9. The changes in our capital structure and ongoing investment needs at SCE drive the financing plan that Pedro mentioned earlier. EIX has historically maintained a strong balance sheet. As Pedro noted, our rate base has grown significantly over more than 2 decades through a combination of internally generated cash flow, retained earnings, debt financing and benefits from other items such as bonus depreciation.

The cost of capital application and the requested change in authorized capital structure to a 52% equity layer drives a need for up to $1.5 billion of additional equity at SCE. The PD highlights ongoing SCE rate base growth at a compound annual rate of 8% from 2018 to 2020. We also see additional capital needs beyond the 2018 GRC, including grid resiliency expenditures and transportation electrification. We are developing 2021 GRC capital requirements and expect to file in September.

Overall, our financing plan takes a balanced approach and utilizes both equity and debt in order to meet the requested increase in authorized equity layer and make capital investments at SCE. EIX has evaluated a range of potential funding options to efficiently finance the current need at SCE, and we will maintain flexibility while we execute our 2019 financing plan.

The plan includes a number of components. Last Friday, EIX closed a $1 billion term loan to bridge our financing needs. The proceeds were split between a $750 million equity contribution to SCE, which was used to repay SCE's outstanding term loan balance, and $250 million retained at EIX to pay off EIX' outstanding commercial paper and for general corporate purposes. This holding company term loan will be repaid through a combination of equity and debt offerings that are part of our longer-term financing plan.

We anticipate issuing up to $1.5 billion of common equity through an at-the-market, or ATM, equity program and the use of internal equity programs. These equity programs have been sized to fund SCE's equity requirements related to the requested increase in the authorized equity layer. The portion of the EIX term loan contributed to SCE last week, or $750 million, will be repaid with the proceeds of the equity financing. This program provides us with greater flexibility and timing of issuances to meet capital needs, including the timing and status of the regulatory process associated with the cost of capital proceeding.

In addition, EIX will continue to utilize other tools to efficiently finance the business, including long-term and short-term debt financing based on debt maturity needs and other cash flow requirements. This includes an anticipated $1 billion long-term financing at the holding company to repay any remaining balance on the term loan, fund additional capital needs at the utility and other holding company requirements.

We have significant capital needs and growth opportunities at SCE and our financing plan supports this. We will update and extend this forecast when we file our 2021 GRC in September.

That concludes my remarks.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from Angie Storozynski from Macquarie.

Angieszka Storozynski -- Macquarie Research -- Analyst

So first, the additional equity. So you don't yet know if the increased equity layer will be approved and yet you're already starting the ATM program. And secondly, the cost of capital proceeding would not kick in until the beginning of next year, right? So you're adding this ROE adder even though we're hopeful -- I think we're all hopeful that before the end of this year, there's going to be either a legislative or a regulatory fix to wildfires. And so is this just a contingency? Or are you trying to send a message that it is unlikely that those issues will be resolved before the end of this year?

Pedro J. Pizarro -- President and Chief Executive Officer

Angie, it's Pedro. Good to hear from you. Let me talk about the back end of that around the adder and then Maria talk about the sequence on the ATM. Just maybe reinforcing some of the comments of both Maria and I have made, we asked for the adder in both the CPUC cost of capital and FERC ROE proceedings because we view that as appropriate compensation for the risks that our investors are being asked to take under the current framework, very hopeful that the state will address that. I think I said in prior calls that we remain confident that ultimately, this will be resolved because of sustaining (ph) financially help the utilities. But sitting here, we can't handicap a probability around whether it happens in this round or next round or what have you, right? So timing is, I think, one of the question marks for us. We thought it was prudent and appropriate to go ahead and make these filings.

Now when you get to the question of what's the best way to start filling the ultimate need, there's different timing on the pieces. The FERC ROE has a separate schedule from the CPUC cost of capital, but I think I'll let -- turn over to Maria now. The bottom line here is flexibility, making sure that we take a nice glide path here that gives us flexibility and optimizes for investors and also for customers.

Maria Rigatti -- Executive Vice President and Chief Financial Officer

Thanks, Angie. I think that's exactly right. We want to be flexible. We want to be disciplined. While the cost of capital proceeding has not yet been completed, obviously, we're in the early stages still. We want to be efficient and we want to be measured in our approach to our financing plan. So we think that the ATM program initiated in 2019 really gives us that flexibility. We can meet those objectives. And we can also move incrementally and address the need while we're still monitoring the process, the regulatory framework, how that's proceeding itself, it's moving along. So I think that's -- we're trying to get in all of those objectives in terms of our financing plan.

Angieszka Storozynski -- Macquarie Research -- Analyst

Okay. Because I'm just -- in a sense, would it -- is it fair to say that if we're assuming this equity dilution, we should be imputing your earnings power using a higher equity layer as well? Because otherwise, I'm just thinking but not to be too punitive (ph) to your earnings power if I were just to just dilute your earnings without giving you the benefit of the higher earnings power, so assuming this higher equity layer.

Maria Rigatti -- Executive Vice President and Chief Financial Officer

Well, certainly, the equity layer is aimed at and sized toward the additional equity layer that will be -- that we've requested from the CPUC. That's for sure. Obviously, they haven't approved it yet. That's why we're taking a very measured approach in terms of the issuance and, as you point out, the potential for dilution.

Operator

Our next question will come from Praful Mehta from Citigroup.

Praful Mehta -- Citigroup -- Analyst

So just to clarify a little bit on the equity issuance, from a timing perspective, are you willing to wait through the July 12 timing, which is the expected legislation? Because obviously, if that goes through, it helps the equity and kind of makes the issuance cost a lot lower. How do you think about -- I get the flexibility point, but how do we think about that in relation to the timing expected for the legislation?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

Sure. Great question, Praful. So we definitely want to share to folks that our financing plan is for 2019. I don't think we're going to get pinned down to exactly when we're going to do particular things. And we did share with you that we just closed a term loan at EIX on Friday, but I think once we share with you the plan, the precise timing of the plan, I think we'll be subject to a lot of different factors.

Praful Mehta -- Citigroup -- Analyst

All right. I guess you want to hold off on being more specific. I get it. I guess the second question, on the wildfire fund -- and I appreciate the 3 points that you laid out, Pedro, in terms of how you think about what's needed. The wildfire fund, as we understand, that came from the strike force seemed like it was more short term in nature as then it was funded at one time, utilized to kind of deal with wildfires over 3, 4 years, at which point you've kind of dealt with the mitigation efforts that are working and you don't need to fund anymore. Do you see the wildfire fund as something that is short term in nature? Or do you see the wildfire fund as something that is needed more longer term to deal with the wildfire problem in California?

Pedro J. Pizarro -- President and Chief Executive Officer

Yes. Praful, it's a good question, and the short answer is it's the latter. This is a longer-term structure. Let me clarify though something in your question because the way that we read the strike force study (ph), a little different from the way you just described it. They actually proposed 2 different funds: one was what they call the liquidity-only fund; and then the second was the wildfire fund, which we understood and viewed as a longer-term structure.

The first one, the liquidity-only fund, in a sense, that looks a lot of different words and maybe slightly different structure, but it's a lot like what we've also been talking about in terms of the ability to securitize needs upfront because we believe that, that can then mitigate cost impacts for customers, right? So we did the liquidity-only fund essentially as a revolving fund of sorts to deal with the short-term need to get cash out to fire victims with the wildfire fund than being what we have been thinking as a more traditional, longer-term structure. Obviously, a lot of details still to be worked out in an early -- the continuing strike force discussions but I think importantly now on the different venue of the Wildfire Commission, as I mentioned in my remarks already, and then ultimately the legislature. But I wanted to clarify that -- the view of 2 different funds that have been suggested.

Operator

Our next call will come from Ali Agha from SunTrust.

Ali Agha -- SunTrust -- Analyst

First question, just to clarify again on the equity front and I was unclear, embedded in that amount that you've laid out, is there some assumption about equity -- or cash, I should say, that you may need to pay for the wildfires? Or would that be a totally separate calculation for equity needs? Is that all built in? And how much do the internal plans annually, DRIP, et cetera, provide for you?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

So Ali, it's Maria. The financing plan we talked about today is really aimed at the increased equity layer that we've requested from the CPUC and growth, capital at SCE. So that's really what this plan is about. I think we'll evaluate the additional considerations as we move forward in time and find out frankly the answers to the types of questions that you just posed in terms of what's happening on the wildfire front. In terms of internal programs, I would say you probably think about $50 million or $60 million a year. I mean it varies. We've had some years that are higher and some years that are lower frankly.

Ali Agha -- SunTrust -- Analyst

Okay. And then second question, on the wildfire front, I just wanted to get a sense of the sequencing and tracking from our site. The governor talked about getting something done by July 12 recess, but after that, the session actually runs till September 13. Just curious how you are looking at the sequencing. And the point that he made about the legal challenge to inverse condemnation, wondering if your legal folks have looked at that and what your thoughts are about the merit of that.

Pedro J. Pizarro -- President and Chief Executive Officer

Yes. So let me start with the last one first. And Adam Umanoff, our General Counsel, is here in case he -- if you want to add anything, Adam. I think the short answer to that, the legal challenge is we feel very comfortable in the strength of the arguments that we've made in a couple of court proceedings that I mentioned. And this really goes to the core assumption that the courts have made and decisions going back to the Baron (ph) decision that looked at the application of inverse condemnation as a means essentially to socialize the cost of this risk across a broad pool of customers, and it assumes that utilities had ready recourse to collect those amounts from customers in the case of lesser utilities to the CPUC.

The significant uncertainty that's been raised toward that with the San Diego Gas & Electric 2017 decision really challenge that assumption, and it's one of the core tenets in our arguments in court. So if you're asking, do we feel strongly about the arguments and we feel they have strong merit? The answer is very clear yes. Now how -- what the courts say with that, that's a different process. Let me pause there. Adam, anything you would add? Or does that cover it?

Adam Seth -- Executive Vice President & General Counsel

Oh, other than giving you an honorary law degree, no other comments.

Pedro J. Pizarro -- President and Chief Executive Officer

Okay. What was I thinking? Thank you, Adam. On the timing question, lots of different venues and pieces here, Ali, to just kind of -- to recap. We now have the strike force report. We understand that the various members of the strike force team are still speaking and engaged, et cetera. But I think we have the major report out. You now have the Wildfire Commission -- my shorthand for the name of the commission, continuing its work. They have a statutory deadline on July 1. The governor, I think, challenged them to finish that process earlier. I believe that they are, at a minimum, on track to meet their July 1 deadline or potentially coming a little sooner.

You have then the challenge that the governor laid out for the legislature to have a package done by July 12, which is clearly an ambitious time line. I think that it's certainly possible and it's not unreasonable to imagine a scenario where you have concrete recommendations coming out from the Wildfire Commission that then feed the legislative process and probably some parallel work and starting to develop language. You saw probably the announcement that came out, I believe, last week on the task force in the Senate, appointed by the Senate President pro Tem Toni Atkins and chaired by Bill Dodd.

Presumably, that's another vehicle for developing language. So there's a -- I think the scenario that the governor laid out of having all of that done by July 12. At the same time, as you pointed out, the session goes on for a couple more months after that. And so there's certainly the possibility that these complex issues could take longer for drafting and for the negotiations that go on in developing new bills.

I would also say there's a more negative scenario but I want to be transparent about it that in spite of the governor's leadership and the time lines that he set that this isn't going to get done. I think that would be an unfortunate outcome. It's one that the state needs a speedy resolution of these issues. It's costing customers significantly through the financial uncertainty in utilities. But I can't sit here and guarantee to you that the state will actually do all those in the time line of the current legislative session. So we said all along that there's always a possibility that this goes longer. We hope not but there's that possibility. So that's the sequence as we see it, Ali, maybe more detail than you wanted.

Operator

Our next question will come from Julien Dumoulin-Smith from Bank of America Merrill Lynch.

Nicholas Joseph -- Merrill Lynch -- Analyst

It's Nick Campanella on for Julien. Just to be a little clear on the 6% adder, I guess if we get some type of framework from the legislature that allows for a liquidity fund, some type of catastrophe fund, is that enough to remove the 6%? Or is this more about an IC 6? And if you could just kind of expand on what you're looking for to actually bring the adder down?

Pedro J. Pizarro -- President and Chief Executive Officer

I think the short answer is the devil's going to be in the details and we need to see actual steps taken before we can answer your question, Nick. Maybe the slightly longer version of that is there's a lot of pieces here. We've pointed consistently though to the important need to address the issues around defining prudency, which we believe is best done by linking it to compliance for CPUC-approved wildfire mitigation plans. As mentioned in my remarks, the analogy to the energy crisis, that's how the state reformed its way out of the energy crisis by setting up a very similar structure that has survived very well till today. So that is really job 1, right, and then linking cost recovery to that kind of framework.

A wildfire fund is an important addition to that, but in our view, you really need to solve the core problem. Now whether you solve that problem through what we have been advocating here, the framework I just discussed, whether you saw the further upstream through little changes on the inverse condemnation strict liability standard, when you solve it through court action in response to the judicial proceedings that Ali was asking about earlier, lots of different ways to get there, but we believe you need to solve that core problem of ultimately cost recovery.

Now once we see any and all of those steps, we can make judgment calls as to how much of the risk has that mitigated for investors and, therefore, what action can we take regarding the 6% adder. It could be one that may be just a package that resolves it and we could actually pull our request entirely or it might be that it happens more gradually and we take steps along the way.

Nicholas Joseph -- Merrill Lynch -- Analyst

I just also wanted to ask about the insurance. I think you guys mentioned that there's $400 million of cost for '19. Ultimately, some of that could get deferred depending on the authorized levels of the GRC. What's proposed right now versus those costs?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

So when we filed our 2018 GRC that was back in 2016, we -- actually, our program was a little bit different, but the allocation of insurance premium to wildfire policies was for the 2018 year, about $75 million. That would then be subject to an attrition mechanism for the subsequent year. So it's $75 million plus some sort of escalation for 2019. So it's in that ballpark. And then depending on what's finally authorized, then the amounts above that, subject to our belief that they are probable of recovery, would be deferred into a memo account that we already have available to us. And we would then go in subsequent to that and demonstrate to the commission that they're reasonable for recovery.

Operator

Our next question will come from Jonathan Arnold with Deutsche Bank.

Jonathan Arnold -- Deutsche Bank -- Analyst

Just when I'm looking at Slide 9 on the holdco financing plan, this may just be the way it played out, but it makes it look as though the equity that you're doing at EIX is basically to fund the higher equity layer at SCE and the debt is funding everything else. So that may just be a sort of graphic impression because when you're talking about it, it sounds like it's more balanced than that.

Maria Rigatti -- Executive Vice President and Chief Financial Officer

Yes. So I think you have to put the bar someplace, so the pieces, the bars someplace. I will say when we start initiating the thought process, we are thinking about what equity does SCE need for the increase in the equity layer and then how much equity you need to provide for that. But you're right, cash is somewhat fungible. We're trying to be flexible not only -- and balanced not only in the types of products that we use but then also the timing. We actually created a plan that gives us that flexibility in terms of timing. That's why we did the term loan. So it's been coming out. You'll see us both pay down the term loan at the parent company, contribute the additional equity into SCE, but generally, we are trying to be balanced, flexible and give ourselves the right runway.

Jonathan Arnold -- Deutsche Bank -- Analyst

Okay. Great. But -- and so taking a step further as you look forward, we think that you're going to continue to invest in rate base growth. And there may or may not be other calls on equity at SCE. How should we also think those incremental investments? In '20 and '21, would it also be financed on a balanced basis? Or is the incremental holdco debt capacity you'd look to access? Sort of how should we think about the -- taking this financing plan and sort of rolling it forward a bit?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

Yes. I think, Jonathan, that we're really focused on, right now, solving or addressing the issue around the increased equity layer and the current capital investment needs at SCE. I think as we roll forward, a lot of other things have to be taken into consideration before I can answer your question more definitively. Right now, we have a lot of cash flows tied up in, for example, insurance. Once we start getting a recovery on that, that will have an impact. We'll have to look and see what our 2021 GRC looks like and how much investment we have in there and the levels and the timing of that. The proceedings that are outside of GRC are also very impactful. So I think as we roll forward, we'll be able to provide you some more information, but I think right now, it's early days.

Jonathan Arnold -- Deutsche Bank -- Analyst

So the holdco debt, you have some number, a maximum that you can carry there?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

Yes. I wouldn't say a maximum. I would say more around the philosophy. So we're trying to, as we always have, maintain a strong, resilient balance sheet. So that will continue to be one of our objectives. Obviously, there is the current situation in California and people -- the credit rating agencies' perception in California plays into that. As we move forward in time, as we get more resolution around the wildfire issues, that could change as well. So I think it's a philosophy as much as anything else.

Pedro J. Pizarro -- President and Chief Executive Officer

And Jonathan, just on that, I think that it serves our investors well that we've had that kind of philosophy for many years. And dry powder's a good thing. And I think continuing to have that sort of prudent approach at the holdco will be part and parcel of how we think about this.

Jonathan Arnold -- Deutsche Bank -- Analyst

So it seems the answers to my 2 questions kind of depends on the circumstances at the time and how things evolve.

Pedro J. Pizarro -- President and Chief Executive Officer

Like everything in life.

Jonathan Arnold -- Deutsche Bank -- Analyst

Okay.

Pedro J. Pizarro -- President and Chief Executive Officer

Thanks, Jonathan.

Jonathan Arnold -- Deutsche Bank -- Analyst

Can ask one other on a different topic? Is that possible?

Pedro J. Pizarro -- President and Chief Executive Officer

I think we -- just make it a quick one here, but you had multiple questions, Jonathan.

Jonathan Arnold -- Deutsche Bank -- Analyst

When you think about your reg asset that you did not manage to book on the wildfire charge, is there -- are there certain items that you're looking for that might change that? Is the stress test proceeding, for example, critical in that decision?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

No. I think, Jonathan, what we talked about last quarter is objectively verifiable evidence or precedents, if you will. There could be things that come out. We're just going to evaluate it every quarter. I wouldn't say there's any one particular thing that's sort of the go, no-go decision on that.

Operator

Our last question will come from Michael Lapides with Goldman Sachs.

Michael Lapides -- Goldman Sachs -- Analyst

Just real quick, the -- when I look at the rate base forecast for 2018, the $700 million versus your prior forecast, can you walk me through just the layers of that? Meaning what are the individual components of that? How much is disallowance of capital you've already spent versus other changes?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

So there were a number of things that the commission decided, in the proposed decision in any case, that they did not want to authorize. A lot of it relates to a few infrastructure programs, overhead conductor program, our 4 kV substation elimination program and corporate real estate. So a lot of that is in here. Separate from that, your question about what prior spending, as an example, was disallowed, if the PD is authorized as it stands today, we would have approximately $185 million after tax disallowed from prior periods or prior spend. So I think it ranges across various things but those are the major points that are affecting rate base.

Michael Lapides -- Goldman Sachs -- Analyst

Got it. And then when I think about going-forward rate base, the delta -- the incremental $400 million is simply a delta in CapEx.

Maria Rigatti -- Executive Vice President and Chief Financial Officer

That's right. It's the programs that were not authorized as you carry them forward through the attrition mechanism.

Michael Lapides -- Goldman Sachs -- Analyst

Fine. And one last thing, just can you all remind me, in prior rate cases, has the commission order differed materially from the proposed decision in terms of the rate base amount and this is all historical looking?

Pedro J. Pizarro -- President and Chief Executive Officer

We have to give you precise numbers. I don't know if somebody has them in the room. But typically, you will see it's a -- typically, you will see changes between an initial proposed decision and the final. I can tell you this every time, but it's not uncommon to have some level of changes already to the final. And Michael, we're certainly going to be advocating for that particularly given some of the core policy things that I was mentioning earlier in my comments. We will certainly have strong comments about some of the changes we believe are needed.

Operator

That was our last question. I will now turn the call back to Mr. Sam Ramraj.

Sam Ramraj -- Vice President of Investor Relations

Well, thank you for joining us today, and please call us if you have any follow-up questions. This concludes the conference call. You may now disconnect.

Operator

This concludes today's conference. All participants may disconnect at this time. Thank you again for your participation in today's call.

Duration: 60 minutes

Call participants:

Sam Ramraj -- Vice President of Investor Relations

Pedro J. Pizarro -- President and Chief Executive Officer

Maria Rigatti -- Executive Vice President and Chief Financial Officer

Angieszka Storozynski -- Macquarie Research -- Analyst

Praful Mehta -- Citigroup -- Analyst

Ali Agha -- SunTrust -- Analyst

Adam Seth -- Executive Vice President & General Counsel

Nicholas Joseph -- Merrill Lynch -- Analyst

Jonathan Arnold -- Deutsche Bank -- Analyst

Michael Lapides -- Goldman Sachs -- Analyst

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