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Edison International (EIX) Q2 2019 Earnings Call Transcript

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Edison International (NYSE: EIX)
Q2 2019 Earnings Call
Jul 25, 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 Second Quarter 2019 Financial Teleconference. [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. Mr. Ramraj, you may begin your conference.

Sam Ramraj -- Vice President of Investor Relations

Thank you, Justin, 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-Q, 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 a reconciliation of non-GAAP measures to the nearest GAAP measure. During the question-and-answer session, please limit yourself to one question and one follow-up.

I will now turn the call over to Pedro.

Pedro J. Pizarro -- President and Chief Executive Officer

Well, thank you, Sam. I would like to start by reflecting on the passing of SCE President Ron Nichols on June 6 after bravely battling gastric cancer. All of us lost a great leader and a great friend. Thanks to all of our investors and stakeholders who joined us and reached out in mourning his passing and celebrating Ron's life.

Well turning to the business at hand. Second quarter core earnings were $1.58 per share, which was $0.73 above the same period last year. The increase in core earnings was primarily due to the adoption of the 2018 GRC final decision in this quarter, and timing of regulatory deferrals related to wildfire insurance and wildfire mitigation costs. Therefore, year-over-year comparisons are not particularly meaningful, but Maria will discuss our financial performance in more detail during her remarks.

The final decision on our 2018 GRC authorizes a base revenue requirement of $5.1 billion for 2018 and $16.4 billion over the 2018 to 2020 period. During this period, SCE's rate base growth has a compound average growth rate of 8.4%. This excludes wildfire mitigation spending and additional items pending regulatory approval like our Charge Ready 2 electric vehicle charging infrastructure program.

Turning to the California wildfire crisis, we remain focused on mitigating catastrophic wildfire risk and the impacts on our communities. I will address the recent legislative actions and then cover the operational practices that SCE has undertaken to reduce wildfire risk.

Please turn to Page 2 of the slide deck we issued with our earnings. We appreciate the significant leadership that Governor Newsom and the Legislature have shown, and their willingness to act with urgency to address this wildfire crisis, through the passage of Assembly Bill 1054 and companion measures. The bills build on the initial steps of Senate Bill 901 to restore California's regulatory framework and provide the financial stability at utilities required to invest in system safety, reliability and resiliency, while continuing to drive toward a clean energy future. As with any major legislation where multiple stakeholders have competing interests, this wildfire bill package reflects compromises. We supported the passage of AB 1054 and the related AB 111, and believe that careful implementation and potential future refinements will be critical to their success.

AB 1054 is a comprehensive wildfire bill that holds utilities accountable for mitigating wildfire risks and improves the regulatory compact by clarifying the determination of prudent wildfire operations. The bill contains several important provisions to address wildfire liability risk. First, it changes wildfire safety oversight by creating a Wildfire Safety Division, initially within the CPUC, that will hold utilities accountable for mitigating wildfire risks and operating safely through an annual safety certification. These responsibilities will transition to the new Office of Energy Infrastructure Safety in 2021. For the first safety certification, the CPUC's executive director must issue it within 30 days of an IOU's request if the IOU has an approved wildfire mitigation plan, is in good safety standing, has a safety committee of its board of directors composed of members with relevant safety experience, and has established board of director-level reporting to the CPUC on safety issues. Earlier today, the CPUC's executive director informed SCE by letter that we have met these requirements and have been granted our initial safety certification for the next 12 months.

In subsequent years, the IOU must meet these requirements, and additionally have an executive incentive compensation structure to promote safety as a priority and to ensure public safety and utility financial stability. The Wildfire Safety Division must approve the IOU's safety certification within 90 days if all the requirements are met.

Second, the bill establishes a Wildfire Safety Advisory Board to advise the Wildfire Safety Division. The members of this Board will have relevant expertise, including experience in the safe operation, design and engineering of electrical infrastructure. The third provision refines the process for IOU's to recover catastrophic wildfire costs, particularly considering factors outside the utility's control and changing the prudency standard.

Fourth, the bill establishes a $10.5 billion wildfire liquidity fund to pay victim claims exceeding insurance for utility-caused wildfires, funded by IOU customers through the extension of the Department of Water Resources bond charge until 2036. There is an option for the IOUs to elect to participate in a broader insurance fund, which conveys additional benefits. It is important to note that for an IOU to benefit from the revised cost recovery standard, it must opt to participate in the wildfire insurance fund. Creation of the insurance fund requires both SCE and SDG&E to participate. With all three IOUs electing to participate, they will contribute a total of $10.5 billion, consisting of an upfront shareholder commitment of $7.5 billion and an annual contribution of $300 million, which is intended to match customers' $10.5 billion contribution over 10 years. Once the fund is established, the revised cost recovery standard will apply, and will continue to apply even if the fund is extinguished.

Based on the 31.5% wildfire allocation ratio for SCE, our upfront contribution translates to approximately $2.4 billion, with the subsequent annual contributions totaling another approximately $950 million. SCE notified the Commission today of its commitment to make its initial and annual contributions in order to establish the fund. SCE will make its initial contribution no later than September 10th. Maria will discuss our thoughts on the financing options in her remarks, which for now I will summarize as a balanced approach to fund the near-term $2.4 billion increment likely with 50% holding company equity contributed to SCE and 50% operating company debt.

The fifth provision requires the large IOUs to invest $5 billion in aggregate on wildfire risk mitigation capital expenditures with no equity return, and authorizes financing of those mitigation costs. SCE's share of these costs will be approximately $1.6 billion. Finally, the bill sets a cap on IOU shareholder liability, even where the IOU is found to have been imprudent, that is available only with the broader insurance fund. The cap equals 20% of T&D equity rate base, which is around $2.5 billion for SCE today.

Turning to our operations, I would now like to address the actions we are taking to combat wildfires in our service territory. For quite some time, even before the devastating fires in Ventura and Santa Barbara counties in December 2017, we have had proactive programs that target wildfire risk. As circumstances continue to change, we have continued to evolve our practices for this new abnormal as it's been called. Approximately 27% of our territory is in high fire risk areas, or HFRA. We recently revised this down from an earlier estimate of approximately 35%. SCE's prior HFRA map was based on CalFire's Fire Hazard Severity Map. When the CPUC developed a new fire threat map in early 2018, out of an abundance of caution we included the combination of the two maps in our HFRA footprint until we could do the thorough evaluation that we completed recently. A foundational part of the longer-term solution to reduce the risk of our equipment starting wildfires in these areas is to harden our infrastructure. Over the course of the past 12 months, we have replaced over 200 circuit miles of overhead line with covered conductor, installed fast-acting current limiting fuses at more than 9,000 locations, and updated protective settings on over 1,600 remote automatic reclosers and circuit breakers on our distribution circuits that traverse our HFRAs.

While we are making significant headway in our system hardening efforts, it will take time to cover the remaining area. In the more immediate term, we remain focused on ensuring our grid is in the best state possible through rigorous inspections and aggressive vegetation management, and then use proactive de-energization known as Public Safety Power Shutoff or PSPS only when conditions warrant it. Through our Enhanced Overhead Inspection program, we have inspected more than 400,000 electrical structures in high fire risk areas since December, fixing the highest risk findings immediately and remediating non-threatening issues in a prioritized manner, generally within six to 12 months, depending on the condition and the location of the findings. In addition to ground-based inspections, we are doing aerial inspections using helicopters and drones.

Our vegetation management practices have been expanded in high fire risk areas including widening clearance distances and removing dead and dying trees. In addition, we have an in-house team of weather experts in our 24/7 Situational Awareness Center to monitor local conditions as well as a fire scientist who has established a fuel sampling program to better understand potential fire risks in our service territory. These risk monitoring activities also support our PSPS program, which is a preventive measure to protect public safety. Trained Incident Management Teams lead our efforts during elevated fire risk conditions, using circuit-specific wind criteria and a fire potential index, or FPI, that measures and predicts local vegetation fuel, fuel moisture content, humidity and other factors.

For circuits that are forecast to be above the wind and FPI thresholds, we pre-patrol the lines ready to find and fix any issues. Ultimately, the decision to shut power off is made based on real-time measures of wind and FPI, and feedback from monitors in the field. Once the power is off, we wait until the wind and FPI conditions clear before patrolling the lines and restoring power when it is safe to do so. Over time, more system hardening should mean that we can lean on PSPS less frequently and only in more severe conditions.

I would now like to give you an update on key regulatory proceedings. The CPUC issued a scoping memo in July on our cost of capital filing. In light of the passage of AB 1054, we are evaluating next steps, including the potential reduction of our requested return on equity. A final decision on this proceeding is expected by the end of this year. In May, the Commission issued final decisions on our 2019 Wildfire Mitigation Plan and de-energization guidelines. The currently approved WMP satisfies one of the requirements for the safety certification in AB 1054. As I mentioned earlier, our first approximately $1.6 billion of WMP spend will not earn an equity return.

Additionally, the CPUC issued a scoping memo in May for our proposed $582 million Grid Safety and Resiliency Program that we filed in September 2018. In early July 2019, SCE and certain parties to the GSRP proceeding agreed in principle to a settlement of all contested issues, which led the CPUC to take the scheduled evidentiary hearings off calendar. SCE and the settling parties anticipate finalizing, executing and submitting a settlement agreement to the CPUC by the end of this month. If the CPUC accepts the settlement agreement, SCE expects a formal decision approximately six months from the date of submission.

Let me conclude by saying that the safety of our customers, communities and employees continues to be our top priority and a core value of Edison. We are taking steps to reduce the risk of wildfires in our service territory through operational mitigation and we are also encouraged by the regulatory and legislative policy changes to our risk profile. We will continue to make our communities safer, and to manage the financial health of our utility to serve our customers and to help achieve California's public policy objectives and environmental goals.

With that, I'll turn it over to Maria for her financial report.

Maria Rigatti -- Executive Vice President and Chief Financial Officer

Thanks, Pedro. Good afternoon, everyone. My comments today will cover second quarter results from 2019 compared to the same period a year ago, plus comments on 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.

Please turn to Page 3. For the second quarter 2019, Edison International reported core earnings of $1.58 per share, an increase of $0.73 from the same period last year. From the table on the right hand side, you'll see that SCE had a positive $0.75 core EPS variance year-over-year. There are a few items that account for a majority of this variance. Upon receipt of the 2018 GRC final decision in May, SCE recorded the retroactive 2018 impact, which increased core earnings primarily due to the application of the 2018 GRC final decision to revenue, depreciation and income tax expenses. This GRC true-up contributed $0.20 of positive earnings.

Additionally, higher 2019 revenues had a positive impact of $0.34, including $0.28 at the CPUC and $0.06 at FERC. FERC revenues were higher primarily due to a change in estimate under the FERC formula rate mechanism. Lower O&M costs had a positive impact of $0.14 primarily due to the timing of regulatory deferrals related to wildfire insurance and wildfire mitigation costs.

During the quarter, certain wildfire mitigation costs reached the total authorized in the GRC and we began to defer incremental costs through approved memo accounts. Finally, lower depreciation and amortization had a positive $0.07 variance, primarily due to the impact of disallowed historical capital expenditures and the change in depreciation rates from the adoption of the 2018 GRC final decision.

For the quarter, EIX Parent and Other had a negative $0.02 core earnings variance, mainly due to higher interest expense.

Please turn to Page 4. For the first half of the year, Edison International core earnings per share increased $0.56 to $2.21 per share. This includes core earnings increases of $0.55 at SCE and $0.01 at EIX Parent and Other. I'm not going to review the year-to-date financial results in detail, but SCE's earnings analysis is largely consistent with second quarter results, except for higher O&M costs and higher net financing costs.

O&M had a negative variance of $0.04 year-over-year primarily due to higher wildfire mitigation costs, partially offset by timing of regulatory deferrals and cost recovery of wildfire insurance costs. Net financing costs had a negative $0.09 variance primarily due to increased borrowings and higher interest on balancing accounts.

Please turn to Page 5. As Pedro mentioned earlier, the CPUC approved a final decision in SCE's 2018 GRC in May. The decision authorized a CPUC GRC revenue requirement of $5.12 billion for 2018 and identified changes to certain balancing accounts, including the expansion of the Tax Accounting Memo Account, or TAMA to include the impacts of all differences between forecast and recorded tax expense.

Based on the 2018 GRC, SCE's authorized revenue requirement is $5.45 billion in 2019 and $5.86 billion in 2020, representing an increase of $335 million in 2019 and $412 million in 2020.

Please turn to Page 6 for SCE's capital expenditures forecast. This forecast reflects planned CPUC jurisdictional spending as approved by the 2018 GRC. It also reflects significant other capital spending needs outside of the GRC, particularly wildfire mitigation-related capital expenditures under the Grid Safety & Resiliency Program, or GS&RP and the Wildfire Mitigation Plan, or WMP.

As an update to our prior forecast, we now estimate approximately $390 million of wildfire-related spending in 2019. Additionally, we continue to expect wildfire mitigation capital expenditures in the range of $500 million to $700 million for 2020. The CPUC has approved the 2019 WMP and authorized tracking of costs related to the GS&RP and the WMP through memorandum accounts. We have also proposed a balancing account for our GS&RP spending and are anticipating a decision from the CPUC this year. Under AB 1054, SCE will not earn an equity return on the first approximately $1.6 billion of wildfire mitigation plan expenditures. We will work with the CPUC to implement this provision in light of the ongoing GS&RP and WMP proceedings.

On Page 7, we have our rate base forecast that incorporates the GRC final decision as well as increases in FERC spend since the last update. The GRC authorizes 2018 CPUC jurisdictional rate base of $22.3 billion. This corresponds to total 2018 rate base of $28.5 billion. SCE's rate base grows at a compound annual rate of 8.4% from 2018 to 2020. I would note that this current rate base forecast does not include any of our wildfire mitigation-related capital spending or additional needs for programs such as Charge Ready 2.

On Page 8, you will see our key financial assumptions and EIX core EPS guidance for 2019. Our revised EPS guidance range for 2019 is $4.61 to $4.81 per share with a midpoint of $4.71. This compares with guidance of $4.72 to $4.92 per share we provided after we obtained a final decision on the GRC in May. I would note that this revised guidance is related to changes to our financing plan as we project funding the $2.4 billion initial contribution to the wildfire fund and there are no updates to the overall operational results at both SCE and EIX Parent.

On the left hand side, we have shown the buildup for core EPS guidance, starting with EPS for 2019 from the simplified rate base model. SCE variances are expected to have a positive impact of $0.41, including $0.32 related to financing and other operational items. The test year 2018 GRC true-up has a positive contribution to EPS of $0.20. We booked this contribution in the second quarter.

For EIX Parent and Other, we expect an earnings drag of $0.30 to $0.35 per share which includes approximately one penny per share per month related to EIX operating expenses. We are forecasting a total of $0.18 of EPS dilution from the financing plan announced last quarter as well as the financing plan required to support the $2.4 billion contribution to the wildfire fund. I will discuss more about this in a minute. At Edison Energy, we are working toward our target of achieving a break-even run rate for earnings by the end of this year.

Let me provide an update on our 2019 financing plan. As Pedro noted earlier, we have notified the Commission of our commitment to provide the initial contribution and subsequent annual contributions to the wildfire fund. Following passage of AB 1054, the rating agencies have reported on the credit-supportive attributes of the wildfire fund and the legislation more broadly, including changes to the cost recovery and prudence standards.

On our last earnings call, I discussed the components of a 2019 EIX financing plan, which included the issuance of $1 billion of holding company debt and $1.5 billion of common equity, through an at-the-market, or ATM, equity program and the use of internal equity programs. This plan was designed to fund SCE's requirements related to the requested increase in the authorized equity layer and additional growth investment at the utility.

Based on our election to participate in the wildfire insurance fund created under AB 1054, SCE requires an additional $2.4 billion to fund the initial shareholder contribution. Funding for this contribution will be in addition to the previously announced plan and together, the combined financing need in 2019 is $4.9 billion.

Through the second quarter, EIX has issued $600 million of unsecured notes as a part of the original $1 billion debt financing need identified in Q1. We have not yet issued any equity under our ATM program, but we intend to do so opportunistically. As we have discussed in the past, our overall approach to financing the business is to fund capital requirements in a balanced manner. Our Q1 plan to fund the requested increase in the authorized equity layer and make capital investments at SCE is consistent with this philosophy. Likewise, this is how we will approach funding for the initial shareholder contribution for the wildfire fund. We are evaluating a range of potential EIX and SCE funding options to support the incremental $2.4 billion financing need and anticipate the permanent capital raise will likely utilize 50% holding company equity contributed to SCE and 50% operating company debt.

As we have outlined, we are focused on a balanced financing approach that maintains a healthy balance sheet and promotes investment grade ratings at both SCE and EIX. We believe this is the most effective way to support operations and future capital investments. We will continue to share our financing needs as we progress other milestones beyond 2019 including the 2021 GRC, our Charge Ready 2 application, securitization activities related to AB 1054 and potential wildfire liabilities.

That concludes our remarks.

Pedro J. Pizarro -- President and Chief Executive Officer

Justin, please open the call for questions. As a reminder, we request you to limit yourself to one question and one follow-up. So everyone in line has the opportunity to ask questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] First question is from Julien Dumoulin-Smith from Bank of America Merrill Lynch. Go ahead, your line is open.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Hey, good afternoon. Can you hear me?

Pedro J. Pizarro -- President and Chief Executive Officer

Yeah. Hi Julien. How are you?

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Hey. Good, excellent, little soft with the operator there, so I wasn't sure. All right, thank you again for all the details here, maybe to just kick it off, I just want to understand a little bit more on the timing for the combined financing of the $4.9 billion. How do you think about the ATM usage and especially against the timeline for the cost to capital case, do we need to see an outcome on that front before you decide to move forward with the $1.5 billion? And then separately related here, just want to understand as you think about the $2.4 billion wildfire fund that as best I understand it is excluded from your authorized capital structure. Can you talk about the decision to use a 50-50 funding for that versus just using more of the leverage capacity at the HoldCo?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

Sure. So Julien, I think we really think about it as there's total need for 2019. So that includes both the Q1 items that you just remarked on, equity layer, investment utility as well as the contribution to the wildfire fund. We're going to use the ATM opportunistically, I think we talked about that earlier in the year that continues to be the case. I think the comment you made around the ability to exclude the amounts from the authorized capital structure, we are obviously contributing some equity down into SCE and they will issue some operating company debt. So that does take advantage of that elements of the legislation. But overall the mix of equity and debt that we've talked about really reflects our philosophy around financing the business and the balanced way in which we're approaching that.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Got it. But just to be clear about this, the $4.9 billion, that is the intention to issue the equity for the cost of capital equity injection by the end of the year as well?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

That's correct.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Got it. All right, excellent. All right, I'll leave it there.

Pedro J. Pizarro -- President and Chief Executive Officer

Thank Jim.

Operator

Our next question is from Praful Mehta from Citigroup. Go ahead, your line is open.

Praful Mehta -- Citigroup -- Analyst

Thanks so much. Just to follow up a little bit on that. In terms of the capital structure, if you don't get the 52% what happens in that case do you want to wait till you get the 52% authorization before you issue? Or is there a pre-funding plan as well.

Maria Rigatti -- Executive Vice President and Chief Financial Officer

So thanks Praful, this is Maria. So we talked about, I think a little bit about this in Q1 obviously with all the events that happened in Q2 it's probably a little bit more to digest. But our plan was to watch the cost of capital proceeding as it goes through the process over the course of the year. Since Q1, there's been -- there have been some developments in terms of issuing scoping memo, setting a schedule etc. Obviously Pedro mentioned earlier that we would also be thinking about the interplay between AB 1054 and our ROE request as well. So things are moving along and we developed the plan to use the ATM to reflect the fact that we would watch that evolve over time. We continue to believe that we're going to use the ATM opportunistically to address that need as well as we're going to be looking at all the tools and the timing frankly and options to fund the initial contribution to the wildfire fund. So that's generally speaking the philosophy.

Praful Mehta -- Citigroup -- Analyst

Got you, that's super helpful. And then just secondly in terms of connected to that if your capital structure does improve and you get to the 52%. Is that reflected in any of the numbers from a GRC perspective in terms of the revenue and all of that? Or do we need to update that in our models to reflect a higher capital equity layer?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

So I mean I don't know what's in your model that the earnings would then reflect 52% not 48%, which we have currently. So -- well, each year we go into the CPUC and we file the revenue requirement for the year. So if 2020 include the 52% equity layer, we would update the revenue requirement for that at the beginning of the year, same thing for '21 etc.

Praful Mehta -- Citigroup -- Analyst

So that decision and that you will show that revenue requirement once you file it depending on the decision from the CPUC?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

That's correct.

Praful Mehta -- Citigroup -- Analyst

All right. Right. Thank you so much.

Operator

Our next question is from Ali Agha from SunTrust. Go ahead, your line is open.

Ali Agha -- SunTrust -- Analyst

Thank you. Good afternoon.

Pedro J. Pizarro -- President and Chief Executive Officer

Hi, Ali.

Ali Agha -- SunTrust -- Analyst

Hi, my first question, just to clarify, when you're thinking about your current equity needs, Maria. So the $1.5 billion stays as is and if we assume 50% of the $2.4 billion will also be equity. So we're really talking about $2.7 billion in total. One, I want to be clear? And then related to that, have you checked in with the rating agencies they're comfortable with that mix and the amount of incremental debt that is implied in this math?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

So in response to your first question Ali, yes the $1.5 billion relates to the equity layer requests that we have into the CPUC. We've indicated sort of a 50-50 structure against the $2.4 billion contribution to the wildfire fund. So that would be $1.2 billion. So yes that's $2.7 billion in confirming your math there. In terms of rating agencies, we have an ongoing dialog with them throughout the course of the year, obviously, lots of dialog around AB 1054. I'm pretty sure they've talked to lots of folks on the phone as well. And they've remarked across the board including in their published reports about AB 1054 all the credit supported aspects that the wildfire insurance funds incorporates, benefits the cap standards for reasonable conduct. So I think that's been a very -- they've come out very strongly in favor of that. Now we just elected to contribute to the wildfire funds and that was one of the things that they've been looking for. They've also been looking for a safety certification, obviously and Pedro just mentioned that we got our safety certification today. So we think that that -- all of that is very supportive and we believe now that we have all these things in place, that the third leg of the school is still rather is the financing plan and we believe that our financing plan aligns with the rating agencies, published guidance around maintaining our financial risk profile.

Pedro J. Pizarro -- President and Chief Executive Officer

And Ali if I could just follow on with Maria here, as we develop that plan, as Maria emphasized that the fact that it is the balanced plan. It's one that we think will preserve our financial health and it's one that frankly we want to make sure that over time we continue to build the strength of the balance sheet and have a good shock absorber built into that. So as folks have been developing their models, we see reports and maybe some folks might have thought perhaps we use more or less that etc. We want to take a balanced approach that allows us to build that strength and preserve some ability to always have some shock absorber in the system.

Ali Agha -- SunTrust -- Analyst

Got you. And a quick follow-up. Where do we stand on the '17 and '18 wildfires which are obviously not covered in this. And eventually are you thinking for modeling purposes that there may be more equity needed, as you have to pay for those liabilities sometimes in the future?

Pedro J. Pizarro -- President and Chief Executive Officer

I don't think we have substantial updates on '17 and '18 from Q1. Recall that at the end of '18, we took the accounting reserve forward what we viewed as the low end of the [Indecipherable] range of potential liabilities there. And I think as we signaled all long, this could be a long process as we work our way through the litigation efforts in the courts. There's always of course a possibility of parties wanting to enter settlement discussions. We're pretty premature to talk about that, but just reflecting the fact that as you've seen cases historically they often end up with some attempts at that. So nothing to update at this point other than to reinforce that we think that the -- we serve, we took at the end of last year. So it makes sense in terms of the funding the lower [Indecipherable] and that will take some time to work through the complex set of proceedings there. There's number of legal milestones, etc from week-to-week or month-to-month, but nothing we felt rose to a level of materiality for these disclosures.

Ali Agha -- SunTrust -- Analyst

Thank you.

Operator

Our next question is from Steve Fleishman from Wolfe Research. Go ahead, your line is open.

Steve Fleishman -- Wolfe Research -- Analyst

Yeah, hi. Thank you. So just Pedro, a question for you, just on your comment of careful implementation and potential future refinements being critical to the lot of success. Could you maybe give a little more color on what you might be referring to with those comments?

Pedro J. Pizarro -- President and Chief Executive Officer

Sure. And I think a number of you have heard us talk about the parallels to the energy crisis two decades ago that also included in its solution new legislation that set up a new framework. And then there was a period of time where the CPUC and other agencies have to go implement the law. There's a lot of building blocks or labor blocks, however, you want to think about it that have to come together in place here. We've already been I think encouraged by seeing positive early steps. The fact that we filed for initial annual certification, safety certification and already obtained that from the CPUC today. That's I think a good marker along the way. There will be many more marker, there will be the creation of the wildfire safety division initially inside the CPUC and then later on they moved out to a new agency under the Natural Resources branch of state government. There will be the creation of a wildfire safety board. There will be the input from those entities into future wildfire mitigation plans.

So probably keep on reciting the various terms of the legislation and things that where we will all I think once you see good implementation of those and good track record built, and that will build I think the confidence that we, that investors, that customers and communities have in how the law is being implemented. We didn't specify any specific potential future refinements but the reality is that with any law that is as large and complex as this one. And frankly that was written and passed and signed by the governor with such a sense of urgency, which means that -- we moved quickly. There are often clean ups that need to be made. Sometimes they can be small, sometimes they can be a little less small, sometimes it's just clarification of the construction of language in them, other times, it might be, maybe more significant things. We're not ready at this point to enumerate a list of those, but we acknowledge that it is certainly very feasible that given the complexity and time of all the year, there will be some of affairs. I don't know if that helps you Steve to frame your -- the answer to the question.

Steve Fleishman -- Wolfe Research -- Analyst

Yeah, no, that's helpful. I have one follow-up just on timing of financing. And just the -- I know the wildfire contribution is not due till September and the equity ratio decision not till year-end. But just we do have record spot market. We have very low interest rates and alike and your stock has bounce at least some with this legislation. So just why wouldn't you just get a lot of this financing off the table as soon as possible?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

Steve, it's Maria. We obviously are watching the market. We want efficient execution. We're evaluating all the timing issues that you just raised. But that's what we're doing right now. We're evaluating it.

Steve Fleishman -- Wolfe Research -- Analyst

Okay. Thank you.

Pedro J. Pizarro -- President and Chief Executive Officer

Thanks, Steve.

Operator

Our next question is from Paul Fremont from Mizuho. Go ahead, your line is open.

Pedro J. Pizarro -- President and Chief Executive Officer

Hello, Paul.

Paul Fremont -- Mizuho -- Analyst

Hi and congratulations on getting the AB 1054 and getting that all behind you. In terms of how to think about the company on a longer-term basis. Is there a level of FFO to debt that we should be thinking that the company is going to be targeting as you move forward in time?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

No, Paul, this is Maria. I think it's about more as we do think that having investment grade with -- that's process we just gone through over the past year or two. Obviously, we have a strong kind of investment ratings at both SCE and EIX. We're still working through a process with the rating agencies in terms of how they will think about and sort of reposition California from a strength of the regulatory construct etc. So as we move through that, I think that, keep in mind, you can understand that we'll be targeting those investment grade ratings. I think the metrics themselves are important, but equally important is how California looks to the rating agencies on a go-forward basis. So that's makes the metric itself, I think, will be less specific about that and we'll just be focused on keeping our investment-grade rating solid.

Paul Fremont -- Mizuho -- Analyst

Okay. So you're not going to have like numerical, I sort of expect you're going to provide to investors?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

Not at this time, no.

Paul Fremont -- Mizuho -- Analyst

And then going back to Ali's question. In terms of when you do pay out claims to claimants from the '17 and '18 fires. Should we think about a funding formula that is similar to sort of the 50-50 that you're talking about for your initial contribution to the wildfire mitigation fund? Or how should we think about your approach toward funding those cash needs?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

Maybe think about it in a couple of three different ways. First, there're a lot of variables that would need to be taken into consideration, so post 2019, you're referring to the wildfire liabilities but we're going to be filing our 21 GRC, there is the issue around the securitization for the wildfire mitigation related spending that's in AB 1054. We have other applications pending in front of the commission that also require capital. So there is a lot of things to take into the mix -- into consideration, in addition to the liability. The first part of the liabilities, presumably, you get covered by insurance as a starting point in any event. So there's a lot of timing in there. There's a lot of different variables. Recall also that when we requested our capital waiver, we asked for some relief around including the charges and the financing for those potential liabilities in our capital structure. So there's a lot of different things that we're going to have to weigh and consider before we make a final determination as to how we finance that part of the go-forward plan.

Pedro J. Pizarro -- President and Chief Executive Officer

And I'll just underscore that just of the timing of the liabilities alone is a significant variable because it will depend on a court process for different cases that has only just begun.

Paul Fremont -- Mizuho -- Analyst

I guess what I'm really trying to get at, is there any expected potential equity need beyond the $2.7 billion? Or is -- should we just think of the $2.7 billion as the end of your equity base?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

The 2019 plan is when we laid out. I think, and as I just noted, there are a lot of variables as you move past this year. And we're going to have to consider all of those variables. We're going to have to consider the timing, that Pedro just noted, not just on the potential liabilities but in all of the decisions that I just referred too. So I think that that is sort of a go-forward planning element that we'll share with you as we have more information. We will continue to focus on our investment-grade rating, so that's the other piece of the mix in terms of the decision-making process.

Paul Fremont -- Mizuho -- Analyst

Thank you.

Pedro J. Pizarro -- President and Chief Executive Officer

Thanks, Paul.

Operator

Our next question is from Angie Storozynski from Macquarie. Go ahead, your line is open.

Pedro J. Pizarro -- President and Chief Executive Officer

Hello, Angie.

Angie Storozynski -- Macquarie -- Analyst

How are you? So I know you mentioned that there's going to be plenty of refinements of this new law. But I'm -- my bigger concern is that it is $21 billion, which seems like a large amount, but we were going through the PG&E bankruptcy where they're mentioning $30 billion in liabilities related to one very large fire, but still in excess of that amount. And the bill, the bill doesn't really talk about how this fund gets replenished. So how should we think about it? Is it -- that's going forward, the goal is still to have some sort of inverse condemnation change which will be more supportive of investor-owned utilities in the state? Or is it that there is hope that this $21 billion basically sufficient for all utilities and all future fires going forward?

Pedro J. Pizarro -- President and Chief Executive Officer

Let me start trying to frame an answer here and Maria or Adam Umanoff or others here may have thoughts too. I think for starters, the $21 million fund is expected to cover potential liabilities that could be much larger at least $40 billion, $45 billion and that's I think based on the history of in how these cases go you often see settlements achieved that have a discount built into them. In fact the legislation itself, as you might recall, has -- essentially built in discount for subrogation claims of 40%. It provides a possibility for settlements that are higher, but those would need to be essentially approved by the fund manager. So there's I think a clear expectation Angie that there's a significant discount there, and frankly, that's part of the compact here across a lot of stakeholders and a lot competing interests. I think the Governor, what we said pretty well, when he gave his first the conference call that he gave when the strike force reports came out and if I recall correctly, he made a comment about everybody in California having today are some share here in terms of dealing with this issue. So clearly there's a piece of shareholders that are now having to contribute. There's a piece of customers that are contributing, there's a piece that through the 40% that's built in there. We're seeing a discount being applied to the recovery that insurers would get. So I think there's a piece here for everybody. So I think that's the starting point, and in fact that the government or governor's office team released some projections of the durability of the fund and those 10-years out exceeded the 90% level. So that's one piece of it.

I think the second piece is that, the focus on durability over 10 years on an actuarial basis was rooted at least in part and the discussions that we heard on the idea of giving California and California utilities time to continue to harden our systems. And so the expectation is that the overall risk profile for the state although will never be zero, will never be zero, but that risk profile should decrease or improve significantly as all of us, the utility side continue to put in investment to hardening or infrastructure and it's not just us, it's other measures of the state that's developing and implementing around better funding for fire suppression. The focus on better standards for homes and businesses, buildings in high fire risk areas, but if I went to fire maps, Angie all of these things, forest management really important one, right? So this all goes to decreasing the risk of the spark coming out but if the spark comes out then decreasing the risk of that spark turns into a massive wildfire of $30 billion plus versus a maybe more contained wildfire. So I think that's the philosophy. You are right that there is not a specific replenishment mechanism in general for the fund, and I think there's a sense that there was a significant accomplishment by the governor and the legislature in implementing this first piece that has visibility that's out hopefully a decade or so. And I'm sure the state will continue to check and adjust, as it sees how that experience goes.

Angie Storozynski -- Macquarie -- Analyst

All right. Thank you.

Pedro J. Pizarro -- President and Chief Executive Officer

Thanks.

Operator

Our next question is from Michael Lapides with Goldman Sachs. Go ahead, your line is open.

Michael Lapides -- Goldman Sachs -- Analyst

Hey guys, thanks for taking my question. Real quickly, is there potential use of securitization to help cover, the 2017 portion of the wildfire claims after insurance that you actually have to pay out?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

As you know the 2017 claims are wildfires are covered in SB 901.

Michael Lapides -- Goldman Sachs -- Analyst

Yeah.

Maria Rigatti -- Executive Vice President and Chief Financial Officer

And there in 2017 you can securitize to the benefit of the customer, if there are amounts that have been disallowed but they're viewed as being would undermine the utilities financial stability. The Commission has gone through a proceeding to define how that would work and what the -- how you calculate the piece that would be basically too much for the utility to bear, that perspect -- calculation, I would say, is one that's falling out an example of perfect clarity, but it's also something that I don't -- I think at the end of the day we probably are not going to find particularly useful. You may recall that we said before that we did not really necessarily be in a position to take advantage of that 2017 provision, so I don't really see securitization as a big opportunity for the '17 amounts. The amount of wildfire mitigation related spending that we have basically implement without a return to our portion of the $5 billion, that's in AB 1054 that is something that is able to be securitized.

Michael Lapides -- Goldman Sachs -- Analyst

Got it. But you would effectively be net neutral on that.

Maria Rigatti -- Executive Vice President and Chief Financial Officer

That's right.

Michael Lapides -- Goldman Sachs -- Analyst

And right. Okay, typical securitization bill, just like storm recovery occurs in other jurisdictions, etc.

Maria Rigatti -- Executive Vice President and Chief Financial Officer

Yeah,

Michael Lapides -- Goldman Sachs -- Analyst

Okay. The -- my second question is what is not in rate base growth guidance that over the next six to 12, six to 18 months you think could get potentially get added to it. You talked a little bit about it in the opening remarks, if you don't mind revisiting that, that would be great. I'm just trying to make sure kind of the puts and takes the items that are in it, the items that are not in it?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

Sure. So six to 12 months frankly Michael is a fairly short timeframe. So not sure that this will be necessarily additive in the next six to 12 months. So what's not in the rate base forecast right now is we haven't included the wildfire mitigation related spending that we've identified for '19 and '20, that's up -- it's in our capex forecast, but not in our rate base forecast. That is going to be potentially subject to that AB 1054 provision. We have to work with the commission to figure out how to implement that alongside our GS&RP and wildfire mitigation plan. But for clarification It's not in our rate base numbers. We also have a Charge Ready 2 application pending in front of the commission we're thinking we're going to get a decision on that later this year. It's about $560 million of capital or thereabout. But remember that rolls out over a number of years. So the impact on rate base, even if we're spending capex. The impact on rate base over the next couple of years, probably pretty moderate. Longer term, we're looking at energy storage at some point [Indecipherable] will development a plan to bring -- to meet the new, the higher renewable portfolio standards and have an opportunity potentially to participate in that mix. But those are not six to 12 month issues, those are longer term issues.

Michael Lapides -- Goldman Sachs -- Analyst

Got it, OK. And on the cost of capital target, what's the timeline and process from here. I mean the CPUC has lots of things on its plate. I'm just trying to think about how they prosecute all of the items and kind of where this one fits in the prioritization ranking?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

Well, thus far they have been very diligent about holding to their schedule. Comments are due from interveners and from the utilities on August 1. And then they have a schedule of scoping metal and a schedule that has the decision coming out before year end.

Michael Lapides -- Goldman Sachs -- Analyst

Got it. Thank you. Much appreciate it.

Operator

Our next question is from Greg Gordon from Evercore. Go ahead, your line is open.

Pedro J. Pizarro -- President and Chief Executive Officer

Hey Greg.

Greg Gordon -- Evercore -- Analyst

Hey, good afternoon. Just the question -- one follow-up question, when it comes to the wildfire mitigation spending where you're not going to receive an equity return. If we're thinking about modeling the spending and the recovery of that, should we presume that it will recover at a cost of debt return on a 100% of the investment and that you could finance it accordingly such that there's no negative arbitrage to your -- on your financing costs relative to your ability to recover to capital? Or did I hear it differently that essentially would be sleeved and that would have no impact at all?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

Yes. So the way legislation is drafted is that it would basically be a securitization, so dedicated rate component that would allow us to recover. I mean the return of our capital. But then the return on the debt, which would be presumably lower costs. So it's structured in a way to be minimize the cost of the customer. So yeah that would be neutral. We need to work with the commission to determine when those pieces would fall into place, so they wouldn't -- potentially we could be implementing program before the securitization actually took -- was issued, the debt was actually issued. So we have to figure out with the commission how will it implement it. But in the sort of like big picture kind of response would be that's basically designed to be neutral to us.

Greg Gordon -- Evercore -- Analyst

Okay. So you'll get a recovery, you'll get essentially a debt return the debt that you issue will be recovered dollar for dollar. And then you'll depreciate the assets and recover the capital you invested?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

That's right.

Greg Gordon -- Evercore -- Analyst

And then when it comes to the -- you're raising this equity at the parent level to put down into SCE and you're going to issue debt at the SCE level to pay for the wildfire insurance contribution and what's the accounting for this. Is this going to be a charge that you have to take that will go against GAAP equity, but I think my understanding of the legislation is from -- in terms of accounting for your regulatory capital structure that this would -- these financing costs would not be counted against your regulatory capital structure for rate making purposes, I'm sitting here trying to model this stuff, frankly. And I'm just -- we could you some guidance.

Maria Rigatti -- Executive Vice President and Chief Financial Officer

Yeah. So we're still evaluating the accounting for it, Greg, to be quite honest. It could be a charge but and certainly wouldn't be more than the amount of the contribution, but we're actually frankly still working through that in determining how we would account for that. That's the first question. So that's a GAAP kind of response

Second part of your question is, yes there could be a charge for GAAP purposes, but under the legislation, we would not have to take that hit in our regulatory accounting.

Greg Gordon -- Evercore -- Analyst

Okay. So if I'm looking to do side by side, the GAAP sort of capital structure against regulatory and I do presume that there is a charge, I would reverse that charge for regulatory purposes in my equity calculation?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

That's correct.

Greg Gordon -- Evercore -- Analyst

Sorry to get darn pick at the end of the call. Thank you.

Operator

Our next question is from Travis Miller from Morningstar. Go ahead, your line is open.

Travis Miller -- Morningstar -- Analyst

Good morning, good afternoon. Thank you. I wonder how you think real quick about the dividends with respect to any kind of equity needs, where does that fit in?

Maria Rigatti -- Executive Vice President and Chief Financial Officer

So I think we understand the importance of the dividends and our shareholders, no question. Obviously from prior quarters when the dividend question was captioned in slightly different way or from a different angle. We don't get ahead of our board on those issues but our policy has been to grow the dividend. We'll continue to manage over the longer term to that 45%, 55% payout ratio range, but we understand the importance to our investors.

Travis Miller -- Morningstar -- Analyst

Okay. And then on the wildfire adder that you had requested in the cost of capital. How do you think about that now? Or how do you think the commission will think about that now post the legislation that presumably would lower your cost of equity in the market?

Pedro J. Pizarro -- President and Chief Executive Officer

Travis, specifically we mentioned in our remarks we're still evaluating that. We had said all along that if there was a new policy established through legislation, we would look at revisiting that for potential reduction or even elimination depending on how the risk profile changed. Be honest with you, we're still absorbing that quickly and evaluating that, and I believe we have a deadline coming up of August 1st for filing our comments in the cost of capital proceeding with the CPUC.

Travis Miller -- Morningstar -- Analyst

Okay, great.

Pedro J. Pizarro -- President and Chief Executive Officer

With more concerns.

Operator

At this time, there are no further questions. I will now turn the call back to Mr. Sam Ramraj.

Sam Ramraj -- Vice President of Investor Relations

Yeah, 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

[Operator Closing Remarks]

Duration: 57 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

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Praful Mehta -- Citigroup -- Analyst

Ali Agha -- SunTrust -- Analyst

Steve Fleishman -- Wolfe Research -- Analyst

Paul Fremont -- Mizuho -- Analyst

Angie Storozynski -- Macquarie -- Analyst

Michael Lapides -- Goldman Sachs -- Analyst

Greg Gordon -- Evercore -- Analyst

Travis Miller -- Morningstar -- Analyst

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