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Edited Transcript of EIX earnings conference call or presentation 25-Jul-19 8:30pm GMT

Q2 2019 Edison International Earnings Call

Rosemead Jul 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Edison International earnings conference call or presentation Thursday, July 25, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Maria C. Rigatti

Edison International - Executive VP & CFO

* Pedro J. Pizarro

Edison International - President, CEO & Director

* Sam Ramraj

Edison International - VP of IR

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Conference Call Participants

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* Agnieszka Anna Storozynski

Macquarie Research - Head of US Utilities and Alternative Energy

* Ali Agha

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Gregory Harmon Gordon

Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research

* Julien Patrick Dumoulin-Smith

BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research

* Michael Jay Lapides

Goldman Sachs Group Inc., Research Division - VP

* Paul Basch Michael Fremont

Mizuho Securities USA LLC, Research Division - MD of Americas Research

* Praful Mehta

Citigroup Inc, Research Division - Director

* Steven Isaac Fleishman

Wolfe Research, LLC - MD & Senior Utilities Analyst

* Travis Miller

Morningstar Inc., Research Division - Director of Utilities Research and Strategist

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Presentation

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Operator [1]

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Good afternoon and welcome to the Edison International Second Quarter 2019 Financial Teleconference. My name is Dustin, 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. Mr. Ramraj, you may begin your conference.

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Sam Ramraj, Edison International - VP of IR [2]

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Thank you, Dustin, 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 reconciliation of non-GAAP measures to the nearest GAAP measure. (Operator Instructions)

I will now turn the call over to Pedro.

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Pedro J. Pizarro, Edison International - President, CEO & Director [3]

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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.

So 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 that utilities require to invest in system safety, reliability and resiliency while continuing to drive towards 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 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 IOUs 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 cost 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 3 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 ration 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 10. 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 CAL FIRE'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 2 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 deenergization, 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 nonthreatening issues in a prioritized manner, generally within 6 to 12 months, depending on the condition and the location of the findings. In addition to our 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 deenergization 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 of 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 the 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 6 months from the date of submission.

Let me conclude by saying that the safety of our customers, our communities and our 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.

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Maria C. Rigatti, Edison International - Executive VP & CFO [4]

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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-based 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 will 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 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 and 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-based 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 of 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 cents to $0.35 per share, which includes approximately $0.01 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 towards our target of achieving a breakeven 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 supported attributes of the wildfire fund and the legislation more broadly, including changes to the cost recovery and prudency 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 program. 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 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've 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 to 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.

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Sam Ramraj, Edison International - VP of IR [5]

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Dustin, please open the call for questions. (Operator Instructions)

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question is from Julien Dumoulin-Smith from Bank of America Merrill Lynch.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [2]

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Can you hear me?

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Pedro J. Pizarro, Edison International - President, CEO & Director [3]

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Yes.

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Maria C. Rigatti, Edison International - Executive VP & CFO [4]

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Yes, we can.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [5]

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Good. Excellent. It's a little soft for the operator there, so I wasn't sure. All right. Well, thank you again for all the details here. Maybe to just kick it off, I just wanted 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, especially against the timeline for the cost of capital case? Do we need to see an outcome on that front before you decide to move forward with the 1 5 ? And then separately and related here, just want to understand, as you think about the $2.4 billion wildfire fund, that as best I understand, 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?

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Maria C. Rigatti, Edison International - Executive VP & CFO [6]

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Sure. So Julien, I think we really think about it as the total need for 2019. So that includes both the Q1 items that you just remarked on, the equity layer, investment in the 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 make 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 element 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 are approaching that.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [7]

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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?

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Maria C. Rigatti, Edison International - Executive VP & CFO [8]

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That's correct.

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Operator [9]

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Our next question is from Praful Mehta from Citigroup.

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Praful Mehta, Citigroup Inc, Research Division - Director [10]

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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 prefunding plan as well?

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Maria C. Rigatti, Edison International - Executive VP & CFO [11]

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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 the -- 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 a scoping memo, setting a schedule, et cetera. 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.

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Praful Mehta, Citigroup Inc, Research Division - Director [12]

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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?

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Maria C. Rigatti, Edison International - Executive VP & CFO [13]

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

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Praful Mehta, Citigroup Inc, Research Division - Director [14]

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

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Maria C. Rigatti, Edison International - Executive VP & CFO [15]

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That's correct.

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Operator [16]

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Our next question is from Ali Agha from SunTrust.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [17]

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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, are they comfortable with that mix and the amount of incremental debt that is implied in this math?

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Maria C. Rigatti, Edison International - Executive VP & CFO [18]

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So in response to your first question, Ali, yes, the $1.5 billion relates to the equity layer request 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, so confirming your math there.

In terms of the rating agencies. We have an ongoing dialogue with them throughout the course of the year obviously, lots of dialogue 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 incorporate, the liquidity benefits, the cap, the standards for reasonable conduct. So I think that's been a very -- they've come out very strongly in favor of that. Now we've just elected to contribute to the wildfire fund. So 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 the -- stool, rather, is the financing plan. And we believe that our financing plan aligns with the rating agency's published guidance around maintaining our financial risk profile.

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Pedro J. Pizarro, Edison International - President, CEO & Director [19]

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And Ali, if I could just follow on with Maria here. As we develop that plan that Maria emphasized, the fact that it is a 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 debt, et cetera. 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.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [20]

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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?

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Pedro J. Pizarro, Edison International - President, CEO & Director [21]

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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 for what we viewed as the low end of the estimable range of potential liabilities there. And I think as we've signaled all along, 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'd be [prepared] 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 reserve we took at the end of last year still make sense in terms of defining the lower end of the estimable range. And that will take some time to work through a complex set of proceedings there. There's a number of legal milestones, et cetera, from week to week or month to month, but nothing that we felt was to a level of materiality for these disclosures.

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Operator [22]

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Our next question is from Steve Fleishman from Wolfe Research.

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Steven Isaac Fleishman, Wolfe Research, LLC - MD & Senior Utilities Analyst [23]

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

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Pedro J. Pizarro, Edison International - President, CEO & Director [24]

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Sure. And yes, I think a number of you have heard us talk about the parallels to the energy crisis 2 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 had to go implement the law. There's a lot of building blocks or Lego blocks, however you want to think about it, that have to come together in place here. Now we need to -- 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 markers. There will be the creation of the wildfire safety division, initially inside the CPUC, and then later on being 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 could 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, that 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 the one -- it moved quickly, there are often cleanups that need to be made, sometimes they can be small, sometimes they can be a little less small, sometimes it's just clarification of a construction of language, and then other times there might be maybe more significant things. We're not ready at this point to enumerate a list of this, but we acknowledge that it is certainly very feasible that given the complexity and time involved here, there will be some [effects]. I don't know if that helps you, Steve, to frame your, the answer to the question.

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Steven Isaac Fleishman, Wolfe Research, LLC - MD & Senior Utilities Analyst [25]

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Yes. 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 stock market, we have very low interest rates and the like and your stock has bounced 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?

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Maria C. Rigatti, Edison International - Executive VP & CFO [26]

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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.

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Operator [27]

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Our next question is from Paul Fremont from Mizuho.

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Paul Basch Michael Fremont, Mizuho Securities USA LLC, Research Division - MD of Americas Research [28]

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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?

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Maria C. Rigatti, Edison International - Executive VP & CFO [29]

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You know, Paul, this is Maria. I think of that more as -- we do think that having an investment-grade rate -- that's a process we've just gone through over the past year or 2, obviously, we have a strong commitment to investment-grade 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, et cetera. So as we move through that, I think that -- keep in mind or 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 makes the metric itself, I think we'll be less specific about that and we'll just be focused on keeping that investment-grade rating solid.

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Paul Basch Michael Fremont, Mizuho Securities USA LLC, Research Division - MD of Americas Research [30]

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Okay. So you're not going to have like numerical targets that you're going to provide to investors?

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Maria C. Rigatti, Edison International - Executive VP & CFO [31]

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Not at this time. No.

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Paul Basch Michael Fremont, Mizuho Securities USA LLC, Research Division - MD of Americas Research [32]

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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 towards funding those cash needs?

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Maria C. Rigatti, Edison International - Executive VP & CFO [33]

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Maybe think about it in a couple or 3 different ways, First, there is 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 2021 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's a lot of things to take into the mix or into consideration in addition to the liabilities. The first part of the liabilities presumably get covered by insurance as a starting point in any event. So there is a lot of timing in there, there is 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.

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Pedro J. Pizarro, Edison International - President, CEO & Director [34]

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And I would just underscore that just those -- 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.

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Paul Basch Michael Fremont, Mizuho Securities USA LLC, Research Division - MD of Americas Research [35]

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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 need?

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Maria C. Rigatti, Edison International - Executive VP & CFO [36]

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This -- the 2019 plan is the one 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 to. 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.

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Operator [37]

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Our next question is from Angie Storozynski from Macquarie.

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Agnieszka Anna Storozynski, Macquarie Research - Head of US Utilities and Alternative Energy [38]

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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're 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 doesn't really talk about how this sum gets replenished. So how should we think about it? Is it that going forward, the goal is still to have some sort of a 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 is sufficient for all utilities and all future fires going forward?

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Pedro J. Pizarro, Edison International - President, CEO & Director [39]

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Yes, 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 billion 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 -- and 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 segregation 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 of competing interests. I think the governor probably said it pretty well when he gave his first -- he hosted a conference call that he gave when the strike force report came out. And if I recall correctly, he made a comment about everybody in California having to bear some share here in terms of dealing with this issue. So clearly, there's a piece that shareholders are now having to contribute, there's a piece that customers are contributing and there's a piece that through the 40% that's built in there, you're seeing a discount being applied to the recoveries that the insurers would get. So I think it's a piece here for everybody. So I think that's the starting point. And in fact, the government -- the 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 in 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 it will never be 0, will never be 0, but that risk profile should decrease, should improve significantly as all of us on the utilities side continue to put in investments to harden our infrastructure. And it's not just us. It's other measures that the state is developing and implementing around better funding for fire suppression, the focus on better standards for homes and businesses and buildings in high fire risk areas, the refinement of fire maps. Angie, all of these things are forest management, really important one, right? So this all goes to the decreasing the risk of the spark coming out, but if the spark comes out, then decreasing the risk that, 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 phase that has visibility that's out in hopefully a decade or so. And I'm sure the state will continue to check and adjust as it sees how that experience goes.

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Operator [40]

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Our next question is from Michael Lapides with Goldman and Sachs (sic) [Goldman Sachs].

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [41]

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Real quickly, is there a potential use of securitization to help cover the 2017 portion of the wildfire claims after insurance that you actually have to pay out?

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Maria C. Rigatti, Edison International - Executive VP & CFO [42]

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Yes. So the 2017 claims or wildfires are covered in SB 901. And there, in 2017, you can securitize to the benefit of the customer if there are amounts that have been disallowed, but they are viewed as being -- would undermine the utility's financial stability. The commission has gone through a proceeding to define how that would work and what the -- how you would calculate the piece that would be basically too much for the utility to bear. That calculation, I would say, is one that's probably not an example of perfect clarity, but it's also something that I don't -- I think at the end of the day, [you pointed out] don't find particularly useful. You may recall that we've said before that we did not think we would 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 to basically implement without a return, so our portion of the $5 billion that's in AB 1054, that is something that is able to be securitized.

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [43]

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

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Maria C. Rigatti, Edison International - Executive VP & CFO [44]

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That's right.

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [45]

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Right. Okay. Typical securitization bill, just like storm recovery occurs in other jurisdictions, et cetera?

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Maria C. Rigatti, Edison International - Executive VP & CFO [46]

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Yes.

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [47]

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Okay. The -- my second question is, what is not in rate base growth guidance that over the next 6 to 12, 6 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.

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Maria C. Rigatti, Edison International - Executive VP & CFO [48]

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Sure. So 6 to 12 months frankly, Michael, is a fairly short time frame. So you're not sure that this will be necessarily added even the next 6 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 -- 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 thereabouts. 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, the CAISO will develop a plan to bring -- to meet the new -- the higher renewable portfolio standards and we have an opportunity potentially to participate in that mix. But those are not 6 to 12 month issues. Those are longer-term issues.

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [49]

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Got it. Okay. And on the cost of capital pocket, what's the time line 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?

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Maria C. Rigatti, Edison International - Executive VP & CFO [50]

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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, a scoping memo and a schedule that has the decision coming out before year-end.

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Operator [51]

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Our next question is from Greg Gordon from Evercore.

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Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [52]

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Just a 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 you'll recover at a cost of debt return on 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 the capital? Or did I hear differently that essentially it would be sleeved and it would have no impact at all?

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Maria C. Rigatti, Edison International - Executive VP & CFO [53]

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

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Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [54]

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Okay. So you'll get a recovery, you'll get essentially be 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?

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Maria C. Rigatti, Edison International - Executive VP & CFO [55]

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That's right.

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Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [56]

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Right. 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, 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 a -- 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 ratemaking purposes. I'm sitting here trying to model this stuff, frankly, and I'm just -- I -- we could use some guidance.

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Maria C. Rigatti, Edison International - Executive VP & CFO [57]

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Yes. So we're still evaluating the accounting for it, Greg, to be quite honest. It could be a charge but -- and it certainly wouldn't be more than the amount of the contribution. But we're actually frankly still working through that and 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.

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Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [58]

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Okay. So if I'm looking to do side-by-side a 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?

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Maria C. Rigatti, Edison International - Executive VP & CFO [59]

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That's correct. Correct.

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Operator [60]

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Our next question is from Travis Miller from MorningStar.

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Travis Miller, Morningstar Inc., Research Division - Director of Utilities Research and Strategist [61]

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Just wondering how you think, real quick, about the dividends with respect to any kind of equity needs. Where does that fit in?

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Maria C. Rigatti, Edison International - Executive VP & CFO [62]

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I think we understand the importance of the dividend to our shareholders, no question. Obviously, from prior quarters when the dividend question was couched in a 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.

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Travis Miller, Morningstar Inc., Research Division - Director of Utilities Research and Strategist [63]

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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?

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Pedro J. Pizarro, Edison International - President, CEO & Director [64]

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Travis, I think 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. To be honest with you, we're still absorbing that quickly and evaluating that. And I believe we have a deadline coming up of August 1 for filing our comments in the cost of capital proceeding with CPUC.

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Operator [65]

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

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Sam Ramraj, Edison International - VP of IR [66]

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Yes. 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.

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Operator [67]

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That concludes today's conference meeting. You may disconnect at this time.