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Edited Transcript of EIX earnings conference call or presentation 1-May-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Edison International Earnings Call

Rosemead Jun 15, 2017 (Thomson StreetEvents) -- Edited Transcript of Edison International earnings conference call or presentation Monday, May 1, 2017 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 - CEO, President and Director

* Ronald Owen Nichols

Edison International - President of Southern California Edison

* Scott S. Cunningham

Edison International - VP of IR

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Conference Call Participants

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* Ali Agha

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Angieszka Anna Storozynski

Macquarie Research - Head of US Utilities and Alternative Energy

* Gregory Harmon Gordon

Evercore ISI, Research Division - Senior MD, Head of Power and Utilities Research and Fundamental Research Analyst

* Jonathan Philip Arnold

Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst

* Julien Patrick Dumoulin-Smith

UBS Investment Bank, Research Division - Former Executive Director of Equity Research for Electric Utilities, Alternate Energy & IPPs Group

* 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

* Shahriar Pourreza

Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst

* Steven I. Fleishman

Wolfe Research, LLC - MD and 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 First Quarter 2017 Financial Teleconference. My name is Princess, 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. Scott Cunningham, Vice President of Investor Relations. Mr. Cunningham, you may begin your conference.

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Scott S. Cunningham, Edison International - VP of IR [2]

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Thanks very much, and good afternoon, 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, Pedro's and Maria's prepared remarks and the teleconference presentation. Next week, we'll 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'll now turn the call over to Pedro.

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

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Thanks, Scott, and good afternoon, everyone. Edison International was off to a solid start in 2017. Today, we reported strong first quarter earnings of $1.11 per share compared to $0.85 per share a year ago. It is early in the year, so for now, we have left our full year guidance unchanged since our normal practice is to wait until more of the year has gone by before formally updating guidance. At the same time, we recognize there is a bias toward the upper half of the range. Maria will cover this in detail in her remarks.

My comments today focus on Southern California Edison's long-term growth opportunity. I'll start with the SCE 2018 General Rate Case. SCE's filing outlined a continued focus on infrastructure reliability investment. It also proposed the first elements of a multiyear grid modernization initiative, one that will be a key enabler of California's ambitious climate change policies, as well as supporting improved system reliability and public safety.

As I have said before, California has only 13 years to reduce greenhouse gas emissions 40% below 1990 levels. Policymakers have identified a robust, modernized electric grid as a critical element in the effort to achieve significant GHG reductions. The CPUC will set SCE's initial pace for grid modernization in its GRC decision.

Agreeing on the right pace for grid modernization will be a key topic in the GRC process as we saw 2 weeks ago. In testimony submitted by the Office of Ratepayer Advocates, or ORA, they recommended 0 capital spending for this key enabler of climate and clean air policy. This is contrary to the CPUC's stated goal of completing grid modernization by 2025, and we don't believe it's consistent with California's climate policy objectives. Testimony from other intervenors is due tomorrow. We will respond to all intervenor testimony on June 16. We will reiterate the strong case we believe we have made for these investments in our GRC filing.

In terms of rate base, ORA's overall capital spending recommendations would still yield annual rate base growth of 6.6% to 2020, above the industry average, compared to our request case of 8.6% average annual growth. This includes ORA's acceptance of about 90% of our nongrid modernization capital spending recommendations. Once we have testimony from other intervenors, we will provide an update to reflect the overall picture of intervenor positions as it relates to capital spending and rate base and any other major new issues. You'll hear more from us on this topic in our main business update investor presentation.

Transmission is another important element of SCE's growth opportunity. SCE is extending and strengthening its system to a number of major projects. The paths to permitting and constructing these projects are complex, but the benefits the system reliability and greenhouse gas emissions reductions cannot be understated. This is especially important as we look ahead to the retirement of a number of gas-fired power plants owned by third parties. These are located along the coast many in our service territory. These plants have to shut down or repower due to the future prohibition on the use of once-through cooling water. Most of them have to shut down by the end of this decade.

Other projects will enable increased access to renewable energy resources. These are necessary to meet our 33% renewables target by 2020. It is particularly important to avoid regulatory delays on these and future transmission projects. These projects are foundational if we are to add new sources of low-carbon renewable energy to the grid as soon as possible.

On April 12, we launched the first in our planned Edison Insights teleconferences. The topics were California's climate change policies and transportation electrification. I won't repeat the details of the call, but for those of you who could not participate, let me summarize a few key points.

First, we provided more context for the potential $1 billion multiyear investment opportunity not currently included in our capital forecast. Most of this relates to transportational electrification. Given the broader discussion on the April 12 call, we see even more to be done in the next decade.

The day after our Edison Insights call, the CPUC issued its scoping ruling on the utility transportation electrification filings. The CPUC is targeting decisions in our pilot project proposals in October of this year and on our much larger medium- and heavy-duty vehicle charging proposal in April of next year. These proposals represent a total potential investment of $574 million, almost all it, capital spending and rate base opportunity.

On our April 12 call, we indicated we'll likely file a request for the second phase of our SCE Charge Ready program in the spring of next year. We will continue to target the balance of the 30,000 commercial charging systems in this phase. Now 30,000 is roughly 1/3 of the 100,000 systems SCE estimated would be needed to achieve the SCE service territory share of California's 1.5 million electric vehicle target by 2025. Our early cost estimate for these 30,000 charging systems was about $225 million. We will leverage the experience from our current pilot program in estimating average per unit capital costs for this filing.

A second key discussion point was a potential need for significantly more commercial charging infrastructure longer term. This is based on the California Air Resources Board's, or CARB's, recently published targets for 0 emission vehicles. CARB's January 2017 recommendation calls for 4.2 million 0 emission vehicles to be on the road by 2030. This goes well beyond the 2025 target I mentioned.

SCE estimates that 1.9 million of these could be in our service territory and could require as many as 220,000 commercial charging systems. In fact, as we analyze other alternative scenarios, we can see the potential need to double CARB's target of 4.2 million 0 emission vehicles on the road by 2030 to meet California's GHG reduction and air quality targets in a more cost-effective way. The application we expect to file next year for the balance of the 30,000 charging systems will likely be followed by filings for significant additional investment in charging infrastructure in the next decade.

Our sense is that there will be policy support for having SCE make much of the necessarily infrastructure investments. We see our main role as owning the electrical infrastructure up to the charging station but typically not the charging station itself. And we believe there is good support for this general split of responsibilities.

We will continue the conversation about our long-term growth opportunities. Our next Edison Insights teleconference will be this summer. It will focus on the long-term outlook for the distribution system. We will put grid modernization and infrastructure reliability into a longer-term context.

There are 2 other topics I'd like to cover now. The first is the cost of capital settlement among the 3 investor-owned utilities and 2 key consumer advocate groups, ORA and TURN, covering the 2018 to 2019 period. Last week, the CPUC withdrew the proposed decision recommending settlement approval and 2 new administrative law judges were co-assigned to the proceeding. The next step will be to issue a revised or new proposed decision, but the CPUC has not yet provided information on timing or on reasons for these extra steps. We continue to believe the settlement is full and fair, and given that there have been no comments from other parties on the settlement, we expect it will eventually be approved.

The last item is the status of the SONGS regulatory proceeding. We were disappointed to receive the news in March that the International Chamber of Commerce, or ICC, arbitration tribunal found that while MHI was responsible for the defective design of the SONGS replacement steam generators, the contractual limit of liability capped MHI's obligations. This came in an unusual 2-1 decision. We understand these are normally unanimous decisions. The SONGS owners were awarded damages capped at the $137 million contract limit. Given the limited grounds to appeal an ICC arbitration award, SCE and the other owners have decided not to appeal the tribunal's decision. As we have mentioned before, as soon as a decision has been redacted for proprietary information, we will make it publicly available. As we expected, the majority of redactions have been requested by MHI.

The next steps in the CPUC-ordered meet-and-confer process will be additional meetings to be held over 3 days in June under the auspices of a mediator, the Honorable Layn Phillips. He is a former U.S. attorney and U.S. District Court judge and is a leading alternative dispute resolution mediator. Reflecting this new schedule, the SONGS owners and most of the parties to the meet-and-confer process filed the request last week with the CPUC to extend the deadline to report on the status of the meet-and-confer process out to August 15. We are taking the meet-and-confer process very seriously, and we will engage fully and in good faith with the parties in the upcoming mediation.

In time, given our strong conviction that the existing settlement is fair and reasonable and that the late notice ex parte discussion between a former CPUC president and a former SCE executive add 0 impact on the 10 months of negotiations among the settlement parties. We are prepared to return to litigation if the meet-and-confer process is ultimately not successful and the CPUC takes that step.

Whatever the path to ultimately resolving the SONGS matter, we are committed to doing our part to do this as expeditiously as possible so that we, the other parties and the CPUC and its staff, can focus our collective time and resources on the other important topics we have at hand, investing in a safe and reliable grid, modernizing the grid to support customers' choices of distributed resources and using the grid to decarbonize our economy and clean our air are the major opportunities that the people of California are depending on all of us together to get right for our state's future.

Well, before I turn it over to Maria, I have just one additional set of comments and it's bittersweet. After 10 years with Edison International, Scott Cunningham will be retiring at the end of June so this will be our last earnings call together. We expect to be able to name Scott's replacement very soon, but that individual is going to have some very large shoes to fill.

Scott has been an outstanding leader on our team and we will all miss him, although we know that he and his wife [Kathy] have great plans for many happy years ahead together. Even before joining EIX, Scott has a diverse career in Investor Relations at AES and also at Praxair, where he established their IR program. Scott's 20-year career at Praxair, which had just been spun off from Union Carbide Corporation, included leadership roles in corporate strategic planning, business development and marketing and finance. You all might not know that Scott began his career in research and water quality programs at the U.S. Department of Interior and the U.S. Environmental Protection Agency.

It is so hard to imagine Investor Relations here at Edison without Scott. He built our program into something truly special. While I and the rest of our team just think the world of him, frankly, the report card that matters the most is that from our investors. And by all measures, you have also given him an A+ in your informal comments and in more formal ratings.

Most recently, Institutional Investor magazine placed Scott on the 2017 All-America Executive Team as the #2 ranked IR professional in our industry and has recognized Scott in the top ranking for several years. Scott's expertise is undeniable, but his contributions can't be captured just by numbers. And saying that Scott is an expert Investor Relations professional doesn't even begin to express what he has meant to us. Scott combined integrity, intellectual curiosity and deep knowledge of our company's strategy and disclosures with a true commitment to transparent and effective communications for our investors. Scott has also been a wonderful coach and mentor to many within our organization. He has served on the Board of Trustees at the California Science Center on the company's behalf, and it's a fun one, he was involved in bringing the space shuttle Endeavour to the Science Center as well as supporting the California Science Center Foundation's educational programs.

On top of it all, and I can say this after having spent many weeks on the road with Scott to visit with many of you, I can confirm that Scott met the ultimate test. He is still fun to be with even when you're stuck together in yet another airport after yet another flight cancellation. We wish Scott and Kathy all the best in their new adventures, but we all are and especially I am so very sorry to see him retire.

Scott, thank you so much for your outstanding leadership and friendship. You are just simply the best, my friend. With that, I'll turn the call over to Maria.

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

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Thanks, Pedro, and I just want to echo those comments. We deeply appreciate Scott's contributions to the company. He's a wonderful colleague and thought partner and has been an integral part of our team for the past 10 years. We will miss his expertise and counsel tremendously. We know however that the friendship will continue. Thank you, Scott.

This afternoon, I'll now cover our first quarter results, our reaffirmed guidance and a few other financial topics. Please turn to Page 2 of the presentation.

First quarter results reflect strong SCE operating performance so let's begin by looking at the key SCE earnings drivers shown on the right of the slide. Higher revenues reflect the normal attrition mechanism in SCE's current General Rate Case. As a reminder, increases in revenues are authorized by the CPUC in the second and third year of each rate case cycle. These increases essentially anticipate standard cost growth for operations and maintenance expenses, depreciation, taxes and other items. The mechanism also provides our rate base earnings for capital additions in that second and third year. Higher revenues contributed a positive $0.12 per share variance compared to last year's first quarter.

SCE continues to implement various operational and service excellence initiatives and O&M was lower in the quarter contributing $0.06 per share to the higher earnings. I would note that some of this can be related to timing of various activities and is not necessarily indicative of a trend line for the full year.

Higher depreciation is to be expected since it's a partial offset to the higher authorized revenues related to SCE's major capital spending program. Depreciation is a $0.04 per share negative variance in the quarter. Net financing costs were also higher by $0.03 per share mainly due to increased borrowings to finance our capital program.

Income tax benefits contributed $0.06 per share. This includes $0.03 per share related to the settlement of all open tax positions with the IRS for taxable years 2007 through 2012. This settlement benefit was included in our 2017 earnings guidance. The balance of the tax items relate to smaller factors such as tax benefits related to cost of removal and depreciation. Taken together, this gets us to an overall SCE earnings increase of $0.17 per share.

One item not included in the quarterly results is the MHI arbitration award we received last month. Although SCE was awarded $47 million net as its share of the award, the legal costs we incurred are subject to a reasonableness review by the CPUC. We thought it prudent to offset the gain with the regulatory liability to reflect the uncertainties around the disposition of this award. This is consistent with our approach to guidance, which do not assume any financial recovery in the arbitration.

At the Edison International holding company, we include traditional holding company costs and competitive business activities, including Edison Energy Group. For the quarter, the holding company recorded $0.04 per share of earnings compared to a loss of $0.05 per share last year. This is mainly driven by $0.10 per share of higher tax benefits on stock option exercises. On a consolidated basis, we had $0.13 of tax benefits from stock option exercises this quarter in comparison to $0.03 last year. Our guidance assumed $0.02 of benefit based on exercises through the end of January. In February and March, we saw additional benefits from further stock option exercises. Edison Energy Group results were consistent with our full year guidance assumptions but not a driver of quarterly earnings variance.

As a reminder, as a result of our 2016 adoption of the new FASB accounting rules on share-based payments, comparisons with the first quarter of 2016 are on an adjusted basis. Previously, we had reported $0.82 per share of core earnings in the first quarter of 2016. This is now $0.85 per share as adjusted. We presented this adjustment of the quarterly results in our 10-K and our February business update. The same quarterly earnings schedule is again included in the presentation appendix. Now please turn to Page 3.

We recognize we had strong first quarter performance, in part driven by tax benefits from stock option exercises above what was in our original guidance. Our normal practice is to consider updating guidance later in the year, and we have reaffirmed our core earnings guidance at a midpoint of $4.14 per share with the range unchanged as well, although we acknowledge the upward bias that Pedro already mentioned.

Our principal key assumptions, including SCE authorized rate base, remain unchanged. We've noted that we had $0.13 per share in tax benefits related to stock option exercises compared to the $0.02 per share in our original guidance. As noted earlier, we have not included the MHI arbitration award in our guidance or any outcomes from the current meet-and-confer process related to the SONGS settlement.

Pedro commented on the key elements of ORA's testimony related to the 2018 SCE General Rate Case that are most relevant to investors. Page 4 shows the details. While most of the issues that ORA raised our consistent with those raised in their testimony in the last rate case, grid modernization is perhaps the most important new topic as expected. The bottom of the slide shows how our capital spending and rate base forecast would be impacted if the CPUC were to adopt ORA's recommendations. Note that ORA's written testimony does not provide 2019 and 2020 capital spending estimates. It does provide forecast of rate base.

Please turn to Page 5. We have reaffirmed our prior capital spending and rate base forecast for the 2018 through 2020 GRC period based on our request. Recall that CPUC rate base earnings are derived from authorized rate base and is not adjusted in the same year if there are capital spending variances but trued up in future periods. Also, what we call rate base math is derived from authorized average annual rate base. I mention this only because SCE could see 2017 capital expenditures ending up at $4 billion rather than $4.2 billion.

This would generally reflect the lack of approval of a grid modernization memorandum account and minor delays in start of construction for the $608 million Mesa substation project. This would not be a factor in 2017, but could result in an adjustment of CPUC 2018 rate base, which is still subject to GRC approval.

Longer term, we continue to see a base case with SCE investing at least $4 billion per year and adding at least $2 billion per year of rate base for the foreseeable future as SCE continues to implement its wires-focused business strategy.

For the Mesa substation project, SCE has extended its construction completion schedule by 6 months, from the fall of 2021 to the spring of 2022, to better reflect preconstruction requirements and seasonal considerations affecting the start of construction. This had only a minor impact on the profile of construction expenditures. This update came out of a project scheduling review process that SCE is undertaking for all of its major construction projects. We want our forecasting to be as consistent as possible across all of these projects given our recent experience with the regulatory delays.

We were pleased to see constructive developments recently on 2 other transmission projects. The CPUC denied ORA's appeal of its decision approving the $1.1 billion West of Devers project on March 23. On April 7, SCE received the final environmental impact review for its $397 million Alberhill System. This review accepted SCE's recommended project scope. Final CPUC approval will still be required. Details in our capital spending, rate base and transmission projects are included in the presentation appendix.

We continue to see no need to issue equity to support SCE's capital spending program. We also continue to target no dilution from benefit plans or stock purchase plans. In the first quarter, we bought common stock in the market to offset potential dilution from employee benefit plans at a net cost of $139 million.

SCE continues to maintain a strong balance sheet and significant financial flexibility. SCE had no short-term debt outstanding at the end of the quarter and the weighted average common equity component of total capitalization is unchanged from year-end at 50.4%.

The Edison International holding company remains only modestly leveraged. We termed out more than half of the holding company commercial paper balance in March with a $400 million 2.125% senior note due in 2020. We continue to maintain what we believe is a prudently conservative balance sheet at both SCE and at the holding company.

That concludes my remarks. Princess, please let's start the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Ali Agha from SunTrust.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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Scott, congratulations and for a job extremely well done and wishing you all the best as well.

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Scott S. Cunningham, Edison International - VP of IR [3]

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Thanks very much, Ali.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [4]

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First question, Maria, for modeling purposes, what effective tax rate should we assume for EIX for the year? And how should we think about that book tax rate going forward as well?

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Maria C. Rigatti, Edison International - Executive VP & CFO [5]

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We usually think about effective tax rate at SCE about 20% and then a percentage or 2 lower at EIX so that really should be how you're thinking for the next several years.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [6]

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Okay. And that would factor in this year as well given the tax benefits that you booked?

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Maria C. Rigatti, Edison International - Executive VP & CFO [7]

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Yes, I would use those assumptions, starting with this year, yes.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [8]

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Okay. And then on the SONGS process, given the new date, you've talked about extending it to August 15, assuming things fall into place, et cetera, what's the earliest, you believe, you could reach a final conclusion on that issue?

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Pedro J. Pizarro, Edison International - CEO, President and Director [9]

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Ali, it's Pedro. I don't think we're in a position to speculate on timing. What we've done is we've provided visibility to the 3 sessions that are coming up in June, but just don't want to speculate or presume that we get resolution to these 3 sessions, to 1 or 2 of them, to the parties decide to go into more sessions, to the parties decide that mediation is not going to work out. So just want to stick to the time lines we've given it and not speculate further. I hope you appreciate that.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [10]

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Okay. Last question, Pedro, given the ORA's position on the GRC and I know others will be filing tomorrow as well, do you still believe there is a possibility to reach a settlement on this rate case? Or do you think it's going to be fully litigated most likely?

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Pedro J. Pizarro, Edison International - CEO, President and Director [11]

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Again, I'm not going to be able to give you any sort of quantification of probabilities left or right on that. I think what we said before and what we reaffirm now is we're certainly open to that. The PUC staff have set a schedule for the first set of settlement discussions. So we'll take it seriously and see how it goes. So now, certainly intellectually open to that but not in a place where we can give you probability in either direction.

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Operator [12]

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Our next question comes from Julien Dumoulin-Smith from UBS.

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Julien Patrick Dumoulin-Smith, UBS Investment Bank, Research Division - Former Executive Director of Equity Research for Electric Utilities, Alternate Energy & IPPs Group [13]

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Well, first off, congratulations, Scott, I really appreciate everything you've always done for us and the team. It really means a lot. So with that said, I'll just kick off a couple basic questions. First, in terms of SONGS, just to set the expectation, could you see a further extention? Or is there actually a drop dead time line? And then the second unrelated question but going back to what Sempra was talking about, on the safety related CapEx, they're talking about the ramp. Is there any potential to see any of that flow into your CapEx perhaps not necessarily in the current instance but perhaps future rate cases? I've just been curious how you think about embedding more of that safety culture?

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Pedro J. Pizarro, Edison International - CEO, President and Director [14]

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All right, Julien, let me start with the SONGS piece and turn it over to Maria or Ron Nichols for the ramp question. On the SONGS piece, yes, similar to the answer I gave Ali, don't really want to speculate on where this may go. I think answering your question head on, I think anything is possible, parties could decide that they want to continue discussions. I'm not aware of a -- I don't think it's a predetermined drop dead date or what have you. So I think we'll leave it fairly open at this point and see where it goes. Let me turn over to Maria on the ramp question.

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

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So, Julien, we actually will file for our 2021 GRC. We will file a similar filing next year as part of the process as it is unfolding. I think from a safety culture perspective, we actually already look at all of our capital from -- through a safety lens and are determining all the time with or without the ramp whether or not we are appropriately addressing all the safety concerns and the safety needs of the company. So I would say you'll continue to see us have that focus on infrastructure replacement, which has both the safety aspect to it as well as the reliability aspect to it.

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Julien Patrick Dumoulin-Smith, UBS Investment Bank, Research Division - Former Executive Director of Equity Research for Electric Utilities, Alternate Energy & IPPs Group [16]

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Great. And then lastly, I hate to bug you on this again, breakeven on Edison Energy, can you even talk about that for '18 yet or anything? I know that was a third quarter subject.

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Pedro J. Pizarro, Edison International - CEO, President and Director [17]

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So we're still -- same comments that we made last time around. We've given folks visibility into the cost for 2017, $0.25 guidance at the total holding company level, $0.08 of that is at Edison Energy, and then we will be coming back sometime in the fall with comments on the broader business plan, and that we do expect to be able to provide some insights on at what point we would get the business to -- or expect to get the business to breakeven. So nothing new to report there yet. Look forward to chatting about it in the fall, Julien.

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Operator [18]

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Our next question comes from Jonathan Arnold from Deutsche Bank.

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Jonathan Philip Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [19]

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And congratulations, Scott, and thank you for all your help over the years as well. So the -- I just wanted to ask about the cost of capital situation and to make sure we understand the process, and there was some comments made at the commission meeting on Thursday about the, I think, the ex parte being no longer in effect because the item was withdrawn from the agenda. Does that mean that your people can start to engage with the commission and figure out where they are headed with this, but you just don't have anything to share with us yet? Or you may choose not to anyway, I would guess? Am I understanding that right?

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Ronald Owen Nichols, Edison International - President of Southern California Edison [20]

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Yes, Jonathan. This is Ron Nichols. We -- they have open back up so we can request those meetings.

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Jonathan Philip Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [21]

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Are they the sort of meetings you'd have to disclose or would they not be ex parte meetings effectively if ex parte is not in effect?

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Ronald Owen Nichols, Edison International - President of Southern California Edison [22]

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No, they will still be ex parte. It was a total ex parte ban for that period. They've lifted the ban but they would still be reported meetings.

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Jonathan Philip Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [23]

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Okay, so we might see some indication of you guys going in there or whatever before we hear what actually happening?

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Ronald Owen Nichols, Edison International - President of Southern California Edison [24]

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Possible.

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Jonathan Philip Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [25]

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Okay. That was one. And then I was also curious on what you said about the tax in February and March. You said you'd seen continued benefits. Are those similar in size to what you saw in the first quarter? Or you're just letting us know there's a little tail that carries on?

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

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No, actually all of the benefits from the exercise of stock options are now in the results for the first quarter. So that reference to the $0.10 variance and the $0.13 for the entire company on a consolidated basis that takes into account all of those exercises through March.

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Jonathan Philip Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [27]

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So what you're really telling us if you have roughly $0.10 of exercises over and above guidance this -- for the front end of this year and...

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Maria C. Rigatti, Edison International - Executive VP & CFO [28]

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That's correct. We had $0.02 embedded in our guidance.

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Jonathan Philip Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [29]

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Okay, and was that -- that $0.02 would typically mostly show up in Q1, right?

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Maria C. Rigatti, Edison International - Executive VP & CFO [30]

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Well, actually, when we included it in guidance, in the original guidance, it was on the basis of option exercises that had already occurred, so they were in Q1, we knew about them.

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Jonathan Philip Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [31]

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Okay. So it's not impossible you'd have more going through the year, but what you have so far is roughly $0.10?

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Maria C. Rigatti, Edison International - Executive VP & CFO [32]

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Right, it's always you can't really predict when people will exercise so that's what we have through the end of March.

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Jonathan Philip Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [33]

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Okay, and then could I just go back to the -- I think I just heard you say that we should be using 20% as an effective tax rate? Is that just a 2017 comments or does that go beyond?

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Maria C. Rigatti, Edison International - Executive VP & CFO [34]

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No, that's the next couple of years.

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Jonathan Philip Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [35]

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Yes, versus what was your -- is that what you have in the rate case filing as well or...

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

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The rate case filing is just a little bit more complicated just because there's a lot of puts and takes when you get into the [RO] model, but from a forecasting perspective, that's an appropriate number.

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Jonathan Philip Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [37]

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Okay. And is this the primary reason for the difference with statutory rate?

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Maria C. Rigatti, Edison International - Executive VP & CFO [38]

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I'm sorry, could you say that again, Jonathan?

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Jonathan Philip Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [39]

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What's the big picture reason for that difference with a more of a normal rate?

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Maria C. Rigatti, Edison International - Executive VP & CFO [40]

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Well, the biggest reason is really the property-related deductions, so the float -- tax repay deductions, bonus, et cetera.

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Operator [41]

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Next in queue we have Mr. Michael Lapides from Goldman Sachs.

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [42]

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Quick question, if I go back to the last rate case or 2, when the final outcome came from the CPUC, were the ending revenue requirement in rate base assumptions, were they generally kind of closer to what your request was? Or were they kind of closer to what the ORA testimony implied?

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Maria C. Rigatti, Edison International - Executive VP & CFO [43]

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Over the last few rate cases, I think you know the percentage of the CapEx that was authorized was, say, between approaching 92% in the last rate case, high 80s in the one prior to that. I think you often do see some give and take over the cost -- course of the litigation of the preceding so that where people first start in terms of their testimony when they're intervening may not be where we end up. But it's hard to say this is a new proceeding from that perspective of we've added the grid modernization expenditures. And so we'll have to see how that turns out. It's one of the reasons why we didn't provide more boundaries around the outcomes as we have in the past simply because it's a new type of investment or a different approach that we think people will review the testimony on.

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [44]

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Got it. And -- but if I look at their testimony, their testimony actually had a little bit lower rate of return in it, just 7.2% versus the 7.9%. I'm sorry, maybe the other way around. I'm just curious why those things would be different. I would think both the ORA and SoCalEd would be using the same assumed rate of return in the testimony?

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Maria C. Rigatti, Edison International - Executive VP & CFO [45]

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We definitely would be using the same assumed rate of returns testimony. We base on our authorized rate of return. They may have some differences just from modeling issues or they may have adjusted some things due to, for example, things like customer deposits. So when you do the math through, it looks like a different calculated number. But I think the going in assumption on ROEs and cost of debt, et cetera, would be the same.

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [46]

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Got it. And finally, just real quick. I think the difference in rate base was about $700 million for 2018. How much of that was grid mod versus other items?

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Maria C. Rigatti, Edison International - Executive VP & CFO [47]

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It was really all generally related to grid mod. It's related to both the portions related to the '18 spend, but there was also a '17 spend that we had, sort of the pre-test year spend on grid mod that also affects that number.

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Operator [48]

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Our next question comes from Steve Fleishman.

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Steven I. Fleishman, Wolfe Research, LLC - MD and Senior Utilities Analyst [49]

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Just at the end of the -- your comments on cost of capital, you did say that you expect it will eventually be -- the settlement will eventually be approved, and I just wanted...

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Pedro J. Pizarro, Edison International - CEO, President and Director [50]

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Yes, as I said in my comments, again, we view the settlement as a very fair one, TURN, ORA, the utilities all agreed to it. And importantly, there were simply no comments from anybody else in the proceeding. So there was no stated opposition to it.

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Steven I. Fleishman, Wolfe Research, LLC - MD and Senior Utilities Analyst [51]

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Okay. So even though you don't know exactly why the delay, there's nothing that would indicate any issues with the settlement?

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Pedro J. Pizarro, Edison International - CEO, President and Director [52]

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We're not aware of anything. Of course, as I also said in my comments, I don't think the PUC has made any public statements about the reason for the withdrawal of the [PDE] or what the timing will be for next step sale. We are staying tuned in that regard.

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Operator [53]

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For our next question, we have Mr. Greg Gordon from Evercore ISI.

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Gregory Harmon Gordon, Evercore ISI, Research Division - Senior MD, Head of Power and Utilities Research and Fundamental Research Analyst [54]

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I just want to be clear when you gave the guidance on the effective tax rate, when we think about rate base math, because a lot of the benefits that you're experiencing that lower the effective tax rate are ultimately put in the balancing account and refunded to customers. We should still think about the right after-tax ROE assumption for the fiscal year for SCE still being at or around your cost of capital plus or minus incentive revenues, right? This isn't going to somehow allow you to, from a tax rate perspective, earn an excess of the authorized return?

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

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Absolutely correct, yes.

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Gregory Harmon Gordon, Evercore ISI, Research Division - Senior MD, Head of Power and Utilities Research and Fundamental Research Analyst [56]

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Okay. And your guidance on earnings per share at the parent as articulated also contemplated that tax rate?

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

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Yes.

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Operator [58]

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Next in queue we have Mr. Praful Mehta from Citigroup.

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Praful Mehta, Citigroup Inc, Research Division - Director [59]

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So quickly, on O&M savings, just want to understand the $0.06 O&M savings this quarter. How do you track that for the full year? And then going forward, given the GRC cycle, how should we think about O&M over the next GRC cycle?

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Maria C. Rigatti, Edison International - Executive VP & CFO [60]

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So I think you probably know that we're always working on reducing O&M cost, affordability operational and service excellence. They're really key components of our strategy because we need to manage customer rates over the long term. So we're always going to be looking for those improvements. When we get to the beginning of the next rate case cycle, things that we've accumulated over time, we're going to return to the customer. But because we have to always be working in order to get them, you'll kind of can see that happening periodically up until the point and get to the rate case and then again after that, we'll continue that work. When I mentioned the $0.06 quarter-over-quarter change in O&M this quarter, that obviously reflects a lot of our operational and service excellence initiatives. I was just noting that not to extrapolate that to a trend line for the year necessarily because you can have timing of initiatives that vary year-over-year. Sometimes work happens in the latter half of the year as opposed to the beginning of the year. But we have embedded in the guidance that we've have given that $0.31 of combined efficiencies and financing benefits and so that's kind of where I think that would land at this point.

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Pedro J. Pizarro, Edison International - CEO, President and Director [61]

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And simply an accent on that, when you think about Kevin Payne and the team at SCE at any point in time, I have a dozen or more different individual projects going on in areas of opportunity, so that adds to the rationale behind Maria's point about this is not a simple linear process. There's real work underlying it with implementation steps that had to be taken.

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Praful Mehta, Citigroup Inc, Research Division - Director [62]

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Got you. That's helpful color. And then just secondly, wanted to just understand a little bit on the strategic side. There still seems to be potential M&A opportunities that can come up at the utility level, for example, in Texas. Wanted to understand how you're thinking broadly about M&A, and if there would be any interest if any opportunities come up?

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Pedro J. Pizarro, Edison International - CEO, President and Director [63]

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Yes, thanks, Praful. I'll take this one and I think you'll hear a repeat of the comments I made in prior earnings calls. General comment with Mr. Cunningham sitting here next to me, usually reminds me of that, but we don't comment on M&A. And then my goal further and just say that as we look at the environment, it is an environment where we are fortunate that we have the strong organic growth opportunity that we do at SCE. Some, not all, but some of the transactions that we've seen out there have been expensive acquisitions done by folks that don't enjoy the same sort of organic growth opportunity. So we don't feel any pressure to go pay the heavy premiums that you're seeing in the current market in order to go chase further growth. That said, you never say never. Always remain open to understanding the landscape but you'd have to be at a value point that is different from what we've seen in the market recently. And finally, if you ever see us do a transaction, it will be very well considered in terms of not only the valuation aspects but the actual real work behind the transaction, which is the integration aspects. That's where you see a lot of deals go south. And when you actually get real people and real teams together and have to merge companies and having done some of that, in my days as a consultant, we know it's very hard work.

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Praful Mehta, Citigroup Inc, Research Division - Director [64]

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Got you. And just finally one quick clarification. I know the electrification call was very helpful and you talked about the opportunity there but what does that mean for gas generators given there was an earnings call from an IPP talking about RMR contracts? How do you see that playing out? And is there a need to have some gas around, I guess?

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Pedro J. Pizarro, Edison International - CEO, President and Director [65]

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Really quick answer and Kevin Payne or Ron Nichols may elaborate more. Thinking of the reality in our current California market is that this resource stack includes gas, gas is needed, and I think I've even said in prior comments that we need to make sure that the market pricing structures are fair to all the parties involved. And we're certainly seeing the pinched gas generators are feeling. That said, over the longer term, as we see the state continue to move towards 40% greenhouse gas reductions by 2030 and 80% by 2050, we do expect that the amount of gas in the system will continue to be squeezed down if the state is really going to make this greenhouse gas reduction and air quality targets. Kevin or Ron, anything you guys would add to that or...

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Ronald Owen Nichols, Edison International - President of Southern California Edison [66]

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Well, I'll just add to that, that we do see a need for gas but you're going to see more of it just being peakers and very flexible generation to be able to meet the ramps that we see as we increase more and more renewables, but it will be there, likely burning less fuel over time.

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Pedro J. Pizarro, Edison International - CEO, President and Director [67]

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Just on that point, you may have seen we, I think we talked publicly about couple of projects we did at 2 of our utility-owned peaker, so we integrated 10 megawatts of battery storage into each of those 50-megawatt peaker projects. And to Ron's point, that's the kind of flexibility that's needed because more and more gas isn't about meeting peak demand, it's about meeting the ramps and the much more volatile California system.

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Operator [68]

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Our next question is from Angie Storozynski from Macquarie.

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Angieszka Anna Storozynski, Macquarie Research - Head of US Utilities and Alternative Energy [69]

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Just a couple of small questions. So on the MHI reversal of legal costs, I understand that you haven't recorded it yet. But could you quantify it? Assuming the current allocation of the award, would it be about $0.09?

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Maria C. Rigatti, Edison International - Executive VP & CFO [70]

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So yes, so we had about $79 million of legal expenses that we, in total, a portion of which we had already recovered, and so the remaining amount would be about $0.09. We've mentioned in the fourth quarter call that to the extent we realize that, that would be a core item.

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Angieszka Anna Storozynski, Macquarie Research - Head of US Utilities and Alternative Energy [71]

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Okay, and so that would be trued up along with the update to your guidance on the second quarter earnings call, correct?

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Maria C. Rigatti, Edison International - Executive VP & CFO [72]

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I think we'll still be looking at the status of whether or not the CPUC has determined reasonableness before that -- before we do that.

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Angieszka Anna Storozynski, Macquarie Research - Head of US Utilities and Alternative Energy [73]

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Okay. And then on the transmission ROE, I mean, I'm actually looking at the slide here, can you tell me if this 10.5% on the transmission ROE, I mean, is it still subject to the FERC quorum? What are we waiting for there?

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Maria C. Rigatti, Edison International - Executive VP & CFO [74]

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So that's our 2017 ROE. We're going to file later this year for 2018. So the 2017 number has already been fully litigated and negotiated. We'd have to go back at the end of this year to get a new arrangement.

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Angieszka Anna Storozynski, Macquarie Research - Head of US Utilities and Alternative Energy [75]

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Okay. And the last question, so yes, we're waiting for the remaining intervenors to opine on your grid mod CapEx, among others. But now that you can actually talk to the commission, are you -- I mean, are you getting any guidance or you think you're going to get any guidance as to what the commission actually thinks about this level of spending and what is the right pace of adaptation of those CapEx that is in a way requested by the state?

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Ronald Owen Nichols, Edison International - President of Southern California Edison [76]

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Angie, this is Ron. I think that you might -- there might be a little confusion. When we're talking about our ability to go back and talk to the commission, that's in the cost of capital case. We still are obviously in the middle of the GRC at this point right now.

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Pedro J. Pizarro, Edison International - CEO, President and Director [77]

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The GRC decisions, where we expect to get from guidance on the grid modernization by way of what approval we get for the grid mod request that we made there.

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Ronald Owen Nichols, Edison International - President of Southern California Edison [78]

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Right. That's it.

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Angieszka Anna Storozynski, Macquarie Research - Head of US Utilities and Alternative Energy [79]

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So just besides the positions of the intervenors, we're not going to know anything about the grid mod CapEx until the GRC approval?

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Ronald Owen Nichols, Edison International - President of Southern California Edison [80]

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Well, there is still the separate ERP proceeding and we -- earlier, they had intended to have something to us by end of Q2. Now it looks like that's going to slip later into the year at this point. So it could be guidance in that. We would not -- it may or may not be static -- it wouldn't be explicit as to the GRC. It could be broader guidance in general. But in general policy on where they're headed but that would be later this year.

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Operator [81]

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Next in queue we have Mr. Travis Miller from MorningStar.

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Travis Miller, Morningstar Inc., Research Division - Director of Utilities Research and Strategist [82]

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Apart from that, I have a very quick question, follow-up on that O&M. If -- so the O&M and financing benefits this quarter, if I'm reading that correctly, it was $0.06 lower O&M, $0.03 higher financing so net $0.03, and that corresponds to that $0.31 in guidance such that there is $0.28 left? Am I reading all that correctly?

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Maria C. Rigatti, Edison International - Executive VP & CFO [83]

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No, the variance as I was referring to were quarter-over-quarter so year-over-year, not relative to guidance. But the guidance that we gave had actually $0.31 of total benefits. We're continuing to work on towards that and extracting that value over the course of the year, so it's 2 different I'll say comparison points.

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Travis Miller, Morningstar Inc., Research Division - Director of Utilities Research and Strategist [84]

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Oh because it's off the rate base, okay, I got it. How are you tracking on that $0.31?

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Maria C. Rigatti, Edison International - Executive VP & CFO [85]

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So we reaffirmed guidance at $4.14, with -- as Pedro mentioned earlier, as the bias to the upside.

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Operator [86]

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Next, we have Mr. Shar Pourreza from Guggenheim Partners.

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Shahriar Pourreza, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [87]

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My questions were answered. Scott, congrats on the retirement.

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Scott S. Cunningham, Edison International - VP of IR [88]

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Thanks, Shar.

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Operator [89]

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Next we have Mr. Paul Fremont from Mizuho.

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Paul Basch Michael Fremont, Mizuho Securities USA LLC, Research Division - MD of Americas Research [90]

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Can you guys break out the EEG losses for the quarter and also how are you tracking relative to your expectation on the year for that?

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Maria C. Rigatti, Edison International - Executive VP & CFO [91]

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So we -- yes, we have actually a table on the Q when you get a chance to look at it. But it's about...

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Pedro J. Pizarro, Edison International - CEO, President and Director [92]

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It's $6 million.

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Maria C. Rigatti, Edison International - Executive VP & CFO [93]

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It's $6 million roughly, $0.02 or so. As you note, there's no -- as I noted earlier, there is no quarter-over-quarter variance and that's consistent with the guidance that we have for the year as well.

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Paul Basch Michael Fremont, Mizuho Securities USA LLC, Research Division - MD of Americas Research [94]

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And then on the holding company, what debt level would you expect to end the year at for EIX holding company?

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Maria C. Rigatti, Edison International - Executive VP & CFO [95]

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So we don't forecast sort of where we'll end up in terms of debt either at SCE or at Edison International. Right now, we are about 12% in the consolidated debt at the company and we think that we're managing to a reasonable level. We want to be -- we're fairly conservative about the SCE and the EIX.

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Paul Basch Michael Fremont, Mizuho Securities USA LLC, Research Division - MD of Americas Research [96]

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And on an absolute basis, so you have about 1.5 billion at the EIX parent?

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Maria C. Rigatti, Edison International - Executive VP & CFO [97]

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We just termed out, so that's about right. I have to go back and double check but that's about it.

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Operator [98]

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That was the last question. I will now turn the call back to Mr. Cunningham. Mr. Cunningham, you may proceed.

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Scott S. Cunningham, Edison International - VP of IR [99]

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Thanks very much, Princess. First of all, I want to say thanks to Pedro particularly and Maria and those of you who said nice things. It has been a lot of fun over the last 10 years. I've worked with a lot of you and a few of you out there I've worked with a lot longer than that, we won't get into those details. I do look forward to catching up with a lot of you on the phone and also in travel later this month. So more formally, thanks very much for joining us today. And please call if you have any follow-up questions. Thank you.

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Unidentified Company Representative, [100]

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Thank you (inaudible)

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Operator [101]

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Thank you. And that concludes today's conference. Thank you all for your participation. You may now disconnect.