U.S. Markets closed

Edited Transcript of EIX earnings conference call or presentation 27-Feb-20 9:30pm GMT

Q4 2019 Edison International Earnings Call

Rosemead Mar 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Edison International earnings conference call or presentation Thursday, February 27, 2020 at 9:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Maria C. Rigatti

Edison International - Executive VP & CFO

* Pedro J. Pizarro

Edison International - President, CEO & Director

* Sam Ramraj

Edison International - VP of IR

================================================================================

Conference Call Participants

================================================================================

* Jonathan P. Arnold

Vertical Research Partners, LLC - Principal

* 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

* Paul Patterson

Glenrock Associates LLC - Analyst

* Praful Mehta

Citigroup Inc, Research Division - Director

* Steven Isaac Fleishman

Wolfe Research, LLC - MD & Senior Utilities Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

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

During this call, we will make forward-looking statements about the outlook for Edison International and its subsidiaries. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our SEC filings. Please read these carefully. The presentation includes certain outlook assumptions as well as reconciliation of non-GAAP measures to the nearest GAAP measure. (Operator Instructions)

I will now turn the call over to Pedro.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, thanks, Sam, and good afternoon, everyone. Today, Edison International reported core EPS of $4.70 for 2019 compared to $4.15 a year ago. The increase in core EPS was primarily due to the approval of the 2018 General Rate Case and higher FERC revenues. This was partially offset by higher wildfire mitigation costs and an increase in the number of shares outstanding. Maria will discuss our financial performance in more detail during her remarks.

We believe that SCE and California are beginning 2020 with a very different wildfire risk profile than the previous 2 years. Edison particularly commends the state's efforts on wildfire suppression and the improved coordination among utilities, state and local emergency management personnel. Also, the state's enactment of Assembly Bill 1054 had a stabilizing effect on the financial health of California's investor-owned utilities.

We have been pleased with the continued implementation of the AB 1054 regulatory framework. This includes the issuance of our safety certification last year, the appointments to the new California Catastrophe Response Council and Wildfire Safety Advisory Board, and our recently filed 2020 to 2022 Wildfire Mitigation Plan. We also are encouraged by the CPUC's timely approval of SCE's 2020 cost of capital application and the proposed schedule for SCE's 2021 General Rate Case.

However, much work remains to be done. For SCE, this particularly means obtaining decisions on outstanding proceedings at the CPUC. This includes the Grid Safety and Resiliency Program settlement, SCE's Wildfire Expense Memorandum Account application, the capital structure waiver application related to the accounting for our 2017 and 2018 charges and the litigation of the various phases of SCE's 2021 GRC application.

Additionally, in 2020, SCE expects to continue to work with legislators, regulators and communities to improve Public Safety Power Shutoff or PSPS related operations. At the same time, we are moving forward with our vision for a sustainable and clean energy future. I will discuss more about this later.

This past year, SCE aggressively executed a comprehensive wildfire mitigation strategy laid out in our Grid Safety and Resiliency Program and 2019 Wildfire Mitigation Plan. Since 2018, SCE has installed more than 500 miles of covered conductor, over 480 micro weather stations, and more than 160 high-definition cameras covering 90% of high fire risk areas, reaching our effective saturation point for cameras. We were able to go beyond the compliance targets in our 2019 WMP in many areas as we work to reduce wildfire risk as quickly as possible. We also completed enhanced inspection of all of our overhead infrastructure in our high fire risk areas during the first 5 months of the year. In the past, this would have been performed over a 5-year period.

SCE's recently filed 2020 to 2022 Wildfire Mitigation Plan will advance our risk prioritization approach. This plan includes ground-based and aerial inspections for higher-risk transmission and distribution assets beyond standard inspection cycles, building on the lessons learned from our comprehensive enhanced overhead inspection program in 2019. The plan also calls for us to further harden infrastructure, bolster situational awareness capabilities and enhance operational practices while harnessing data analytics and technology. The plan includes specific metrics that provide transparency to the public and other stakeholders and will enable the CPUC to evaluate SCE's performance. In our filing, SCE has proposed spending approximately $3.8 billion in capital and O&M over the 3-year plan period.

Last October, parts of our service territory faced many days of elevated wildfire threat conditions marked by severe winds, low humidity and dry fuel. During these periods, SCE exercised our PSPS protocols to protect the public from the risk of electric equipment causing a fire. Patrols conducted after those PSPS events found over 40 impacts from the severe conditions, including equipment damage in 3 branches contacting power lines. This further validated the importance of preventive de-energization as a safety measure under severe weather conditions.

SCE understands that PSPS can be a hardship for our customers and communities. We utilized an extensive community outreach effort to help customers prepare for these events. We have learned from these experiences and are working to improve our wildfire mitigation and PSPS resilience capabilities. Our #1 priority continues to be the safety of the public, our customers, employees and first responders.

SCE has also spent significant time educating customers, communities, and state and local government officials on our PSPS-related efforts to demonstrate the vast amount of work and data analysis that go into our decision-making on PSPS events. As more mitigations are deployed, we expect to reduce the scope and impact of PSPS, but PSPS will have to remain available as a tool to mitigate wildfire risk during severe weather and high fire potential index events.

I would now like to give you an update on our accounting reserve related to the 2017 and 2018 wildfire and mudslide events. You will recall that in the fourth quarter of 2018, SCE recorded a gross liability of $4.7 billion for the low end of the estimable loss range for these events. We regularly reassess this reserve, which includes our internal assessment of damage estimates, known and expected third-party claims, litigation proceedings and risks and prior experience litigating and settling wildfire-related claims.

In our latest assessment, we increased the estimated losses for claims related to the 2017 and 2018 wildfire and mudslide events by $232 million to a gross estimate of $4.9 billion. While this estimate is determined on an aggregate basis, some of the factors we evaluated in connection with the review contributed to a significant increase in certain loss estimates, while others contributed to a significant decrease. Also, we lowered our accrued liabilities by the $360 million settlement reached in the fourth quarter with a number of local public entities.

These changes led to a revised pretax accrued liability of $4.5 billion for the 2017 and 2018 wildfire and mudslide events. After adjusting this gross liability for $1.6 billion of remaining insurance coverage and $149 million for a FERC regulatory asset, the net after-tax charge for these events is $1.98 billion which is an increase of $157 million from our previous estimate.

I would now like to provide an update on our operational and service excellence efforts and a few of the key nonfinancial metrics our Board uses in measuring our performance. Operational and service excellence starts with the safety of our workers and our communities. This is a major priority across our company and is at the very top of our core values. Our 2019 performance on worker safety had mixed results. While we did not have any employee fatalities, there were 3 worker fatalities among our contractor workforce. And our hearts continue to go out to their families and loved ones.

The number of serious SCE employee injuries in 2019 fell by more than 50% from 2018, but our rate of injuries leading to days away, on restricted duty or transferred known as the DART rate was worse than our target. We did, however, and importantly, successfully complete an enterprise-wide safety culture training program that has received strong reviews from our employees and lays the foundation for long-term improvement.

Our goals related to improving public safety are tied to the implementation of the wildfire resiliency measures outlined in our GSRP and 2019 Wildfire Mitigation plan. We made significant progress in these areas, as I discussed earlier. Among other key measures, our customer satisfaction and system reliability fell short of our targets. Our performance was heavily impacted by maintenance and repair activities related to wildfire mitigation, the installation of new equipment to harden our electric system and PSPS de-energizations to safeguard our communities during dangerous fire weather conditions.

We also deployed additional digital technologies to transform processes across our business and improve the quality and efficiency of our operations. For example, we rolled out new mobile solutions to support our enhanced overhead inspections. And we use robotic process automation to improve outage notification to our customers.

We continued our focus on sustainability, particularly on addressing climate change. We are committed to delivering 60% renewable power by 2030 and 100% clean energy by 2045, which are among the most aggressive targets in the industry. Last quarter, I announced the release of our Pathway 2045 white paper, which shows the changes required across California's economy to meet the state's 2045 carbon neutrality goals will be profound.

We are focused on doing our part, such as accelerating transportation electrification. Today, SCE is implementing the largest electric truck and transit utility initiative in the nation by installing charging infrastructure to support approximately 8,500 medium- and heavy-duty vehicles at 870 sites by 2024 through our $356 million Charge Ready Transport Program.

We are also awaiting CPUC approval for our $750 million Charge Ready II application that will support over 50,000 passenger vehicle chargers. This sounds big, but we believe this is just a fraction of the new technologies and infrastructure that will be needed to support California's economy in the years ahead, which further underscores the need for resilient and financially strong utilities.

To conclude, we are making significant investments over the near-term in grid hardening and resiliency. At the same time, we continue to see significant long-term investment opportunities in our business related to addressing California's 2045 climate goals. We have a robust capital program over the next few years that, if approved, will invest more than $5 billion annually on infrastructure replacement, transportation electrification, transmission infrastructure and wildfire mitigation.

As you can see, we have a continuing focus on safety and resiliency, operational excellence and strategic advancement of policy objectives. Our near-term priorities to improve safety and mitigate wildfire risk will enable the reliable and resilient grid that is needed to accelerate toward the state's clean energy goals and achieve our Pathway 2045 vision for California, including increased use of zero-carbon resources and broad electrification of the entire economy.

With that, Maria will provide her financial report.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Pedro, and good afternoon, everyone. My comments today will cover fourth quarter and full year 2019 results, our capital expenditure and rate base forecasts, 2020 EPS guidance and financing framework. As we have said, year-over-year comparisons for 2019 are less meaningful given the timing of the 2018 GRC decision.

Please turn to Page 2. For the fourth quarter 2019, Edison International reported core earnings of $0.99 per share, which was $0.05 higher than the same period last year. From the table on the right-hand side, you will see that SCE had a core EPS variance of positive $0.07 year-over-year. This was primarily driven by $0.17 of higher EPS from SCE core activities, which was partially offset by $0.10 of dilution from an increase in shares outstanding.

There are a few items that accounted for the majority of the EPS variance at SCE. To begin with, higher revenues had a positive variance of $0.32. This was primarily driven by $0.19 of higher CPUC revenues, largely as a result of the GRC escalation mechanism and lower income tax benefits refunded to customers in our tax balancing account, which is offset in income taxes.

FERC revenues had a positive variance of $0.13 due to higher expenses, rate base growth and increased ROE from the 2019 settlement of the 2018 formula rate proceeding. Higher O&M expenses negatively impacted year-over-year EPS by $0.03. This was largely driven by an increase in wildfire mitigation expenses. I will discuss more about this when we cover full year variances.

During the quarter, we recorded a $0.05 charge for the self-insured retention under our wildfire insurance, primarily related to 2019 wildfire. We treated this charge as core to remain consistent with how we treat deductible for expenses that are covered by insurance. Higher net financing costs related to increased borrowings had a negative $0.03 impact. There was also a $0.07 lower income tax benefit, which primarily reflects tax benefits captured through our tax balancing account, as noted earlier.

EIX Parent & Other had a negative $0.02 core variance in the quarter. This was largely due to $0.07 of higher interest expense related to increased borrowings, partially offset by a $0.05 positive variance at Edison Energy due to the 2018 goodwill impairment.

Please turn to Page 3. For the full year, Edison International core earnings per share increased $0.55 to $4.70 per share. This includes an improvement in core earnings of $0.59 at SCE, partly offset by higher EIX Parent & Other costs of $0.04. While the full year and fourth quarter earnings analysis are largely consistent, I will highlight a few areas.

You will see a positive $0.20 impact from the retroactive application of the 2018 GRC decision that was recorded in Q2. Also, we have positive $0.13 in FERC revenues related to SCE's 2018 formula rate settlement, which includes $0.10 we recorded in the third quarter. Finally, for the year, there was a positive $0.14 income tax variance, primarily related to benefits that are passed back to customers through the tax balancing account with no impact on earnings.

Related specifically to wildfire mitigation activities, for the full year, we recorded expenses of $519 million to the related memo accounts. We recorded regulatory assets for $400 million of the spend that most closely resemble historical precedents. As you know, a regulatory asset is only recorded when there is objectively verifiable precedent for recovery. We have not recorded a regulatory asset for the remaining $119 million pre-tax, and I would like to provide some additional context for these amounts which are reflected in O&M expenses for the year.

The scale of this mitigation effort is unlike what we have seen in the past, and there are some activities for which there is no historical precedent. During the year, we had to increase crews, project management personnel and other human resources to execute our wildfire mitigation program. We also managed and sequenced the work in order to reduce risk as quickly as possible, which also contributed to higher costs.

The higher volume of work that drove increases in crew, human resource and execution costs in high fire risk areas also drove increased costs in nonhigh fire risk areas. We don't have a precedent where incremental cost impacts in one program or geographic area, drive incremental costs in another area. So we have not recorded regulatory assets for all the costs incurred, particularly the incremental costs in nonhigh fire risk areas. However, SCE is seeking full recovery of these costs through separate tracks of the 2021 GRC.

Page 4 shows SCE's capital expenditure forecast. This includes CPUC jurisdictional GRC capital expenditures, certain non-GRC CPUC capital spending and FERC capital spending. From 2020 through 2023, we are forecasting a robust $19.4 billion to $21.2 billion capital program. This represents an increase of approximately $200 million from our previous forecast and is primarily due to higher spending on wildfire mitigation. In January, the CPUC extended the GRC cycle by adding a fourth year for SCE and other large utilities. As a result, SCE is required to file an amendment to its 2021 GRC application to add an attrition year for 2024. We are awaiting further direction from the commission on the timing of this amendment.

On Page 5, we show SCE's rate base forecast. At the capital expenditure levels requested in the 2021 GRC, total weighted average CPUC and FERC jurisdictional rate base will increase to $41 billion by 2023. Spanning 2 rate case periods, this represents a 6-year compound annual growth rate of 7.5% at the request level. To develop a range of outcomes, management is applying a 10% reduction to the rate base forecast based on our historical experience of previously authorized amounts and other operational considerations. At this level, SCE's rate base forecast reflects a compound annual growth rate of 6.6%.

Pages 6 and 7 show our 2020 guidance and the key assumptions for modeling purposes. As we have in the past, let's begin with rate base earnings. This reflects the CPUC jurisdictional rate base authorized in 2018 GRC as well as the recently approved ROE and capital structure from the 2020 cost of capital decision. We settled the 2018 transmission rate case and the rate was in effect until early November 2019. However, we have not yet resolved the subsequent case and had to make an assumption regarding the FERC ROE in 2020.

As you know, FERC has varied its approach to determining ROE over the past few years and its approach remains unsettled, with FERC currently considering rehearing request to the MISO Order. We believe that methodologies resulting in FERC ROEs lower than state level ROEs will result in suboptimal investment decisions. At this time, we are basing guidance on a 2020 FERC ROE that is comparable to our CPUC ROE of 10.3%.

Finally, FERC has historically used recorded capital structure to determine revenues. This is forecasted at 47% in 2020 and does not benefit from the CPUC exclusions related to AB 1054 and other items. Based on the actual 2019 weighted average share count of 339.7 million, these items result in a rate base EPS outlook of $5.17.

Let's next discuss SCE operating and financial variances, which add to rate base earnings. This is forecasted at a net contribution of $0.20, which is not as large as we've seen in some prior years. There are a number of drivers to this. First, as noted earlier, on January 1, the CPUC cost of capital decision was implemented, and the embedded cost of debt and preferred equity were adjusted to actual, reducing previous financing benefits. On the operating side, we continue to manage costs, which ultimately benefits our customers. However, $0.14 of costs related to wildfire mitigation activities represent a larger offset to other items such as AFUDC than we have seen historically.

As I discussed earlier, we will pursue recovery of these incremental costs that we record in wildfire memo accounts. However, lacking a historical precedent, we do not assume we will meet the accounting requirements for deferral. We expect the drag related to wildfire mitigation activities to be removed in 2021, since the costs are included in the 2021 GRC revenue request. Finally, we also included $0.02 related to expected energy efficiency earnings.

Moving to the right in the chart, SB 901 and AB 1054 included certain items that are not recovered in rates. In 2020 guidance, we highlight the annualized cost of interest expense related to the wildfire insurance fund contribution and the nonrecovery of disallowed executive compensation. These amount to a total drag of $0.10.

Finally, for EIX Parent & Other, we expect a total drag of $0.41. This includes holdco and other operating expenses at the previously communicated rate of approximately $0.01 per month or $0.14 for the year. The balance of $0.27 is the after-tax interest cost, including the expected impact of the $400 million debt issuance that is part of the 2020 financing plan.

The impact from share count dilution in 2020 can be broken down into 2 areas. The first is the full year impact of the shares issued in 2019, and this translates to $0.30. The second area is the impact related to the $800 million equity issuance in 2020. This results in another $0.09 of dilution in our 2020 EPS guidance. I will discuss the 2020 financing plan that relates to these debt and equity assumptions embedded in guidance in a moment.

Overall, this results in 2020 EPS guidance of $4.47 per share, with a range of $4.32 to $4.62 per share. This range is slightly wider than in the past and accommodates the large number of items that are being resolved in proceedings outside our typical general rate case.

Please turn to Slide 8, and we will discuss the rationale and strategy for our 2020 funding plan and longer-term outlook. The objective is to provide details regarding 2020 as well as a framework that informs our longer-term approach. Over the past 2 years, there have been some unique issues that have informed our financing plans, including the Wildfire Insurance Fund contribution. One constant has been the robust level of capital spending required to make our grid more resilient and prepare for the clean energy future.

As we discussed earlier, SCE is estimating approximately $5 billion per year of capital spending over the next several years. One key part of our framework is to deliver on these capital plans while we maintain investment-grade ratings at both SCE and EIX. That overarching tenet informs the 2020 financing plan and will also influence us in the longer run as we are targeting a long-term FFO-to-debt ratio of 15% to 17%. We also look forward to a point when this ratio level will be supportive of a ratings improvement as the rating agency's view of wildfire risk and their general California outlook further improve.

This longer-term ratings framework has implications for our near-term financing plan. First, we are spending significant amounts on wildfire mitigation and wildfire insurance. And these amounts are not yet being recovered in rates. Even though we expect the commission to begin addressing some of these amounts this year, and while this spending provides additional operational risk mitigation, these items will continue to challenge our near-term credit metrics until the proceedings are resolved and the balances are worked down.

Second, while very few claims have yet been paid related to the 2017/'18 events, some rating agencies are burdening our credit metrics with imputed debt equivalent to their assumptions around our liability to pay those claims.

With this framework and factors in mind, the holdco financing plan for 2020 includes $800 million in equity, of which $600 million supports the growth capital need at SCE. The remaining $200 million as a carryover related to the equity plan we disclosed in 2019 that we expect to complete this year. We have the flexibility to address this total equity need through a variety of approaches, including our ATM and internal program. The plan also includes $400 million of debt, as mentioned earlier.

In 2019, we deployed significant capital to meet our customers' needs, and we expect this to continue. Given this level of growth at the utility, our dividend payout ratio and current ratings as supported by the 2020 equity issuance, we expect minimal equity requirements to fund our ongoing capital expenditures beyond 2020.

With regard to wildfire-related costs, this financing plan is also predicated on requested cost recovery on the memorandum account, the current level of liabilities reflected on our balance sheet for the 2017 and 2018 wildfire and mudslide events, and timely resolution of SCE's capital structure waiver request. If there is a material change in these wildfire-related assumptions, we will then reevaluate our balance sheet requirements using the same framework that drove our current and prior year plan. That is, we will work to maintain investment-grade ratings and our financing approach will be consistent with that objective.

That concludes my remarks.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question will come from Praful Mehta from Citigroup.

--------------------------------------------------------------------------------

Praful Mehta, Citigroup Inc, Research Division - Director [2]

--------------------------------------------------------------------------------

Sorry, I've been jumping calls. So if I repeat the question then sorry about that. But just wanted to understand from the progress on the wildfire mitigation activities, could you give us a sense for how you feel in 2020 versus 2019 in terms of the efforts on the ground so far and how you expect the wildfire fund in terms of sufficiency to deal with all the risks on the wildfire side?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, thanks, Praful. And you're the first question, so I can tell you didn't repeat any. So as far as the preparations, as I mentioned in my remarks, there's been a lot of work that we've done. And we think that, that certainly helps to continue to advance the ball in terms of mitigation and risk reduction. But importantly, it's not just the work that we are doing, it's also the work that the state is doing and that other entities are doing, and frankly, greater consciousness about fire prevention and preparedness across the state.

And so I think in our last earnings call, I probably mentioned how, as we had made our way through the bulk of 2019, we saw that one of the key factors in the mix -- in addition to the work we were doing, the early stages of things like covered conductor or replacement, the impact of PSPS, which we saw. I mentioned in my remarks already that after the big wave in October, we saw over 40 instances of issues that could have turned into ignition, that were not in ignition because we had used PSPS. But I mentioned in the call that we have seen a remarkable difference in the state's capacity around fire suppression. And the impact from the governor's actions in terms of increasing the state budget. We had firefighters and equipment, speed of response. And so that made a significant impact in 2019.

As we now head into 2020, I don't know if you're aware, but the governor in his 2020 budget proposal talked about increasing firefighting resources by another, at the least, 625 individuals over the next 5 years. Taking a good chunk of that in 2020. So the fact that it's not just our work but the work by the state in areas like fire suppression, that all helps.

Now in terms of answering your question quantitatively in terms of the fund, that's harder to do. I'll remind you that when AB 1054 was being debated. The state, I think through the governor's team, had some analysis that showed a 94% probability of the fund surviving at least 10 years based on a number of assumptions. So that, I think, baked into it some concept that over the course of those 10 years, utilities and others will continue to improve in terms of the risk reduction. So I can't tell you quantitatively what that means in terms of percent risk reduced, but I will tell you, we're in a much stronger place this year than we were last year or the year before. That said, the risk is not 0 and I don't think the risk will ever be 0 given the realities of California.

--------------------------------------------------------------------------------

Praful Mehta, Citigroup Inc, Research Division - Director [4]

--------------------------------------------------------------------------------

Got it. Got it. As always, a pretty comprehensive answer. So I appreciate that. Just separately, on the equity side, quickly, we get the $800 million need. But as I look at going forward, post the 2020 time frame, are you looking at like an ongoing equity need driven by the SCE equity needs so you keep the holdco debt kind of flat? How should we think about the ongoing post-2020 kind of equity needs going forward?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, Praful. This is Maria. I think what we're trying to lay out for folks is sort of that framework where, on a long-term basis, we will be targeting the metrics, 15% to 17% FFO to debt. As we think about the capital program, related to the capital program, we actually see a minimal equity going forward at those levels. I think not trying to pinpoint a very precise level, so it's not a particularly quantitative response. But we just don't really see a need for significant new equity for that. Separately, we did -- I just did mention, we made certain assumptions around wildfire issues as well, whether that's recovery on the memo accounts, the level of liabilities associated with those wildfires, the capital structure waiver. If we see material changes there, we'll revisit our balance sheet needs, again, within that 15% to 17% metric framework.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question will come from Steve Fleishman from Wolfe Research.

--------------------------------------------------------------------------------

Steven Isaac Fleishman, Wolfe Research, LLC - MD & Senior Utilities Analyst [7]

--------------------------------------------------------------------------------

The -- I'm just curious on the capital structure waiver request. I think PG&E also has a similar one. Could you just give us an update? Is there any process of knowing when that will likely get rolled on? And is there any like real opposition to it? Or are you just waiting for an answer?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure. So just as a reminder, we did file for that last February when we took the charge. The 2 things that we asked for in the capital structure waiver were that -- would be that the charge itself would be excluded from the calculation of our capital structure and the debt associated with paying any liabilities or claims would also be excluded from the capital structure until the commission made a decision as to whether or not we would get recovery for that.

The request has been pending for a while. Interveners have filed various comments, some of which have really been around -- actually, some of the interveners actually said they didn't think our request was ripe yet at the time because we still are in compliance on -- with the 37-month average. As part of our cost of capital proceeding, the ALJ sort of like pushed it out a little bit. But once we got the decision, asked us to -- each of us to answer particular questions, not all of which were particularly relevant for us, some of them were more related to PG&E, largely around whether or not there should be a set date at which the waiver kind of stops being effective and then also sort of implications for customers.

We filed those comments. Actually, there were not any reply comments, I believe, in return for those. And then the commission has set a deadline or their regulatory processes that they have to issue a decision before August, of course they have flexibility in terms of determining whether or not they extend or that. But that's the status right now. We don't have a date for when we will hear back. Until we do receive the waiver, we would be deemed to be in compliance. And even if you look at our numbers today and calculate where we are, even if we do the calculation on the basis of not getting the waiver, we're in compliance with the 37-month rolling average.

--------------------------------------------------------------------------------

Steven Isaac Fleishman, Wolfe Research, LLC - MD & Senior Utilities Analyst [9]

--------------------------------------------------------------------------------

Okay. And one other question. Just in looking at the 2020 variances related to the, I guess, the SCE variances. As you mentioned, the $0.14 incremental wildfire, you would hopefully have recovery in 2021 and you're through the GRC. The financial operating other, the $0.32, not necessarily specifically that number, but that's been there for a while. So I assume there should be some sustainability to that portion continuing.

--------------------------------------------------------------------------------

Maria C. Rigatti, Edison International - Executive VP & CFO [10]

--------------------------------------------------------------------------------

You know that bucket includes a lot of things. It includes financing benefits, which actually do change from time to time. This year, they would have changed because we adjusted the embedded cost of debt and equity to the capital -- cost of capital proceeding decision. Every year, when we have a new rate case, we give back benefits to customers. So we're continuing to try and really manage our costs because that overall helps us in terms of system average rate and how we implement all of our capital plans as well. So we do have an ability to manage through in those areas, but you'll see different mixes from time to time, and you could potentially see things go up and down just because we start a new rate case cycle.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [12]

--------------------------------------------------------------------------------

So perhaps, I want to focus on the credit metrics here a little bit further and just understand the 15% to 17% FFO-to-debt metric. A, where are you today? And b, how do you think about latitude relative to that metric sort of under a variety of scenarios? And I'm specifically thinking here around some of the imputation issues that you already alluded to. Maybe asked in a more simplistic way, how are you thinking about getting the rating agencies to not impute a certain amount of liability? And how do you think about the latitude that you possess today sort of on an ongoing basis? And again, this kind of gets back to the last question that Steve just asked about your variances and what that might look like on a normalized basis, but I'll let you respond now.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. So I think the first question is how do we feel about having the liabilities imputed, I guess, before the determination as to whether or not we will get recovery. Certainly, we've had lots of ongoing conversations with the rating agencies around this. I think at this point in time, because, again, similar to our requirement to take the charge and not have a regulatory asset booked against it because there's really no precedent here, I think that's a place where the rating agencies are going to want to see some actual cost recovery absence before they would actually take a step back and not impute the debt. I think that that's an ongoing conversation as we see more things happen with the commission, potentially that will be a conversation that we can continue to have with them. But this is where they are right now. I mean that's just a fact.

In terms of sort of where we are relative to our metrics, I'll be really frank with you. Right now, I think our metrics are a little bit challenged. A lot of it having to do with the fact that we are not getting recovery real-time on those wildfire mitigation expenses and the wildfire insurance. Because we do have a lot of dollars that are capital related, but we actually have a lot of dollars that are O&M related, which you would normally get recovery on in a lot quicker turnaround during, I'll say, in real time. I think that we've had those discussions and ongoing dialogue with the rating agencies around that as well, and I think they understand that. But again, that's why in the closing part of my remarks earlier, I said the financing plan was predicated on certain assumptions, one of which was timely recovery of the amounts in those accounts. To the extent we see things going in a different direction, we will have to revisit that.

--------------------------------------------------------------------------------

Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [14]

--------------------------------------------------------------------------------

Got it. If I may just clarify that quickly. With what you just said there, are you basically saying that $0.14, for instance, of incremental wildfire mitigation costs, that would be what you're talking about of timely recovery here, principally in those variances? And then secondly, going back to what you just said, this -- are you alluding to securitization? Or when you think about getting comfortable here, is that just simply being able to successfully tap into this newly created fund?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So I'm going to ask you to clarify that last part, but in terms of the first question that you asked on the $0.14, it's not just the $0.14. I realize no one has looked at our 10-K yet. But if you look at that, we are actually under-recovered right now about $868 million. So the $0.14 that you see in 2020 guidance are the amounts that do not have a regulatory asset booked against it. Right now at the end of 2019, we're already -- in part it's -- there are things that we have regulatory assets on the books for as well, but cash out the door that we had not yet collected is about $868 million. So it's all of the above.

--------------------------------------------------------------------------------

Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [16]

--------------------------------------------------------------------------------

That's fair. And then the second piece there was just when you were saying that the credit rating agencies needed to get comfort here, that was about your ability to tap into the fund and actually successfully doing so?

--------------------------------------------------------------------------------

Maria C. Rigatti, Edison International - Executive VP & CFO [17]

--------------------------------------------------------------------------------

No. I meant getting comfortable that the cash flow from these memo accounts, et cetera, would be timely. That's all. And we...

--------------------------------------------------------------------------------

Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [18]

--------------------------------------------------------------------------------

But you don't actually need to tap the fund or the securitization for them to get comfortable?

--------------------------------------------------------------------------------

Maria C. Rigatti, Edison International - Executive VP & CFO [19]

--------------------------------------------------------------------------------

No. No, no.

--------------------------------------------------------------------------------

Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [20]

--------------------------------------------------------------------------------

Okay. I'm sorry. I didn't want to...

--------------------------------------------------------------------------------

Maria C. Rigatti, Edison International - Executive VP & CFO [21]

--------------------------------------------------------------------------------

I mean just to be clear, Julien, I think their overall comfort with California should increase over time and it's going to be related to all the factors that you just described, but I was speaking more narrowly,

--------------------------------------------------------------------------------

Pedro J. Pizarro, Edison International - President, CEO & Director [22]

--------------------------------------------------------------------------------

Yes. I mean just to make sure that it's really clear. There was a time when a 15% to 17% FFO to debt would have implied a higher level of credit ratings. There's, I think, a discount being applied in terms of how they view California risk. We would hope that over time, as they see continued implementation of AB 1054, the machinery in place, that also translating into reduced overall wildfire risk, we would hope that there's some reassessment over time of what credit rating is implied by that kind of range.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Our next question will come from Paul Fremont from Mizuho.

--------------------------------------------------------------------------------

Paul Basch Michael Fremont, Mizuho Securities USA LLC, Research Division - MD of Americas Research [24]

--------------------------------------------------------------------------------

You guys, I think, have revised obviously the low end estimate on wildfire exposure. At what point do you -- would you expect that you would have an estimate on the high end?

--------------------------------------------------------------------------------

Pedro J. Pizarro, Edison International - President, CEO & Director [25]

--------------------------------------------------------------------------------

That continues to be really challenging. And as we continue to look at all the various facts, I think as I mentioned in my comments, we looked at a broad set of factors as we do our assessments and as I shared, as we did this revision, some things went up significantly, some things went down significantly. So we continue to have a hard time seeing how we would define a high end. It may be that we don't end up being able to define the high end. But for example, if we continue to see resolution of the uncertainties through, whether it be additional settlements or core process, later on the regulatory process, then as those pieces fall into place, you would see us do what we've done here, which is that with the $360 million settlement, that uncertainty gets taken off the table.

And now we -- the range may be narrower, we define what the low end might be for the remaining liabilities. But just to be honest with you, given the nature of these wildfire cases and all the ins and outs, it's unclear to me whether we would get to a place where we can define a hard and fast 75% probability under accounting rules, high end of the range. Maria, do you have any different view of [that]?

Did that make sense, Paul?

--------------------------------------------------------------------------------

Paul Basch Michael Fremont, Mizuho Securities USA LLC, Research Division - MD of Americas Research [26]

--------------------------------------------------------------------------------

Yes. I would assume that when you actually are paying out the claims that you're going to book at least an equivalent NOL to the charge-offs that you took in 2018. Can we get a sense of the time frame over which that NOL could materialize?

--------------------------------------------------------------------------------

Maria C. Rigatti, Edison International - Executive VP & CFO [27]

--------------------------------------------------------------------------------

So we booked the tax impacts when we took the charge, I think your question may be like when do you become a cash taxpayer, and we would expect -- right now, obviously, the future will inform this as well. But right now, we're estimating that EIX becomes a cash taxpayer around 2027.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Great. And maybe the last question from me. Historically, I think in terms of AFUDC, you've talked about executive comp. You've talked about advertising, charitable donations as offsets. The only offset that I've heard so far is executive comp. So should we expect that you should be able to recognize the remaining portion of equity AFUDC?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So we may be talking past each other a little bit here. But when we provided the sort of walkover for 2020 guidance, we included all those -- I know, historically, we've kind of enumerated a whole laundry list of things that are in the bars that are to the right. Included in that bar, that $0.20 net benefit are all the things that you were just talking about. So it isn't that they've sort of gone away, they're just all included there. We've broken some out to give you a little bit more specificity. And then to the right of that, the AB 1054, SB 901 items, those are -- I'll call those the newer issues. They weren't historically in the set of things that we discussed, but post the legislation, those are things that we know we cannot get recovery on as per the legislation.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So as we go out sort of 2 years beyond 2020, I mean, should we expect that there would be no material offsets to that?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So what we tried to do when we laid out the chart is to identify things that you might consider, things that are new. So the SB 901, AB 1054 items, and then some things that we think will not continue because -- for example, the incremental wildfire mitigation costs that we don't currently have a reg asset against, because those things will get incorporated into our 2021 GRC revenue. We will continue, as we always have, try and manage our costs that we create headroom, which ultimately benefits our customers. So I think that we have the same approach to how we manage the business on a go-forward basis. We just wanted to give you more visibility into some of these new components.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Next question will come from Michael Lapides with Goldman Sachs.

--------------------------------------------------------------------------------

Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [33]

--------------------------------------------------------------------------------

I'm trying to ask a simplifying question, which is how do you think about the path to get to what is a normal earnings power? And how long it takes kind of -- and the key things that have to happen to get you there?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So I think one of the things, Michael, is that what we've been seeing the past few years is that more things are happening outside the general rate case. We've always had balancing accounts, and those are actually good things. They're very constructive in terms of sort of visibility, et cetera. But what we have now in addition to the balancing accounts, which generally are cover amounts that have either already been reviewed or we have a lot of history with them in terms of recovery, now we have a lot of memo accounts. And the memo accounts help us avoid sort of retroactive ratemaking issue, but they don't actually give you visibility as to sort of when costs will hit. And we don't yet have, in some cases, an ability to say that they're all probable of recovery or 100% of them are probable of recovery because we don't have historical precedent.

So I think that we -- and that was really the driver for how we set up the 2020 core earnings guidance. So you could start to see some of those things more specifically. As we get into the next General Rate Case, I think you'll see some of that -- those variability dissipate because we will have things included in our revenue requirement, as opposed to now where the '18 and '19 costs related with wildfire mitigation are in one track that gets decided in 2021. The 2020 cost are going to be another track that gets decided after that. So I think we do need to move through and get into the next rate case cycle to have a little bit less variability and a little bit more clarity. But again, that's why we tried to set up the guidance slide the way that we did.

--------------------------------------------------------------------------------

Pedro J. Pizarro, Edison International - President, CEO & Director [35]

--------------------------------------------------------------------------------

And Maria, I'll add one other point to this, maybe from a different angle. Some of the variability you've seen here has been because we've been in an unprecedented period of figuring out how to address a very different type of wildfire risk called or a different level of wildfire risk than we understood 3 years ago. And so a lot of the extraordinary things you've seen our team doing required the use of the memo accounts, et cetera. They've also redefined activities that the utility needs to take on and costs then that need to be recovered.

I think as we get further maturity through the wildfire mitigation plan process and another year or 2 of experience under our belts, I'm hoping that we see that uncertainty band continue to narrow in terms of understanding, okay, here's the -- here's how we now do utility operations in a world of a much higher wildfire risk. And then that, to Maria's point, translates into more predictability both for us and for investors in terms of the kinds of investments and cost recovery items that get built into rate cases and other proceedings. So to use the lingo a little bit, moving from the new normal to actually having it normalized and stabilized.

--------------------------------------------------------------------------------

Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [36]

--------------------------------------------------------------------------------

Got it. And then I have one other question, which is the settlement, the $360 million that you're paying in municipals. Just curious what is that as a percent of what the original request or what the original damages and claims they filed were?

--------------------------------------------------------------------------------

Maria C. Rigatti, Edison International - Executive VP & CFO [37]

--------------------------------------------------------------------------------

That's about 1/3 of what they -- their original hope or expectation, I guess.

--------------------------------------------------------------------------------

Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [38]

--------------------------------------------------------------------------------

Got it. So they filed for a little over $1 billion roughly and settled at $360 million?

--------------------------------------------------------------------------------

Maria C. Rigatti, Edison International - Executive VP & CFO [39]

--------------------------------------------------------------------------------

Yes. About 1/3 worth.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

Our next question will come from Jonathan Arnold with Vertical Research.

--------------------------------------------------------------------------------

Jonathan P. Arnold, Vertical Research Partners, LLC - Principal [41]

--------------------------------------------------------------------------------

Just to -- I wonder -- I'm not sure you'll be willing to do this, but I'm curious whether you might be -- you could give us any insight into sort of the kinds of things that moved around in the accrual. You said they moved -- there were big movements. Can you be any more specific, just to give us a little bit more sense of the process?

--------------------------------------------------------------------------------

Pedro J. Pizarro, Edison International - President, CEO & Director [42]

--------------------------------------------------------------------------------

Yes. Sorry, no. And the reason is there's a lot of pieces and parts inside there. And from a disclosure perspective, we've disclosed the net amount, but we don't expect that we would be disclosing all the pieces and parts on an ongoing basis. So that's why I think that the guidance has been to just keep it at high level. This won't answer your question, but you can imagine that things that are inside there. And I won't be able to share which ones went up or which ones went down or which ones didn't move. But this includes the spreadsheet, if you will, of items that we track and things like the size of claims, the actual claims being filed continue to move around, additional facts that are being uncovered through the discovery process. It's those sorts of things that are the underlying element across each of the cases.

And then you have to add one more layer of complexity. Remember, it's not just one big set of cases, it's really individual actions across all the different events and so a lot of detail underneath each of those. So it's a pretty massive complex thing and that's why rather than try and not do it justice, we're just keeping the disclosure to investors at a high level.

--------------------------------------------------------------------------------

Jonathan P. Arnold, Vertical Research Partners, LLC - Principal [43]

--------------------------------------------------------------------------------

Will we see any change in your sort of general position on your view of your involvement in various ignitions when we read the 10-K?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

Pedro J. Pizarro, Edison International - President, CEO & Director [45]

--------------------------------------------------------------------------------

There are no new material disclosures regarding information about the events that I can think of, right?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. The one thing that is a little bit new is they've gotten through the Attorney General's [case on] Thomas. But other than that, we didn't -- we still, I think, to summarize, Koenigstein Road ignition, we still believe our company was involved. The other ignition in the 2017 fire, we still have the same information in there around that and will lead to the same disclosure we had last quarter.

--------------------------------------------------------------------------------

Pedro J. Pizarro, Edison International - President, CEO & Director [47]

--------------------------------------------------------------------------------

So no new information that we're offering. But Maria, you're right, maybe elaborate a little bit on the Attorney General piece.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. So as we got through the process during the -- over the course of the year, we understand now that the California Attorney General has completed their analysis around Thomas and there is not -- they're not moving forward with any sort of criminal liability charges and will be the -- the valuation continues.

--------------------------------------------------------------------------------

Jonathan P. Arnold, Vertical Research Partners, LLC - Principal [49]

--------------------------------------------------------------------------------

Okay, great. And just -- I wanted to clarify something on one of the previous questions. There was sort of some suggestion that you'd be tapping the fund. But I just -- I want to make sure I had it straight, what you were talking about nothing whatsoever to do with the fund. Right?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No. Yes, we're not going into the fund. We did have a few wildfires in our service territory in 2019. We did take a little bit of a charge for a self-insured retention on those fires primarily, but it's well within our own commercial insurance.

--------------------------------------------------------------------------------

Pedro J. Pizarro, Edison International - President, CEO & Director [51]

--------------------------------------------------------------------------------

Yes, we don't need to access the fund. Let me be really clear about that. There has been no event that would qualify or require that.

--------------------------------------------------------------------------------

Jonathan P. Arnold, Vertical Research Partners, LLC - Principal [52]

--------------------------------------------------------------------------------

Yes. You were just talking about regular recovery of costs you incur in the (inaudible).

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Correct. Yes.

--------------------------------------------------------------------------------

Pedro J. Pizarro, Edison International - President, CEO & Director [54]

--------------------------------------------------------------------------------

Thanks, Jonathan.

--------------------------------------------------------------------------------

Operator [55]

--------------------------------------------------------------------------------

Our next question will come from Paul Patterson with Glenrock Associates.

--------------------------------------------------------------------------------

Paul Patterson, Glenrock Associates LLC - Analyst [56]

--------------------------------------------------------------------------------

So a lot of my questions have been answered. And so I've got just sort of one remaining one. And that is, in your 10-K, you mentioned a little bit about this, the competitive environment for transmission projects. And we saw the Diablo Canyon Gates project go to LS Power, and you mentioned that, I think with Mesa, that portions of that might be bid out. I'm just wondering, could you give us a little bit of flavor as to -- I assume that given your ROE guidance and everything that what you have in your plan is for regulated projects. But what are you guys seeing in terms of what happens when sort of FERC Order 1000 stuff is happening?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. So the planning in California around additional transmission that might be required for more solar, more wind, what have you, to get to sort of the higher renewable -- the higher green energy standards, that hasn't yet started. Until the CAISO does their transmission planning, I think it won't be clear yet exactly what projects are going to be required, what's needed. So I think there's a little bit of time still to lapse. I mean you're obviously very familiar with the fact that those projects, other than the ones that are already sort of involve our own facilities, they would normally be bid out and people would participate and try and get them on a competitive basis. But right now, I think there's still work to be done to determine what facilities are needed.

--------------------------------------------------------------------------------

Pedro J. Pizarro, Edison International - President, CEO & Director [58]

--------------------------------------------------------------------------------

And again, if it's the facility needed is an upgrade of an existing line then we have essentially right of first refusal on that. If it's a brand-new line, then that goes to the FERC Order 1000 competitive process.

--------------------------------------------------------------------------------

Paul Patterson, Glenrock Associates LLC - Analyst [59]

--------------------------------------------------------------------------------

Okay. And when's CAISO going to be releasing this updated -- this information about what their plans are with respect to the...

--------------------------------------------------------------------------------

Pedro J. Pizarro, Edison International - President, CEO & Director [60]

--------------------------------------------------------------------------------

We don't believe they started that broad planning process yet, and that's really within probably a mind or a view towards 2030-ish kind of time frame, a milestone [setup]. Sitting here, I don't think we have a time line to offer you.

--------------------------------------------------------------------------------

Operator [61]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sam Ramraj, Edison International - VP of IR [62]

--------------------------------------------------------------------------------

Thank you for joining us today. And if you have any questions, please call us. So this concludes the conference call. You may now disconnect.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

Thank you for joining today's call, and thank you for your participation. You may disconnect at this time.