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spk01: Good afternoon and welcome to the Edison International Fourth Quarter 2021 Financial Teleconference. My name is Missy and I'll be your operator today. When we get to the question and answer session, if you have a question, press star one on your phone. 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.
spk12: Thank you, Missy, and welcome, everyone. Our speakers today are President and Chief Executive Officer Pedro Pizarro, and Executive Vice President and Chief Financial Officer Maria Rigotti. Also on the call are other members of the management team. I would like to mention that they're doing this call with their executives in different locations, so please bear with us if you experience any technical difficulties. Materials supporting today's call are available at www.edisoninvestor.com. These include a 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'll 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. During the question and answer session, please limit yourself to one question and one follow-up. I will now turn the call over to Pedro.
spk14: Well, thank you, Sam. Today, Edison International reported core earnings per share of $4.59 for 2021, which exceeded the guidance range we provided on last quarter's call and was higher than the $4.52 we had a year ago. We are introducing our 2022 EPS guidance range of $4.40 to $4.70, and we are reiterating our high confidence in our longer-term EPS growth target of 5% to 7% through 2025. Maria will discuss our financial performance and outlook. In my comments today, I want to address three key themes that underpin the double-digit total return potential for EIX shares. I want to start with the tremendous progress and results achieved by FCE in recent years in reducing wildfire risk and what gives us increased confidence of further risk reduction. I will then highlight our clean energy transformation that is underway and the substantial capital investment opportunities over the next few years to support the state's goals. Lastly, I will discuss our operational excellence culture that will enable us to deliver greater value for customers, investors, employees, and other stakeholders. All these initiatives, combined with our dividend yield, present an attractive total shareholder return potential. And that's before even factoring in the increase in our price-to-earnings multiple that we believe is merited today by SE's wildfire risk reduction and ongoing utility and government wildfire mitigation efforts. I am extremely pleased to say that the 2021 fire season marks the third consecutive year without a catastrophic wildfire associated with SCE's infrastructure. This is despite another severe wildfire season and intensifying drought conditions in the state. We believe this illustrates the cumulative effect of SCE's and the state's wildfire mitigation investments and practices over the last several years, as shown on page three of the presentation. During 2021, the utility continued its strong execution of its wildfire mitigation plan and in many cases exceeded program goals. In its 2022 wildfire mitigation plan update, SCE reiterated that covered conductor is one of the most effective measures to reduce wildfire and PSPS risks in its service area. As shown on page four, several factors contribute to our confidence in the covered conductor program. Further, SCE is evaluating the potential for additional enhanced mitigation, including undergrounding in certain areas based on unique factors. Reducing wildfire risk will remain a top priority for the company, and this will require significant capital investment, including $2.2 billion over the next two years to the GRC Track 1 period. Overall, SCE estimates that its mitigation work through December of last year has reduced the probability of losses from catastrophic wildfire by 65 to 70 percent relative to pre-2018 levels. And please note that this is an increase from the 55 to 65 percent we reported previously for mitigation work through June 2021. As shown on page five, SCE expects to further reduce risk with continued grid-hardening investments, including deploying an additional 1,100 miles of covered conductor this year. This encouraging risk reduction metric does not take into account significant improvements at the state and federal levels to date and in progress. The governor's proposed budget continues the trend of increased wildfire suppression and prevention investment, with CAL FIRE's headcount set to be 45% higher than just five years ago. It also includes continued funding for aerial resources, and the investments to date already have made CAL FIRE's fleet of aircraft, more than 60 aircraft, the largest civil aerial firefighting fleet in the world. The state budget would also add $1.2 billion to the previously approved $1.5 billion wildfire and forest resilience strategy to support forest health and fire prevention. We are also pleased to see the Biden administration's multi-billion dollar plan to bolster fire prevention across the West. as 57% of the forest lands in California are owned by the federal government. Protecting against the threat of extreme weather today lays the foundation for the increasingly reliable and resilient grid necessary for the clean energy transition. Through SCE, one of the largest utilities in the country, Edison International is leading this transition through its spot leadership and SCE's programs to accelerate economy-wide electrification. On slide six, I would like to highlight that Edison International has one of the strongest electrification profiles in the industry, starting with transportation electrification. FCE has the largest programs among U.S. investor-owned utilities, and California is on the leading edge of electric vehicle adoption. In fact, one in seven EVs registered in the U.S. are in FCE's service area. EV adoption will be critical to achieving California's climate goals And we estimate this could add over 50 million megawatt hours of incremental electricity consumption by SCE's customers by 2045. Building electrification is another critical opportunity to reduce greenhouse gas emissions, and it's the area of the California economy where the least amount of progress has been made today. Last December, SCE proposed a $677 million program to jumpstart widespread adoption of electric heat pumps in buildings. And then last month, Governor Newsom's budget proposed almost $1 billion to accelerate building decarbonization. The governor's proposal is a welcome compliment to SCE's plan, and it's a meaningful addition to help meet California's climate goals. Additionally, energy storage is going to be an important part of an electric-led future to ensure reliability of the grid. As we've highlighted previously, SCE is investing $1 billion to construct 535 megawatts of utility-owned storage. The CPUC has already approved this investment, and the project is on track to be in service by August. These projects and programs all help to advance the vision set forth in SCE's Pathway 2045 analysis. Underpinning the need to electrify the economy is substantial continued investment in the grid through 2045. In late January, the California Independent System Operator released its first-ever 20-year transmission outlook, which estimates over $30 billion of transmission investment is needed by 2040 to meet the state's climate goals. We see this as generally consistent with SCE's Pathway 2045 work, and that identified over $40 billion of transmission investment CalISO-wide. FCE estimates that CalISO's outlook includes approximately $8 billion of transmission investments in our utility service area, which supports the potential for continued long-term rate-based growth beyond 2025. The FCE team is going to be fully engaged in the CalISO processes that lie ahead, and those processes will turn this conceptual plan into real projects. and they will be focused on bringing ideas to the CalISO table that maximize the value of existing transmission lines, of upgrades, and of new projects that will all make the clean energy transition as affordable as possible for all California ISO customers. In upcoming regulatory proceedings, including the 2021 GRC Track 4 and the 2025 GRC, SCE will provide greater visibility into the near-term investments that are needed to ensure that we remain on track to help achieve the state's climate goals. to achieve our ambitious long-term goals. Operational excellence is absolutely imperative, and it's going to be a constant focus for our team. For over a decade now, FCE has proactively pursued cost reduction efforts to manage affordability for its customers. This focus on cost management, along with broader operational excellence improvement, that's all allowed the utility to absorb some of the rising costs to serve customers. which in recent years has largely been driven by investments to reduce wildfire risk and strengthen the grid reliability. So I want to highlight that SCE's system average rate has grown less than local inflation over the last 20 years, and SCE's average system rate is the lowest among the large California investor-owned utilities. Last year, SCE advanced its operational capabilities with new systems and new digital tools deployed across the company and these resulted in enhanced data quality, improved power line inspection and maintenance, and enriched abilities to gather and to act on customer feedback. To further our capabilities and focus on operational excellence, we launched an employee-led continuous improvement program late last year. Our employees have been wonderful and they've enthusiastically provided thousands of ideas that we believe are going to have real, positive, measurable impact on safety, on affordability, and on quality. We expect that the ideas that SE will implement over the next two years will enable delivering greater value for our customers, for our investors, for employees, and for all of our other stakeholders. I am looking forward to telling you more about the results of this program in the future. With that, I'll turn it over to Maria for her financial report.
spk10: Thanks, Pedro, and good afternoon, everyone. My comments today will cover fourth quarter 2021 results, our capital expenditure and rate-based forecast, our 2022 guidance, and updates on other financial topics. Edison International reported core earnings of $1.16 per share for the fourth quarter. Full year 2021 core EPS was $4.59, which exceeded our guidance range. On page seven, you can see SCE's key fourth quarter EPS drivers on the right-hand side. Core EPS increased year-over-year, primarily due to higher revenue from the 2021 GRC final decision and income tax benefits from the settlement of California tax audits, partially offset by higher O&M expenses and higher net financing costs. The increase in O&M is due to a variety of miscellaneous items. Net financing costs were higher primarily due to the debt issued throughout 2021 to finance the resolution of wildfire-related claims. At EIX parent and other, the core loss per share was seven cents higher than in fourth quarter 2020. This was primarily due to dividends on the preferred equity we issued at the parent in March and November of 2021. Now let's move to SCE's capital expenditure and rate-based forecast. As shown on page eight, we continue to see significant capital expenditure opportunities at SCE, driven by investments in the safety and reliability of the grid. In 2022, we project the highest capital spending level in our history, which includes SCE's $1 billion investment in utility-owned storage to support summer 2022 reliability. As shown on page nine, our capital forecast results in projected rate-based growth of 7% to 9% from 2021 to 2025. We are confident in this range, which is driven by continued investment in wildfire mitigation, infrastructure replacement, and SCE's programs to accelerate electrification. Page 10 provides an update on the 2022 cost of capital proceeding. The CPUC scoping memo separates the cost of capital mechanism into two issues. Whether extraordinary circumstances warrant a departure from the cost of capital mechanism, and if so, how to set the cost of capital for 2022. SCE recently submitted its opening testimony reiterating that extraordinary circumstances over the last couple of years warranted departure from the mechanism and recommending that the 2022 cost of capital components should be left unchanged. Our earnings guidance is based on this position and in consideration of the wide range of potential outcomes in the proceeding. I will address this when I discuss our 2022 earnings guidance. Additionally, the CPUC ruled that this proceeding is limited to 2022. and directed the utilities to file their cost of capital request for 2023 through 2025 at the regularly scheduled time, which is in April of this year. Turning to page 11, SCE continues to make solid progress settling individual plaintiff claims across the 2017 and 2018 wildfire and mudslide events. In total, the utility has resolved approximately 78% of the best estimate of total losses. At the appropriate time, SCE will seek CPEC recovery of eligible and prudently incurred costs. As a reminder, SCE is funding claims payments with debt that is outside its rate-making capital structure. Turning to guidance, pages 12 and 13 show our 2022 guidance and the key assumptions for modeling purposes. We are initiating a 2022 EPS guidance range of $4.40 to $4.70. To address the components, let's start with rate-based EPS, which we forecast at $5.34. Given the status of SCE's cost of capital proceeding, we are basing guidance on the current ROE of 10.3%. To help you better understand the sensitivity, a 10 basis point change in ROE results in a 4 cent change in EPS. After receiving a final decision from the CPEC, we will provide an update on guidance to incorporate any changes in the ROE and our outlook for the rest of the year. Let's now discuss STE's operational variances, which add to rate-based earnings. This is forecasted at a net contribution of 11 to 38 cents per share. This includes 10 cents related to the currently authorized costs of debt and preferred equity that will be addressed in the 2022 cost of capital proceeding. Consistent with our approach with ROE, the currently authorized cost of debt and preferred are reflected in guidance. As we expected, the remaining variances are not as large as we've seen in the past. Prior years benefited from items that aren't expected to occur going forward. For EIX, parent, and other, we expect a total expense of 70 to 73 cents per share. The year-over-year increase is driven primarily by a full year of dividend expense and the $2 billion of preferred equity issued last year. Lastly, we have 32 cents per share of SCE costs excluded from authorized. The primary increase in this category is the interest expense on debt issued to fund wildfire claims payments. As we previously communicated, SCE will have a full year of interest on the debt issued during 2021, plus interest on debt issued throughout 2022 to fund additional settlements. I would now like to provide the parent company's 2022 financing plan. Turning to page 14, We project total financing needs of $1.2 billion, including the $300 to $400 million of equity content we previously discussed. We continue to expect to issue securities with an annual average of up to $250 million of equity content in 2022 through 2025. In 2022, the amount is higher than average because of SBE's $1 billion utility-owned storage investment that was accelerated into this year. However, this does not increase the total expected over the period. Additionally, we expect to refinance the $700 million of maturing parent debt with new debt issuances. Turning to page 15, we are confident in reiterating our 5% to 7% EPS CAGR from 2021 to 2025. This would result in 2025 earnings of approximately $5.50 to $5.90 per share. We have provided modeling considerations for 2025 EPS to give clarity behind our confidence in achieving this range. As you can see in the table on the right, we expect 2025 EPS to be driven by strong growth in SCE's rate-based earnings with offsets from increases in financing costs to the parent and costs to fund wildfire claims payments. Our earnings growth is underpinned by the capital investment opportunities at SCE that will create a strong foundation for climate adaptation, and the clean energy transition. Thank you. That concludes my remarks.
spk12: Merci. Please open the call for questions. As a reminder, we request to you to limit yourself to one question and one follow-up, so everyone in line has the opportunity to ask questions.
spk01: Yes, sir. If you would like to ask a question, please press star 1 on your phone. One moment for the first question, please. Our first question comes from Jeremy Tonet from JP Morgan. Your line is open, sir.
spk08: Hi, good afternoon. It's actually Rich Sunderland on for Jeremy. Thank you for the time. Hi, Rich. Maybe starting off with the guidance drivers, you outlined the 10 cents of cost of capital financing benefits. Just want to be clear on that component alone. Does that Does that mean you're expecting more likely to have kind of a steady state outcome in the 2022 portion of cost of capital or, I guess, put simply, not have to give that back to ratepayers? Just any high-level thoughts there would be helpful.
spk10: Sure. Thanks for the question. So the way we developed our guidance is to base it on the current cost of capital. So basically the carryover, no trigger of the mechanism, and having that, you know, continue through the end of 2022, which would be the normal cycle. We know we're in the middle of a proceeding in that proceeding. The, um, the, the assigned commission is really actually, um, really closely defined the questions that can be considered. One is, was there an extraordinary event? And then if there was how to address the 2022 cost of capital at this point, we're in the middle of, of that, the, um, the proceeding itself, all of the hearings, et cetera, should be done by the end of March. And then there'll be a decision sometime thereafter. So what we're really doing is really just developing it from that basis to the extent that there are changes from the current cost of capital. We just wanted to lay out for you what the impacts might be on earnings for the year. And so we've separated that into two parts. One is the ROE sensitivity and one is the embedded cost of debt and press sensitivity. And as we get through the proceeding and we see where we stand, because there can be a really wide continuum of outcomes, it could be no impact all the way to you know, sort of the trigger resetting or something else in the middle. And as we get to understand what that outcome would be, then we can take another look at where we stand over the course of the year and we can provide an updated guidance.
spk08: Got it. That's helpful, Collar. And then maybe separately, the high and low end of your undergrounding cost ranges on a dollar per mile basis. Could you parse that and maybe speak to, is that targeting a cost reduction or more representative of just the range of activity across your system?
spk14: So, Rich, I think that's been what the numbers we showed have been based on prior experience. Let me turn it over to Steve Powell, the CEO at SCA, to give more color there.
spk07: Yeah, Pedro, you hit that right. The numbers we're showing are based on our experience over the last number of years, and it's also represented in our wildfire mitigation plan Those costs certainly aren't things where we're doing it at scale. When we do an undergrounding over the last number of years, it's in the single digits or up to 10 miles. As we look at undergrounding, the numbers show our average is a little over $3.5 million per mile. I would expect if we were to do it at scale, and especially if we were looking to do a broader undergrounding plan as we analyze potential risk reduction, that The factors we're looking at there as we look at egress and the frequency of fires and our PSPS thresholds and what the winds are in a specific location, we're evaluating probably hundreds of miles of opportunities for undergrounding that would be at least a few years out. In that, we'll also consider costs, and so we'd be selecting ones that ideally would be lower cost, but it's really driven on the risk side. So that band you see is backwards looking. We still have work to do to figure out how much we could bring those costs down, doing them in larger volumes and targeted places where we can manage the cost more effectively.
spk14: And, Rich, one really important thing that Steve has mentioned there is that You know, we're looking at potentially hundreds, but it's not thousands of miles. We continue to see covered conductor as the mitigation of choice for most of our territory. And it's just given the terrain that we have, the geography, the specific factors. And so it's really looking at where are there some narrow applications for an undergrounding would be the right choice from a risk basis. But again, it's probably hundreds, not thousands.
spk08: Great. Thank you for the time today.
spk14: Yeah.
spk08: Thanks, Rich.
spk01: Thank you. Our next question comes from Shar Perez with Guggenheim Partners. Your line is open.
spk06: Hey there, Shar. Hi. Good afternoon. It's the Pedro team. It's actually Constantine here picking up for Shar. Thanks for taking the question. I appreciate the updates today and just as you're moving closer to the wildfire claims resolution and you seem to be up back on pace in terms of reduction of outstanding claims is there anything incremental you're seeing in terms of pace of settlement and along those lines maybe you have a sense of what constitutes being reasonably close to completion to start filings or discussions with the CPUC yeah maybe I'll start in Maria you can certainly add here
spk14: I'll probably start with something you've heard us say before, and that's it's really hard to forecast timing on this. Clearly, as each quarter goes by, you've seen the continued progress we've made. So, you know, certainly the uncertainty cone keeps narrowing here, but there's still uncertainty, and that uncertainty includes timing. You know, these cases are not uniform. They're, you know, they're unique. They're, you know, case-specific. And so that says it's hard to project, you know, or give you insights around the potential pace on these. In terms of what substantial completion might mean or, you know, another volume of these, I don't think we can really define that, but I believe the CPC would expect us to have, you know, pretty good visibility into what the total exposure is going to be. So I think that would mean, you know, the vast majority of the cases for a given, for a given bundle. And so by that I mean, you know, you could imagine Woolsey standing in its own two feet and, you know, seeing substantial completion of Woolsey cases and then taking the Woolsey matter to the CPUC. Separately, you could imagine Thomas and Koenigstein and the mudslides as another bundle. So I don't think we need to think of these as a joint bundle of all 17 and 18 events, but, you know, what the logical collection is of cases. you know, for whatever that logical collection is, you know, Wolsey or Thomas Koenigstein, then we would need to see the vast majority of cases done so we could have a good sense of, you know, total liability. Maria, anything you'd add or correct there?
spk10: Certainly not add or correct. I'd just say maybe in addition to some of that, it's probably the case for sure that it benefits us to have more clarity as well as to what the quantum is and just what the types of claims are that we've settled and can bring that forward and there are fewer open or loose ends when we get to the commission. I think that helps just in terms of the proceeding once it does start. So I think we're weighing all of that as we go forward. It probably doesn't have to have Every last person settled, but certainly we think that there's a benefit to having the vast majority of them settled before we start the process. And I think it's important to denote what pager just said is that Thomas and will be our separate events and would have a different set of facts that we would bring forward.
spk06: Certainly appreciate that detail. And as we're thinking about the tail end of your CapEx plan or the non-GRC years, can you discuss the magnitude of potential upsides that you're seeing? We've seen the CPC working on various non-GRC investments like microgrids, risk mitigation, other policy items. Just curious how that's being implemented in your plan, if at all.
spk14: I'll give you a very high-level answer, which is, as we constructed that 5% to 7% range to 2025, You know, we took a look at the, you know, large number of opportunities that we have in this state, you know, around electrification, around expansion of the grid, you know, items like the ones you mentioned, you know, storage. I think as you get into the later years, transmission starts being more important. And all of those are supportive then of the upper end of the range. So I don't think we're at a point certainly this early to say, here are things that could take us beyond the range, but rather we'd look at all that set of opportunities as being supportive of that 5% to 7% range.
spk06: Okay. So a bit of an all of the above approach. Excellent. Appreciate your time today. Thank you.
spk14: Yeah. Thanks, Constantine.
spk01: Thank you. Our next question comes from Jonathan Arnold with Vertical Research Partners. Your line is open.
spk09: Hello, Jonathan. Good afternoon. Just picking up on the legacy liabilities, Pedro, is it? I think it went down from 2.2 to 1.6. You didn't change the overall accrual. So fair to assume you settled about 600 million in the quarter. And that's on par with the prior two quarters. So is there any reason I wouldn't assume that, you know, somewhere between two and three quarters from now, you would be pretty much done with this? you know, absent some big change in the accrual?
spk14: You know, I go back to the answer I shared with Constantine that, you know, I think your math is right in terms of the pace we've experienced, but we don't want to use that to say precisely, so therefore, you know, it's X points Y quarters from now if you assume the same rate. Because again, Jonathan, all of these cases are really unique and specific, and so we don't want to be extrapolating precise timing, you know, based on the history we've had. We're working hard. We're pleased with the progress that we're making, but, you know, just can't give you that firm an answer. Sorry, I know it's a little unsatisfying.
spk13: All right.
spk09: I understand. Well, maybe I'll try something that you do have some control over the timing of. When should we anticipate that you would, you know, give your 23 guidance? I know you've just given us 22, but we're now in a more sort of normal rate case cadence, presumably. Just what would be, what's the new normal?
spk10: Yeah, so Jonathan, really what we're trying to do is kind of focus on that overall five-year cycle or 21 through 25 cycle and give people that visibility on that EPS CAGR over time. I think we'll give our 23 guidance, I think, in the same, we have the same schedule to give annual guidance that we have in the past. I mean, today was 22. Next, in Q4, we'll give 23. We have started to provide a little bit more visibility into how we think about the long term. So when you do get a chance to look at the slides, you'll see that 2025, now we've developed some of the piece parts for folks to use so they can take that and start to do modeling out on a longer term basis. But I think that annual look we'll do on the same schedule we have as in the past.
spk02: Okay. Thank you, Maria. Thanks, John.
spk01: Thank you. Our next question comes from Angie Sorzenski from . Your line is open.
spk11: Thank you. Hello. I just wanted to do just one follow-up to that slide 11 with remaining claims for 2017 and 2018. When you show that there's 22% of the best estimates still outstanding, can you tell us if it's roughly the same for Thomas and Woosley? Meaning that it's roughly the same number or percentage-wise for both? Or can we expect that, for instance, one of them becomes ready for filing sooner?
spk14: Yeah. Thanks, Angie, for the question. We have not split that out in how we report it for a number of reasons. So I don't think you can extrapolate from that which case might get to that CPOC line sooner.
spk11: Okay. And then a bigger picture question. So I understand you're in the midst of your 2022 cost of capital proceeding. We've seen the filings by the consumer advocates with some interesting points being made about no link between the stock performance and the cost of equity, right? which for an equity analyst is quite an interesting conclusion.
spk14: You just confirmed that you disagree with that, right?
spk11: Yes, I do. I hope so. At least that underpins my job, I think. But also, I mean, you guys are issuing equity to finance growth. And so that cost of equity and the affordability of equity actually plays into into your customer rates, et cetera. So I think that you are in a particularly good position to demonstrate the importance of that cost of equity. I mean, we have this, you know, a number of new members of the commission, very few of the existing ones have gone to a cost of capital proceeding. So far, we have the position of the consumer advocate. So is there anything you can tell us to, you know, give us a sense that there is this sense of fairness and reasonableness at the commission that will, you know, end up with a, you know, again, a reasonable outcome, at least of this 22 cost of capital proceeding?
spk10: So, Angie, I mean, all the points that you just made, I think, you see reflected in the filings that we've already made. and now the assigned commissioners ruling on the 2022 cost of capital question really made it clear that they want the utilities to go back and file for 23 through 25 and that's I think our opportunity as you say a lot of the commissioners haven't been through a cost of capital proceeding before that's our opportunity to really go back we're going to be making similar arguments to the ones we made back in August and then you know just recently in January but it's really an opportunity for us to underscore how all of this really flows through to customer rates at the end of the day. And so you really need to have, you have to have a cost of ROE that's reflective of what the real cost of equity is, but that the proceeding itself really gives a signal to the market around the jurisdiction itself. And that ultimately in the long term, that's important to affordability. So we are going to be making all of those points. I think we probably did make many of the points you just made when we did our filing just in January. and we'll proceed from there. Even separately from the proceeding, of course, we have routine discussions with staff and energy division where we make all of those same points, how costs like this, if they're not handled appropriately, if the decisions aren't appropriate, that they come back and get you in the end of the day, and it all ends up in the customer rates.
spk14: Well, and I think even more broadly, and Maria, you got it right, but from an even broader perspective, Angie, I think we've seen now over the past number of years that this commission and more broadly the whole apparatus of government in the state understands the need for financially healthy utilities. And that's been tested and we've gone through some of the challenges around the wildfire cost recovery framework. We saw legislation passed in Navy 1054 that we think does a good job addressing that. All that stems from an understanding that the state needs financially healthy utilities to do the work that we need to do. And ultimately, like Maria said, to minimize customer costs in the long run. And so we would hope and expect that, you know, that principle will be top of mind for commissioners as they go through the cost of capital proceeding.
spk11: Okay. Hopefully. Thank you. Thanks. Thanks, Angie.
spk01: Thank you. Our next question comes from Michael Lapidus with Goldman Sachs. Your line is open.
spk05: Hey guys, thank you for taking my questions and congrats on good guidance. Just curious, speaking of the guidance, when we look out to the out years, meaning kind of 2025, just that, you know, there are a handful of things in that. And I'm thinking, you know, the SCE cost excluded from authorized, you know, that 35 cents, but also the 20 to 30 cents SCE operating variance, that's a benefit. you don't assume, let's take the 20 to 30 cents, you don't assume that at some point, maybe future GRC, future regulatory event, that gets kind of clawed back, or the 35 cents, and a lot of that's executive comp, some of it's interest, doesn't get added back to rates?
spk10: Hey Michael, thanks for the question. So, yeah, thinking out to 2025, and let's separate those two buckets the same way you just did, the operational variances and then the costs excluded from authorized. I would say, you know, we think about those operational variances every year when we give guidance. And it's, you know, it can have some discrete things in it. You saw in our 22 guidance we called out a few things like ASEDC as well as, you know, shareholder costs. But really, it's a lot of different things across the board. you know, what exactly is coming into your capital plan that year in terms of the type of asset. It can be the timing of regulatory proceedings. And, you know, do you have to true up after a regulatory proceeding? So we're actually doing a very, very, like, detailed look every year and then coming back with the number. As we move out in time, you know, we have visibility into things that will happen, you know, over the course of the next several years as well. And that's really what we're thinking about in that number and how that might range from a lower number to a higher number. When we think about, you know, O&M savings over time, we actually, for the very reason you said, that 2025 year is the first year of a GRC cycle, really not making in a lot of, you know, O&M savings because we know that the work that we're doing is ultimately going to go back to the benefit of the customer. Same thing on the flip side in terms of the cost excluded from authorized. Look, you know, we're going to make our arguments in every general rate case around things that should get recovered in rates that, At least, you know, the past few rate cases haven't been recovered in rates. But we're going to, you know, we're going to push on that for the next rate case, but we're not presuming that that's going to happen. Also, those costs not recovered and authorized, you're right, some of it's legislatively driven. Some of it's, you know, the fact that we're, that SCE is paying interest expense on those claims payments, those welfare claims payments, and we're not making any assumptions right now that that would go away. We will certainly, make claims to recover the cost, but we're not making the assumption right now that that would occur.
spk05: Got it. Okay, super helpful. And then, Pedro, one for you, just trying to think about it. How do you think about the role hydrogen versus hyper-electrification of industrial customers? How do you think about the – I don't want to call it a battle, but it's really going to be a discussion that happens in the states of what's the right way to decarbonize the larger users in the state?
spk14: Yeah, hey, that's a great topic. And I'll start with our Pathway 2045 work, right? If you go back to that, you might recall that in that we talk about the largest part of the emissions reductions coming from clean electricity and using that electricity across society. But we do point out there that there will be some hard to electrify applications where we will need low carbon fuels, you know, like hydrogen. And by the way, that's not all hydrogen is the same, right? We're talking about hydrogen, you know, made from a clean source and so therefore probably not from methanation unless you're assuming, you know, carbon capture, which, you know, my sense is that we also assume there will be some level of carbon capture, but the availability of that probably will change. should be dedicated for places we absolutely need, you know, to be using fossil fuels. So, you know, with hydrogen, I think it's a lot of excitement about being able to drive down the cost of production from electrolysis. You have the, you know, the hydrogen earthshot at DOE. You have a number of other announcements on that. We are engaged in the work that's a joint five-year project that the Electric Power Research Institute and the Gas Technology Institute have going on. It's called the LCRI, the Low Carbon Resources Initiative, and that's digging deep into what's the potential for low carbon fuels like hydrogen and, you know, what are some of the technical issues to actually help them work? How do you think about the metallurgy of pipelines, for example, and how much hydrogen can they accommodate and what changes do you need for that? So that's kind of a backdrop to get to the core of your question. I don't think I can sit here and tell you clearly it's going to be these applications that go fully electric and these applications that go hydrogen. I think in general probably some of the heavier duty, more heat consuming processes, industrial processes, you know, would be more likely to benefit from hydrogen. Perhaps some long haul transport, you know, would be another application that would lend itself to hydrogen. I think when you're looking at applications like light duty vehicles, that it's hard to see that really, you know, making sense for hydrogen because electricity, you know, particularly as battery advances continue, it's just such a much better vehicle, no pun intended, for this. So we definitely see some role. Final point to make is just to pick a little bit on your, I think you used the word competition between the two. I'm not sure I see quite as much competition in the sense that if the hydrogen is going to be clean, then chances are it's going to need to be coming from clean electricity, you know, through electrolysis. And so therefore, there's an important role for the electric grid in delivering what may likely be massive amounts of electric power to, you know, electrolysis plants that can then deliver, you know, the hydrogen into a pipeline. So I think there's still a role for a robust modern grid, and that's the business we're in. So we think it's necessary in the hydrogen side as well.
spk05: Got it. Thank you, Pedro. Much appreciated. My pleasure.
spk01: Thank you. Our next question comes from Ryan Levine with Citi. Your line is open.
spk03: Good afternoon. What portion of the $8 billion of potential electric transmission highlighted in the prepared remarks does Edison have right of ways to potentially use? And are there any initiatives today underway to enable those opportunities?
spk14: You know, I'm going to give you a quick answer, but turn it over to Steve Powell. This is a conceptual plan. It needs to get translated into projects. So I don't think there's a beat as specific as, you know, an answer as specific as your question, but Steve, check me on that.
spk07: Yeah, no, Pedro, that's right. The conceptual plan in a lot of cases is identifying general paths of where projects would end up. You know, as you look at the mix of projects that are identified in there, It is heavily based on new projects that largely wouldn't be followed within the sort of right of first refusal for utilities given the current framework. There is a lot more work to be done for those sort of conceptual projects and plan to be translated into resource planning processes that are upstream of this, but really into the KISO's 10-year plans as we move forward. So a lot more work to be done to understand if more and more of the existing system that we own and would have right of first refusal around can be, how much of that can be managed through upgrades versus how much is going to be new. But I think looking back at just the overall opportunity, I think it's important that it really reinforces what our pathway has shown is a large opportunity out there. And now it's a matter of figuring out the most cost-effective ways to deliver it for customers.
spk03: Okay. So no right of way is existing. So you have to procure those independently. Am I hearing that correctly?
spk07: It would depend on the ultimate projects and paths that these translate into. And so, you know, some of them may be close to some of our existing right-of-ways, but there is a lot more work to do to bring more clarity to what those projects ultimately will entail.
spk03: Okay.
spk13: We don't know yet, Ryan, but some of it may be, you know, accessible through upgrades.
spk03: Appreciate that. And then one clarifying question from earlier. Are the potential undergrounding 200 miles in replace of or in addition to the current covered conductor miles?
spk07: Yeah, so right now as we're looking at that, we're focused on the places where we haven't already installed covered conductor. You know, so we've got, you know, approximately 3,000 miles of covered conductor installed. As we look forward, you know, we believe that there's thousands more of miles that need to be hardened one way or another. And As we do that evaluation, we're going to be looking to figure out where undergrounding might make sense. So the focus right now is on those places where we haven't currently installed Covered Conductor because there's a lot more of that grid hardening to do.
spk03: Appreciate the cover. Thank you. Thanks, Ryan.
spk01: Thank you. Our next question comes from Julian Dumoulin-Smith with Bank of America. Your line is open.
spk02: Hey, good afternoon, team. Thanks so much for the time. Absolutely. Thank you. So first, just a little detail here. You've got about a dime in there that talks about financing benefits associated with 2022 cost of capital proceeding. Can you elaborate on that, what that is? I understand the COC proceeding. Just what is the 10 cents there?
spk10: Sure, Julian. So typically the cost of capital proceeding covers a three-year cycle. you make an estimate at the beginning of that three-year cycle as to what the cost of debt will be and what the cost of prep will be. Certainly a whole bunch of that is debt that's already been issued, but you're also using a forecast when you start a three-year cycle. Over the course of that three-year cycle, you can start to see those costs diverge from the original forecast. And so it's the benefit that you get because the actual embedded cost of your debt, once you get to sort of the tail end of the cycle, is less than what you anticipated at the beginning of the cycle.
spk02: Got it. All right, excellent. And then just, if I can, going back to like a higher level question here, just as you've answered a lot of the detailed pieces, but I'm just curious, as you look at especially accelerating EV penetration, for instance, amongst other factors, what is the bill inflation percentage that you all are contemplating through the forecast period? And then what is your ability to mitigate that, especially, you know, cognizant of the NEM resolution here, et cetera, but really, Just sticking with that line of sight of trying to amortize across more kilowatt hours.
spk14: Yeah, I'll give you a couple thoughts. First, I don't think we've provided any sort of firm estimate out there over the long run of what that inflation would look like or that the bill pressure would look like. I think we've commented that we certainly continue to see some overall pressure in the next few years as we get to the, you know, largest bow wave of the wildfire mitigation work, and we do see then our path returning to a more, I'll call it, quote, unquote, normal, you know, path in terms of, you know, system rate increases and bill increases. That's one part of the answer. The other part of the answer, though, Julian, is that you alluded to, which is that You know, with the push on electrification, that will bring in more kilowatt hours. That's why my, you know, remarks, I mentioned the extent of kilowatt hours that may get added just from electric vehicles alone through 2045, right? And that, as you know, we don't earn on those because we have decoupling, which is a good thing, but adding those kilowatt hours to the system will just help reduce rate pressure overall for all customers. So the final part of the answer, though, and this is a really important one in policy space. We need to consistently remind our customers and policymakers broadly that the journey we're on here is not just an electric utility journey. It's an economy-wide journey to get to net zero carbon. And the benefit of work like our Pathway 2045 analysis is that it showed that The cheapest way for the economy to get there is by using more clean electricity, making more investments in the grid to move that power around to electrify a lot of the economy. That will put upward pressure on bills, right? And that's not just a pressure coming from the investments being made, you know, maybe offset some by the electrification benefit, but the bills themselves will go up because consumers will be using more electricity for more things in their lives. At the same time, they'll be reducing the amount that gasolines are using, maybe zeroing that out. They'll be reducing the amount of natural gas that they're using. So you might remember we mentioned before that we see the average customer spending one-third less across your entire energy bill in 2045 in real terms than they do today. They spend more on electricity. They'll spend less on other forms of energy. And overall, that's the cheapest way for society to get to net zero. And so that means that the conversation around affordability needs to migrate from one that's frankly very narrowly focused right now on the electric bill to one that is more thoughtful in looking at the total cost across society and the total cost for the customer to decarbonize. And that may mean that we may need to see some bill increases that are a little bit above inflation in the long run in order to have the cheapest approach to get to the net zero target, which is so important. One other place where this has come up You might recall the oral arguments that the prior SCE CEO, Kevin Payne, made last year in the GRC proceeding. You know, he pointed out that, you know, affordability also includes not just the climate mitigation part, but climate adaptation, right? And so, you know, the costs that are putting pressure on the electric bill now are in wildfire mitigation are, we believe, helping us avoid the cost for the whole economy of the aftermath of a catastrophic fire, right? And so that's also a cost reduction or a benefit to all society that's getting captured through some increase in today's electric bill. I know I went a little farther in the aperture than your question, but I think that's all interrelated.
spk02: Indeed. And just even within that, the effort on covered conductors, do you think that you can bring that to a place in which it doesn't meaningfully contribute to customer bills just given the offsets from insurance or just reduced costs over time?
spk14: You heard us say we'll continue to work on all pieces of the puzzle here. I know Steve and his team are focused on how do they continue to deploy Covered Conductor and possibly some undergrounding as well at the lowest cost possible. We're focused on our operational performance and driving operational excellence and continuing the pathway that we've set for a long time, improving our operations. That means higher reliability. better customer experience, more safety. It also means lower cost, right? And so I think our cost position relative to our peers in California speaks for itself. So we're not just starting a new initiative here. We are continuing a long journey for us. That also contributes to being able to do all this as affordably as possible for the customer. But again, as we look at the types of investments that will be needed over the long run for both climate mitigation and climate adaptation, that may well lead to rate increases that are at or maybe even a little bit above, somewhat above inflation. Hopefully not the levels we've seen for the last couple of years. Those were extraordinary just given the big bow wave of wildfire investment data.
spk10: Maria? Yeah, Julian, maybe I'll just... Julie, may I just jump in on one thing, because you had one specific, I think, question in there about, like, can we offset some of the cost of the capital plan with lower O&M, specifically insurance? Certainly, our hope is that as we move through time and we can demonstrate to insurance carriers that our risk has been mitigated down, we will see benefit, which would flow directly through to the customer. We're out right now, you know, marking for our next policy year, so we'll see, but we have seen One, we didn't see quite as high a trajectory as we thought perhaps we were going to see if we went back to the forecasts that we were putting together in 2018 and what we're realizing today. So that's a good thing. It actually is lower than the forecast we had for now, but it's still high. Our rate online is about 41%, so that's $0.41 on the dollar when we buy insurance. The other thing we're doing around that is not just waiting for the insurance companies to see the demonstration of risk reduction, but we're also pursuing customer-funded self-insurance, which as we mitigate risk, you know, would allow us to take premiums from one year and roll them into the next. You know, basically the customer would not be out-of-pocket premiums if there were no losses. So we're doing all of those things as well to try and, you know, sort of the parallel to the covered conductor cost is potentially this reduction in some of the other risk mitigation efforts.
spk12: Great, guys. Thanks for the detail.
spk14: Thanks, John.
spk01: Thank you. Our next question comes from Paul Fremont with Mizuho. Your line is open.
spk04: Hello, Paul. Hello. Thank you very much for taking my question. My first one is, when I look at your equity and rate-based assumptions, Are they assuming a certain amount of regulatory recovery of wildfire expenses, or are they assuming that anything that you've written off is going to be excluded from those assumptions?
spk10: And when you say wildfire expenses, you mean the liabilities?
spk04: Yes, yes.
spk10: Yeah, we do not assume in here that we will be getting recovery on those wildfire liabilities. However, I want to reiterate what I said earlier. We will be filing for recovery. So for all of the prudently incurred costs that we have, we will go back and ask the commission to allow us to recover that in rates. We have not built that into the forecast.
spk04: Okay, so that means anything that would be recovered then, I would assume that would be upside then to your rate-based numbers?
spk10: That wouldn't be rate-based, Paul. If you think about recovery, again, I'm just going to make sure we're talking about the same thing. You mean recovery of the wildfire liabilities that we've been paying out. That would not typically be something that would be a rate-based asset. If you think about it, it's kind of like O&M. It is a big number, you know, depending on, you know, what level the commission is comfortable allowing us to recover. So we would have to think through ways to mitigate customer rate impacts. There's language in legislation right now that we think would allow us to potentially securitize that over time if we were to recover it. But I don't think about it as a rate-based asset at this point.
spk04: I'm just thinking, but it would be earnings accretive or would it be earnings neutral if you were to recover a portion of that liability through regulatory proceedings?
spk10: If we were to recover a portion of that, like right now, for example, we have interest expense coming through in core earnings associated with the debt that's being used to finance the payment of those claims. So if we were to recover that, then that would come through earnings. We would reverse that and it would come through earnings in the future. the actual liability itself that we wrote off, we wrote that off to the non-corp.
spk04: Great. And then the other question I have is, I think part of the strategy that is being used by your northern neighbor in terms of undergrounding is trying to use O&M savings that it believes it would be able to achieve on the vegetation management side as an offset to the cost of actually undergrounding its system. Do you see potential O&M savings with your more limited plans to underground?
spk14: Let me turn it over to Steve for this one as well. Let me start by saying this is another place, Paul, where it's really important to remember the difference in terrain and geographies. I think Patty and the team have been very open about just the significant amount of veg management cost that they have at PG&E. Their terrain is much more forested. Our terrain is more grasslands. They have more concerns with trees falling into lines. We have more concerns with contact from objects and stuff blowing in. So that's where the math has tilted towards covered conductor in our case. But Steve, what else would you say there?
spk07: Yeah, no, Pedro, the differences between the terrain and the risks that we face from the types of ignitions that each of us have in our different territories is that huge driver of why the plans look so different. To the extent that we end up doing more undergrounding, I would expect where we're undergrounding, we would get some O&M savings in those specific areas for not having to do vegetation management and potentially changes to the inspection approach for undergrounding as well. But it would just be for those places where we were doing undergrounding on the covered conductor side. Um, we still need to keep, you know, trees and vegetation. Um, you know, we need to be doing that work, um, because trees falling into covered conductor, if they could take it down, if they're large trees, um, would be an issue. So over time, we'll learn more about how, um, our O&M and vegetation management practices can evolve and potentially have savings with Covered Conductor, but we're not at that point yet. So I'd say that, you know, Covered Conductor is really cost-effective for us and it's been great to get it out so quickly to reduce the risk up front. And we'll have opportunities for more underground industry.
spk04: Great. That's it for me. Thank you. Thanks a lot.
spk01: I will now turn the call back to Mr. Sam Ramraj.
spk12: Well, thank you for joining us. This concludes our conference call. Have a good rest of the day and stay safe. You may now disconnect.
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