Edison International

Good afternoon, and welcome to the Edison International First Quarter 2019 Financial Teleconference. My name is Nichelle, and I will be your operator today. When we get into the question and answer session, if you have a question, press star 1 on your phone. Today's call is being recorded. I would now like to turn the call over to Mr. Sam Ramja, Vice President of Investor Relations. You may begin, sir. Thank you.

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 Rigotti. Also here are other members of the management team. Materials supporting today's call are available at www.edisoninvestor.com. These include a Form 10-Q, prepared remarks from Pedro and Maria, and the teleconference presentation. Tomorrow, we will distribute a 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. 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.

Thank you, Sam. Before I begin my business remarks, I want to pause to mourn the loss of one of our directors, Ellen Tauscher, who passed away last night. Ellen accomplished so much. She was one of the first and youngest women at 25 to hold the seat in the New York Stock Exchange. a talented congresswoman who built bridges across the aisle, a nuclear arms nonproliferation leader who truly made our world safer, a thoughtful director on the boards of multiple companies and national labs, an unstoppable cancer survivor who then led national efforts to help others, an inspiring mother for her daughter, Catherine, and above all, a deeply caring individual whom I and all of us at Edison will miss deeply. Well, knowing Ellen, I can sense that she's hearing me and smiling from a better place, but also telling me to get back to work. So let me turn to our quarterly update. First quarter core earnings were 63 cents per share, which was 17 cents below the first quarter last year, largely driven by increased wildfire mitigation costs. As we have mentioned before, year-over-year comparisons are not particularly meaningful because SCE did not receive the proposed decision in its 2018 general rate case until April 12th of this year. Since our policy is to account for a regulatory decision on the period in which it is received, SCE recognized revenue from CPUC activities for both the first quarter of 2018 and 2019, largely based on 2017 authorized base revenue requirements, with reserves taken for known items, including the 2017 cost of capital decision and tax reform. If adopted, the GRCPD would result in base rate revenue requirements of $5.1 billion in 2018, $5.4 billion in 2019, and $5.8 billion in 2020. This is lower than our request. The primary drivers are lower depreciation, capital authorization lower than requested levels in the areas of infrastructure replacement, grid modernization, and corporate real estate, and reductions in operating expenses or incentive compensation. Maria's remarks will cover the proposed decision in more detail, our financial performance for the quarter, and other financial topics. But let me first give you a few policy observations. We have reviewed the GRC-PD carefully and have serious concerns in a few areas that will further erode the California regulatory framework if not corrected. First, there are several areas where the PD attempts to shift standard cost-of-service items unfairly to shareholders. Also, over the past 15 months, we have managed our business in the absence of a GRC decision. That required us to make pragmatic choices for expenditures and programs based on our assessment of the most effective way to deliver safe, reliable, and affordable energy to our customers. Receiving a very late proposed decision that does not acknowledge this is truly challenging. There are critical principles at stake, and our comments will focus on the need to ensure a durable and predictable process, one that leads to timely decisions and gives us sufficient guidance and assurance of cost recovery for reasonable management decisions. Turning to the California wildfire crisis, we first remain focused on mitigating catastrophic wildfire risk and impacts on our communities. Governor Newsom has recognized the need for urgent action and initiated steps to strengthen California's emergency preparedness and response capabilities and build community preparedness and resilience. Importantly, the governor recently declared a state of emergency and directed his administration to expedite forest management projects to protect California's most wildfire vulnerable communities. Governor Newsom also announced additional funding for public awareness campaigns to inform residents about local emergency action plans. aircraft acquisitions for firefighting, improved evacuation planning, and technology upgrades for fire prevention, preparedness, and response. The Governor's April 12th Strike Force Report was comprehensive in addressing the key areas related to wildfire risks and issues, climate change, and California's energy sector. The report sets out a roadmap to reduce the incidence and severity of wildfires, reduce the state's commitment to clean energy, and outlines actions to hold utilities accountable for their conduct related to wildfires. The report acknowledges the important role California's investor-owned utilities play in helping the state meet its clean energy and greenhouse gas emission reduction goals and identifies potential measures to ensure the financial health of IOUs. The Strike Force report notes that any successful approach for allocating wildfire cost responsibility among stakeholders should be based on several principles, including maintaining safe and affordable power, treating wildfire victims fairly, and requiring equitable stakeholder contributions. The report also acknowledges the uncertainty surrounding cost recovery of wildfire liabilities, including the significant liquidity impact this can have on a utility. This uncertainty can and has resulted in lower credit ratings and higher financing costs, which in turn leads to higher rates paid by utility customers. We are encouraged by the broad scope and sense of urgency of the Governor's Strike Force Report. It appropriately reflects the need to address wildfire liability through legal and regulatory reform, the need to restore confidence in California's regulatory compact, and the importance of financially healthy IOUs to support the state's policy goals. Governor Newsom has pointed to the Commission on Catastrophic Wildfire Costs and Recovery as an important implementation vehicle. SB901 tasked this Commission with making recommendations to the legislature on the equitable distribution of catastrophic wildfire costs and damages. In its first three meetings, the Commission heard testimony on several topics, including climate risk, CAL FIRE's prevention efforts, customer rates, the existing wildfire liability regime, the state of the insurance markets for utilities and homeowners, utility risk financing options, and community needs around wildfire damages. The Commission held its fourth meeting yesterday and established three workgroups to assess, first, utility wildfire liability and cost recovery standards, second, a wildfire fund and or other funding mechanisms, and third, homeowners insurance availability and affordability and household and community wildfire mitigation and protection. The commission is expected to submit its final report by the statutory July 1 deadline or sooner as requested by the governor. On the judicial front, we continue to challenge the application of inverse condemnation in the courts. We have pending motions challenging inverse in two cases arising out of the Liberty Fire. We argue that the fact that an IOU cannot broadly socialize costs runs directly counter to the rationale underlying the application of inverse condemnation. whatever the ultimate vehicle, whether executive, legislative, or judicial action. We believe three major components are needed in a comprehensive statewide plan. The first is enhanced prevention. We continue to reduce the risk of electrical equipment igniting wildfires and go beyond non-standard industry practices to address the new conditions we are facing. This includes hardening the grid to significantly reduce potential fire emissions. bolstering situational awareness capabilities, and expanding operational practices such as enhanced overhead inspections, vegetation management, and emergency response protocols. We have detailed our actions in several recent SCE regulatory filings. We're also expanding the use of public safety power shutoffs when high wildfire risk conditions warrant targeted circuit shutdowns to protect the safety of our communities. The second component reestablishes a fair regulatory compact for IOUs to recover prudently incurred costs in rates. A new framework must directly connect cost recovery following a wildfire to compliance with objective standards like the CPUC approved wildfire mitigation plans. If an IOU complies with its approved wildfire mitigation plan, the CPUC must find the company a prudent operator for purposes of cost recovery to remove financial uncertainty and support investment grade credit ratings. Compliance with an approved wildfire mitigation plan is an appropriate standard to judge a utility's wildfire risk management and mitigation operations since perfection is an unreasonable and unrealistic standard regardless of the industry in question. In the wildfire mitigation plan, proposed decisions issued yesterday, the CPUC interpreted their ability to do this under existing legislation more narrowly than we would. The legislature should clarify that the CPUC should deny cost recovery for utility wildfire claims only if a utility's noncompliance with its wildfire mitigation plan was a significant cost of a wildfire and its damages. And any such denial should be in proportion to the noncompliance's contribution to damages relative to other factors that contributed to the wildfire and its impacts. A similar standard led the state and its utilities out of the energy crisis through AB57 passed by the legislature and enacted into law in 2001. Such a framework defining prudency through compliance with a detailed plan approved by the CPUC is a necessary component to restore the regulatory compact on a go-forward basis. The third component is a viable wildfire cost recovery fund covering third-party property damage in excess of utility insurance with broad risk and cost sharing. A fund would benefit property owners by providing relief quickly and with more certainty. SCE and other electric utilities play a key role in helping the state achieve its ambitious climate change and other environmental goals while providing safe, reliable, affordable, and clean energy service to customers. Investor-owned utilities must therefore remain financially healthy to attract capital and invest in the important infrastructure needed for this essential role. Related to that, SCE submitted its CPUC cost of capital application and an updated FERC return on equity filing earlier this month. In both proceedings, we are requesting a 6 percent adder to compensate investors for risks related to wildfire liability and significant regulatory uncertainties. I want to be clear. We do not consider this wildfire-related increase to be a long-term solution. This is not an efficient or effective way to resolve the wildfire issue. It is a temporary necessity until the state implements a comprehensive solution that addresses wildfire risk. In the CPUC cost of capital application, SCE is also requesting changes to its authorized capital structure to increase its common equity to 52 percent from 48 percent, and reduce its preferred equity. The change will bring FCE more in line with other utilities in California and in other jurisdictions, which is especially important in the current business environment. To address these capital structure changes and the ongoing significant needs at FCE for infrastructure replacements and enhancement, we are implementing a new financing plan at EIX. This includes an at-the-market or ATM program. Between that and turning on internal programs, We plan to issue up to $1.5 billion of EIX equity to fund the increased equity layer at SCE. This will be the first EIX equity issuance since 1993. Since that time, our rate base has essentially tripled while our system average rate has grown less than the rate of inflation. We do not take new equity issuance lightly. and believe that FCE's growth opportunities to support California's clean energy pathway merit this constructive step to optimize our capital structure. Maria will address this plan in more detail. Let me now turn to updates on the December 2017 fires. There are no significant updates on the 2018 events. As we have mentioned previously, we believe the evidence shows there were at least two separate ignitions that led to two fires that together we have referred to in the past as the Thomas Fire, one in the Antelope Canyon area and another near Koenigstein Road. The Ventura County Fire Department or VCFD and CAL FIRE released a joint report on March 13th regarding the origin and cause of the fire that ignited in Antelope Canyon which they and now we are referring to as the Thomas Fire. We will continue to refer to the fire that resulted from the Koenigstein Road ignition as the Koenigstein Fire. In their March 13 report, the two agencies concluded that the Thomas Fire was started by SCE power lines coming into contact during high winds, resulting in molten metal falling to the ground. However, the report does not state that molten metal was found on the ground in that location during their investigation. SCE has been unable to determine that the ignition of the Thomas fire involved SCE equipment. In fact, SCE has evidence from publicly available radar data, which shows smoke in the air, that the ignition of the Thomas fire started at least 12 minutes prior to any issue involving SCE's system, and at least 15 minutes prior to the start time indicated in the March 13 report. SCE believes the Thomas fire was independently responsible for a portion of the damages from the Thomas and Koenigstein fires. On March 20th, VCFD and Cal Fire released a report finding that SCE equipment was the cause of the Koenigstein fire. The company previously disclosed in October of 2018 that witnesses reported a fire ignited along Koenigstein Road near an SCE power pole and SCE believes this equipment was associated with this ignition. These two investigative reports do not provide a final resolution as to cost or responsibility. The courts will ultimately need to make that determination after a full review of all the evidence. Let me conclude by saying that the safety of our customers, communities, and employees is our top priority and a core value of Edison. Our employees work vigilantly year-round to strengthen our system and protect the public and themselves against a variety of natural and man-made threats under all working conditions. We are taking substantial steps to reduce the risk of wildfires in our service territory and continue to look for ways to enhance our operational practices and infrastructure. We are also actively engaged with state leaders on comprehensive policies to collaboratively address statewide wildfire risk and establish a durable financial and operating framework for utilities. At the same time, we continue to invest in grid hardening and resiliency, as well as the other capital programs that support California's world-leading clean energy goals. We also continue our relentless focus on improving our operational execution capabilities across the board, from our ongoing work to strengthen our safety culture. to our bridge funding program building out electric vehicle charging infrastructure, to improve technology driving more streamlined customer interactions, to promising work applying machine learning to our smart meter data to detect down wires within minutes. We will not lose sight of the many important aspects of our business. While we are keenly focused on mitigating wildfire risk and reestablishing sound policy, these other elements are the foundation of our business for the long term. and we will continue to deliver on them for both our customers and our investors. With that, Maria will provide her financial report.