Edison International (EIX) — Q4 2018 Earnings Call Transcript

Thank you, Caron, and welcome, everyone. Our speakers today are President and Chief Executive Officer, Pedro Pizarro; and Executive Vice President and Chief Financial Officer, Maria Rigatti. Also here are other members of the management team. Materials supporting today's call are available at www.edisoninvestor.com. These include our Form 10-Q, prepared remarks from Pedro and Maria, and the teleconference presentation. Tomorrow, we will distribute our regular business update presentation. During this call, we will make forward-looking statements about the outlook for Edison International and its subsidiaries. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our SEC filings. Please read these carefully. The presentation includes certain outlook assumptions, as well as reconciliation of non-GAAP measures to the nearest GAAP measure. 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, and good afternoon, everyone. As we look back on the results for 2018, I want to express our thoughts for all those impacted by the wildfire crisis across the state. The safety of our public, customers, and employees remains our primary concern, and we are dedicated to supporting the communities affected by these events. Now, regarding our financial results, Edison International’s core earnings in 2018 were $4.15 per share, down from $4.50 the previous year. As previously noted, comparing year-over-year results is not very meaningful since SCE has not yet received a decision in its 2018 General Rate Case. For the fourth quarter, EIX reported core earnings of $0.94 per share, excluding non-core items, primarily a $1.8 billion after-tax charge related to claims from the wildfire and mudslide events in SCE’s service area during 2017 and 2018. I will explain the accounting reasons behind this later, and Maria will provide a detailed overview of our financial performance in her remarks. Today, the Board of Directors of Edison International declared its first quarter 2019 common stock dividend of $0.6125 per share. In deciding to declare the dividend, the Board assessed a wide range of potential negative outcomes related to the wildfires in 2017 and 2018, and the Montecito mudslides in 2018, concluding that the requirements for the declaration under California law were met. The Board's evaluation included consideration of potentially unrecovered wildfire-related costs and financing scenarios, even accounting for outcomes that could be worse than those reflected in the charge accrued by the fourth quarter of 2018. Our top priority continues to be mitigating increased wildfire risk and its financial impacts. Catastrophic wildfires in our state have resulted in billions of dollars in property damages and claimed over a hundred lives. It is clear that the risk conditions under which all utilities in California operate have significantly changed. From an operational perspective, SCE has taken substantial measures to reduce wildfire risks in our service area, going beyond traditional industry practices to address the current conditions. The groundwork we are establishing to mitigate the risk of utility equipment-ignited fires is outlined in several recent regulatory filings. These filings include our Grid Safety and Resiliency Program submitted to the Commission last September, the Risk Assessment and Mitigation Phase of our 2021 GRC filed in November, and the proposed Wildfire Mitigation Plan submitted this month. These filings detail both near- and long-term actions SCE is undertaking to significantly lower the likelihood of fire ignitions and to strengthen the system against future climate change impacts. Specifically, SCE’s Wildfire Mitigation Plan focuses on three key areas: hardening the grid to greatly reduce potential fire ignitions, improving situational awareness capabilities, and enhancing operational practices, especially through data analytics. SCE will pursue opportunities to expedite wildfire mitigation efforts beyond the compliance goals proposed in our plan where feasible. The CPUC and stakeholders are currently reviewing this plan, and SCE anticipates receiving approval by May, in line with the 90-day timeline set by SB 901. As part of our Wildfire Mitigation Plan, we are intensifying and accelerating inspections of all overhead transmission and distribution power lines in high fire risk areas. These risk-based inspections exceed mere compliance checks, allowing us to make necessary repairs and conduct preventive maintenance to enhance public safety. Additionally, in these high fire risk areas, SCE plans to identify and remove 7,500 hazard trees that threaten our power lines, replace at least 96 circuit miles of bare conductor with covered conductor, install over 7,800 fast-acting, current-limiting fuses, and deploy 62 high-definition cameras and 350 micro weather stations. We are also exploring further solutions and evaluating additional mitigation measures, such as enhanced vegetation management and new technologies. We propose utilizing public safety power shutoffs when situational awareness indicates that a grid shutdown is necessary to ensure safety in high wildfire risk areas. Regarding regulatory actions, I want to update you on key wildfire-related regulatory proceedings with the CPUC. In January, the CPUC approved the establishment of an interim memorandum account effective from September 2018 to track our expenses related to the $582 million Grid Safety and Resiliency Program while the Commission reviews our overall request. We have also filed an advice letter to create an additional memorandum account to track costs associated with our SB901 Wildfire Mitigation Plan that exceed those covered in the GS&RP and our 2018 GRC. In February, the CPUC approved our Z-factor advice letter to recover $107 million in incremental wildfire-related liability insurance, which we expect to collect through rates over 2019. Moreover, on February 11th, SCE submitted comments in a proceeding by the Commission related to implementing part of Senate Bill 901, which focuses on determining the maximum amount of wildfire costs that could be disallowed without harming customers, referred to by some as the Customer Harm Threshold or Financial Stress Test. SCE recommended expanding the scope of this proceeding beyond a narrow stress test methodology, advocating that the Commission first establish a clear and repeatable process for assessing the prudency of utilities' wildfire operations and the timely recovery of wildfire-related costs. We have requested expedited action and decisions on this process linked to the approval of wildfire mitigation plans in May or June. We emphasized that utilities should be deemed prudent for cost recovery if they significantly comply with their approved wildfire mitigation plans, considering that substantial compliance is a reasonable standard of measurement while acknowledging that utilities cannot be expected to be infallible. This approach aligns with California's Assembly Bill 57, set after the energy crisis, which ensures compliance with Commission-approved energy procurement plans. Additionally, we have asked the Commission for a more timely financing authority and approval process to better align financing capabilities of the utilities with cash flow needs for wildfire damage claims. We continue to contest the application of inverse condemnation in court. We currently have pending motions challenging this principle in two Liberty Fire cases. The fact that an investor-owned utility cannot broadly socialize costs contradicts the fundamental principles underlying inverse condemnation. On the legislative front, we are heartened by Governor Gavin Newsom's actions since taking office in January. On his first day, he stated that addressing increased wildfire risks was a priority for his administration, issuing two executive orders and proposing significant state resources for wildfire prevention and suppression. The Governor has also recognized the necessity of financially stable utilities to achieve the State’s ambitious climate change goals. In his first State of the State address on February 12th, he indicated he has formed a Strike Team, which includes financial advisors from the energy sector and bankruptcy experts, to develop a comprehensive strategy within 60 days. He stressed that climate change adaptation extends beyond utility concerns, mentioning that regulations and insurance practices established decades ago did not anticipate current challenges. The Governor urged the state to create long-term strategies for California’s energy future and ensure that these ongoing issues do not impede the state’s clean energy objectives, nor let the costs of climate change burden those least equipped to handle them. Overall, we are optimistic about the Governor’s comments and his quick interest in these matters. He also appointed a new Commissioner to the CPUC and three members to the Commission on Catastrophic Wildfire Cost and Recovery, formed by SB901 to provide recommendations on equitable distribution of wildfire costs and damages. This five-member commission, with appointees from both legislative chambers, is expected to hold at least four public meetings and submit its report by July 2019, or sooner if requested by the Governor. The first public meeting took place on February 25th, where former CPUC Commissioner Carla Peterman was unanimously selected as Chair. The scope of work will involve assessing utility wildfire liabilities and providing recommendations on the fair distribution of these costs alongside a funding mechanism for wildfire damages. The Commission will also look at how these recommendations impact commercial and residential insurance markets and communities. In coordination with the Governor's office, we are engaged with State legislative leaders to reform policies regarding wildfire prevention and response that are vital for protecting Californians and achieving the State’s clean energy goals. The deadline for introducing bills in the legislature was February 22nd, leading to over two dozen wildfire-related bills being presented. Throughout the legislative process, we anticipate many of these bills will undergo amendments before the session concludes. We are actively involved in proposed legislation concerning SCE’s wildfire risk mitigation efforts, stressing the importance of maintaining healthy utilities amid reforms to the current uncertain cost recovery structure at the CPUC. As with our legislators and other stakeholders, our primary focus remains on our communities. In light of the wildfires' impact on areas served by SCE, the Board of Directors' Compensation Committee decided, after consulting with management and with our full support, that myself and my four senior executive colleagues would not receive an annual incentive award. This decision does not reflect the company’s performance or those individuals’ performance. Furthermore, the full Board has approved a $3 million donation to the Edison International Wildfire Assistance Fund to bolster community resilience, prevention, and mitigation efforts related to wildfires. We trust our shareholders see this resource allocation as beneficial to communities and a worthwhile initiative during this extraordinary and challenging phase in our region’s history. Turning to an update on the 2017 and 2018 wildfires and mudslides, investigations into the causes of the fires are ongoing, and final determinations regarding liability, including whether SCE was negligent, will arise during the complex litigation process. Even with investigations pending and liability remaining disputed, evaluating probable outcomes may necessitate recording a charge under accounting standards due to potential settlements. As of December 31, 2018, following SCE's internal review, we anticipate incurring a significant loss linked to these events. We have recorded a non-core, after-tax charge, net of expected insurance recoveries and costs booked for FERC customers, totaling $1.8 billion. This charge represents the lower end of the estimated range of potential losses and may change as more information emerges. We maintain that prudently incurred costs should be recoverable in electric rates; however, the CPUC's flawed decision to deny all of SDG&E’s uninsured wildfire costs in the 2017 San Diego WEMA decision creates significant uncertainty, so we have not registered a corresponding CPUC regulatory asset. Historically and based on regulatory practices, we have recorded a FERC regulatory asset. As we gather more details regarding the CPUC's framework and potential alterations through future actions by the CPUC or legislative changes, we will keep reassessing our capacity to recognize a CPUC regulatory asset. Looking forward, SCE continues to invest heavily in electric infrastructure, including Transportation Electrification, which we view as essential to supporting California’s environmental objectives. Specifically for electric vehicles, the CPUC authorized an additional $22 million in bridge funding in December, allowing us to continue our Charge Ready pilot at existing levels until the Commission approves the requested additional funding through Charge Ready Phase 2. Recall that we filed for Charge Ready 2 in 2018, seeking an extra $760 million over four years, which encompasses $561 million for infrastructure needed to support 48,000 new EV charging ports, along with increased marketing, education, and outreach efforts. We expect a proposed decision in the second or third quarter of this year. On our 2018 General Rate Case, we anticipate a proposed decision shortly but cannot predict the exact timing. At the request level, the rate base is projected to rise to $34.7 billion in 2020, reflecting a cumulative average growth rate of 9.8% during the three-year GRC period. This rate base forecast will be updated once the CPUC issues a decision. Next, I would like to discuss our operational and service excellence initiatives, highlighting a few important non-financial metrics that our Board uses to assess our performance. Ensuring safety for our workers and communities is foundational to our operational and service excellence goals. This remains a top priority and core value of our company. Unfortunately, our 2018 performance regarding employee safety did not meet expectations, with our DART rate falling short of our targets. Nonetheless, we remain committed to enhancing our safety culture, and in 2018, we intensified training efforts, especially for field employees engaged in high-risk jobs. In terms of customer satisfaction, SCE improved its standing in residential customer satisfaction, and we believe achieving first quartile performance is within reach. SCE already ranks in the first quartile for business customer satisfaction. To bolster our operational excellence, SCE notably improved system reliability in 2018, surpassing our annual goals. We executed various operational measures to minimize the frequency and duration of repair outages, striving for top-quartile performance in this area. Additionally, we took significant strides in 2018 to adopt digital technologies, transforming processes throughout our business, with expectations of this becoming a major focus for 2019 and beyond. Lastly, SCE improved its cost performance in 2018, exceeding its goal of managing costs to keep rates affordable for our customers. We believe our efficiency, as measured by O&M cost per customer, places us within the top quartile of our peer group. We aim to maintain this performance level across most of our operations, although we recognize that costs associated with wildfire risk mitigation and insurance will exert additional pressure beyond what utilities in other states face. Our focus remains on enhancing our safety culture and broader operational excellence, while we continue to actively collaborate with State leaders on comprehensive policies addressing statewide wildfire risk mitigation. Simultaneously, SCE will persist in investing in grid hardening, resiliency, and other capital programs aligned with the state’s ambitious clean energy targets. With that, I will turn it over to Maria to provide the financial report.

Thank you, Pedro, and good afternoon, everyone. My comments today will cover fourth quarter and full-year results for 2018 compared to the same period a year ago, our updated capital expenditure forecast, and other financial updates for SCE and EIX. As we’ve communicated to you before, until we receive a decision on the 2018 General Rate Case, we will continue to recognize revenues from CPUC activities largely based on 2017 authorized base revenue requirements with reserves taken for known items including the cost of capital decision and tax reform. Also, consistent with prior quarters, we are providing our SCE key drivers analysis at the prior combined statutory tax rate of approximately 41% for both 2018 and 2017 for comparability purposes. Before we take a look at our core earnings drivers, let me provide a bit more detail regarding the $1.8 billion non-core charge related to the 2017/2018 wildfires and mudslide events that Pedro mentioned earlier. We have recorded a gross charge related to these events of $4.7 billion prior to recoveries and taxes which represents the lower end of a reasonably estimated range of outcomes. We have also recorded a $2 billion insurance receivable and a $135 million regulatory asset related to FERC recovery. The combination of these results in the $1.8 billion after-tax charge. Considering the San Diego WEMA decision and the uncertainty regarding how the CPUC will interpret and apply its prudency standard in wildfire cost-recovery proceedings, we have not at this time recorded a regulatory asset related to CPUC recovery. We will continue to evaluate the probability of recovery based on available evidence, including guidance from the Wildfire Commission and new judicial, legislative and regulatory decisions. For the fourth quarter 2018, Edison International reported core earnings of $0.94 per share, a decline of $0.16 from the same period last year. From the table on the right-hand side, you will see that SCE had a negative $0.14 core EPS variance year-over-year. There are a few items that account for the bulk of this variance. To begin, lower revenues had a negative impact of $0.06. This includes lower CPUC revenue of $0.04 due to the recognition of revenues largely based on 2017 authorized base revenue requirements with reserves for known items and lower FERC and other operating revenue of $0.02. There was also a negative impact of $0.03 due to higher O&M. This is primarily related to increased vegetation management costs. We had a negative impact of $0.04 from higher financing costs due to increased borrowings and higher interest expense on balancing accounts, partially offset by higher AFUDC equity. Finally, increased income tax benefits were largely offset by an increase in property taxes and other expenses. For the quarter, EIX Parent and Other had a negative $0.02 core earnings variance related primarily to two items. First, a negative variance of $0.04 related to a goodwill impairment at Edison Energy. The impairment reflects a shift in the business model since we purchased the companies that make up Edison Energy in 2015 to our more measured proof-of-concept approach. This was partially offset by an income tax benefit of $0.02 primarily related to a reduction in uncertain tax positions that resulted from the settlement of our 1994 through $2.6 California tax audit partially offset by the lower 2018 corporate tax rate on pre-tax loss. For the full year, Edison International core earnings per share decreased $0.35 from the prior year. This includes core earnings decreases of $0.16 and $0.19 at SCE and EIX Parent and Other, respectively. Significant drivers at SCE include higher O&M expenses of $0.13 related to increased wildfire insurance premiums and vegetation management costs as well as a negative variance of $0.12 due to higher net financing costs. These were largely offset by a tax benefit of $0.19, primarily from higher income tax benefits, including true-ups related to the filing of our 2016 and 2017 tax returns. At EIX Parent and Other, the majority of the $0.19 decrease in core earnings was due to the absence of tax benefits in 2018 relative to 2017, largely related to stock-based compensation and federal tax settlements. As I have mentioned previously, earnings comparisons pending a 2018 GRC decision are not meaningful. We expect to record a true-up when we receive a decision and we have established a memo account to track costs. While we continue to wait for a decision on SCE’s 2018 general rate case, SCE has developed and is executing against a capital expenditure plan for 2019 in support of our business objectives. This plan will allow SCE to execute its capital spending program over the three-year GRC period, that is 2018 through 2020, to meet what is ultimately authorized in the decision while minimizing the associated risk of unauthorized spending. Our total 2019 CapEx forecast is $4.5 billion and includes $346 million for wildfire related programs largely related to the GS&RP we filed last year and the Wildfire Mitigation Plan we filed in early February. We have accelerated some activities included in our GS&RP into 2019. This acceleration will primarily target our covered conductor program. We will track this spending through various memorandum accounts and pursue cost recovery through current and subsequent CPUC proceedings. Given the significance of wildfire-related risks and the need for skilled resources to complete activities, SCE may reallocate spending authorized in the 2018 GRC to maximize wildfire mitigation efforts. For 2020, we continue to present our capital forecast at the request level included in our 2018 GRC. While we wait for our 2018 GRC decision, over the long-term, we continue to see SCE investing at least $4 billion per year and adding at least $2 billion per year of rate base for the foreseeable future. As SCE focuses on investments in the grid and resiliency and continues to be a key enabler of California’s ambitious climate change policies. On Page 6, our rate base remains essentially the same from the last forecast and it is still shown at our GRC request levels. I would note that we expect to update our full forecast when we get a proposed decision on the 2018 GRC. On Page 7, you will see our financial assumptions for 2019. As I mentioned in prior quarters, we will not be providing earnings guidance for 2019 until we receive a final decision on the GRC. However, we have laid out some additional information on this page that you may consider as you model 2019 and beyond. This includes, other items that reflect some considerations outside of the simplified rate base model. The approval of the Z-factor filing related to the recovery of previously incurred wildfire insurance premiums will create a benefit of approximately $0.05 per share in the first quarter of 2019. Additionally, we expect energy efficiency incentives of $0.05 for 2019. This includes $0.03 related to a 2018 CPUC approval that was delayed and which we now expect in the first or second quarter of this year. We are still in settlement discussions regarding our 2018 FERC Formula Rate. However, we plan to file a new Formula Rate with an updated cost of capital to reflect the impacts of recent events in California since FERC procedures require a new filing when requesting a rate increase. For EIX Parent and Other, we expect an earnings drag of $0.30 to $0.35 per share. Included in this is approximately one penny per share per month related to EIX operating expenses. The overall increase from last year is primarily due to higher forecasted interest expense driven by higher long-term debt issuances and rates. At Edison Energy, we continue to work towards our target of achieving a break-even run rate for earnings by the end of this year. I now want to provide a few comments on other financial topics. Let me start with our wildfire insurance coverage. Market conditions are more difficult than last year and we continue to see a decline in the number of insurance providers willing to underwrite policies in California. We have also included co-insurance in the structure in order to more effectively obtain coverage. SCE has secured new wildfire-specific insurance coverage of approximately $700 million from early February through the end of May, subject to $10 million of self-insurance and up to $15 million of co-insurance. SCE has also initiated efforts to place coverage for the period starting June 1st and currently has $750 million of wildfire-specific insurance coverage from that date through June 30, 2020, subject to a $10 million of self-insurance and up to $115 million of co-insurance. We will continue our efforts to secure additional coverage in amounts generally in line with previous years for the period June 2019 through June 2020. The 2019 wildfire insurance cost, prior to any regulatory deferrals, would be $321 million for the current policies. Over time, we have worked diligently to maintain a strong and flexible balance sheet. SCE will continue to access the capital markets to support its large investment program. Both SCE’s and EIX’s credit ratings have been negatively impacted as the rating agencies consider the ability of the regulators and legislators to provide a durable framework for wildfire cost recovery. As we work with state and regulatory officials to find a solution to the current problem, SCE will continue to use its first mortgage bond secured debt structure when issuing new debt as well as other options such as commercial paper and term loans to meet short-term requirements. EIX continues to have access to the debt capital markets although currently investors require much higher spreads than were necessary for previous debt issuances. As you are aware, SCE is required to maintain an authorized capital structure under its CPUC jurisdiction and the current authorized equity level is 48% calculated over a rolling 37-month period. As of December 31st, SCE is in compliance with this requirement with a 49.7% average equity ratio. In addition, SCE is required to file an application for waiver if in any month, its actual equity ratio, or spot ratio, falls 1% below its authorized level. Based on the non-cash charge related to wildfires included in the year-end financial statements, our spot ratio has fallen below this level and SCE filed an application notifying the CPUC. The waiver requests exclusion of any equity charges resulting from the 2017 and 2018 wildfires and mudslides as well as any debt issued to finance payment of these claims. We have requested that these adjustments to the calculation of SCE’s regulatory capital structure remain in effect until a determination is made regarding recovery of costs related to these events. While the CPUC reviews the waiver application, SCE is considered in compliance with the capital structure rules and therefore continues to issue debt and make dividends in the ordinary course of business and considering its capital spending and other needs. As discussed, we continue to have significant capital needs, those that will ultimately be authorized in our 2018 GRC as well as additional capital needs related to wildfire prevention and mitigation and programs that support the environmental objectives of the state. Our upcoming Cost of Capital proceeding will be an important venue to demonstrate the critical nature of the work that investor-owned utilities undertake in California and the need to support financially healthy utilities. It is imperative that we maintain a robust capital structure and strengthen our investment grade credit ratings and be positioned to continue to attract capital to support our customers’ needs. We will be evaluating and requesting the appropriate level of equity return and capital structure changes to achieve these objectives. We look forward to giving you an update after our Cost of Capital filing in April. That concludes my remarks.

Caron, please open the question call for questions. As a reminder, we ask that you limit yourself to one question and one follow-up, so everyone in line has the chance to ask.

Good morning, good afternoon everyone.

Hi, Jonathan.

Hi, Jonathan.

I’m unsure about the direction this is going. Pedro, could you provide some clarification regarding the reason for taking this charge today? From our perspective, it doesn’t appear that there is much new publicly available information. I’m interested to know what you are aware of now that you weren’t aware of last quarter that could justify this charge.

Well, Jon, thanks for your question. We've tried to provide some context in both my remarks and Maria's. To summarize, we're considering all aspects, including the events themselves and our ongoing internal assessment of the facts, as well as the number of claims filed, the potential for litigation, and the litigation history in similar cases. When we evaluate all of this, we determine that we may face a significant liability. Based on accounting rules, we believe it’s appropriate to disclose this through a reserve. According to these rules, we need to find a situation that is both probable and estimable. In this case, we think we can estimate the number we shared today as the lower end of the potential outcomes. To be frank, we believe it will be quite challenging to estimate the upper end of the range. Therefore, we have provided investors with a disclosure that includes the reserve and indicates that actual results might differ. Importantly, we addressed this in our comments, but I want to ensure it’s clearly understood. There is the total exposure and the total reserve, which we’ve netted against our insurers. We are confident about accessing our $2 billion through these insurance policies and have also accounted for FERC recovery amounts. However, we didn't net out a regulatory asset for CPUC recoveries. This is mainly because of the uncertainty caused by the CPUC's flawed decision regarding the San Diego WEMA case. This is a significant data point in California regarding how the CPUC manages cases, and they adopted a perfection standard instead of a prudency standard. They provided no cost recoveries in San Diego rather than a proportional recovery based on a thorough review of prudency. Taking all of this into account, we did not believe it was suitable to record a regulatory asset for CPC recoveries that would offset a portion of the overall liability. That's how we arrived at the $1.8 billion after-tax charge. Maria, do you have anything to add?

No.

No?

That's very helpful. Thank you, Pedro. For my follow-up, could you explain what happens if the legislature or the CPUC does not act quickly enough to persuade the rating agencies to maintain your investment grade before the next fire season? Could you also discuss the implications of a downgrade if that were to occur?

Jon, I’ll start and I’m sure Maria will have more to add. From the perspective of rating agencies, as you know, they are independent and have been sharing their views on this matter. Recently, S&P's report was quite explicit about the need for action at the state level to reform the overall liability framework, which we agree with. They mentioned a strong possibility of further downgrades if reforms are not made at the state level soon, which we believe will take months rather than years. I will let Maria discuss the implications if we are downgraded below investment grade. This would raise cost issues. We think access remains available, but certainly at a much higher cost to consumers. Before I pass it to Maria, I’ll comment on the situation in Sacramento. I feel like I’m repeating myself, but once again, it seems to be early days. The Wildfire Commission has just been established and held its first meeting. The Governor has also created his Strike Team, and those advisors are getting organized. The Governor has expressed awareness that this issue is significant, not just for utilities, but also for the broader California economy. It certainly seems like there is a case for action being communicated. However, how that translates into specific recommendations, particularly addressing the reform we are advocating for—such as the cost recovery framework and exploring options for a Wildfire Insurance Fund or necessary securitization—is complicated. We will be very involved, but it's challenging to predict when or how these issues might be addressed in Sacramento. Maria, would you like to discuss the implications?

Sure. So, Jonathan, there are cost issues tied to the downgrade and we need to evaluate how costs would change with lower ratings. It's important to mention that for SCE, this will also affect their cost of capital filing because as their debt costs rise, it will be included in our filing. Ultimately, this will be presented to the CPUC and once that case is resolved, it will impact their cost of capital. There is a clear connection. Additionally, when people inquire about the implications of a downgrade, collateral posting is usually a consideration. We have provided information on this previously. If we are downgraded below investment grade under our PPAs, there’s an estimated impact of about $25 million. This figure is tied to market prices at the time of calculation. There's also another estimated amount around environmental remediation and a few other miscellaneous costs, bringing that total to approximately $100 million. These are the two main cost implications of a downgrade.

Perfect. Thanks. Thank you for the very cool answers.

Thanks, Jonathan.

Thank you.

Hi, Praful.

Hi. To address the question about dividends, if there is no wildfire litigation this year and no wildfires, we currently do not see any risk to dividends. Are there any other situations, such as a downgrade, that could potentially affect dividends?

Praful, this may sound repetitive, but once again, the Board reviewed a wide range of potential negative outcomes and determined that we meet all the conditions to continue issuing this dividend. As we mentioned before, we never make that decision until the quarter when we decide on that quarter's dividend installment. However, I think today's comments indicate that the Board again assessed a broad spectrum of potential risks and felt confident about this next dividend.

I understand. That's very clear. Regarding the charge, I see that the language indicates the lower-end, and you’ve mentioned the lower end of the range several times. Can you provide any details on what factors could lead to it reaching the higher end of your range or increasing the charge? Any insights on that would be appreciated.

So, Praful, as Pedro mentioned earlier, we cannot provide an estimate for the high end of the range. The accounting rules are quite definitive. We, as an organization, have considered various factors and examined several components, reviewing data from sources like the insurance commissioner and our litigation experiences. According to the accounting rules, we are only able to identify the lower end of a reasonably estimated range of outcomes. That's about all we can disclose. We conducted a thorough evaluation, but that reflects our assessment at this time.

Fair enough. Just one last clarification on the regulatory asset point you mentioned regarding the charge you've taken. You talked about the WEMA case, but since then, Senate Bill 901 has expanded the CPUC's ability to review and allowed for broader recovery options. Should we interpret this as you believing that the broader provisions of Senate Bill 901 are not sufficient and that there is still enough uncertainty for you to feel uncomfortable taking the regulatory asset related to the charge?

We rely on objectively verifiable evidence and place a strong emphasis on prior precedents. The WEMA case serves as a significant example of this. As I mentioned in my prepared remarks, we will continue to assess the situation as more information becomes available from sources like the Wildfire Cost Recovery Commission and other legislative or judicial proceedings. However, it is important to note that we strongly base our conclusions on actual precedents.

Got you. Super helpful. Thank you, guys.

See you Praful.

Thank you for taking my question. Can you provide an update on the litigation concerning inverse condemnation that you mentioned? What is the current status of that litigation and what are the next steps?

Why don't I take this one, Pedro? This is Adam Umanoff, the General Counsel. We have made motions in most of our wildfire cases, challenging the application of inverse condemnation. By and large those motions have not been granted by the trial courts. We currently have pending motions in two Liberty fire related cases. The Liberty fire was a smaller fire in our service territory. We appealed denials of our motions in the Thomas Fire, but those appeals are discretionary. The appellate court can, with or without reason, accept the review or reject it. And to date, no appellate court has taken a review, discretionary review. So we have not had an opportunity to take these issues up to the appellate courts for review.

Got it. Is there a possibility that this could end up in federal court, or do you believe it will mainly be handled in state court? Additionally, will any of the cases, including your case or the San Diego Gas & Electric case related to the 2007 wildfire, reach the Supreme Court for clarification on inverse condemnation?

So for appeals to be heard by the appellate courts, it is a matter of right, as opposed to a discretionary appeal. You have to have a verdict, a jury deciding that inverse damages are payable. We are not in that position. SCE is not in that position. I will note that in one of the cases that PG&E has, there is a current verdict, directed verdict on inverse, which if they get relief from the stay and the bankruptcy, could be appealed. Ultimately that appeal would have to be heard by the appellate court. You led off by asking, can you get into federal court? As a practical matter, in our cases, the path to the federal court is largely through appeals up to the California Supreme Court, which if unsuccessful would give you an opportunity to appeal to the US Supreme Court.

Meaning, and your appeal would be some things along the line of a takings clause related case or something like that?

Yes, we have several legal arguments. One is related to the policy of the Takings Clause, and we also have a due process argument. Ultimately, we strongly believe that the principle behind inverse condemnation requires the ability to broadly socialize inverse costs if that standard is used to establish liability. Since we cannot automatically socialize those costs and must seek approval from our regulator, we believe it is unfair for the inverse condemnation standard to be applied in this situation.

Got it. Thank you. Much appreciated.

Thanks, Michael.

Hi Ali.

Thank you. Hey, good afternoon, Pedro. First question, Pedro, as you outlined there are a number of initiatives the governor has talked; the Task Force, there is the bills and the legislature etcetera. From your vantage point, what do you think is the most important and likely path through this process? Is it that Commission that's been set up and looking at that, I mean what’s the confidence that something does take place before the end of the session, which I believe is end of August, correct me there, but just to understand how do we tracking this from your vantage point?

Thank you for the question, Ali. The legislative sessions actually last two years, so as we approach next year, it's challenging for us to predict specific pathways or details. You have consistently heard from our Company, and will continue to, a strong sense of confidence that this issue will eventually be resolved, as the state requires financially healthy utilities to maintain operations in its economy and to help mitigate greenhouse gas emissions for climate change. We believe this confidence supports the likelihood of future reforms. Over the past year and a half, I have felt personally optimistic, but I can't translate that into a concrete prediction or timeline for specific actions. The Wildfire Commission will play a crucial role in this process, and it has had quality appointments and its first meeting, which indicates it's organizing effectively. It's promising to hear the governor discuss the possibility of expediting the timeline outlined in SB 901. Legislative action might be necessary, as the Wildfire Commission will propose recommendations to the Legislature, which will need to act on them. The governor's leadership will be essential in guiding the Legislature on this matter. He has formed a Strike Team, staffed at a high level, which suggests that the administration is taking this seriously and is focused on all necessary actions. We've previously highlighted key issues, particularly the need to address the liability framework for investor-owned utilities, which also impacts municipal utilities. That's about all I can share; I might not have provided new data points, but it’s clear that multiple factors are involved, and strong leadership from the Governor is crucial, with his early communications being promising.

But just to clarify that, thank you for that, Pedro. Is it fair to say that nothing concrete probably happens until after the Wildfire Commission recommendations are in?

I don't want to provide anything too firm or conclusive because anything could happen. One possibility is that the Wildfire Commission makes recommendations, followed by the legislative process. However, the Strike Team created by the Governor, which he mentioned in his State of the State address, has a 60-day timeline. This is about half the time allocated by the legislature for the Wildfire Commission's process. We need to see what proposals the Governor develops, which I would speculate could include different vehicles for those proposals. Additionally, we are currently facing the issue of PG&E's bankruptcy, which affects the entire state. One key aspect of Chapter 11 is that the debtor must have a reorganization plan that instills confidence that they won't end up in Chapter 11 again soon. We believe that, as Edison, we need reform of this framework, and it is crucial for PG&E to have a successful reorganization as well. This adds to the urgency for the state.

Great. For my second question, you mentioned the charge and indicated that your current ratio is slightly below the appropriate level, representing the lower end of potential outcomes. When do you anticipate that equity needs will factor into this situation? You've mentioned a significant amount of debt, but when do you see equity becoming relevant?

So, Ali, that second question felt like number three or four, but just having a little fun with you. I think, Maria commented on the fact that the cost of capital proceeding will be a very good frame in place to think about the overall capital structure.

Yes, I think Ali, obviously there is a lot of stuff going on in the state. There is all the things that we've just been talking about in terms of the wildfires and when that will be resolved. But we have a lot of other unknowns that are coming out. We're going to get our TRC decision. We have capital requirements related to proceeding, they're actually separate and apart from our GRC. So as we are getting that information we will be able to provide a more fulsome response, but in particular, in our cost of capital proceeding, we would expect that we would be able to share more information with you. We're developing that right now. It's going to be filed at the end of April. And I think that would be a good point at which to continue the discussion.

Thanks, Ali. Appreciate it.

Hey, good afternoon, everyone.

Hi there.

Hey. So, I wanted to follow-up on this waiver you all are seeking with respect to capital structure. Just wanted to understand what does that involve? I suppose it's ultimately to the extent to which it does get approved, how do you come to them with the plan on improving that to get back to authorized equity over time? What are the tools at-hand there? And also what are the consequences if they don't approve the waiver? I just want to understand that as well. And especially, how that waiver works with respect to the charge, if there is any latitude, if they don't too?

I want to clarify that the charge is not an issue related to the CPUC or a waiver. It pertains to our GAAP accounting. We have submitted the waiver, and the Commission is currently reviewing it. If you consider that our spot equity ratio is more than 1% below our authorized level due to this charge, it's important to note that we do not have a corresponding CPUC regulatory asset. Our application to the Commission argues that both the charge and any debt financing linked to it should be overlooked until we go through a proceeding that will establish our ability to recover that through rates. The core of the waiver request stems from the uncertainty introduced by the WEMA decision, which prevents us from booking a regulatory asset. We are seeking a period of time until we receive a decision on that, during which we would exclude the charge from our calculations. In the meantime, as the Commission reviews our application and waiver, we are compliant with the plan. Our 37-month weighted-average equity ratio stands at 49.7%, which keeps us aligned with the authorized capital structure's parameters. This serves as a notification to the Commission. Once we progress through the process and if they agree to accept our application, we will move forward. However, if they decide not to accept it, we will need to assess our compliance with the 37-month average. If we fall out of compliance, typically we would then present a plan to the Commission on how we intend to regain compliance. Many other factors will be at play during this, as I previously mentioned regarding our cost of capital proceeding. There will be numerous developments before the Commission requires a plan from us.

Got it. All right. Excellent. And then just coming back to some of the nuances on the charge specifically and the allocation, just on the FERC allocation, how should we think about the percentage there? Should we take that on the notional 47 or on some kind of netted basis? And then, also just within that, the charge itself is, I know it's the low end, but what is reflected even in that low-end in terms of subrogation claims or assumptions on settlements etcetera. I just want to make sure we understand that a little bit more specifically here, beyond just the insurance netting.

When considering the gross charge before customer recovery, it's important to first recover from third parties like insurance. The allocation of FERC regulatory assets is based on the labor allocator used when separating costs between FERC and CPUC jurisdictions. This is the perspective I have on the FERC asset. Regarding other factors influencing our charge estimate, we have previously stated that we examine all available information, whether from the Insurance Commissioner or through litigation processes. Our determination is based on the risks we observe in litigation and our past experiences, including settlements, which led us to our conclusion.

It's roughly 3% of the growth?

5%.

Thank you all.

That was the last question. I will now turn the call back to Mr. Sam Ramraj. Thank you for joining us today. And please call us if you have any follow-up questions. This concludes the conference call and you may now disconnect.