Edison International (EIX) — Q2 2019 Earnings Call Transcript

Thank you, Dustin, and welcome, everyone. Our speakers today are President and Chief Executive Officer, Pedro Pizarro; and Executive Vice President and Chief Financial Officer, Maria Rigatti. We also have other members of the management team with us. Materials supporting today's call are available at www.edisoninvestor.com, including 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 detailed in our SEC filings, so please read these carefully. The presentation includes certain outlook assumptions and reconciliation of non-GAAP measures to the nearest GAAP measure. I will now turn the call over to Pedro.

Well, thank you, Sam. I would like to start by reflecting on the passing of SCE President Ron Nichols on June 6 after bravely battling gastric cancer. All of us lost a great leader and a great friend. Thanks to all of our investors and stakeholders who joined us and reached out in mourning his passing and celebrating Ron's life. So turning to the business at hand. Second quarter core earnings were $1.58 per share, which was $0.73 above the same period last year. The increase in core earnings was primarily due to the adoption of the 2018 GRC final decision in this quarter and timing of regulatory deferrals related to wildfire insurance and wildfire mitigation costs. Therefore, year-over-year comparisons are not particularly meaningful, but Maria will discuss our financial performance in more detail during her remarks. The final decision on our 2018 GRC authorizes a base revenue requirement of $5.1 billion for 2018 and $16.4 billion over the 2018 to 2020 period. During this period SCE's rate base growth has a compound average growth rate of 8.4%. This excludes wildfire mitigation spending and additional items pending regulatory approval like our Charge Ready 2 electric vehicle charging infrastructure program. Turning to the California wildfire crisis. We remain focused on mitigating catastrophic wildfire risks and the impacts on our communities. I will address the recent legislative actions and then cover the operational practices that SCE has undertaken to reduce wildfire risk. Please turn to Page two of the slide deck we issued with our earnings. We appreciate the significant leadership that Governor Newsom and the Legislature have shown and their willingness to act with urgency to address this wildfire crisis through the passage of Assembly Bill 1054 and companion measures. The bills build on the initial steps of Senate Bill 901 to restore California's regulatory framework and provide the financial stability that utilities require to invest in system safety, reliability and resiliency while continuing to drive towards a clean energy future. As with any major legislation where multiple stakeholders have competing interests, this wildfire bill package reflects compromises. We supported the passage of AB 1054 and the related AB 111, and believe that careful implementation and potential future refinements will be critical to their success. AB 1054 is a comprehensive wildfire bill that holds utilities accountable for mitigating wildfire risks and improves the regulatory compact by clarifying the determination of prudent wildfire operations. The bill contains several important provisions to address wildfire liability risk. First, it changes wildfire safety oversight by creating a Wildfire Safety Division, initially within the CPUC, that will hold utilities accountable for mitigating wildfire risks and operating safely through an annual safety certification. These responsibilities will transition to the new Office of Energy Infrastructure Safety in 2021. For the first safety certification, the CPUC's executive director must issue it within 30 days of an IOU's request if the IOU has an approved wildfire mitigation plan, is in good safety standing, has a safety committee of its Board of Directors composed of members with relevant safety experience and has established Board of Director level reporting to the CPUC on safety issues. Earlier today, the CPUC's Executive Director informed SCE, by letter, that we have met these requirements and have been granted our initial safety certification for the next 12 months. In subsequent years, the IOU must meet these requirements and additionally, have an executive incentive compensation structure to promote safety as a priority and to ensure public safety and utility financial stability. The wildfire safety division must approve the IOU safety certification within 90 days if all the requirements are met. Second, the bill establishes a Wildfire Safety Advisory Board to advise the Wildfire Safety Division. The members of this Board will have relevant expertise, including experience in the safe operation, design and engineering of electrical infrastructure. The third provision refines the process for IOUs to recover catastrophic wildfire costs, particularly considering factors outside the utility's control and changing the prudency standard. Fourth, the bill establishes a $10.5 billion wildfire liquidity fund to pay victim claims exceeding insurance for utility cost wildfires, funded by IOU customers through the extension of the Department of Water Resources bond charge until 2036. There is an option for the IOUs to elect to participate in a broader insurance fund, which conveys additional benefits. It is important to note that for an IOU to benefit from the revised cost recovery standard, it must opt to participate in the wildfire insurance fund. Creation of the insurance fund requires both SCE and SDG&E to participate. With all three IOUs electing to participate, they will contribute a total of $10.5 billion, consisting of an upfront shareholder commitment of $7.5 billion and an annual contribution of $300 million, which is intended to match customers' $10.5 billion contribution over 10 years. Once the fund is established, the revised cost recovery standard will apply and will continue to apply even if the fund is extinguished. Based on the 31.5% wildfire allocation ratio for SCE, our upfront contribution translates to approximately $2.4 billion, with the subsequent annual contributions totaling another approximately $950 million. SCE notified the commission today of its commitment to make its initial and annual contributions in order to establish the fund. SCE will make its initial contribution no later than September 10. Maria will discuss our thoughts on the financing options in her remarks, which for now I will summarize as a balanced approach to fund the near-term $2.4 billion increment likely with 50% holding company equity contributed to SCE and 50% operating company debt. The fifth provision requires the large IOUs to invest $5 billion in aggregate in wildfire risk mitigation capital expenditures with no equity return, and authorizes financing of those mitigation costs. SCE's share of these costs will be approximately $1.6 billion. Finally, the bill sets a cap on IOU shareholder liability even where the IOU is found to have been imprudent, that is available only with the broader insurance fund. The cap equals 20% of T&D equity rate base, which is around $2.5 billion for SCE today. Turning to our operations. I would now like to address the actions we are taking to combat wildfires in our service territory. For quite some time, even before the devastating fires in Ventura and Santa Barbara counties in December 2017, we have had proactive programs that target wildfire risk. As circumstances continue to change, we have continued to evolve our practices for this new abnormal, as it's been called. Approximately 27% of our territory is in high fire risk areas, or HFRA. We recently revised this down from an earlier estimate of approximately 35%. SCE's prior HFRA map was based on CAL FIRE's fire hazard severity map. When the CPUC developed a new fire threat map in early 2018, out of an abundance of caution, we included the combination of the two maps in our HFRA footprint until we could do that thorough evaluation that we completed recently. A foundational part of the longer-term solution to reduce the risk of our equipment starting wildfires in these areas is to harden our infrastructure. Over the course of the past 12 months, we have replaced over 200 circuit miles of overhead line with covered conductor, installed fast-acting current-limiting fuses at more than 9,000 locations and updated protective settings on over 1,600 remote automatic reclosers and circuit breakers on our distribution circuits that traverse our HFRAs. While we are making significant headway in our system hardening efforts, it will take time to cover the remaining area. In the more immediate term, we remain focused on ensuring our greatest and best state possible through rigorous inspections and aggressive vegetation management, and then use proactive deenergization, known as Public Safety Power Shutoff, or PSPS, only when conditions warrant it. Through our Enhanced Overhead Inspection program, we have inspected more than 400,000 electrical structures in high fire risk areas since December, fixing the highest risk findings immediately and remediating non-threatening issues in a prioritized manner, generally within 6 to 12 months, depending on the condition and the location of the findings. In addition to our ground-based inspections, we are doing aerial inspections using helicopters and drones. Our vegetation management practices have been expanded in high fire risk areas, including widening clearance distances and removing dead and dying trees. In addition, we have an in-house team of weather experts in our 24/7 Situational Awareness Center to monitor local conditions as well as a fire scientist who has established a fuel-sampling program to better understand potential fire risks in our service territory. These risk-monitoring activities also support our PSPS program, which is a preventive measure to protect public safety. Trained incident management teams lead our efforts during elevated fire risk conditions using circuit-specific wind criteria and a fire potential index, or FPI, that measures and predicts local vegetation fuel, fuel moisture content, humidity and other factors. For circuits that are forecast to be above the wind and FPI thresholds, we pre-patrol the lines ready to find and fix any issues. Ultimately, the decision to shut power off is made based on real-time measures of wind and FPI and feedback from monitors in the field. Once the power is off, we wait until the wind and FPI conditions clear before patrolling the lines and restoring power when it is safe to do so. Over time, more system hardening should mean that we can lean on PSPS less frequently and only in more severe conditions. I would now like to give you an update on key regulatory proceedings. The CPUC issued a scoping memo in July on our cost of capital filing. In light of the passage of AB 1054, we are evaluating next steps, including the potential reduction of our requested return on equity. A final decision on this proceeding is expected by the end of this year. In May, the commission issued final decisions on our 2019 wildfire mitigation plan and de-energization guidelines. The currently approved WMP satisfies one of the requirements for the safety certification in AB 1054. As I mentioned earlier, our first approximately $1.6 billion of WMP spend will not earn an equity return. Additionally, the CPUC issued a scoping memo in May for our proposed $582 million Grid Safety and Resiliency Program that we filed in September 2018. In early July of 2019, SCE and certain parties to the GSRP proceeding agreed in principle to a settlement of all contested issues, which led the CPUC to take the scheduled evidentiary hearings off the calendar. SCE and the settling parties anticipate finalizing, executing and submitting a settlement agreement to the CPUC by the end of this month. If the CPUC accepts the settlement agreement, SCE expects a formal decision approximately six months from the date of submission. Let me conclude by saying that the safety of our customers, our communities and our employees continues to be our top priority and a core value of Edison. We are taking steps to reduce the risk of wildfires in our service territory through operational mitigation, and we are also encouraged by the regulatory and legislative policy changes to our risk profile. We will continue to make our communities safer and to manage the financial health of our utility to serve our customers and to help achieve California's public policy objectives and environmental goals. With that, I'll turn it over to Maria for her financial report.

Thanks, Pedro. Good afternoon, everyone. My comments today will cover second quarter results from 2019 compared to the same period a year ago, plus comments on our General Rate Case, our updated capital expenditure and rate-based forecasts and other financial updates for SCE and EIX. As we have said, year-over-year comparisons are difficult given the timing of the GRC. Please turn to Page 3. For the second quarter 2019, Edison International reported core earnings of $1.58 per share, an increase of $0.73 from the same period last year. From the table on the right-hand side, you will see that SCE had a positive $0.75 core EPS variance year-over-year. There are a few items that account for a majority of this variance. Upon receipt of the 2018 GRC final decision in May, SCE recorded the retroactive 2018 impact, which increased core earnings, primarily due to the application of the 2018 GRC final decision to revenue, depreciation and income tax expenses. This GRC true-up contributed $0.20 of positive earnings. Additionally, higher 2019 revenues had a positive impact of $0.34, including $0.28 at the CPUC and $0.06 at FERC. FERC revenues were higher primarily due to a change in estimate on the FERC formula rate mechanism. Lower O&M costs had a positive impact of $0.14, primarily due to the timing of regulatory deferrals related to wildfire insurance and wildfire mitigation costs. During the quarter, certain wildfire mitigation costs reached the total authorized in GRC and we began to defer incremental costs through approved memo accounts. Finally, lower depreciation and amortization had a positive $0.07 variance, primarily due to the impact of disallowed historical capital expenditures and the change in depreciation rates from the adoption of the 2018 GRC final decision. For the quarter, EIX Parent and Other had a negative $0.02 core earnings variance, mainly due to higher interest expense. Please turn to Page 4. For the first half of the year, Edison International core earnings per share increased $0.56 to $2.21 per share. This includes core earnings increases of $0.55 at SCE and $0.01 at EIX Parent and Other. I'm not going to review the year-to-date financial results in detail, but SCE's earnings analysis is largely consistent with second quarter results, except for higher O&M costs and higher net financing costs. O&M had a negative variance of $0.04 year-over-year, primarily due to higher wildfire mitigation costs, partially offset by timing of regulatory deferrals and cost recovery of wildfire insurance costs. Net financing costs had a negative $0.09 variance, primarily due to increased borrowings and higher interest on balancing accounts. Please turn to Page 5. As Pedro mentioned earlier, the CPUC approved a final decision in SCE's 2018 GRC in May. The decision authorized a CPUC GRC revenue requirement of $5.12 billion for 2018 and identified changes to certain balancing accounts, including the expansion of the Tax Accounting Memo Account, or TAMA, to include the impacts of all differences between forecast and recorded tax expense. Based on the 2018 GRC, SCE's authorized revenue requirement is $5.45 billion in 2019 and $5.86 billion in 2020, representing an increase of $335 million in 2019 and $412 million in 2020. Please turn to Page 6 for SCE's capital expenditures forecast. This forecast reflects planned CPUC jurisdictional spending as approved by the 2018 GRC. It also reflects significant other capital spending needs outside of the GRC, particularly wildfire mitigation-related capital expenditures under the Grid Safety and Resiliency Program, or GS&RP, and the wildfire mitigation plan, or WMP. As an update to our prior forecast, we now estimate approximately $390 million of wildfire-related spending in 2019. Additionally, we continue to expect wildfire mitigation capital expenditures in the range of $500 million to $700 million for 2020. The CPUC has approved the 2019 WMP and authorized tracking of costs related to the GS&RP and the WMP through memorandum accounts. We have also proposed a balancing account for our GS&RP spending and are anticipating a decision from the CPUC this year. Under AB 1054, SCE will not earn an equity return on the first approximately $1.6 billion of wildfire mitigation plan expenditures. We will work with the CPUC to implement this provision in light of the ongoing GS&RP and WMP proceedings. On Page 7, we have our rate-based forecast that incorporates the GRC final decision as well as increases in FERC spend since the last update. The GRC authorizes the 2018 CPUC jurisdictional rate base of $22.3 billion. This corresponds to a total 2018 rate base of $28.5 billion. SCE's rate base grows at a compound annual rate of 8.4% from 2018 to 2020. I would note that this current rate base forecast does not include any of our wildfire mitigation-related capital spending or additional needs for programs such as Charge Ready 2. On Page 8, you will see our key financial assumptions and EIX core EPS guidance for 2019. Our revised EPS guidance range for 2019 is $4.61 to $4.81 per share, with a midpoint of $4.71. This compares with guidance of $4.72 to $4.92 per share we provided after we obtained a final decision on the GRC in May. I would note that this revised guidance is related to changes to our financing plan as we project funding the $2.4 billion initial contribution to the wildfire fund, and there are no updates to the overall operational results of both SCE and EIX Parent. On the left-hand side, we have shown to build up for core EPS guidance, starting with EPS for 2019 from the simplified rate base model. SCE variances are expected to have a positive impact of $0.41, including $0.32 related to financing and other operational items. The test year 2018 GRC true-up has a positive contribution to EPS of $0.20. We booked this contribution in the second quarter. For EIX Parent and Other, we expect an earnings drag of $0.30 to $0.35 per share, which includes approximately $0.01 per share per month related to EIX operating expenses. We are forecasting a total of $0.18 of EPS dilution from the financing plan announced last quarter as well as the financing plan required to support the $2.4 billion contribution to the wildfire fund. I will discuss more about this in a minute. At Edison Energy, we are working towards our target of achieving a breakeven run rate for earnings by the end of this year. Let me provide an update on our 2019 financing plan. As Pedro noted earlier, we have notified the commission of our commitment to provide the initial contribution and subsequent annual contributions to the wildfire fund. Following the passage of AB 1054, the rating agencies have reported on the credit supportive attributes of the wildfire fund and the legislation more broadly, including changes to the cost recovery and prudency standards. On our last earnings call, I discussed the components of a 2019 EIX financing plan, which included the issuance of $1 billion of holding company debt and $1.5 billion of common equity through an aftermarket, or ATM equity program, and the use of an internal equity program. This plan was designed to fund SCE's requirements related to the requested increase in the authorized equity layer and additional growth investment of the utility. Based on our election to participate in the wildfire insurance fund created under AB 1054, SCE requires an additional $2.4 billion to fund the initial shareholder contribution. Funding for this contribution will be in addition to the previously announced plan and together, the combined financing need in 2019 is $4.9 billion. Through the second quarter, EIX has issued $600 million of unsecured notes as part of the original $1 billion debt financing need identified in Q1. We have not yet issued any equity under our ATM program, but we intend to do so opportunistically. As we've discussed in the past, our overall approach to financing the business is to fund capital requirements in a balanced manner. Our Q1 plan to fund the requested increase in the authorized equity layer and make capital investments at SCE is consistent with this philosophy. Likewise, this is how we will approach funding for the initial shareholder contribution to the wildfire fund. We are evaluating a range of potential EIX and SCE funding options to support the incremental $2.4 billion financing need and anticipate the permanent capital raise will likely utilize 50% holding company equity contributed to SCE and 50% operating company debt. As we have outlined, we are focused on a balanced financing approach that maintains a healthy balance sheet and promotes investment-grade ratings at both SCE and EIX. We believe this is the most effective way to support operations and future capital investments. We will continue to share our financing needs as we progress another milestone beyond 2019, including the 2021 GRC, our Charge Ready 2 application, securitization activities related to AB 1054 and potential wildfire liabilities. That concludes our remarks.

Dustin, please begin the Q&A session.

Can you hear me?

Yes.

Yes, we can.

Good. Excellent. A little soft for the operator there, so I wasn't sure. All right. Well, thank you again for all the details here. Maybe to just take it off. I just wanted to understand a little bit more on the timing for the combined financing of the $4.9 billion. How do you think about the ATM usage, especially against the timeline for the cost of capital case? Do we need to see an outcome on that front before you decide to move forward with the $1.5 billion? And then separately related here, just want to understand, as you think about the $2.4 billion wildfire fund, that as best I understand, it is excluded from the authorized capital structure. Can you talk about the decision to use the 50-50 funding for that versus just using more of the leverage capacity at the holdco?

Sure. So Julien, I think we really think about it as this is a total need for 2019. So that includes, both the Q1 items that you just remarked on, equity layer, investment utility as well as the contribution to the wildfire fund. We're going to use the ATM opportunistically. I think we talked about that earlier in the year. That continues to be the case. I think the comment you make around the ability to exclude the amounts from the authorized capital structure, we are obviously contributing some equity down into SCE and they will issue some operating company’s debt. So that does take advantage of that element of the legislation. But overall, the mix of equity and debt that we talked about really reflects our philosophy around financing the business and the balanced way in which we are approaching it.

Got it. But just to be clear about this, the $4.9 billion that is the intention to issue the equity for the cost of capital equity injection by the end of the year as well?

That's correct.

Just to follow up a little bit on that. In terms of the capital structure, if you don't get to 52%, what happens in that case? Do you want to wait until you get to 52% authorization before you issue? Or is there a prefunding plan as well?

Thank you, Praful. This is Maria. We discussed this briefly in Q1, but with everything that transpired in Q2, there's likely more to consider. Our strategy has been to monitor the cost of capital as it evolves over the year. Since Q1, we've made progress on issuing a scoping memo and establishing a schedule, among other developments. Pedro mentioned our consideration of the relationship between AB 1054 and our ROE request, so we are making progress. We have devised a plan to utilize the ATM to adapt to these changes over time. We still believe we will use the ATM opportunistically to meet our needs, and we'll be evaluating all available tools and timing to fund the initial contribution to the wildfire fund. That encapsulates our general approach.

Got it. That's very helpful. Regarding the capital structure improvement, if you reach 52%, will that be reflected in the revenue numbers from a GRC perspective, or do we need to adjust our models to account for the increased equity layer?

I am not sure what assumptions you have in your model, but the earnings would then show 52%, rather than the current 48%. Every year, we present our revenue requirements to the CPUC. If 2020 includes a 52% equity layer, we would revise the revenue requirement at the start of that year, and the same process would apply for 2021 and so on.

Got it. So you'll present that revenue requirement once you file it based on the CPUC's decision?

That's correct.

My first question. Just to clarify, when you're thinking about your current equity needs. So the $1.5 billion stays as is? And if we assume 50% of the $2.4 billion will also be equity, so we're early talking about $2.7 billion in total. One, I wanted to be clear. And then related to that, have you checked in with the rating agencies, are they comfortable with that mix and the amount of incremental debt that is implied in this math?

In response to your first question, Ali, the $1.5 billion is tied to the equity layer request we submitted to the CPUC. We're suggesting a 50-50 structure in relation to the $2.4 billion contribution to the wildfire fund, which amounts to $1.2 billion. So yes, that totals $2.7 billion, confirming your calculations. Regarding the rating agencies, we maintain ongoing discussions with them throughout the year, including extensive dialogue about AB 1054. I believe they've communicated with us and have mentioned in their reports the supportive elements of AB 1054, such as the credit enhancements provided by the wildfire insurance funds, liquidity benefits, caps, and standards for reasonable conduct. They've expressed strong support for these measures. Additionally, we have decided to contribute to the wildfire fund, which was something they were looking for. They have also been interested in our safety certification, which we received today as Pedro mentioned. We think all of this is very supportive, and now that we have these elements in place, the final piece is the financing plan. We believe our financing strategy aligns with the guidance from the rating agencies regarding the maintenance of our financial risk profile.

And Ali, if I could just follow on with Maria here. As we developed that plan that Maria emphasized, the fact that it is a balanced plan, it's one that we think will preserve our financial health. And it's one that frankly we want to make sure that overtime continue to build the strength of the balance sheet and have a good shock absorber built into that. So as folks have been developing their models, we see reports, and maybe some folks might have thought perhaps it is more or less that, et cetera. We wanted to take a balanced approach that allows us to build that strength and preserve some ability to always have some shock absorber in the system.

Got you. And a quick follow-up. Where do we stand on the '17 and '18 wildfires, which are obviously not covered in this? And eventually are you thinking for modeling purposes that there may be more equity needed as you have to pay for those liabilities sometimes in the future?

I don't think we have substantial update '17 and '18 from Q1. Recall that at the end of '18, we took the accounting reserve for what we viewed as the low end of the estimable range of potential liabilities there. And I think as we've signaled all along, this could be a long process as we work our way through the litigation efforts in the courts. There's always, of course, a possibility of parties wanting to enter settlement discussions. We've returned to talk about that. But just reflecting the fact that as you've seen cases historically, they often end up with some attempts at that. So nothing to update at this point other than to reinforce that, we think that the reserve we took at the end of last year still makes sense in terms of refining low end of the estimable range. And that will take some time to work through a complex proceeding there. There's a number of legal milestones, et cetera, from week to week or month to month, but nothing that we felt was to the level of materiality for these disclosures.

So Pedro, a question for you just on your comment of careful implementation and potential future refinements being critical to the law's success. Could you maybe give a little more color on what you might be referring to with those comments?

Sure. I think many of you have heard us draw comparisons to the energy crisis from two decades ago, which included new legislation that established a new framework. There was a period where the CPUC and other agencies had to implement that law. There are many foundational elements that need to come together here. We are encouraged by the positive initial steps we've seen, such as filing for and receiving initial annual safety certification from the CPUC today. This is a significant milestone. There will be additional milestones, including the establishment of a wildfire safety division within the CPUC, which will later transition to a new agency under the Natural Resources Branch of state government, and the formation of the Wildfire Safety Board. Input from these entities will be essential for future wildfire mitigation plans. We will continue to cite various aspects of the legislation, and I believe that once we see effective implementation and a solid track record, it will build confidence among investors, customers, and communities regarding how the laws are being enacted. While we haven't outlined specific potential refinements, it's important to acknowledge that with a law as large and complex as this one—especially one that was created with urgency—there are often adjustments that need to be made. These can range from minor clarifications in language to more significant changes. We're not in a position to provide a detailed list at this time, but it is certainly realistic to expect that given the complexity and time required, some adjustments will be necessary. I hope that helps provide clarity, Steve.

Yes, that's helpful. I have one follow-up regarding the timing of financing. I understand the wildfire contribution is not due until September and the equity ratio decision will not be made until the end of the year. However, considering we have a record stock market and very low interest rates, along with your stock's recent performance, it raises the question of why you wouldn't want to secure a significant portion of this financing as soon as possible.

Steve, it's Maria. We obviously are watching the market. We want efficient execution. We're evaluating all the timing issues that you just raised. But that's what we're doing right now. We're evaluating it.

Congratulations on getting the AB 1054 and getting that all behind you. In terms of how to think about the company on a longer-term basis, is there a level of FFO-to-debt that we should be thinking that the company is going to be targeting as you move forward in time?

No, Paul, this is Maria. I think it's about more than just investment-grade ratings; we've recently gone through a process for that over the past year or two and are committed to maintaining investment-grade ratings at both SCE and EIX. We are still in discussions with the rating agencies regarding California's regulatory strength and its implications for our ratings. As we progress, please keep in mind that we will be targeting those investment-grade ratings. While the metrics are important, how California is perceived by the rating agencies moving forward will also play a crucial role. We will be less specific about the metrics themselves and instead focus on maintaining that solid investment-grade rating.

Okay. So you're not going to have like a numerical target that you're going to provide to investors?

Not at this time, no.

And then going back to Ali's question. In terms of when you do pay out claims to claimants from the '17 and '18 fires, should we think about a funding formula that is similar to the sort of the 50-50 that you're talking about for your initial contribution to the wildfire mitigation fund? Or how should we think about your approach towards funding those cash needs?

Maybe think about it in a couple of three different ways. First, there isn't a lot of the variables that would need to be taken into consideration. So post-2019, you're referring to the wildfire liabilities. But we're going to be filing our 2021 GRC. There is the issue around the securitization for the wildfire mitigation-related spending. That's in the AB 1054. We have other applications pending in front of the commission that also require capital. So there's a lot of things to take into the mix or into consideration in addition to the liabilities. The first part of the liability is presumably covered by insurance as a starting point in any event. So there are a lot of timing in there, and there are a lot of different variables. Recall also that when we requested our capital waiver, we asked for some relief around, including the charges and the financing for those potential liabilities in our capital structure. So there's a lot of different things that we're going to have to weigh and consider before we make a final determination as to how we finance that part of the go-forward plan.

The timing of the liabilities is a significant factor because it will rely on a court process for various cases that has just commenced.

I understand you mentioned that there will be many refinements to this new law. However, my main concern is the $21 billion amount, which appears to be substantial. We're currently seeing the PG&E bankruptcy, which has reported $30 billion in liabilities linked to a single major fire and even exceeds that figure. The bill doesn't clarify how this amount will be replenished. How should we approach this? Is the intent moving forward to achieve some form of a reversal that will benefit investors in utilities across the state? Or is there an expectation that this $21 billion will be adequate for all utilities and all future fires?

Yes. Let me start framing an answer, and Maria or Adam Umanoff or others may have thoughts too. The $21 billion fund is expected to address potential liabilities that could actually be much larger, at least $40 billion or $45 billion, based on the historical growth of these cases. Settlements typically include a built-in discount, and the legislation has essentially incorporated a 40% discount for segregation claims. It allows for higher settlements, but those need approval from the fund manager. There’s a clear expectation that a significant discount is in place, which reflects the agreement among various stakeholders with differing interests. The governor highlighted this when he spoke during a conference call after the strike force reports were released, indicating that everyone in California has to share some responsibility in addressing this issue. Shareholders are contributing, customers are contributing, and the 40% discount is affecting the recoveries for the insurers. So, it involves everyone. Additionally, the governor's office released projections indicating that the fund's durability is expected to exceed the 90% level over the next ten years. The focus on maintaining this durability on an actuarial basis is partly based on discussions about giving California and its utilities time to enhance their infrastructure. The overall risk profile of the state is expected to improve significantly as utilities invest in infrastructure hardening. This also aligns with the state’s other measures, such as better funding for fire suppression and improved standards for buildings in high fire risk areas. The efforts include refining fire maps and implementing effective forest management strategies. All these measures aim to reduce the likelihood of ignitions and, if they do occur, to contain the resulting wildfires to more manageable sizes rather than catastrophic ones exceeding $30 billion. However, it’s important to note that there isn't a specific mechanism for replenishing the fund. There’s a belief that achieving this first phase was a significant accomplishment by the governor and legislature, and they will continue to monitor and adjust based on how the situation evolves over the next decade.

Real quickly, is there a potential use of securitization to help cover the 2017 portion of the wildfire claims after insurance that you actually have to pay out?

Yes, the 2017 claims from the wildfires are included in SB 901. In that context, you can securitize customer benefits if there are amounts that have been disallowed, but which could jeopardize the utility's financial stability. The commission has conducted a proceeding to clarify how this process would work and how to calculate the amount that would be excessive for the utility to handle. This calculation may not be completely straightforward, but we believe it is important to define clearly. As we mentioned previously, we may not be in a position to leverage the 2017 provision. I don’t see securitization as a significant opportunity for the 2017 amounts due to the wildfire mitigation expenses we must implement without a return. However, our share of the $5 billion available in AB 1054 can be securitized.

Got it. But you would effectively net neutral on that?

That's right.

Right. Okay. Typical securitization built, just like storm recovery occurs in other jurisdictions, et cetera?

Yes.

Okay. My second question is about what is missing from the rate base growth guidance. Over the next 6 to 12 months or 6 to 18 months, what do you believe might be added to it? You mentioned a bit in your opening remarks, and I would appreciate if you could revisit that. I'm trying to understand the factors included and excluded in that guidance.

Six to twelve months is a relatively short timeframe, so we're uncertain about whether any additions will definitely occur in that period. Currently, we have not included the wildfire mitigation-related spending identified for 2019 and 2020 in our rate base forecast. Although it is part of our CapEx forecast, it is not reflected in our rate base figures. This spending will be subject to the AB 1054 provision, which requires us to collaborate with the commission to implement it alongside our GS&RP and wildfire mitigation plan. For clarification, it is excluded from our rate base numbers. Additionally, we have a Charge Ready 2 application pending with the commission, and we expect to receive a decision on that later this year. This amounts to around $560 million in capital, but keep in mind that the rollout is over several years, so the impact on the rate base will likely be moderate in the next couple of years, even if we are spending CapEx. Looking ahead, we are focused on energy storage, and eventually, CAISO will devise a plan to meet the new higher renewable portfolio standards, in which we may have a chance to participate. However, these matters extend beyond the 6 to 12 month timeframe and are longer-term considerations.

Got it. Okay. And on the cost of capital pocket, what's the timeline and process from here? I mean, the CPUC has a lot of things on its plate. I'm just trying to think about how they prosecute all of the items and kind of where this one fits in the prioritization ranking?

Well, thus far, they have been very diligent about holding to their schedule. Comments are due from interveners and from the utilities on August 1. And then they have a schedule on scoping manual and schedule that has the decision coming out before year-end.

I have a follow-up question regarding the wildfire mitigation spending where you won't receive an equity return. Before we discuss the modeling, should we assume that you will recover the full investment at a cost of debt return and that you can finance it in a way that avoids negative arbitrage on your financing costs in relation to capital recovery? Or did I misunderstand that it would be managed separately and have no impact at all?

Yes. The legislation is designed as a securitization, incorporating dedicated rate components that will enable us to recover our capital investment and the return on the presumably lower-cost debt. This structure aims to minimize costs for the customer. Therefore, it would be neutral for us. We need to collaborate with the commission to determine when these elements will align, as we might have to initiate a program before the securitization is actually issued. We have to clarify with the commission regarding its implementation. Overall, it is intended to be neutral for us.

Okay. So you'll get a recovery, essentially be a debt return, the debt that you issue will be recovered dollar-for-dollar, and then you'll depreciate the assets and recover the capital you invested?

That's right.

Just wondering how you think, real quick, about the dividends with respect to any kind of equity needs. Where does that fit in?

I think we understand the importance of the dividends to our shareholders, no question. Obviously, from the prior quarter when dividend question was captioned in slightly different way or from a different angle. We don't get ahead of our Board on those issues. But our policy has been to grow the dividend. We'll continue to manage over the longer term to that 45%, 55% payout ratio range. But we understand the importance to our investors.

Okay. And then on the wildfire adder that you had requested in the cost of the capital, how do you think about that now? Or how do you think the commission will think about that now post the legislation that presumably would lower your cost of equity in the market?

Travis, I think we mentioned in your remarks, we're still evaluating that. We had said all along that if there was a new policy established through legislation, we will look at revisiting that for potential reduction or even the elimination depending on how the risk profile changed. To be honest with you, we're still observing that quickly and evaluating that. And I believe we have a deadline coming up of August 1 for filing our comments in the cost of capital proceeding with CPUC.

Yes. Thank you for joining us today. And please call us if you have any follow-up questions. This concludes the conference call. You may now disconnect.