Edison International (EIX) — Q3 2021 Earnings Call Transcript

Thank you, Michelle, and welcome, everyone. Our speakers today are President and Chief Executive Officer, Pedro Pizarro; and Executive Vice President and Chief Financial Officer, Maria Rigatti. Also on the call are other members of the management team. I would like to mention that we are doing this call with our executives in different locations, so please bear with us if you experience any technical difficulties. Materials supporting today's call are available at www.edisoninvestor.com. These include 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'll make forward-looking statements about the outlook for Edison International and its subsidiaries. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our SEC filings. Please read these carefully. The presentation includes certain outlook assumptions as well as reconciliation of non-GAAP measures to the nearest GAAP measure. During the question-and-answer session, please limit yourself to one question and one follow-up. I will now turn the call over to Pedro.

Well, thank you, Sam. And before I start commenting on the quarter, I wanted to note the senior leadership changes that we announced last week. Kevin Payne, SCE's President and CEO, plans to retire on December 1, and this is after 35 years with the company. Kevin has had a profound impact on the utility, most particularly with its customer-centric focus, leading our wildfire risk mitigation efforts and advocating for and advancing the company's clean energy strategy. While I am going to miss my good friend very much, I am delighted with our deep bench. Steve Powell will succeed Kevin as President and CEO; and Jill Anderson, currently Senior Vice President of Customer Service, will succeed Steve as EVP of Operations. Promoting Edison talent will ensure a seamless transition, and I believe that Steve and Jill both bring exceptional experience to their new roles. I know that a number of you have already met Steve and Jill, and many of you will have an opportunity to meet them next week at EEI's financial conference as well. Turning to the quarter. Today, Edison International reported core earnings per share of $1.69 compared to $1.67 a year ago. This comparison is not meaningful because during the quarter, SCE recorded a true-up for the final decision in Track 1 of its 2021 general rate case, which is retroactive to January 1. Reflecting the year-to-date performance and our outlook for the remainder of the year, we are narrowing our 2021 EPS guidance range to $4.42 to $4.52. We are also reiterating our longer-term EPS growth target of 5% to 7% through 2025. Maria will discuss our financial performance in detail in her report. Now starting with past events. SCE today announced 2 updates related to the 2017 and 2018 wildfire and mudslide events. Page 3 in the slide deck provides an overall summary. First, SCE revised the best estimate of potential losses to $7.5 billion from $6.2 billion. As we have mentioned in our continuing communications on this topic, we evaluate the best estimate quarterly. As part of the ongoing and very complex litigation process, we diligently consider new information that arises to provide all of you with our best estimate. Based on additional information across a broad set of claim types collected during the quarter, along with an agreement with the CPUC Safety and Enforcement Division, or SED, which I'll talk about in a minute, SCE revised its estimate of the total potential losses. While the total estimate increased this quarter, SCE continued to make meaningful progress, settling claims and completed approximately $485 million of settlements. SCE has now settled about 70% of the estimated exposure for the 2017 and 2018 events. I want to emphasize that we do not need equity above our previously disclosed 2021 financing plan to fund the higher estimated losses. Maria will address this topic later on the call. Second, the utility reached an agreement with the SED to resolve its investigations into the 2017 and 2018 wildfire and mudslide events and 3 other 2017 wildfires. As we have previously disclosed, the SED has conducted investigations to assess SCE's compliance with applicable rules and regulations in areas affected by the Thomas, Koenigstein, and Woolsey fires. It was possible that CPUC would initiate formal enforcement proceedings to pursue fines and penalties for alleged violations, though we were unable to estimate the magnitude or timing as part of our best estimate. The recently executed agreement, which is subject to CPUC approval, would resolve that uncertainty. The agreement has a total value of $550 million, composed of about $110 million fine, $65 million of shareholder-funded safety measures, and an agreement by SCE to waive its right to seek cost recovery for $375 million of uninsured claims payments out of the $5.2 billion total in the current best estimate. In the SED agreement, SCE did not admit imprudence, negligence, or liability with respect to the 2017 and 2018 wildfire and mudslide events and will seek rate recovery of prudently incurred actual losses in excess of available insurance other than for the $375 million waived under the SED agreement. While SCE disputes a number of the alleged violations, reaching an agreement puts one additional uncertainty behind us. Let me now address the Southern California wildfire season. SCE continues to make solid progress on the execution of its wildfire mitigation plan or WMP and its PSPS action plan. SCE has installed over 1,000 miles of covered conductor year-to-date, bringing the total to 2,500 miles since program inception. Over the past 3 years, the utility has replaced about 25% of its overhead distribution power lines in high fire risk areas with covered conductor. SCE has also performed another annual cycle of inspections in high fire risk areas, supplemented with additional inspections targeting dry fuel areas. This resulted in approximately 195,000 assets undergoing 360-degree inspections in SCE's high-power risk area. SCE also continues to be on track to meet most of its goals outlined in our WMP by the end of the year. And the scorecard is shown on Page 4 of the slide deck. All these ongoing mitigation actions continue to strengthen our confidence in our utility's overall improved risk profile with respect to wildfires. Turning to Page 5. We highlight the metrics we showed you last quarter, which are proof points of how SCE believes it has reduced wildfire risk for its customers. We have added an additional metric. Looking back at past wildfire events and considering the utility's current PSPS protocols, we can't quantify the damage that would have been prevented. Using red flag warning days as a proxy for when the utility would use PSPS today, SCE would have prevented over 90% of the structures damaged or destroyed by fires larger than 1,000 acres associated with its infrastructure. However, we think it is much more important to assess how much total risk SCE has reduced on a forward-looking basis. And we have summarized this on Page 6. In total, considering physical mitigation measures such as covered conductor, operational practices such as tree removals, inspections, and vegetation management, and the use of PSPS, SCE estimates that it has reduced the probability of losses from catastrophic wildfires by 55% to 65% relative to pre-2018 levels. This is based on a recent analysis using risk management solutions, an industry-leading wildfire model, and SCE's data related to actual mitigations deployed and mitigation effectiveness, which enabled us to quantify the risk reduction. While the risk can never be fully eliminated, the utility does expect to further reduce risk and to decrease the need for PSPS to achieve this risk reduction with continued grid-hardening investments. As California continues to transition to a clean energy economy, maintaining and even improving system reliability becomes essential, particularly with greater reliance on electricity. SCE worked closely with the Governor's office, Cal-ISO, the CPUC, customers, and many stakeholders to avoid rolling outages this past summer when the state and the entire West once again faced record temperatures. Major California energy agencies, including the California Independent System Operator, California Energy Commission, and CPUC have indicated that additional capacity is needed to support summer 2022 under extreme conditions like the heat, drought, and wildfires we have seen repeatedly over the past several years. To accelerate the construction of new capacity, the governor issued an emergency proclamation that requested the CPUC to work with load-serving entities to accelerate construction of energy storage for 2021 and 2022. To this end, in addition to securing over 230 megawatts of additional capacity from third parties, SCE plans to construct about 535 megawatts of utility-owned storage for this upcoming summer. This is a material increase in incremental capacity to mitigate the risk of statewide customer outages for summer 2022 caused by extreme weather events and continued drought conditions. While the governor signed the largest climate package in state history, which included 24 bills and over $15 billion in climate, clean energy, and wildfire preparedness funding, there is still an ongoing need for a lot more to be done. So I would like to highlight a paper that we recently released and it's entitled 'Mind the Gap, Policies for California's Countdown to 2030.' This policy paper is Edison International's latest contribution to identify policies and actions needed to help California reduce emissions and decarbonize the economy. In the paper, we identified state and federal policy recommendations needed for California to meet its 2030 climate target, which is a foundational waypoint for the state to achieve its goal to decarbonize its economy by 2045. While California has made progress in reducing greenhouse gas emissions, closing the gap between the current trajectory and its 2030 goal requires a significant acceleration of effort. It means quadrupling the average 1% annual reduction in greenhouse gas emissions achieved by the state since 2006, quadrupling that to 4.1% per year between 2021 and 2030. That's a tall order, but it's feasible. It will require market-transforming policies and incentives to advance critical areas, such as decarbonizing the power supply, preparing the grid for shifts in usage and increasing demands, and electrifying transportation and buildings. As the only all-electric investor-owned utility in California, SCE is well positioned to lead this transition. We will continue to work in close partnership with policymakers and stakeholders to identify ways to improve funding, planning, standard setting, and other approaches to successfully achieve an equitable and affordable transition to a clean energy economy. To emphasize affordability, our analysis shows that an electric led transition is the most affordable pathway since the greater efficiency of electric motors and appliances will reduce customers' total costs across all energy commodities by one-third by 2045. Edison International is committed to achieving net zero greenhouse gas emissions across Scopes 1, 2, and 3 by 2045. This covers the power SCE delivers to customers as well as Edison International's enterprise-wide operations, including supply chain. This all continues our alignment with the broad policies needed to address climate change and ensure a resilient grid. We will also continue to engage with state, national, and global leaders to advance the clean energy transition, which is why today, I am joining you by phone from COP26 in Glasgow, Scotland, where I am representing both Edison and the Edison Electric Institute. And with that, Maria will provide her financial report.

Thank you, Pedro, and good afternoon, everyone. My comments today will cover third quarter 2021 results, our capital expenditure and rate base forecast, and updates on other financial topics. Edison International reported core earnings of $1.69 per share for the third quarter 2021, an increase of $0.02 per share from the same period last year. As Pedro noted earlier, this year-over-year comparison is not particularly meaningful because SCE recorded a true-up for the final decision in its 2021 general rate case, and that's retroactive back to January 1. On Page 7, you can see SCE's key third quarter EPS drivers on the right-hand side. I will highlight the primary contributors to the variance. To begin, SCE received a final decision in the 2021 GRC during the third quarter because first and second quarter results were based on 2020 authorized revenue; a true-up was recorded during the quarter for the first six months of 2021. This true-up is reflected in several line items on the income statement for a net increase in earnings of $0.35. The components are listed in footnote 3. Higher 2021 revenues contributed $0.55, including $0.50 related to the 2021 GRC decision, $0.04 for CPUC revenues related to certain tracking accounts, and $0.01 to FERC. O&M had a positive variance of $0.28, mainly due to the establishment of the vegetation management and risk management balancing accounts, partially offset by increased wildfire mitigation costs due to the timing of regulatory deferrals in the third quarter of 2020. Depreciation had a negative variance of $0.20, primarily driven by a higher asset base and a higher depreciation rate resulting from the 2021 GRC decision. Income taxes had a negative variance of $0.41. This includes $0.39 of lower tax benefits related to balancing accounts and the GRC true-up, which are offsetting revenue and have no earnings impact. At EIX Parent and Other, the loss per share was $0.09 higher than in the third quarter of 2020. The primary driver was preferred dividends on the $1.25 billion of preferred equity issued at the parent in March of this year. Now let's move to SCE's capital expenditure and rate base growth forecast. As shown on Page 8, we have updated our capital forecast primarily to reflect the recently announced utility-owned storage investment. As Pedro mentioned, SCE filed an advice letter for cost recovery of $1 billion of capital spending to construct about 535 megawatts of utility-owned storage. SCE is seeking expedited approval of the advice letter to maximize the likelihood of the projects meeting their expected online dates for the incremental capacity needed for summer 2022. These projects are a prime example of the essential role utilities can play in quickly ensuring California has a safe, reliable, and clean electricity supply. We increased our 2022 capital expenditure forecast by approximately $900 million and lowered the forecast somewhat for 2023 through 2025 because these storage projects accelerate some, but not all, of the capacity we previously forecasted in those years. The net increase in the high end of the capital forecast for 2021 through 2025 is approximately $500 million. As shown on Page 9, we have also updated our rate base forecast to reflect the storage investments I just mentioned. This is the primary driver of the increase to the 2022 through 2025 rate base forecasts. For 2021, we also fine-tuned the forecast to reflect adjustments related to wildfire mitigation tracking accounts following the implementation of the 2021 GRC decision and quarter-end estimates of the spending related to these accounts. The results of these updates is a reduction to the 2021 rate base of $300 million. Overall, these updates result in a projected rate base growth rate of 7% to 9% from 2021 to 2025. Page 10 provides an update on several major approved and pending applications for recovery of amounts and regulatory assets. This will result in significant incremental cash flow to SCE over the next few years. SCE expects to collect over $1.4 billion in rates between now and 2024 related to already approved applications. About half of that balance will be recovered in 2022. For the three pending applications shown in the middle of the slide, assuming timely regulatory decisions, SCE expects to collect another $844 million by the end of 2023. Lastly, we show the remaining expected securitizations of AB 1054 capital expenditures. The utility recently received a final decision in its second securitization application. This will allow SCE to securitize $518 million of wildfire mitigation capital expenditures. SCE expects to complete the securitization in Q4 of this year or Q1 2022. The securitizations, along with the rate recovery of the other regulatory assets, will allow SCE to pay down short-term debt and strengthen our balance sheet and credit metrics. Turning to Page 11. During the quarter, SCE filed an application to establish its CPUC cost of capital for 2022 through 2024 and reset the cost of capital mechanism. SCE is requesting an ROE of 10.53%, with resets to its cost of debt and preferred financing, which would keep customer rates unchanged. The utility's alternative request to maintain its ROE at 10.3% and reset the cost of debt and preferred would reduce customer rates by about $50 million in 2022. When SCE filed the cost of capital request in August, it paused any other filings related to the trigger mechanism. Last week, SCE was directed by the CPUC to file the information that would have normally been provided in those other filings. The next step from here is that the commission will issue a scoping memo to outline the issues and procedural schedule. Turning to guidance, pages 12 and 13 show our 2021 guidance and the preliminary modeling considerations for 2022. As Pedro mentioned earlier, we are narrowing the 2021 EPS guidance range to $4.42 to $4.52. Turning to Page 14. We see an average need of up to $250 million of equity content annually through 2025. The specific annual amounts will depend on the level of spending within our capital plan for that year. The significant new investment of $1 billion of utility-owned storage considerably accelerates the timing of the capital investment program and increases the overall opportunity as noted earlier. To fund this growth, which is well above the high end of the capital spending range previously disclosed for next year, equity content securities will be pulled from the 2023 through 2025 period into 2022. The 2022 equity need will be in the range of $300 million to $400 million, and we will provide more specifics on the financing plan when we provide 2022 EPS guidance on the fourth quarter 2021 earnings call. Additionally, let me reiterate Pedro's comment that the SED Agreement and update to the best estimate of potential losses associated with the 2017 and 2018 wildfire and mudslide events do not require equity above the levels previously announced in our 2021 financing plan. Consistent with our prior disclosure, we plan to issue securities with up to $1 billion of equity content to support investment-grade ratings. In closing, I want to underscore the important role that SCE plays in ensuring safety and resiliency. This can be seen in the ongoing investment in risk-reducing wildfire mitigation as well as utility-owned storage to enhance near-term reliability. These investments are indicative of the longer-term opportunity associated with meeting customer needs and clean energy objectives and give us confidence in reiterating our long-term EPS growth rate of 5% to 7% for 2021 through 2025. That concludes my remarks.

Michelle, please open the call for questions.

First question here. Just wondering, how does the Safety Enforcement Division agreement impact the settlement process for those remaining claims, if at all? And then do you have any updated thoughts on when you would be able to file for recovery here?

Yes. Let me address both points. We do not anticipate any impact from the SED settlement on our settlement activities. Importantly, we did not admit to any claims regarding imprudence on our part. As for the timing of cost recovery, it remains uncertain because we need to resolve a significant portion of the claims for each incident. We might tackle Thomas and Koenigstein on one path and Woolsey separately, but we have to address most of the claims before we can file with the PUC. As I mentioned in previous calls, it's challenging to predict the timing. We have made notable progress and are now at around 70% of the claims, but it’s hard to say exactly when we will finish this process.

Got it. That’s helpful. And then I just wanted to pivot a little bit here, and there’s a lot of talk about resiliency investment potential. Just wondering if you could provide, I guess, updated thoughts on what the total opportunity set could look for capital investments and resiliency investments?

Yes. I would point you back to the rate base forecast that we provided, the 5-year view and say that elements like the storage project that we just announced is supportive of that range we painted. So you heard us reaffirm that view of when we translated into earnings or EPS growth of 5% to 7% EPS growth coming from that. And so we would view the opportunity set as falling within that range. The storage project shows you that sometimes they can be needs that pop up sooner than we might think, and the ability to step in and take a meaningful action that will help the state with its resiliency and reliability in case that next summer ends up being one with extreme weather, just like the last couple of summers have been. It's just one indication that sometimes you can be called on to take these steps more quickly or in a large quantum like you see with a storage project. But I would say that we would continue to see the opportunities falling within the range that we provided. Maria, anything you would say differently there?

No, I think that we’ve covered the waterfront in that range, Jeremy. We think about resiliency from the perspective of additional wildfire mitigation. We think about resiliency from the perspective of storage, building electrification because we know we have to pursue those sorts of investments. We're going to get to those greenhouse gas emissions reductions. So I think that full range is covered in the capital forecast that we've laid out for you.

Just maybe connecting today's disclosures to your equity needs. With the new estimates for the total wildfire liability increasing by 1.3% and the CPUC agreeing not to pursue recovery of a portion of that, regarding the reiterated equity of $1 billion, is that aligned with the current plan for 2025? Does the timing of paying out the claims affect that equity? Additionally, Pedro, why settle now if you believe you have a strong case for prudence before seeking recovery?

Yes. Let me address your last question first, and then Maria can provide details on the equity aspect. Referencing my prepared comments, the SED has the authority and responsibility to conduct investigations. There is always uncertainty associated with these processes, as well as regarding how the CPUC will ultimately interpret the facts. We do not agree with several of the claims, but we acknowledge that there is a process involved. We believe it was wise and prudent for us to eliminate one uncertainty. Therefore, we see the settlement as a means to achieve that. This is essentially why we are acting now; an opportunity arose to collaborate with the SED. We believe that this will not hinder our ability to pursue cost recovery for reasonable expenses, except for the $375 million we allocated in the settlement. Ultimately, it is important to recognize that uncertainty exists, and sometimes it is sensible to take actions that we might not have fully agreed with under different circumstances. However, in this situation, by entering into the settlement and collaborating effectively with the SED, we can move past that uncertainty. Maria, could you address the equity aspect?

Sure. So Shar, we talked a bunch before about our 2021 financing plan and the need to issue up to $1 billion of equity content securities. That was really to support the 15% to 17% FFO to debt framework that we have at the company. And so as we assess the change in the reserve level, we think that, that $1 billion equity content in 2021 still supports our overall financing framework objective. And we've been pretty measured in how we approach issuing that additional equity or equity content securities. At the same time, SCE does issue debt to make claims payments. So if you think about the EIX financing plan that's in support of the metrics and then SCE's cash flow is tied to sort of when they issue debt to pay the claim. At that level, the SCE level, they are pacing their financing plan along the same lines as when they make claims payments. I think when you think about the equity requirement that we have for this year, we've already done $1.25 billion of that preferred financing to get a certain amount of the equity content, and we'll continue to evaluate market conditions as we undertake the balance of the program.

Got it. And then just lastly for me, just on thoughts on the CapEx and rate base growth from 24% to 25%. There's a significant step-up in the expectations on Slide 8 with sort of the range case staying flat from 23%. What is included in that top end of that CapEx on the slide? Any color on what is covered under the GRC versus incremental programs like reliability storage spending in ‘22?

Sure. I understand your question, Shar. Moving forward, we have the 2021 GRC decision in place. Regarding utility-owned storage, there can be near-term developments that increase our capital expenditure opportunities. As we look towards 2024 and 2025, there are several factors to consider. In 2024, we still need authorization for this rate case cycle. While it may resemble the attrition mechanism from 2021 to 2023, we recognize there are budget-based approaches available for wildfire mitigation, which we will prioritize. For 2025, we will enter a new rate case cycle. Ongoing wildfire mitigation and potentially renewing infrastructure replacement could influence the broader range anticipated. Additionally, there could be opportunities to submit applications outside of the general rate case proceedings. As Pedro mentioned earlier, various factors like greenhouse gas emissions reductions, transportation electrification, building electrification, and increased energy storage or transmission can impact these estimates.

Just a question about the reserve for the wildfire claims. Could you maybe explain as best as possible, why the number went up, and this has happened a couple of times, and why we should assume it’s not going to happen more?

Yes. Thanks, Steve. I believe we touched on this in the prepared remarks, but it's important to emphasize again. In simple terms, as we process more claims and reach more settlements, we gain additional insights. I hope that this uncertainty will continue to decrease over time. Currently, we process about 70% of the exposure. We have been conducting quarterly tests to identify any new information or details regarding specific claims that might necessitate changes in reserves. We did not need to adjust reserves in the previous quarter, but this quarter we had enough new information to justify a reserve adjustment, which aligns with GAAP requirements. As mentioned in our disclosures, we strive to provide the best estimate, though there is uncertainty surrounding that estimate. Ultimately, outcomes could be higher or lower than our projections. However, I hope that as we progress and as we overcome more volume, our understanding will become clearer. That's about the best insight I can provide, Steve. I understand it would be helpful to give more detailed explanations, but the ongoing litigation complicates that.

No, I think Pedro, you covered that.

And so just a related question on the SED settlement portion. So on the one hand, you agreed not to seek $375 million. On the other hand, that would imply that, theoretically, you might seek recovery of a lot of the other costs of this, which obviously is not assumed in your plan. So even though on the surface that seems like a negative, is it possible to read this to say that you still have a claim and the potential to seek recovery of these costs for some portion of it?

Yes. We've consistently stated that our plan is to pursue recovery for costs that were prudently incurred. To facilitate the settlement and eliminate uncertainty, we agreed to set aside $375 million. However, as previously mentioned, we are not admitting to any imprudence or negligence, and we reserve the right to seek cost recovery. I cannot provide an exact figure for the recovery amount at this time, as we are still completing investigations. As I mentioned in earlier quarters, it's still true that we lack access to some equipment because it's being held by fire agencies. This is simply part of the process. We believe we have several strong arguments to make, and we expect to seek recovery for all costs we believe are valid. The reason you don't see a high level of confidence reflected in the adjustments to our reserves is that, since these incidents occurred in 2017 and 2018, and given the existing CPUC precedent from the San Diego Gas and Electric case prior to AB 1054, we cannot assume any recovery from the CPUC under GAAP. Nevertheless, we continue to expect recovery from FERC for the same circumstances, which underscores our belief that recovery is justified based on the facts. While we cannot assume recovery from the CPUC due to the San Diego Gas and Electric precedent, we will present our case. We have also noted that we believe the CPUC's ruling in the San Diego case aligns with our understanding of the facts involved. Therefore, while AB 1054 strengthens the framework, we believe we can still advocate for reasonable cost recovery based on facts, and we are confident we will have the necessary facts to support our case.

I guess, during the quarter, it looked like you received about $400 million of cash from the Morongo transmission asset for use of the asset for about 30 years. Are there any other similar opportunities in the portfolio to raise capital to help offset some of these equity needs?

Ryan, it’s Maria. Yes, so that actual transaction has been part of that project for many, many years. The trigger for it was when the project was completed and became commercial. So that was the genesis of that $400 million, and you’re right, it did happen over the summer. I think we’ve talked a little bit about this before in terms of just the overall portfolio. The things that SCE owns, basically, they’re really customer assets, and so the opportunity to sell a bunch of assets isn’t really available to us in the sense that you’re talking about. I think from time to time, people have asked about real estate and the like, but there’s really not an opportunity in this portfolio.

And then in the prepared material, it was referenced that the settlement process for Woolsey and TKM increased in pace, which helped drive the increased estimate. What’s the current outlook from the pace from here for the settlement process?

Well, I think that’s what I touched on earlier, right? We continue to work really diligently on this. But, Ryan, it’s just really hard for us to forecast when we will be substantially complete with it. So the good news is that we’ve mentioned this in prior calls. There are structured processes in place for both the Thomas, Koenigstein, and Woolsey cases, allowing us to work our way through a good volume of these cases every month, but it’s just really difficult to predict what that means in terms of ultimate timing.

Okay. And then last one, as you continue to implement the covered conductor plan, are you noticing any improvement in the cost per mile as the plan is implementing?

I think we’ve been pretty consistent with the cost per mile. We haven’t seen significant increases, but we also haven’t seen decreases. I believe we were quite accurate with our initial estimates.

Just a little bit of a macro question, which is your proposing as you did in the GRC covered conductors. Your neighbor to the north is proposing kind of more of an undergrounding program. I haven’t seen anything material different out of SED in a while. Just curious, do you think there is a need for a piece of follow-on legislation where the state develops a formal multiyear, maybe more multi-decade, kind of similar to like what Illinois has with gas distribution or what Florida has with storm hardening to help kind of think through both the timeline, the pace of investment, the cost recovery, and kind of the broader state strategy in terms of doing things for wildfire mitigation and prevention?

That's an interesting question, Michael. In my opinion, we don't need new legislation for this. I believe that AB 1054 already provided a solid framework by establishing the wildfire mitigation plan process. This process includes reviews by CAISO and enhanced ratification by the CPUC, along with a state budget line for an outside consultant advising the governor's office. It's proving to be a good platform for discussions and exchanging ideas alongside our collaborative efforts with other utilities. I see the wildfire mitigation plan framework as crucial for utilities to present updated information and innovative strategies on fire prevention, which subsequently influences the ramp in GRC processes. Additionally, it's essential to note that each utility serves different geographic areas. While it may seem uniform when viewed from outside, PG&E operates in a much larger territory of 70,000 square miles, compared to our 50,000 square miles and San Diego's even smaller area. To illustrate, PG&E's high-fire risk areas are heavily forested, leading to a greater likelihood of ignitions from falling trees, often outside the vegetation management zone. Conversely, much of Edison’s high-fire risk area consists of chaparral and grasslands, where the ignition risk predominantly comes from contact with objects hitting the lines. This distinction helps clarify why PG&E's calculations may differ, even though we are using the same mathematical framework. Regarding the cost-benefit analysis for methods like undergrounding versus covered conductor, it's my understanding that tree falls significantly impact the advantages of undergrounding for PG&E. In our case, we find that covered conductor offers substantial risk reduction at a lower overall cost. Additionally, since we've previously replaced many poles through a pole-loading program, our covered conductor installations can often avoid the costs associated with pole replacements that other utilities may incur. In summary, our territories have distinct needs, and while we share similar foundational concepts, the variables in our calculations yield different outcomes. We maintain communication, and as PG&E gathers more insights on undergrounding, there is a possibility that more underground miles could be considered for Edison. We are committed to continuous learning in this area.

And Michael, just one more thing since you’re asking about it from a macro perspective. While legislation to help the utilities might be something that’s already been addressed, we do keep an eye on and definitely would support additional legislation that really addresses things like land management and forest management and home hardening and development in the wildland because those are things that are going to have to be addressed if we really want to have a long-term mitigation to this issue.

Just to make sure I understand these numbers on the accrual correctly. Is this $550 million settlement that’s now in the best, that’s part of the increase in the best estimate? Is that correct?

Yes. So there are three components to the $550 million, Jonathan; there is $110 million that’s payment to the general fund, there’s $65 million of mitigation activity that we’ll undertake, and there’s that $375 million of foregone recovery.

So I should think about that as part of the overall strategy.

Because we hadn’t taken a regulatory asset against the $375 million, that has already been part of our overall cost of the events of 2017 and 2018.

So that’s part of the $7.5 billion best estimate effectively, all of it.

Yes, all of it.

But it's not part of the resolved. Is it all considered like unresolved from a perspective of the difference between the $7.5 billion and $2.2 billion?

Well, it’s all in that number, the $7.5 billion. In terms of cash flows, we obviously have different time frames for making payments to the general fund and for the necessary mitigation investments. Those cash flows have not occurred yet. I believe your question is about the cash flow.

And my question is, if the CPUC approves the settlement, will the $2.2 billion of remaining expected losses effectively be going down by 550 because that will now be resolved, or at least no longer unpacked?

No. The $2.2 billion remaining will go down as we make actual cash payments for settlement or payment to the general fund or mitigation payments. That's for the future.

So just to be really clear, the SED is viewed as resolved, not unresolved.

It’s viewed as resolved. Okay. Pending approval.

Obviously, it’s pending approval, but I think for purposes of the $6.2 billion versus $7.5 billion.

Thank you for joining us. This concludes the conference call. So have a good rest of the day and stay safe, everyone. You may now disconnect.