Edison International (EIX) — Q3 2022 Earnings Call Transcript

Thank you, Dexter, 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. 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 1 question and 1 follow-up. I will now turn the call over to Pedro.

Thank you, Sam. Edison International reported core earnings per share of $1.48 for the third quarter and $2.49 for the first 9 months of the year. Based on our year-to-date performance and outlook for the remainder of the year, we are narrowing our 2022 core EPS guidance range to $4.48 to $4.68 from our prior range of $4.40 to $4.70. We are fully committed to delivering our long-term EPS growth rate target of 5% to 7% for 2025. In my remarks, I will focus on 3 key messages. First, SCE's excellent progress reducing wildfire risk. Second, we have updated the 2017 and 2018 wildfire and mudslide events reserve. Third, I'll talk about the increasing alignment between California's clean energy actions and SCE's vision to lead the transformation of the electric power industry. SCE is making excellent progress in executing its wildfire mitigation plan. As I mentioned before, when we look across all 17,000 circuit miles of distribution lines in SCE's high fire risk area, over 7,000 miles are already underground. And the utilities grid hardening measures are focused on the remaining approximately 10,000 miles that were above ground. SCE is rapidly deploying covered conductor and is on pace to complete 4,300 miles or 43% of its overhead miles in HFRA by year-end. As depicted on Page 3, SCE plans to continue hardening the grid through its next rate case cycle, which will result in about 8,400 overhead miles hardened. Additionally, SCE has continued to reduce the impact of PSPS. With the acceleration of grid hardening activities on frequently impacted PSB circuits this year, SCE anticipates reducing PSPS outages by over 44 million customer minutes of interruption. That's more than 17% compared to the last 2 years, assuming the same weather and fuel conditions. As analysts, investors, rating agencies, and members of the CPUC have observed from visits to emergency operations centers this year, SCE has made marked advancements in its wildfire mitigation and emergency preparedness capabilities. Additionally, we continue to share extensive data on SCE wildfire mitigation efforts on the Investor Relations website. Turning to the 2017 and 2018 wildfire and mudslide events. In the third quarter, SCE paid about $350 million towards settlement of claims. Driven by this significant new information obtained through the litigation process following the closing of the Woolsey Fire statute of limitations in May, and our thorough evaluation of such information, the utility increased the best estimate of total losses by $880 million to a total of $8.8 billion. As summarized on Page 4, I would like to share with you some additional information and background on the reasons for this large estimate revision. The resolution is a long and challenging process, and we really appreciate your patience as SCE works through it in a prudent manner, which will ultimately support the utility's strong cost recovery applications. With the statute of limitations for Woolsey individual plaintiffs behind us, we now know the actual number of plaintiffs bringing claims in connection with that event. And we have obtained important additional information on the nature of the claims for many of these remaining plaintiffs, though still not for all of them. To give you more visibility into the process, we now have more information regarding the type of claim a plaintiff has. For example, whether a plaintiff has a claim for smoke and ash damage, damaged property, entire property loss, or for a business. Based on now having a defined number of claimants and more clarity on the nature of the respective claims, the reserve was adjusted to reflect our experience to date settling similar types of claims, including higher-than-expected costs to settle several types of those claims. The continued progress settling claims enables us to move further along in resolving these historical 2017 and 2018 events. I want to be clear that we still expect SCE to file the application for TKM cost recovery by late 2023 and to seek full CPUC cost recovery of claims payments, excluding, of course, amounts recoverable from insurance or FERC forgone under the agreement with the Safety Enforcement Division. I will also note that our financial assumptions for 2025 and beyond do not factor in any potential upside from this cost recovery application. My final comments focus on California's clean energy actions and Edison International's vision to lead the electric utility industry through the clean energy transition. In August, the California Air Resources Board approved the rule requiring 100% of new cars sold in California to be zero emission vehicles by 2035. The regulation codifies the light-duty vehicle goals set out in an executive order earlier this year. In September, CARB voted to ban the sale of new gas furnaces and water heaters beginning in 2030. This built on the CPUC's unanimous decision a week earlier to eliminate subsidies for new natural gas hookups beginning July 2023. At the federal level, the administration is proceeding with multiple implementation actions by the Bipartisan Infrastructure Bill, the Inflation Reduction Act, and the CHIPS Act. Just this week, the U.S. EPA announced the first $965 million tranche of funding for the electric school bus program authorized by the infrastructure bill with about $35 million supporting school districts in SCE's area. We are pleased to see this state and federal support for electrification, which is also consistent with our vision laid out in our Pathway 2045 white paper. SCE is a leader in electrification with the country's largest suite of transportation electrification programs led by an investor-owned utility, which benefits SCE in a differentiated manner. Electric vehicle adoption continues to accelerate here in California. Over the last 3 months, EVs accounted for roughly 20% of new car sales in California. SCE's service area has about 400,000 of the 3 million EVs in the country. EV charging accounts for over 2.5 million megawatt-hours or about 3% of SCE's projected 2022 retail sales. However, by 2045, this could grow to about 50 million megawatt-hours. Meanwhile, we are awaiting CPUC review of SCE's $677 million building electrification application, which will help catalyze this market in tandem with California's plans to include around $1 billion in state budgets over the next 5 years. We are excited about working in partnership with state and federal governments and with other stakeholders, including the communities we serve, to advance policies that rapidly cut greenhouse gas emissions. With that, Maria will provide her financial report.

Thanks, Pedro, and good afternoon. In my comments today, I will highlight that we had strong third-quarter results and have narrowed our 2022 EPS guidance range to $4.48 to $4.68. Before I move to that, there are 3 additional takeaways for today's call. First, we remain committed to delivering on our 5% to 7% growth target through 2025. Second, our near-term maturities are manageable. Finally, SCE's current operational excellence program, which we call Catalyst, is up to a strong start, and we have high expectations for the program. Let's move to third-quarter results, as shown on Page 5. Edison International reported core earnings of $1.48 per share. Recall that in the third quarter of 2021, SCE received its 2021 GRC final decision and recorded a $0.35 true-up. This results in an unfavorable year-over-year comparison for this quarter. I will highlight 2 additional key variances. SCE's earnings were driven by an increase in CPUC-related revenue in 2022 due to the GRC escalation mechanism and previously unrecognized return related to the customer service replatform project final decision. Moving to Page 6, SCE's capital forecast has been updated slightly, primarily to reflect the timing of the spending related to the utility-owned storage project. The project is now expected to be online before summer 2023 and, consequently, some of the capital spending has shifted to 2023. As shown on Page 7, our capital forecast continues to result in projected rate base growth of 7% to 9% from 2021 to 2025. This forecast incorporates SCE's current view of the request to be made in the 2025 GRC and other applications. With respect to 2022 guidance, as shown on Page 8, we are narrowing our 2022 core EPS guidance range to $4.48 to $4.68 from $4.40 to $4.70. Based on our year-to-date performance and outlook for the rest of the year, we are confident we will deliver results within the narrowed range. I would now like to provide a brief update on our 2022 financing plan as outlined on Page 9. We continue to expect to refinance the last $300 million of parent debt maturing this year with new debt. Recall that we completed a $400 million refinancing in August. Combined, these will complete the refinancing of $700 million of parent debt. On the equity side, we expect that internal programs will generate about $100 million of our 2022 need of $300 million to $400 million of equity content. In April, we entered into a $600 million term loan maturing in April 2023, which provides execution timing flexibility for the equity content we identified in our original guidance. If we defer into 2023, we will incorporate any remaining amount into the 2023 EIX financing plan. All in all, we will share our 2023 financing plan on our Q4 earnings call. Turning to the current interest rate environment, I would like to frame the company's interest rate exposure that factors into our 2025 EPS guidance and address how we plan to mitigate the impact of higher interest rates. Page 10 shows Edison's debt maturities over the next 5 years. There are 3 categories to consider. The first category is the debt that funds 2017 and '18 wildfire and mudslide claims resolution. Pedro and I have been clear and consistent that SCE plans to apply for full cost recovery of eligible losses. SCE's cost recovery application will also include the interest on the debt that funds the claims payments. None of this potential upside is built into our financial forecast. The second category is SCE operational debt. The interest rate exposure is minimal as we updated the estimated cost of debt and preferred in September as part of our 2023 capital application. The third category is EIX parent debt. We are currently forecasting the incremental cost of debt at approximately 6.1%. To the extent rates go higher over the next several years, we have headwinds to manage. Across the organization, we are always looking for operational efficiencies underpinned by a continuous improvement mindset. Over multiple rate case cycles, the utility has a distinguished track record of implementing operational excellence initiatives focused on enterprise-wide efforts to improve performance, safety, reliability, affordability, customer experience, and quality. This has also enabled SCE to have the lowest system average rate among California IOUs. In the current program, Catalyst, the portfolio includes over 600 employee-driven ideas with capital efficiency and O&M benefits. These ideas and SCE's operations and major themes include work planning, procurement, and technology. The expected benefits should aggressively increase as we accelerate implementation through 2024, further benefiting affordability for SCE's customers. Additionally, we evaluate one-off opportunities. For instance, we have been evaluating our real estate portfolio for efficiencies. Reducing our footprint and managing the facilities costs will benefit customers in the longer term. We have high expectations for the Catalyst program and the ability to deliver value for customers. We expect to identify additional opportunities in the core areas of safety, reliability, affordability, and quality as part of a multiyear program. We look forward to sharing success stories from the front line as we go along. Moving to Page 12, we have provided you with our long-term EPS guidance rooted in the significant investment opportunities aligned with our objectives of decarbonization and electrification. In this regard, I will emphasize 2 key points. First, we have incorporated the current interest rate environment and updated other assumptions. Second, we have identified tailwinds and headwinds that may drive variability around these ranges and provided sensitivities where applicable. As you can see from individual details on the page, we believe that the combination of drivers and strong execution will deliver the 5% to 7% growth. Let me highlight a few areas. One is operational variances, which include the catalyst work that I've described among other items. Also, I would like to point out that embedded in our guidance is SCE's current ROE of 10.3%. In the 2023 proceeding, SCE has requested an ROE of 10.53%, which is strongly supported by SCE's analysis and the current interest rate environment. The 2023 proceeding also includes resetting the benchmark for the cost of capital mechanism to about 4.4%. If the bond index rates exceed the 100 basis point deadband, the mechanism would trigger, which in turn, would result in updating the cost of debt and adjusting the ROE starting with the following year. For sensitivity analysis, we expect each 10 basis points of ROE changes EPS by about $0.05 in 2025. Additionally, the range around the parent expense we've shown you in the past also incorporates a range of equity content needs, up to $250 million per year on average, and the amount will vary with rate base growth. To conclude, we are reiterating our 5% to 7% EPS growth rate guidance from 2021 through 2025. My management team and I are fully committed to delivering on this target. That concludes my remarks.

Dexter, please open the call for questions. As a reminder, we request you to limit yourself to 1 question and 1 follow-up, so everyone in line has the opportunity to ask questions.

Wanted to just start off on the legacy claims disclosures. Obviously, the estimates going up to 8.8%. What are you currently embedding for financing needs associated with the increase in the overall liability? And as you guys are reiterating the cost recovery process could be an upside to the current financial plan. I guess, what's a good way of looking at the potential range of scenarios and how and when you would disclose any potential benefits?

Let me address the last part of your question first and then turn it over to Maria for the financing details. To clarify, we plan to and expect to have SCE recover full costs, except for the amounts already anticipated to be excluded in the SED settlement. As you've pointed out, we have not claimed any regulatory asset for those. We encourage investors to form their own expectations. However, we do expect to have a strong case for cost recovery and will proceed through the regulatory process. While we cannot guarantee outcomes based on the GAAP precedent from the San Diego Gas & Electric situation, we believe we will make a compelling argument for prudency. Any recovery amounts or advantages beyond the base numbers we've provided here will be discussed. Maria, would you like to discuss the financing assumptions?

Sure. To clarify, we haven't factored in any potential cure into our 5% to 7% EPS CAGR forecast through 2025. Instead, we've accounted for all liabilities, beyond insurance recovery, in the SCE costs that are excluded from what is authorized. This includes the updated drag resulting from the liabilities we revised this quarter. We are estimating a cost of financing at about 5.3%, reflecting the current forward curve, with an assumed 5-year tenure on the debt. We'll aim to be as efficient as possible in financing, and if the market indicates that shorter-term debt becomes cheaper, we may consider that option as well. For now, that's how we are structuring our projections.

Got it. And then just 1 last thing on the financing side. Could you delay beyond '23? And obviously, you guys have some generating assets in rate base. One of your peers is obviously engaged in a process to split and sell equity for efficient financing. Could you envision something very similar or not? You have, I think, a little bit over 4 gigs?

Yes. So I would say, as part of the 5% to 7% CAGR, we're assuming that we execute our financing plans, I'll say, in the normal course. So what we announced earlier this year, but we've just created additional runway to push that off into next year. We're always looking at opportunities. I think obviously, we'll be tracking the developments that are happening in other parts of the state, looking at the regulatory outcomes, et cetera. We're also looking at other opportunities. We're always looking through our portfolio for assets that could provide a more efficient form of financing, but every company has a different portfolio. So we'll have to just keep looking.

So I think just going to the claims increase, I think your percent resolved actually went down. And so could you just explain, is that just because you're now assuming just a bigger total amount?

Yes, that's simple math, Steve. Yes.

We resolved about $350 million claims this quarter. So we're still making progress on the claims, but it's just the math of the increase versus the resolutions.

Okay. Is there any other statute of limitations left to pit that you haven't yet?

No, there is not.

Okay. How are the rating agencies assessing the claims here? Is there any risk of needing more equity to support the further increase in claims?

So the rating agencies typically treat whether we've actually sent the dollars yet or we've just reported the reserve or the liability, they treat that as either actual debt. If we've financed it or imputed debt if we haven't yet financed it. So that is part of the calculation. So it will be embedded. We do not need to change our financing plan to address this. We've been, as you know, quite interested in having our metrics improve. And so we've built up a little cushion. This is leading to the cushion over the next several years now.

Okay, this may be obvious, but it seems rather demanding. What's going on with the continuous increases and the long wait for recovery? Is there anything else that can be done or ways to speed this up? We don’t want this situation to persist for several years until we see any recovery. Are there other options the company can explore to expedite this process?

Yes. Steve, I appreciate the question, and I know it's on a lot of investors' minds. We have all hands on deck on this. And the reality is that we passed a major milestone in terms of information content with the closing of the Woolsey statute of limitations period. As I said in my prepared remarks, we now actually know the number of claimants, which is not something that we knew until we were able to get past that closer date and be able to evaluate the data. We said all along that we work hard to make sure we are providing investors the best estimate under GAAP, but we recognize that there are things that can change the best estimate as we proceed along. I'm not aware of any magic tool that we could use to somehow accelerate this other than where our legal team is working expeditiously with the thousands of remaining plaintiffs to get through that process. As you might recall from prior quarters, we have worked successfully to set up processes having that be as expedited as possible with support from the respective courts. And so we will continue at it. I know there's some element of frustration with this for all of us, but it is the reality of having the mass litigation case with thousands of individual claims still remaining in the balance sheet.

And Steve, maybe I'll just add one more thing. We do plan on filing for our first application recovery by late 2023. The change in the reserve has not impacted that schedule.

And just one more clarification on that filing. Could you give us some sense roughly of the kind of amount that's available for recovery and how much that filing would capture as a percent of that? Is it half of it, 90% of it, or 20% of it?

Yes. Steve, I think because we're still in the middle of the settlement process and the litigation process, we probably don't want to break it out in too much detail, but obviously, it's a substantial amount.

But to be clear, Maria, in helping out upon misunderstanding, Steve, we plan to request recovery of all allowable amounts. So the only amount that we would not be asking for recovery for are the amounts that we've recovered already through insurance, the amounts that we'll recover from FERC, or we expect to recover from FERC, and the amounts that we agreed in the settlement with the safety enforcement division to exclude from cost recovery. So that leaves the vast bulk of the reserve; we plan to go seek recovery of all of that.

In this filing in late '23?

In 2023, we'll be filing for the events from 2017 and then later for the events from 2018, which naturally won't coincide as 2018 follows a year after 2017. What Maria mentioned is that we haven't specified for investors the distinction between TKM and Woolsey; we've presented a combined figure. We're currently involved in active litigation, and we need to strike a balance between giving our investors enough information while being cautious not to share too much that could hinder our defense in the litigation process.

I think Maria made a comment about the real estate portfolio or management of and an optimization there. What were you referring to?

So Gregg, I think that real estate portfolio optimization is really about reducing the size of our footprint. Like many companies, we're returning to the office or have returned to the office in a different mode. So we're looking at places to consolidate and reduce our real estate footprint. I'd say that has the biggest impact on customer costs over time as we get more efficient with the use of our facilities.

Rich Sunderland on for Jeremy, but thank you for the time today. I just wanted to start on the operational variances. I think, first and foremost, that $0.80 to $0.95 EIX in other. That was unchanged from 2Q. Curious if you were already embedding the current interest rate assumptions in there if there are kind of other offsets you've adjusted over the quarter here?

Yes. So we did update the financing assumptions there. So now at the parent company, we are assuming that the embedded cost is about 6.1%. Like the rest of the company, at the parent, we have opportunities for both operational and performance efficiencies. And so we're targeting some of those to help offset the increase in rates. So it's a blend of things that have happened this quarter.

Understood. I guess at a high level on these variances, are these recurring or I guess, thinking about that walk, you mentioned 2024, but then the new GRC cycle in '25, do they reset in '25, whatever you've accomplished in '24?

There are various factors at play. We will definitely achieve some efficiencies in the coming years, which will affect the 2025 General Rate Case. Additionally, misalignments can occur during a rate case. When we align spending with what has been authorized, we may see a reduction in some of the challenges we’ve been facing. Overall, there are many different inputs contributing to these variances. For example, we have operational efficiencies and other elements that will help us catch up with the General Rate Case, so there are several factors to consider.

I just wanted to ask kind of when you think about the capital that needs to be deployed for your decarbonization plan, the coverage conductor plan? And then also the fact that fuel lines have come up, and we're in just a greater inflationary environment here. And then you kind of layer on the recovery of the wildfires. Just overall confidence level and just being able to kind of maintain customer rates where they are and kind of execute on this plan?

Yes, let me address that question. It's a great one. Starting with the conclusion, the perspective we have on Pathway 2045 is crucial because we believe this decarbonization pathway will ultimately reduce customers' total energy costs. Over the next couple of decades, we anticipate upward pressure on electric rates due to the necessary investments for decarbonization and electrification across the economy, as well as the investments customers will need to make in end-use technologies. Support from initiatives like the Inflation Reduction Act has been incredibly beneficial in this regard. One of the key takeaways from Pathway 2045 is our expectation that by 2045, the average customer will spend one-third less on their total energy bill compared to today. This is also why in our upcoming business update, as well as in the previous quarter's, we have included a chart comparing the share of our customers' energy spending to that of customers in other states across all energy types. It's essential to view this in totality, considering not just electricity but also natural gas and gasoline, as all of these factors affect overall spending. There will be shifts in expenditures from gasoline and gas towards electricity, so it’s not just about electric alone; a comprehensive view is necessary. In the short term, the work mentioned by Maria builds on what we've been doing for over a decade, focusing on managing the controllable aspects of our cost structures to minimize rate impacts while making room for necessary capital investments. Each dollar spent on operations and maintenance allows us to invest about seven dollars in capital without raising rates. We're proud of our record in this area, as evidenced by SCE's rates being significantly lower than those of PG&E and San Diego Gas & Electric. We’ve been dedicated to this effort and will continue to focus on both immediate actions we can control and communicating the long-term benefits that these electric items will have, not just for decarbonization but also for reducing total energy costs for customers. Maria, do you have anything to add?

Yes. Maybe Nick, just maybe one more thing. I think Pedro has really focused both on the long term and the near term and recognizing that there are things that we want to work on over the near term to help bridge to that longer-term. I think it's really interesting, too, from a commission perspective that they recognize the need for affordability. They recognize the work that people need to do. And our recent cost of capital proposed decision alternate proposed decision. A lot of the interveners actually focused a lot on affordability as the reason why the trigger mechanism should be permitted to trigger. And when the PD and the APD came out, the commission recognized that it's allowed to trigger that rates would actually go down, with dollars already refunded to customers. But they also recognize that if you don't set the ROE at an appropriate level that reflects the utilities' risk, it will just make it that much harder to attract capital. So I think that you're seeing a balanced approach to affordability in California.

That's helpful. And definitely noted the strong confidence in the long-term outlook and the opportunities you're kind of searching for to deliver this 5% to 7% that you're working on to deliver this 5% to 7% rate you narrowed the '22 midpoint. Just how do we kind of think about '23 in the context of this 5% to 7% range and just any drivers that are explicit into the '23 that are notable today?

So we'll obviously give our guidance on our 2023 guidance on our Q4 call. We've said before 5% to 7% from the midpoint of our 2021 guidance through 2025. There are some nonlinear years in there, you can imagine. But we are focused on delivering that value over the longer term.

Thanks, team, for the time. I appreciate it. So maybe just stepping in when Nick left off here, just to make sure I heard this right. As you think about '23 relative to the core of the outlook through '25, is it fair to say that there's sort of a nonlinear element to getting to that 5% to 7%, i.e., near-term pressures with respect to the refinancing, et cetera, but ultimately, between the cost savings that you've identified and latitude on timing of equity that you can get to that '25 outlook in kind of a nonlinear way?

Yes. I previously mentioned to Nick that the growth is nonlinear. As we progress, we're creating more efficiencies, and we can apply lean practices in our programs more effectively. Additionally, as I discussed with someone earlier on the call, we are focused on regulatory proceedings to ensure we meet those decisions timely. All of this is integral to achieving the 5% to 7% EPS CAGR by 2025.

Excellent. And then just to clarify, I think just going back to Rich's question on the 85 to 95 by '25 here. Can you elaborate a little bit on the lower total equity content issued? Is that basically pushing out the timeline in the 26 plus the total equity? Or is there a way to actually eliminate equity from the plan altogether? I just want to clarify, because you alluded before to multiple moving pieces and how you get there, although in the slide you specifically called this one out.

Yes. In the range for parent and other, we are accounting for all the dilution. With the lower end of the capital range, we would require less equity. When we first discussed the plan through 2025, we mentioned an average of $250 million per year, which aligns with the higher end of that range. This variability also reflects our ability to manage various operational differences.

Well, thank you for joining us today. This concludes the conference call. Have a good rest of the day and stay safe. You may now disconnect.