Edison International (EIX) — Q4 2022 Earnings Call Transcript

Thank you, Ted, 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 Form 10-K, prepared remarks from Pedro and Maria, and the teleconference presentation. Tomorrow we will distribute our regular business update presentation. During the call, we will make forward-looking statements about the outlook for Edison International and its subsidiaries. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our SEC filings. Please read these carefully. The presentation includes certain outlook assumptions as well as reconciliation of non-GAAP measures to the nearest GAAP measure. During the question-and-answer session, please limit yourself to one question and one follow-up. I will now turn the call over to Pedro.

Well, thanks a lot, Sam, and good afternoon, everybody. I am pleased to report that Edison International's core EPS for 2022 was $4.63, which was in the upper end of our initial guidance range. Today, we are introducing 2023 EPS guidance of $4.55 to $4.85, and we are reinforcing our strong confidence in delivering our long-term EPS growth target of 5% to 7% from 2021 through 2025. Maria will discuss our financial performance and outlook. Let's start with our key accomplishments in 2022, and they are noted on Page 3. First, we once again delivered on our annual EPS guidance, as I just mentioned. Second, SCE continued to make tremendous progress in reducing wildfire risk and PSPS. SCE successfully executed its wildfire mitigation plan and updated the key statistic shown on Page 5; that is that SCE now estimates it has reduced the probability of losses of catastrophic wildfires by 75% to 80% compared to pre-2018 levels, and critically with much lower reliance on PSPS, now only 15%, as hardening and other mitigations continue, as depicted on Page 6. Despite this strong operational and financial performance, market sentiment impacted our total shareholder return. Our TSR for 2022 trailed that of the Philadelphia Utility Sector Index and most of our peers. As shareholders ourselves, our leadership team and I are deeply committed to achieving our financial targets while strengthening SCE's ability to deliver safe, reliable, affordable, and increasingly clean electricity. Diving deeper into SCE's tremendous progress in wildfire mitigation, despite challenging weather conditions and some fires in our service area last year, 2022 marks the fourth consecutive year without a catastrophic wildfire associated with SCE's infrastructure. Key achievements in 2022 included deploying about 1,400 circuit miles of covered conductor, bringing total installations to around 4,400 circuit miles. To put this in perspective, this is nearly the round-trip distance from Los Angeles to Washington, DC. So, I am extremely proud of SCE's ongoing execution of grid hardening activities, which have made our communities safer. The utility is targeting up to another 1,200 miles of covered conductor in 2023. By year-end, approximately 74% of total distribution lines in high fire risk areas, or HFRA, including the 7,000 miles already underground, are expected to be hardened. This is a significant achievement and it is summarized on Page 7. SCE completed its one-millionth high fire risk inspection since 2019, which is like visiting every structure in HFRA at least three times. The utility continued to build out its network of weather stations, and now, with more than 1,600 in total, SCE has the largest privately-owned weather station network in the country, providing a granular view of weather-related risk to inform operations. A key result is that total acres burned from ignitions on hardened sections of our grid are 99% smaller than those in areas not yet hardened. SCE's approach to reducing wildfire risk is differentiated by the speed of its infrastructure hardening and by reducing reliance on measures that affect customer reliability, like PSPS, for example, by prioritizing hardening circuits at risk of power shutoffs. By the end of the 2023 through 2025 wildfire mitigation plan, SCE will have hardened about 7,700 miles of its overhead distribution system and scaled innovative pilots, such as Early Fault Detection. We look forward to SCE's continued success in reducing the greatest amount of wildfire risk in the shortest amount of time. Turning to the 2017 and 2018 wildfire and mudslide events outlined on Page 8. In the fourth quarter, SCE paid about $280 million in claims settlements. SCE now targets filing the TKM cost recovery application in the third quarter of 2023. Let me emphasize that SCE will seek full CPUC cost recovery excluding amounts foregone under the agreement with the Safety Enforcement Division or already recovered. SCE will show its strong, compelling case that it operated its system prudently and that it is in the public interest to authorize full cost recovery. The utility currently expects to request about $2 billion in this first application. Our financial assumptions for 2025 and beyond do not factor in any potential upside from the cost recovery applications, which would represent substantial value. Looking ahead, I want to highlight key management focus areas for 2023; these are laid out on Page 9. First and foremost, safety is foundational to our values and success, and we are targeting reducing the rates of employee injuries by 15%. Tragically, a utility troubleman, Johnny Kinkade, died from a work-related injury last month, and 1,200 of us joined his loved ones at his memorial service last week. This was our first employee work-related fatality in 5.5 years, and it redoubled my resolve and our team's resolve to make it our very last. SCE's unwavering commitment to keeping our communities safe through wildfire mitigation also continues. The utility plans to keep its pace of about 100 miles per month of covered conductor, reaching a total of 5,600 miles by year-end. Again, filing the first cost recovery application for the historical wildfires is a front-and-center focus area for us. On the regulatory front, SCE looks forward to its upcoming 2025 GRC application and will monitor the cost of capital mechanism, which could result in significant upside to 2024 earnings should it trigger. On the financial side, we will be focused on achieving our capital expenditure and earnings goals, as well as pursuing upgrades to our credit ratings. We believe this is well-warranted considering the significant wildfire risk reduction by SCE, the state's strong firefighting capabilities, and supportive California regulation. Looking toward the future, the support for economy-wide electrification continues to grow nationally and here in California. We've shared before that we forecast electricity usage growing 60% by 2045; yes, that's a big sixty. And previously, we projected almost flat annual growth through 2030 followed by a steep trajectory through 2045, but we are now seeing earlier increases with the breadth of legislation, regulations, and codes and standards approved last year. SCE has updated its electricity sales forecast to reflect these significant policy changes and now projects about 2% annual growth from 2023 through 2035. Both transportation and building electrification forecasts have increased significantly, narrowing the gap to our Pathway 2045 analysis. This strong electrification load growth outlook is also consistent with the California Energy Commission's forecast based on the state's decarbonization policies, providing a source of external validation. Rapid expansion of electrification sharpens the continued need to make significant investments in SCE's infrastructure. Over the coming years, SCE will continue to invest in wildfire mitigation and increase its grid work to support California's leading role in building a carbon-free economy. With growth in electricity demand, this significant grid investment will be spread over a higher volume of sales, supporting affordability overall. SCE's system average rate is already the lowest among major California investor-owned utilities, and we expect it will be the lowest for the foreseeable future. All of this, wildfire risk reduction, cost recovery for historical wildfires, the clean electrification investment opportunity, and, importantly, our confidence in the 2025 EPS target, makes me excited about our near-term steps and our long-term growth, so I am confident that investors will fully recognize our significant value creation. And with that, let me turn it over to Maria for the financial report.

Thanks, Pedro. Good afternoon, everyone. I want to start by pointing out that Edison International's core EPS of $4.63 for 2022 was at the upper end of our initial guidance range. During my comments today, I will cover our fourth quarter results, our 2023 EPS guidance, and our financing plan for 2023. Starting with the fourth quarter of 2022, EIX reported core EPS of $1.15. As outlined in our year-over-year quarterly variance analysis, SCE's fourth-quarter earnings increased mainly due to the GRC attrition year escalation. This increase was partly offset by higher depreciation and net interest expenses, which were influenced by rising interest rates related to the funding of wildfire claims payments from 2017 and 2018. At EIX Parent and Other, we recorded a negative variance of $0.03, mainly due to higher interest expenses at the holding company. Next, I want to discuss SCE's capital and rate base forecasts, which are largely consistent with last quarter's disclosures. SCE has significant capital expenditure opportunities focused on enhancing the safety and reliability of the grid. We anticipate strong rate base growth of 7% to 9% from 2021 to 2025, including SCE's current perspective on the requests for the 2025 GRC and other applications. SCE will submit its 2025 GRC application and testimony in May, and we will revise our forecasts to extend through 2028 before our second quarter earnings call. Moving on to our earnings outlook, we are introducing our 2023 core EPS guidance at a range of $4.55 to $4.85. I will explain the components of our 2023 guidance shortly, but first, I want to contextualize our year-over-year EPS growth. The main driver is rate base growth, which we expect to be around 8.5% in 2023. However, our guidance range suggests relatively flat to modest growth for the year. To help clarify this difference, we have outlined core EPS growth year-over-year. The significant factor for the difference is the higher interest expenses at both the parent and SCE levels. The refinancing of debt for historical wildfire claims payments accounts for much of this increase. Specifically, about 75% of the gap between rate base and EPS growth can be traced back to SCE's wildfire settlement-related debt. While SCE carries these financing costs until a cost recovery resolution is reached, I want to be clear that the utility plans to seek full CPUC cost recovery for all eligible claims payments, including financing costs. Please refer to our guidance and key earnings drivers. The components of our EPS guidance begin with rate base math, which we project to be $5.68. Next, we will look at SCE's operational variances, which contribute $0.48 to $0.75 per share to guidance. The major contributors are indicated on the right side of the page. SCE costs not authorized amount to $0.71, with the primary contributor being interest expenses related to wildfire claims payments. For EIX Parent and Other, we expect total expenses to be between $0.87 and $0.90 per share. I now want to outline the parent company's financing plan for 2023. Regardless of the specific instruments we use, our financing plan is entirely included in our EPS guidance. We project total EIX parent financing needs of $1.4 billion, which we plan to cover with a mix of securities comprising $300 million to $400 million of equity content and parent debt for the rest. We issue securities with equity content to uphold our investment-grade credit ratings, which we are dedicated to maintaining. To achieve the desired level of equity content, we may use a combination of hybrid securities, internal programs, or our existing at-the-market program. We also have an update on the CPUC cost of capital mechanism. If the 12-month average of the Moody's Baa utility bond index surpasses 5.37% at the end of September, the mechanism requires an increase in the ROE by half the difference between the average and 4.37%. Importantly, this mechanism also resets the authorized costs of debt and preferred equity. As of February 16, the measurement period average is around 5.8%. We will keep an eye on this mechanism over the next seven months. For further clarity, we have provided a downloadable spreadsheet on our Investor Relations website. Looking forward, we reaffirm our EPS growth rate guidance of 5% to 7% from 2021 through 2025, equating to an EPS of $5.50 to $5.90 in 2025. My management team and I are firmly committed to achieving this target. This EPS goal takes into account the higher interest rate environment but does not reflect the upside potential from the cost of capital mechanism that adjusts the ROE and updates the costs of debt and preferred. To provide a sensitivity perspective, if the mechanism is activated, it would increase the ROE by at least 50 basis points, with each 50 basis points of ROE change impacting 2025 EPS by about $0.28. Additionally, our financial assumptions for 2025 do not consider the potential recovery of historical wildfire costs, which could be significant. Lastly, I want to revisit Pedro's earlier point about affordability and emphasize another step SCE has taken to manage customer rates. Earlier this month, SCE reached a settlement agreement with TURN and Cal Advocates to transition to a customer-funded wildfire self-insurance model. This builds on the customer-funded self-insurance model that was previously approved in the 2021 GRC. Under this new structure, SCE will be able to reduce its revenue requirement by an annualized $160 million, further decreasing SCE's system average rate, which is currently the lowest among major California IOUs and is expected to remain so for the foreseeable future. In conclusion, EIX presents a double-digit total return potential, combining our EPS growth rate guidance of 5% to 7% with a 4% dividend yield. SCE's rate base growth is the key driver, as the utility invests in the safety and reliability of the grid, which becomes increasingly crucial each year as electrification across the economy speeds up. That wraps up my remarks, and I will now hand it back to Sam.

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

Good afternoon, Shar.

Hey, Shar.

Hey, good afternoon, Pedro. Hey, Maria. Pedro, just given the, I guess, emerging visibility on the wildfire cost recovery, I mean, I guess that's light at the end of the tunnel, if you will, do you still need to issue equity or equity content? I mean, assuming if you start getting cost recovery, you become over-equitized, right, at that time, so you could find some efficiency in deferring issuance and potentially showing the agencies a glide path for credit metrics?

Hey Shar, it's Maria. When we've previously discussed our equity needs, we've concentrated on the underlying rate base and the company's capital requirements. We've already tackled all our liabilities, and our main aim has been to reach that stage. Now, we are referring to equity moving forward, which amounts to $1 billion, or an average of $250 million annually over the next four years, tied to rate base growth. As we navigate recovery processes, we'll continue to determine how to integrate that into our capital structure. We will also need to retire some debt at SCE once the funds start coming in. We'll address all of this as we progress.

Okay. Got it. So, more to come there. Okay. And then, just obviously since you're now seeing a 2% load growth starting in '23, I think from flattish levels, I guess, do you anticipate any increment investment needs that aren't currently in the GRC approved CapEx within sort of this planning horizon? I mean, could that sort of have an impact on rate base? And how do we sort of think about the recovery mechanisms? Would that be recovered under? Or do you need to file another GRC? Thanks.

Yes. Thanks, Shar. Apologize, I jumped in there. There was a little blip on the phone line, so I thought you were done.

No, it's okay.

Couple of pieces to this, and Steve Powell may want to add to this as well. We're certainly managing within the current '21 rate case. You saw that we have a Track 4 application. We're waiting for approval of that. Key thing here though is, as we look through 2030, 2035, we see that growth earlier than we had expected. We will certainly be building that into the '25 to '28 GRC application that Steve's team is completing now and expecting to file in May. I think within that we believe this is manageable. Steve, anything you would add from your perspective?

Pedro, to clarify regarding load growth, we anticipate it will increase over the next 13 years. Initially, it will be lower, so don't expect to see a 2% increase starting next year. The growth will pick up as vehicle electrification and building activity accelerate. Eventually, this growth will outpace solar rooftop growth. However, this won't significantly affect the next couple of years in our current rate cycle. As you mentioned, we are closely evaluating the 2025 rate case to determine what additional investments will be necessary to support this growth.

Yes, it’s great, Steven. I’d like to add one more point that I believe is important and quite exciting. This process may not be entirely smooth. We can expect some positive surprises along the way, which might introduce some volatility in customer adoption. A prime example of this is fleet electrification. For instance, if a large retailer with a significant truck depot decides to invest in a fleet of heavy-duty electric vehicles, they might not have informed us about it yet. That could be a surprise down the line, but we will manage it. In the upcoming 2025 General Rate Case application, our team will propose investments that will give us more flexibility to handle these positive surprises, like earlier or more concentrated electrification in a distribution network than we have seen before. We are entering a new era, which is a positive development for California's decarbonization efforts, although it will bring some significant changes, especially concerning heavier-duty electrification applications such as larger trucks.

So maybe, Shar, just the main takeaway there is that in the next couple of years, we can fully manage within our existing GRC, but you will see this load growth fully reflected in our 2025 application.

Okay. This is perfect. Fantastic, guys. I appreciate it.

Thanks, Shar.

Hey, Angie.

Thank you. Hey, how are you?

And how are you?

Okay. Good. So for the first question, looking at the equity requirements for 2023, they appear to be relatively low since you did not issue all the equity needed for 2022. Is this due to improved efficiencies in cash flow, indicating that a catch-up for 2022 is unnecessary? Or have you found a way to monetize some assets, such as buildings or others?

Hi, Angie. It's Maria. I want to start by mentioning that we are managing to a range of 15% to 17% for FFO to debt. We are firmly committed to maintaining our investment-grade ratings. Previously, we mentioned that we have an equity content requirement of up to $1 billion through 2025, which could vary based on our capital program. As we entered 2023, we had deferred some of the equity content from 2022 due to market conditions. However, we reassessed our metrics and are confident that we can meet our commitments to our investment-grade rating. Moving through the cycle from 2021 to 2025, we will continue to monitor our position regarding the capital plan. Overall, we are quite comfortable with our financing plan for 2023.

Okay. And you didn't mention anything about your battery project. Could you give us a sense of the status of that project?

Yes, that's on track to be online by the summer. Steve, you want to give any more detail on that?

As a reminder, SCE signed an agreement in October 2021 with Ameresco for 537 megawatts. We have been working on that project since then. Last year, we faced supply chain issues and other execution challenges. As mentioned, we expect it will be operational this summer. We anticipate spending about $1 billion in total on the projects. Additionally, with the project going live this year, it will qualify for approximately $230 million in tax credits under the Inflation Reduction Act, which will benefit our customers.

Okay. And then, lastly and probably most importantly, so you are planning to accelerate the filing for the wildfire cost recovery, at least the first portion. I'm just wondering why is it coming earlier than expected. So, that's one. And number two is, so you're not deferring any interest associated with the financing of those wildfire claims because you haven't had any decision from the CPUC. So, I'm just wondering, if you do get a decision or a settlement or at least a settlement in that first batch, is that enough for you to start deferring the interest expense associated with Woolsey?

I will handle the first part of the question, and Maria will address the second part. We have previously mentioned our goal to make the first filing by the end of this year. We also noted the importance of completing this process as soon as we can since it helps us achieve certainty and facilitates cost recovery. While I wouldn’t say we’ve expedited the filing, it aligns with our end-of-year timeline. However, with greater clarity each quarter, we now see the potential to file in the third quarter, which is when we plan to proceed. Maria, would you like to address the other part?

Yes, Angie, as you pointed out, we are not deferring the interest expense related to the wildfire claims debt, which is reflected in the income statement. We will request recovery when we submit the application, and once we receive that recovery, we will reverse it and you will see that reflected in earnings. Upon receiving the decision, we will examine the specific language and determine how it might apply to Woolsey or whether it sets a precedent. We will assess the situation based on the wording of the TKM decision.

Awesome. Thank you.

Thanks, Angie.

Yes. Hi, good afternoon.

Hi, Steve.

You probably already knew this, but it looks like Moody's may have upgraded your rating, so congrats on that.

Thank you.

So, first checkmark on our scorecards, do you?

Could you discuss the expected timeline to receive a response from the CPUC regarding the filing for recovery? I believe there are two decisions involved: first, the prudency assessment, and then determining the actual monetary amount related to that process. Can you explain both aspects?

Sure. So, our intent when we file the application is to request an 18-month schedule; that's consistent with how they handle rate setting sorts of applications. We are also going to ask that they consider both of those items that you just mentioned, both the prudency of our operations and the prudency of our settlement process or claim process simultaneously. What will happen after we file the application is that typically, there would be a 30-day window in which people could file comments after which the commission would schedule a pre-hearing conference. And following a pre-hearing conference, they would issue their scoping memo. The scoping memo would then have their schedule, sort of their response to our requests and other intervener comments. So that's sort of thing we're looking at, and we'll know a lot more after that scoping memo is issued.

Okay. Great. I think you've managed to counterbalance many of the interest rate increases with improvements in operational variances, especially looking towards '25. Can you provide more insight into what is driving those improvements? Also, since this is the GRC year, how does that factor into the '25 GRC? Thank you.

Sure. There are many factors at play, as reflected in our 2023 guidance. The range for '23 is quite similar to the 2025 EPS CAGR. Key components include AFUDC earnings, which represent a significant portion of the operational variances. Additionally, we continuously submit regulatory applications, typically every year, and the decisions on these can lead to adjustments reflected in operational variances. Regarding 2025, as it's the first year of the GRC cycle, some elements may become misaligned throughout the cycle. A common example is depreciation, where discrepancies may arise between recognized depreciation and what has been authorized. However, in the first year of the GRC cycle, these can be reconciled, allowing us to return to a more regular rhythm. These factors have been taken into account for '23, '22, and will also be relevant in '25.

Okay. Thank you.

Yes, thanks, Steve.

Hi, everybody. Hoping to follow up on cost recovery application. In the prepared remarks in the presentation, you highlighted about $2 billion that would be the ask. How did you determine that amount? And what factors could cause some deviation from that request?

Good question, Ryan. The simple answer is that this is about the TKM case, which is separate from the Woolsey case. We have not previously shared how the total amount was divided between the two cases. Now, this provides insight into the amount allocated to TKM. Essentially, this is the accounting of what claims belong to which case.

But it probably doesn't give you perfect insight just yet, because we will continue to settle claims and accrue interest, and we will include a true-up mechanism in the application that we filed to address any costs we incur following the application.

That's right.

Between now and any filing in the third quarter, presumably, there's a lot of work that needs to be done. Any factors that you care to share that could influence the more specific timing and the milestones to watch in the process?

I think Maria covered nicely earlier, Ryan. Our expectation there will be proposing an 18-month schedule. I think we shared in past calls that the team has been working on these applications already for quite some time. So, it's not work that starts now; it's work that's been ongoing. And so, we'll have final details once we put the application out there.

Okay. Thank you.

Thanks, Ryan.

Hey, Greg.

Thank you for your question. Could you provide insights on the Track 4 proceeding and its implications on your financial goals? How should we perceive its impact?

Track 4 is the stub year in our 2021 GRC case, addressing the revenue requirements for 2024. We have received comments from interveners and are moving through the usual process. We expect to have a decision by the end of this year, which is an important factor for 2024. This process is standard anytime there’s a GRC or any part of it pending. It does not influence 2025. As mentioned in response to Steve's question, we will complete this GRC cycle, and 2025 marks the start of the next GRC cycle. Our projected 5% to 7% EPS CAGR from 2021 to 2025 is primarily based on the results for 2025.

And the final outcome would be expected to be somewhere between the interveners and some improvement on that in the final decision?

I think there are still some things we need to work through on Track 4. There are still procedural schedules and comments that are due. So, we'll work through that the balance of the year.

All right. Good luck.

Hey, thanks, Gregg.

Hey, everyone. Thanks for taking my questions. And I wanted to ask just a follow-up on the claims, and I'm sorry if I missed it. But just for Woolsey, when would that actually be filed? I guess, would it be sometime after '25, after the 18-month process on the TKM? Or can you just explain that?

We haven't provided a new timeline for that yet. In the past, we mentioned that Woolsey occurred about a year after TKM, so you can expect that filing to be scheduled sometime after TKM. However, we don't believe it's necessary to wait for the TKM process to conclude before filing for Woolsey. Similar to what we did with TKM, we’ll file once we are substantially complete with settlements, and I think that would dictate the timing for the filing.

I appreciate the information. Your confidence in the 2025 earnings guidance is impressive, and thank you for outlining the path to it. Considering the $0.24 impact from the debt balances on 2023, I assume that will carry over into 2024 as you wait for recovery and actions from the CPUC. How do you see your position within the 5% to 7% range for 2024? Are you on track to meet it, or is it more about reaching that goal in 2025? Thank you.

Well, fundamentally, 2025 is the most important aspect of this conversation, as that's the target we have set and are working towards. Regarding 2024, we will provide guidance during the Q4 call next year, but I see 2024's rate base as a key driver of growth. There are elements from 2023 that will influence our 2024 guidance. We've discussed several aspects today, such as the decision from GRC Track 3 to Track 4. We have various memo account filings pending, and we'll see the timing related to those. We'll continue to implement our financing plan and I want to clarify that we've accounted for the higher interest rate environment in our figures. While I can't definitively say where interest rates will settle by 2025, it is already factored in. We're also going to keep an eye on the cost of capital mechanism. While it's not essential for us to reach our 5% to 7% EPS growth rate in 2025, it could affect 2024. We are preparing for 2024 and the team is focused on improving operational efficiencies, which are crucial for this situation and for customer affordability.

Thanks for that color, Maria. I really appreciate it. Thank you.

Thanks, Nick. Take care.

Hi, thanks so much for taking my questions. I was wondering maybe first following up on the financing outlook and the interest rate environment. We've seen a couple of your peers do some different types of debt securities recently, convertible-like debt securities that have offered lower interest rates. Wondering if there are any ideas like that that you're exploring in terms of opportunities to lower the debt financing costs as you look at some of the upcoming refinancing and debt issuances?

Yes. I think the answer to that question is, we're always looking at opportunities to be as cost-effective as possible. We'll have to monitor the market and see how all those other transactions go, whether it fits our situation, but we're absolutely looking for every opportunity like that that we can.

Okay, got it. Thanks. And then, also following up on the operational variances, looking at the 2025 outlook, I'm wondering if you could give an indication as to what kind of portion of that increased versus the prior expectation? And are you able to give just how much of that is operational efficiencies within the overall bucket?

Yes. So, we haven't broken it out into a ton of detail in terms of operational efficiencies because remember, operational efficiencies, there's a lot of work that goes on at SCE and at EIX. And so, like you have many, many line items that you're working through. But some of the broad thematic areas that we've looked at relate to technology improvements and leveraging technology; it relates to work management and relates to procurement. So, there are a number of areas that I would say fall into the category of operational efficiencies. But as I mentioned earlier, the operational variances bucket also includes a lot of other things. It includes AFUDC. It includes sort of the realization of regulatory applications as we get into that time period. It includes the fact that we're going to realign some of the things that may have gotten a little bit misaligned over the course of a four-year GRC cycle like depreciation. So, there's all of those things that fall into the operational variances.

Okay, great. That's helpful color. I appreciate it. Thanks so much.

Thank you.

Thanks so much.

Hey, good afternoon, team. Thanks so much for the time. I appreciate it. Hope you guys are well. Hey, just coming back to the guidance here, right, '23, '25, we received a good amount of attention here. But just let me ask it this way. When you look at your Parent and Other, right, it's relatively flattish from '23 to '25, call it, like that $0.88 midpoint. Given the commentary thus far about the balance sheet and the focus on equity issuance and the fact that some of that included, right, the parent includes the dilutive effect, it kind of suggests that there is no incremental parent debt issuance or equity issued. Or if there is, there is some kind of positive offset, right, i.e., maybe some debt paydown from TKM or something like that. Just trying to understand the puts and takes in that Parent and Other line.

Yes. I think, Julien, at the parent, we do the same things that the utility does and look for cost efficiencies. And we think that there are a number of areas around operational efficiencies, around how we manage our work, et cetera, that will allow us to fall into the range that we've given in 2025. So, I think it's not that glamorous, but it's a lot of hard work getting costs down.

Got it. Do we have any sense of how much is baked in there in terms of cost reductions through the course of the period, if you will? And also, in the '23 guidance, I think it was like a $0.14 CEMA. So, what is that true-up as well, just while we're on the subject of details?

We are actively working on various initiatives to improve our operational efficiencies and overall effectiveness at the holding company. We will provide more updates as we address these matters. Regarding the 2023 CEMA item you mentioned, CEMA stands for Catastrophic Event Memo Account. We incurred costs a few years ago related to capital expenditures due to catastrophic events such as storms or wildfires, which were not associated with the events of 2017 or 2018. When these situations arise, we submit applications for any additional costs incurred. We believe that this application will materialize this year, and those costs will be reflected in our operational variances. This is similar to the CSRP item we highlighted when we provided guidance for 2022.

Got it. All right. Thank you guys very much. Have a great day.

Thanks.

Thanks, Julien.

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