Edison International (EIX) — Q1 2023 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-Q, prepared remarks from Pedro and Maria, and the teleconference presentation. Tomorrow we will distribute our regular business update presentation. During this call, we will make forward-looking statements about the outlook for Edison International and its subsidiaries. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our SEC filings. Please read these carefully. The presentation includes certain outlook assumptions as well as reconciliation of non-GAAP measures to the nearest GAAP measure. During the question-and-answer session, please limit yourself to one question and one follow-up. I will now turn the call over to Pedro.

Well, thanks a lot, Sam, and good afternoon, everybody. Edison International's core EPS for the first quarter 2023 was $1.09. We are pleased with our start to the year and are confident in affirming our 2023 core EPS guidance of $4.55 to $4.85. We also remain confident in delivering our long-term EPS growth target of 5% to 7% from 2021 through 2025. Maria will discuss our financial performance and outlook. My key message today is that we continue to see a number of positives in the near-term and in the long-term, and these make us excited for our company’s future. SCE’s actions to sustain and strengthen the electric grid, mitigate wildfires, and enable decarbonization through electrification are critically needed by California and are increasing our investment opportunity. In the longer term, our Pathway 2045 analysis highlights the continued investment in transmission and distribution needed to evolve the grid. This is being recognized by regulators in California. In 2021, the California ISO released a 20-year plan estimating about $30 billion of transmission investment needed through 2040, consistent with our Pathway analysis. Only a few weeks ago, CAISO published its Draft 2022 to 2023 Transmission Plan, with its current thinking on system needs over the next 10 years. Their draft plan calls for 46 transmission projects with a total estimated cost of $9.3 billion. Over $2 billion of that represents proposed incumbent projects for SCE, and over $5 billion represents FERC Order 1000 competitive projects within Southern California for which SCE will be able to compete. In the near term, SCE continues its diligent execution of its Wildfire Mitigation Plan and has reduced the probability of losses from catastrophic wildfires by 75% to 80% compared to pre-2018 levels, predominantly from grid hardening measures that allow the utility to mitigate risk while keeping electricity flowing to our customers. I want to say thanks again to the many of you who visited us in person at our headquarters and heard directly from several of our leaders about the utility’s achievements and ongoing actions. In March, SCE filed its 2023 through 2025 WMP with the Office of Energy Infrastructure Safety. Highlights of the plan are shown on Page 3. Our number one priority remains the safety of the public, customers, workers, and first responders. In 2023, the utility is building on the work already accomplished while focusing on five key areas: these are continuing to harden the grid, ramping up targeted undergrounding work in severe risk areas, continuing to reduce PSPS impacts, expanding aerial fire suppression funding to year-round, and furthering technological advancements. SCE’s flagship grid hardening program, covered conductor, remains its key mitigation measure. More than 2,850 additional miles of covered conductor will be installed between 2023 and 2025. By the end of 2025, SCE expects to have replaced more than 7,200 miles, or about three quarters, of overhead distribution power lines in high fire risk areas with covered conductor. SCE also plans to complete about 100 miles of undergrounding by 2025 to address the high risk presented by unique factors in certain areas, and plans to underground a total of 600 miles by the end of 2028. Additionally, to quickly suppress fires regardless of how they start and protect the communities SCE serves, the utility continues to partner with the LA County Fire Department, Orange County Fire Authority, and Ventura County Fire Department to expand their firefighting capabilities. As highlighted in the WMP, this support has been expanded to year-round aerial fire suppression from the Quick Reaction Force, made up of the world’s largest fire-suppression helicopters with unique night firefighting capabilities. The WMP is adaptive and is focused on furthering technological advancements to find new ways to mitigate wildfire risk. SCE is continuously developing new approaches and collaborating with other utilities, with academia, and with the energy sector to make our communities safer. The WMP highlights technologies, such as the Rapid Earth Current Limiter, Early Fault Detection, and using artificial intelligence that will continue to advance our suite of wildfire mitigation measures. Going back to the long-term view, a key driver for SCE’s investment in the grid and for enabling customer affordability is transportation electrification. We aren’t just talking here about regulatory policies or long-term forecasts. We are seeing customers really start to embrace and adopt EVs today, including operators of medium- and heavy-duty vehicle fleets. SCE was an early mover and today has the country’s largest suite of transportation electrification programs led by an investor-owned utility, with over $800 million in approved funding for its Charge Ready programs, which include a program aimed at the medium- and heavy-duty segment. Momentum and customer interest have certainly increased, and we are beginning to see vehicle availability improvements in the heavy-duty segment, with more options available to order. SCE is currently working with nearly 200 sites to potentially support approximately 4,000 medium- and heavy-duty vehicles. Customers operating heavy-duty vehicles are requesting higher-powered chargers, resulting in larger load requests that may require additional distribution system upgrades to ensure adequate capacity is available. SCE continues to engage with these customers to understand when and where these vehicles will materialize to ensure the grid is ready. I will conclude by noting that even as SCE makes substantial investment in the grid to keep the utility and the state on track for decarbonization and electrification efforts, affordability is always top-of-mind. SCE’s long-standing culture of actively pursuing and maintaining productivity improvement and cost control measures has enabled it to have the lowest system average rate among California investor owned utilities. Some recent examples include the pending settlement agreement with TURN and Cal Advocates to move to a customer-funded wildfire self-insurance model and SCE’s operational excellence program, which includes over 600 employee-driven ideas with capital efficiency and O&M benefits. These include work planning, procurement, and technology as shown on Page 4. Beyond these, we will constantly pursue new opportunities for digitization, automation, and generative artificial intelligence to drive further improvements in customer interactions, asset data quality, and back-office efficiencies. The expected benefits should progressively increase as we accelerate implementation through 2024 and beyond, further benefiting affordability for SCE's customers. With that, Maria will provide her financial report.

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

Hi, Angie.

Thank you. How are you? Okay, so my first question is still just looking at the settlements of the 2017 and 2018 claims, so didn’t settle more since basically the fourth quarter update?

No. Angie, this is Maria. We actually settled about $148 million in additional claims during the quarter. So we have been settling more claims. We report on the amount settled in each quarter. So last quarter the pace of the demands did slow down some, but we're still very well positioned, and we will be filing our first cost recovery application in Q3 for the TKM event.

Okay, okay, that's fine. And then for the SCC GRC application that you'll file in May, do you plan to assume positive load growth in your filing?

So we will be filing that in another week and a half or so. I think we reported in our last quarter that we're seeing load growth picking up and there are assumptions built into the rate case you'll see those when we file it, but there are assumptions regarding the rate case on load growth. Steven Powell, do you have anything to add?

Hi, yes. As we, now on load growth we expect to see in the rate case focus on all the things we need to do on the grid, both to deal with customer demands like now as well as the load growth that we are anticipating and other things. And so that will be a focus on reliability including looking at infrastructure replacements that have been ramped down over the last number of years while we've dealt with a lot more wildfire mitigation. So you'll see more wildfire mitigation activities in there, both continuation of our covered conductor program as well as a move towards some targeted undergrounding, continued electrification investment and of course dealing with what we project to be load growth between now and 2035 is going to be about 2% a year on average. So that was right investments in the grid and of course with all of that is making sure we're thinking about from an affordability perspective balancing the needed investments in the grid with the customer's needs for affordability.

Okay, and then my last question for Maria, so given all of the credit upgrades and then reduction in wildfire risk, have you seen, and again I could probably see myself, but have you seen a meaningful reduction in your credit spreads? I'm just wondering if everybody else in the industry is chasing growth in their cost of debt, are you guys actually seeing some reversal of the risk premium that is positioning you better versus peers in the industry?

Sure, so Angie I think we've for a long time we've had the reverse, right, where there's been a big gap between us and where the others in the industry are, we share that with the commission as well. We are seeing some improvement. I think there's still room for improvement, and it's one of the things that we're very focused on over time, but we have seen some benefits from some of these recent upgrades.

Okay, that's great. Thank you.

Thank you, Angie.

Hey guys.

Hey Shar.

Hey, good afternoon, Shar.

Good afternoon. Pedro, you mentioned the CAISO transmission plan and sort of that associated CapEx opportunities in your prepared remarks. Just to clarify, those have not been assumed in your current 5% to 7% growth guidance. And maybe just tying into the CAISO AB, 538 is proposing to kind of expand CAISO into a western RTO. Does that put further tailwinds for transmission development there?

Yes, so on the first part of the question, no, those are not part of our 2021 to 2025 EPS growth rate. And in fact, the chances are that those projects would be early in the development process by 2025, since they're only now being identified by the Cal-ISO. One of the challenges, Shar, is that today transmission development can take a decade largely because of the approval and permitting and siding processes. So, we're also looking at the efforts at the federal level and state levels to expedite permitting and siding. So that's on the transmission piece. On your question about Western regional market expansion, we're monitoring the bill. We are actually very supportive of the concept of an expanded Cal-ISO providing a platform to become a western regional market. Of course, the devil will be in the details and we want to make sure that that expansion if and when it happens, and hopefully it will, but that it's done with all the right sort of safeguards in place to make sure that the right benefits accrue both to California and other states' customers. And then you asked whether that could add tailwinds and I think of it as a larger market will provide greater opportunities to minimize the cost of the clean energy transition. It will allow better sharing of resources across the west. And so at its core, I think the main benefit of it would be to provide a platform to support greater affordability for both California customers and customers across the west. And it's we mentioned in remarks here we are mindful of affordability. It's something we continue to focus a lot on. So anything like a western regional market that helps bring down the cost of the transition is a good thing then in terms of creating more room in our rates to either minimize rates or to provide room for all the other projects that are important here. As to whether our western regional market could mean more transmission projects, ultimately for SCE it's a little harder to tell and I think the main benefit is that cost reduction for customers.

Got it. And then lastly, obviously you guys just completed your financing plan, but there is somewhat of a cash pay convert market forming. Several peers have tapped it, some don't even need equity. Your embedded interest cost is over 6%, which is obviously materially higher than this market. Any kind of interest there in that, and could that be sort of accretive to the current plan? Thanks.

Yes. So Shar, it’s Maria. So the financing we've done to date has been consistent with what we said on our last call in terms of the total $1.4 billion and the junior subordinate notes were aimed at the equity content, balance in the equity content we're going to be addressing through our internal program, so that's one piece of it. In terms of the debt financings we have to do for the balance of the year, we're going to look at all the different options. We want to be efficient. We want to consider all of the costs, the all-in cost of doing that and take into consideration what both the near-term but also the longer-term potential costs associated with that. But, we're going to keep everything on our radar.

Perfect. That was it. Thank you guys so much.

Yes, thanks Shar.

Hi, Ryan.

Hi everybody. Follow-up on some of the transmission comments or questions. In terms of the initial FERC Order 1000 transmission projects, when do you think the company is likely to pursue those from a timeline standpoint?

Hey Ryan, you're cutting up a little bit. Would you mind repeating the question? Might be our bad phone line or so.

In terms of the FERC Order, 1000 transmission lines, from a timeline standpoint, when do you think the company is looking to pursue those opportunities?

Yes, so it really starts with what timeline the Cal-ISO follows for the process of finalizing the transmission plan and then ultimately taking projects through that competitive process. I don't know that we have a specific time available yet, but Steve, are you aware of anything more specific at this point?

Yes, I think, so in the draft plan there were four projects identified that would be eligible for competition. They still have to finalize and approve the draft plan. And then in terms of the bidding windows, I believe some of the bidding windows start as early as the beginning into the summer and into the fall. So the project evaluation bidding is kind of later this year in terms of when bidders would be going in on those projects.

Okay. And then the follow-up maybe from Maria, if those projects were to be one, what, how would you look at the financing of the incremental capital given that it's more long duration?

Yes, so when SCE bids and wins, we'll finance that the way we would finance our normal rate based investments, Ryan. So we'll do that in the normal course. I think that there will be a lot of opportunity for us to be able to finance all of it.

Right. Thank you.

Thanks Ryan.

Hi, Gregg.

Yes, hi. Thank you. Maybe just a quick one on the pending heat pumps investment and just wondering what you would expect the duration of that program would be to spend the money, the $677 million?

Our proposal was for a five-year program, though it's likely a four-year program. Just to remind you, we proposed deploying around a quarter million heat pumps. Additionally, we aimed to help about a third of the customers obtain heat pumps and upgrade their homes for broader electrification to make them ready for electrification. Approximately 90% of the program will focus on residential customers, with a significant portion directed towards low-income and disadvantaged communities. The proposal is still undergoing the PUC process, so expect a deployment timeline of about four years following PUC approval.

Thank you very much.

Thanks.

Hey, good afternoon, Julien.

Thank you very much, I appreciate it. I wanted to return to the update that’s coming up. In mid-May, we have the rate base update approaching. It seemed like in the prepared remarks, you hinted at a possible extension of the earnings outlook with the second quarter call. Could you confirm that? Please provide some context regarding the parameters you’re considering for the base and also how you anticipate the EPS trajectory in relation to the rate base that will be released in mid-May.

Those are all great questions, Julien. Let me take them from a timing perspective first. So when we file the rate case in mid-May, we'll provide an update at that point relative to capital spend and rate base and that will be through 2028. So that's consistent with the timeline of the general rate case itself. On the Q2 call, we will then add to that our EPS projections through 2028. So your other questions are really excellent, but we'll bring all of that into play on the Q2 call.

So stay tuned.

Got it. Okay, understood. And base here will be rolled forward by a couple of years?

So we'll go into all that detail when we get to the Q2 call.

Got it. All right. Excellent. Well, we will leave it there. Thank you guys. I appreciate it.

All right, thanks Julien.

Thanks, Julien.

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