Edison International (EIX) — Q3 2023 Earnings Call Transcript

Thank you, Sue 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 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.

All right. Thanks, Sam and good afternoon, everybody. Edison International reported core earnings per share of $1.38 for the third quarter and $3.48 for the first nine months of the year. We are pleased with our performance year-to-date and, combined with the outlook for the fourth quarter, we are confident in reaffirming our 2023 core EPS guidance range of $4.55 to $4.85. I would also like to reaffirm our ongoing commitment to delivering 5 to 7% core EPS growth through 2025, which does not factor in several potential upsides. We also reaffirm our EPS growth guidance of 5 to 7% for 2025 through 2028. My comments today cover four key topics: first, an update on the legacy wildfires relating to a change in the best estimate; second, how SCE’s industry-leading wildfire mitigation practices differentiate the company as climate change-driven wildfire risk affects utilities across the nation; third, several SCE regulatory updates, and finally, Edison’s updated projections on the dramatic grid expansion required to enable economy-wide electrification and the clean energy transition. Starting with SCE’s legacy wildfires, the process to resolve claims and estimate the final outcome is complex and challenging, and each quarter SCE evaluates the estimated cost for resolving the remaining claims. The utility has made substantial progress settling claims and moving toward recovering these costs. However, this quarter’s evaluation required SCE to increase the best estimate by $475 million, driven primarily by settlements being resolved at higher levels than originally estimated and assuming that trend will continue. SCE also now has more refined information about the types of claims being presented as it works through the mediation process. The majority - about two-thirds of the increase is attributable to Woolsey. The impact of this increase on you, our shareholders, is not lost on us. As shareholders ourselves, we understand the importance of putting this issue behind us. Resolving all outstanding claims is crucial, and SCE is firmly committed to completing this in a reasonable and prudent manner that will ultimately support cost recovery. A positive step in this process is that recently a deadline was set for Woolsey claimants in the settlement protocol to notify SCE of their complete claims by February 2024. After then, SCE will have increased clarity on the remaining value of claims and the utility’s ability to swiftly resolve them. As always, we will continue to update you each quarter, including SCE’s expectation for when it will file the cost recovery application for the Woolsey Fire. The Woolsey application will cover more than $4 billion of eligible claims payments, plus financing and legal costs. We recognize that utilities across the country are facing new challenges from wildfires, which were initially viewed as specific to California, but have expanded to become an international issue. Against this backdrop, SCE has made tremendous progress since 2018, reducing its risk of losses from catastrophic wildfires by 85%. SCE has differentiated itself through its multi-layered wildfire mitigation strategy. This is anchored by grid hardening and includes enhanced vegetation management, asset inspections, and other programs. SCE has replaced more than 5,200 miles of distribution lines with covered conductor. In fact, by year-end, SCE will have physically hardened over 75% of its distribution miles in high fire risk areas. Risk mitigation beyond covered conductor includes one of the largest private weather station networks in the country, and enhanced protective settings. Moving to the regulatory front, I’d like to provide three updates. First, in August, SCE delivered on its commitment to file its TKM cost recovery application, requesting recovery of $2.4 billion. SCE provided a compelling case that it prudently designed, managed, and operated its equipment, and that the associated costs were reasonably incurred. The evidence provided shows that the damages resulted from extraordinary environmental conditions and other factors beyond SCE’s control. Expert testimony estimates that a reasonable decision could save customers as much as $4.9 billion by avoiding excess financing costs for SCE debt issued over the next 10 years, making it more affordable to achieve economy-wide electrification. Second, in September, SCE filed an unopposed motion for the CPUC to approve a settlement on Track 4 of its 2021 GRC, which sets the revenue requirement for 2024. Reaching this agreement is a successful outcome for the utility and its customers, and SCE has sought CPUC approval by the end of the year. Maria will provide additional details in her remarks. Third, at the end of September, the cost of capital mechanism triggered, resulting in a 70-basis point increase to SCE’s return on equity, effective January 1, 2024. Consistent with our usual practice, we will provide 2024 earnings guidance on our fourth quarter earnings call. I’d like to reiterate that our EPS growth through 2025 is achievable at SCE’s currently authorized ROE and this increase is one of the upsides I mentioned earlier in my remarks. I now want to share a recent achievement and recognition of our company’s strong corporate governance. For the second consecutive year, Edison International received a perfect score in the annual index, which is the marquee measurement of corporate political transparency and accountability. I’m very proud of our team for this accomplishment and our continued commitment to integrity and transparency. Edison has been a thought leader on the clean energy transition for many years. We conclude that for California to achieve its net-zero greenhouse gas emission goals in just over two decades, the electric grid must expand faster than ever before to levels higher than we previously estimated. We forecast an 80% increase in electrical demand by 2045, due in part to 90% of vehicles and 95% of buildings going electric. This means new transmission and distribution grid projects will need to be added at 4 times and 10 times their historical rates, respectively. At Edison, we are deeply committed to helping California reach its ambitious goal to mitigate the impacts of climate change. With that, let me turn it over to Maria for her financial report.

Thanks, Pedro, and good afternoon, everyone. In my comments today, I will cover third quarter results, discuss our 2023 EPS guidance and provide additional insight into our long-term core EPS growth expectations. Starting with third quarter of 2023, EIX reported core EPS of $1.38. SCE's third quarter earnings saw a $0.03 decrease. Recall that during this period last year, SCE received a CPUC final decision on its customer service replatform project and recorded a $0.09 true-up. This results in an unfavorable year-over-year comparison for this quarter. I will highlight two additional key variances. SCE's earnings were driven by an increase in revenue due to the GRC escalation mechanism partially offset by higher interest expense. At EIX Parent and Other, there was a negative variance of $0.07, primarily due to higher holding company interest expense. Overall, we are pleased with our performance in the first nine months of the year, and combined with our outlook for the fourth quarter, we are confident in reaffirming our full year core EPS guidance of $4.55 to $4.85. I'll cover this in more detail in a few minutes. Our capital plan supports approximately 6% to 8% rate base growth from 2023 to 2028. Let me emphasize that SCE is an electric-only transmission and distribution focused utility, which benefits from several strong regulatory mechanisms and competitive ROEs. So we see this rate base growth as high quality and lower risk since it is driven by the crucial grid infrastructure needed to facilitate California's leading role in transitioning to a carbon-free economy. Before I discuss our outlook for 2023 and beyond, I'd like to point out two key opportunities we have identified that would have certainty around our future financing needs and financial outlook. SCE will be filing an application with the CPUC tomorrow that would allow the utility to monetize its current portfolio of contracts with wireless providers and future contracting opportunities on its transmission infrastructure. SCE is making this filing prior to the marketing of these assets to shorten the timeline leading to final regulatory approval. The contract the utility expects to monetize generates nearly $20 million in annual revenue. This transaction will financially benefit customers. And for shareholders, this is an efficient form of financing that can reduce the need for equity in the future. We will keep you updated as the transaction progresses. Second, EIX recently announced a $750 million tender offer for its outstanding preferred stock. This offer would be funded with debt issuances. Overall, the transaction will simultaneously delever the balance sheet and reduce our interest rate exposure. Let me underscore that this transaction creates near- and long-term financial benefits. In 2023, we would recognize core EPS of about $0.02 for every $100 million of preferred stock tendered. In 2026 and beyond, we will have locked in lower after-tax financing costs compared to the expected reset rates for the preferred stock. These two opportunities build on our track record of successfully identifying ways to manage and create additional value. As shown, we are reaffirming our 2023 core EPS guidance range of $4.55 to $4.85. Recall that this guidance includes $0.14 related to SCE's 2022 CEMA application. Together with the tender offer, these two items could put us at the top end of our guidance range. However, if the CEMA final decision occurs in 2024, we will realize those earnings in that year. The financing transactions so far this year have been in line with our expectations and supported by strong investor response. On the regulatory front, I'd like to expand on a couple of Pedro's earlier points. First, to provide some detail on GRC Track 4, the agreement would authorize 98% of SCE's requested revenue requirements and 99% of its requested rate base. The key takeaway here is that once approved by the CPUC, the agreement will provide clarity on 2024 revenue. Consistent with our typical practice, we will provide 2024 earnings guidance on our fourth quarter earnings call. Second, this benefits 2025 EPS by approximately $0.39. This investment would enable the utility to capture savings sooner, thereby providing a strong base for long-term customer benefits. I want to reiterate the high confidence we have in our ability to achieve our 2025 and 2028 EPS growth targets. That concludes my remarks. And with that, I'll hand it back to Sam.

Sue, can you 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, Pedro. Good afternoon, Maria.

Good afternoon. How are you?

Good. Follow up on the last slide, Maria, Slide 10, or Pedro wants to take it, on the cost of capital. Just first, I mean, you gave some insight into the use of proceeds on the reset. Just curious if the Senate Bill 410 plays into where you would deploy the proceeds. And then also if you go through the procedure, what happens at November 2? And then I have one follow-up.

Sure. So maybe let's think a little bit about the $0.39 and the ROE shift. If you think about the cost of capital mechanism, it's really driven by interest rates. And it's a mechanism that has been embedded in the cost of capital proceeding for more than a decade now. And the reason for that is because we have this three-year cost of capital cycle. The assumption around the '21 through '25 period notes that SCE will finance at a 5.3% interest rate and EIX at a 6.1% interest rate. We executed our plan in 2023 right at those levels. The mechanism provides a hedge against future increases in interest rates above the levels embedded in our 2025 guidance. We also see the operational drivers that we shared with you already. But as we see the CCM trigger, we do want to look at opportunities to accelerate benefits in our operational excellence program.

Great. After the intervenors file tomorrow, do we wait for comments on the Energy division or should you walk us through the year-end?

Sure. So the comments are due tomorrow or the deadline from intervenors. Once that deadline is passed, the energy division would still consider whether they would just - the decision or if they would pass it on to the commission. I do think that's an important element of the mechanism.

Great. Lastly, referring to Slide 3, I appreciate the clarity. Is my understanding correct that the additional increase is primarily related to Woolsey? By February, when the deadline for claims arrives, we should have much more certainty about the total amount of claims.

That's right, Anthony. Because that gives a deadline there for filing claims, so that provides a certainty around the scope here. So looking forward to reaching at the timeline.

Great. Thanks for all the clarity.

You bet. Thanks, Anthony.

Hey, Shar.

Hey, guys. Hey, Pedro. Just on the monetization of the telecom infrastructure leases, $20 million in revenue and obviously potentially coupling that with the wildfire claims recovery. What time frame are you embedding in the plan to start seeing EPS and credit metric benefits? And do the increased claims figures present a drag versus some of the benefits from the equity content of the sale?

Hey, Shar, it's Maria. So I'm going to take that in two pieces. The framework is 15% to 17% FFO to debt. We are comfortable that we can hit our targets for the 15% to 17% FFO to debt. The recovery applications filed will be important. We're focused on demonstrating our prudency. For every $1 billion of cost recovered, that's about a 40 to 50 basis point improvement in our credit metrics. The increase in claims will fit into the final procedure that we proposed.

Got it. And the increasing value of the claims, does that present any challenges to the timing of the claims recoveries with the CPUC?

No.

It will just fit into the final procedure that we proposed.

Okay. Perfect. That was good. And then just lastly, you noted $0.39 of upside from the cost of capital mechanisms and the opportunity to sort of deploy it into customer-focused CapEx. I guess how long would it take you to deploy the incremental CapEx that the $0.39 of earnings would support? And I guess what mechanisms would you utilize to minimize that lag? Thanks, guys.

Yeah. So we would be looking at a whole range of things in terms of deploying that $0.39. We have been working on operational excellence and driving efficiencies for many years. So we're looking at the operational investment, as well as other opportunities to enhance customer experience. It will be building on successes that we have next year into 2025.

Okay, perfect. Thank you, guys. Appreciate it.

Hi, Angie.

Hello. Thanks for letting me ask the question. So the first, again, I mean, those wildfire loss increases are very substantial. It just almost feels like it's a moving target. We're almost in the ninth inning. And every other quarter, we have these very big increases. It's somewhat surprising to see it this late into the process. And again, I'm clearly hopeful that by February, we will have a full picture, but it just feels like there are more increases to come. Would you disagree?

We know this is something that our shareholders are certainly taking notice of, and we are too as management and as shareholders. The reality is that every quarter, we test again, we reevaluate. This quarter, a number of factors change. We're seeing settlements coming in higher than expected. We are certainly looking forward to February. I want to caution that the deadline for claims filing might still take some time beyond the deadline to get all the details behind specific claims. Our team is very focused on having a fair outcome as we continue through this litigation.

It is a process that we have to go through, and we have to do an evaluation. The most important part is getting through it and creating the certainty that comes with completion. At completion, we will be able to go and get a final resolution as well.

In the meantime, the total number of claims or financing of claims is increasing, and the cost of capital mechanism is not beneficial here, since those are not currently eligible for recovery.

We are going to file for recovery of the interest expense associated with financing the claims payments. We are about 85% complete with all of our individual plaintiffs' claims to resolutions. So we are moving through the pile.

Okay. And then changing topics. You lowered your rate base projections for '23-'24 or '25. Can you provide more details on that?

The capital that you're seeing moving around is particularly in the very near term. It's just a shift in the utility-owned storage project and the timing of those payments. So it is related to schedule adjustments. Overall, for the period '23 through '28, the capital program is still the same.

Okay. Thank you.

Thanks, Angie.

Hey, Gregg.

Hi. Is there a temporary financing for the preferred tender before you get to the potential sub-note financing?

We can address it in different ways. We will replace the equity content of preferred stock.

Hi, everybody. Just to clarify one question more for Maria. In terms of clarification of why now for the telecom asset sale? And can you walk through the mechanics of how I think in your remarks, you tested and offsetting to the equity content?

We have been completing our analysis, and we think these are attractive assets that folks would find attractive. During a time of affordability, we will be able to accelerate those benefits into the near term. About 15% of the value is for customers and about 85% of the value is for the company or shareholders.

In your prepared remarks, you suggested the idea of offsetting equity.

Yeah. About $100 million a year or so because we're going to be using our internal programs. At which point we can look at the proceeds and determine what that there's an opportunity there to offset some of the equity that we would otherwise issue under our internal program.

Hi, thanks for taking my question. So there's been some concerns about electric vehicle demand slowing. I was wondering if you could share your thoughts on the risks within your planning period.

I think like with any market, you're going to see ups and downs. The long-term trend is pretty clear here in terms of the value of electric vehicles to consumers and the role that EV deployment will play in reducing greenhouse gases. Our Countdown to 2045 white paper makes clear how valuable that is for GHG reduction.

We've seen significant growth in EV adoption in our territory. About 25% of new vehicle sales in the state are electric. We are following the customer on this, and we have planned for the growth that we're seeing right now. We are looking at everything from how do we accelerate the infrastructure development ahead of that demand.

The innovation in the general rate case to include the request for mobile equipment to temporary equipment is critical as it helps meet the load demands.

Yeah, yeah. Of course. No, thank you. Thank you very much.

Terrific. Next.

Hi, David.

I was just curious to get your perspective on PG&E's rate case. Any perspective that might come into play as you go through the process?

It starts with acknowledging that each of these rate cases is very situation-specific and company-specific. Our rates have emphasized the build-out of covered conductor, while others have had a strong emphasis on undergrounding forests. We continue to focus on operations aligned with our needs. The cost recovery adjustments and mechanisms are rules that have proven necessary for us. We emphasize that ours is different and continues to strengthen.

To underscore that every rate case is different. We also have a different escalation mechanism.

Got it. Thanks. And I also wanted to check on the CapEx outlook. Was that also related to the store project?

One piece of it is related to the schedule around the utility owned stores. More dollars will be spent in '24 versus '23. We're still at that $38 billion to $43 billion of CapEx.

Okay, perfect. Thanks for that.

Hey, Paul.

I just wanted to clarify something around the Track 4 GRC benefit. You mentioned $0.12 year-over-year into 2024. Is that correct? That's just a component of kind of what you would expect in terms of the rate as earnings per share growth?

To reflect the rate base math, yes.

Assuming the cost of capital trigger is in force at $0.39, should we think about it as above the earnings growth range to 2025?

The cost of capital mechanism is related to interest rates. We are managing the business every day. If we see an opportunity to accelerate benefits, we have four years ahead of us.

I want to be clear that this kind of situation is precisely what this mechanism was built to deal with.

Thank you very much.

This concludes the conference call. Have a good rest of the day. You may now disconnect.