Edison International (EIX) — Q1 2024 Earnings Call Transcript

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

Well, thank you, Sam, and good afternoon, everyone. Edison International's core EPS for the first quarter of 2024 was $1.13. We are pleased with our start to the year, and we are confident in affirming our 2024 core EPS guidance of $4.70 to $5.05. We also remain confident in delivering on our long-term EPS growth targets of 5% to 7% for 2021 through 2025 and similarly for 2025 to 2028. Our conviction remains grounded in the drivers that continue to support our outlook. Starting with SCE's legacy wildfires. The utility continues to advance the process of resolving claims. Based on the latest information available, which Maria will expand on, the best estimate of losses increased by $490 million or $333 million after tax. With wildfires now a national issue, litigation outcomes outside of California are impacting the cost to resolve claims everywhere. We remain committed to achieving ultimate certainty by working through the process expeditiously and seeking cost recovery. We are confident about the case SCE has made in TKM and will make for later discussions. I would like to reiterate that we strongly believe that cost recovery is warranted and in the public interest, and we conservatively have not reflected the significant potential in our financial projections. On the operations front, I want to start by highlighting Edison's leadership of the industry's response to climate change. Recent wildfires across the nation have provided a stark reminder of the changing climate conditions, which underscore the need for further enhancing resiliency and adaptation as we transition to a clean energy future. SCE is a clear leader in wildfire mitigation and is sharing its expertise with peers across the industry, who are now experiencing similar conditions. We have shown that wildfire risk associated with utility infrastructure is manageable. Also, our state has dramatically increased resources for fire suppression including having the largest civil aerial firefighting fleet in the world. Our regulators understand the importance of financially healthy utilities. AB 1054 put in place constructive prudency standards and the insurance fund. Over the past five years, SCE has invested about $5 billion of wildfire mitigation-related capital and expects to invest more than $6 billion over the next five years. This investment ranks among the highest levels in the utility sector. On Page 3, you can see the numbers and the results. I will point out that SCE has not seen ignitions due to the failure of covered conductors, and the program is well recognized for its effectiveness. Putting this all together into what it means for reducing future risk of losses from wildfires. We estimate the risk is 85% to 88% lower than pre-2018. Turning to Page 5. Let me highlight three key points that enhance the significance of this reduction. First, physical mitigation dominates. Unlike heavy reliance on operational measures like power shutoffs or faster settings, the primary driver behind this risk reduction is physical mitigation. This is important because it means a much lower burden for customers. Second, SCE's estimate comes from Moody's RMS industry-leading model, widely trusted by insurers. This model considers intricate factors, terrain, vegetation, historical data and more to predict wildfire probabilities. Third, to estimate the probabilities of losses in dollar terms, we employ a stochastic model. This model runs 50,000 simulations, considering potential emissions and fire sizes while incorporating SCE's mitigation strategy. This approach contrasts with simpler deterministic methods used by some other companies and regulators that only analyze past events. In summary, our rigorous data-driven approach validated externally paints a clear picture. SCE's risk profile today is dramatically different than in the past as a result of the utilities mitigation efforts. To focus specifically on grid hardening, Pages 6 and 7 highlight SCE's significant progress to date. I'm pleased with the progress our team has made, and I look forward to continued progress making our communities even safer. By the end of 2025, SCE expects to be approaching 90% physical hardening of its distribution lines and high fire risk areas. With over 7,300 miles already underground and more than 5,700 overhead miles hardened, SCE's total hardened miles surpassed those of all other California IOUs combined. We're really proud of these efforts to swiftly enhance grid safety for SCE's customers. Turning to load growth. After years of relatively flat demand, we are seeing 2% to 3% annual growth in the coming years with an inflection point above 3% annual growth beginning in 2028. In SCE's service area, we project this growth will be driven by the continued adoption of electric vehicles, increases in industrial electrification and higher penetration of building electrification. In California, one-fourth of new cars sold in 2023 were zero-emission vehicles, and that trend is continuing into 2024. As another indication of this acceleration, the state recently reached a milestone of over 100,000 public EV chargers now installed throughout California, and that is on top of over 500,000 at-home chargers. Southern California already has a significant data center presence. So while we also see low growth potential from this sector, we expect transportation electrification to drive a more substantial increase in the region's electricity demand. As our investment levels grow to support economy-wide electrification, affordability remains top of mind. We have demonstrated cost leadership over the years, resulting in the lowest system average rate among the major California IOUs. This discipline of managing our cost is a continuous focus. For example, we previously highlighted that the 2025 GRC application included $41 million of annual O&M savings as an immediate benefit for customers. Building on that, in SCE's rebuttal testimony submitted earlier this month, the utility identified another $35 million of annual O&M savings to further mitigate the revenue increase. 2024 is very much a year of execution across the business, and we are pleased with our start to the year. SCE continues to make significant investments and make the grid safer year after year. We continue to see constructive regulatory decisions. SCE is also making progress toward full resolution of the legacy wildfires. All of this allows us to remain confident in our ability to achieve our near and long-term commitments. I will conclude by reemphasizing that Edison International offers an excellent investment vehicle to participate in California's clean energy transition. SCE is hardening the grid every day to the benefit of customers and investors, and its wildfire mitigation execution has shown positive results for five wildfire seasons running. California is at the forefront of electrification, decarbonization and climate adaptation. As an electric-only, wires-focused utility, SCE is in a strong position to focus on the future, which will be electric led. Our commitment to clean energy leadership and innovation is well recognized in the industry and has only been further elevated as the impacts of climate change become more prominent. Ensuring the greatest reliable, resilient and ready is paramount to achieving the clean energy transition and the driving theme of our investments and growth. With that, I'll turn it over to Maria for her financial report.

Thanks, Pedro, and good afternoon, everyone. In my comments today, I will cover first quarter 2024 results, provide an update on regulatory proceedings and discuss 2024 EPS guidance. I also want to reaffirm our continued confidence in achieving our EPS growth targets. Let me begin with first quarter results. EIX reported core EPS of $1.13. As you can see from the year-over-year quarterly variance analysis shown on Page 8, core earnings grew by $0.04, primarily due to higher CPUC revenue authorized in track 4 of the 2021 GRC and higher authorized rates of returns, partially offset by higher interest expense associated with debt for wildfire claims payments. EIX Parents and Other was in line with the same period last year. Turning to SCE's capital and rate base forecast shown on Pages 9 and 10. These are consistent with last quarter's disclosures. The bulk of the capital plan will be addressed by SCE's 2025 GRC. The rate case includes investments necessary to meet the critical objectives of reliability, resiliency and readiness to meet customers' needs today and in the future. This includes gearing up traditional distribution grid investments on activities such as infrastructure placement and load growth as well as continued wildfire mitigation. SCE is facing the fastest electricity demand growth in decades. Thus, the capital plan reflects resuming traditional levels of infrastructure placements necessary for system reliability and making significant investments to support load growth, driven in large part by transportation electrification. During the first quarter, interveners submitted their testimony and recommendations in the GRC proceeding. The key points are summarized on Page 11. In summary, we are not surprised by Cal Advocates and Turn's focus areas, and we are confident that we will secure a good outcome for customers. Altogether, the recommendations would translate to rate base growth of approximately 6%, which is consistent with our projected 6% to 8% rate base growth range. Further on the regulatory front, SCE is advancing a handful of other key proceedings, including the 2022 CEMA, the TKM cost recovery application and the recently filed WMCE application. Earlier this month, SCE received a favorable proposed decision in the 2022 CEMA proceeding. If adopted, it would authorize $191 million of revenue that would be recovered over 12 months and fully approve $312 million of capital expenditures. The proposed decision is scheduled to be voted on at the CPUC's May 30 meeting. It's a big positive to get this decision earlier in the year, and its approval strengthens our 2024 EPS guidance. Additionally, the ALJ and the cost of capital proceeding recently issued a proposed decision that would deny intervenors petition for modification that sought to suspend the cost of capital mechanism. This decision is consistent with the intent articulated by the CPUC when the cost of capital mechanism was originally adopted and reinforces our views on the topic and the constructive California regulatory environment. Page 12 provides an update on the resolution of SCE's legacy wildfires, which continues to advance. The change in the estimated losses was primarily driven by information obtained related to the Woolsey Fire mediation program. Recall that plaintiffs who had opted into the program were required to submit their demand by a deadline in February. The demands received revealed that more plaintiffs intend to continue to pursue claims as considerably fewer plaintiffs have dropped their litigation in Woolsey than observed in the TKM process. Settlement outcomes during the quarter also exceeded previously estimated values. SCE has now resolved 97% of TKM individual plaintiff claims and 86% of Woolsey individual plaintiff claims and is on track to file the Woolsey cost recovery application in Q3. I will remind you that SCE intends to seek full recovery of all eligible costs, so the increase will be reflected in the cost recovery applications. In the TKM proceeding, next steps include intervener testimony due May 29 and SCE's rebuttal testimony due June 28. Turning to EPS guidance. Page 13 shows our 2024 core EPS guidance and modeling considerations. We are pleased with our start to the year and are confident in affirming the range of $4.75 to $5.05. As Pedro mentioned, the estimated losses for the 2017 and 2018 events increased. As a reminder, SCE funds the cost to resolve claims with debt, which is excluded from its regulatory capital structure. Thus, SCE expects to issue additional debt, which will result in about $0.02 of incremental interest expense in 2024. Regardless, we maintain our confidence in achieving our EPS guidance. SCE's cost recovery applications include the financing costs associated with resolving claims. So this increase will also be reflected in the cost recovery application. On the financing front, I want to underscore that we have limited equity needs as we continue to deploy substantial amounts of capital and extend our dividend track record. As shown on Page 14, the Parent's 2024 financing plan is nearly complete and we have already addressed our equity needs via internal programs. Also, we maintain our forecast of about $100 million of equity per year through 2028. As you can see on the right side of Page 15, SCE's strong cash flow generation and the incremental debt to finance accretive growth address nearly all our cash needs through 2028. We have significantly strengthened our balance sheet through efficient financing execution along with regulatory asset recovery of about $4 billion over the last three years and approximately $2 billion expected through 2025. This ability to track and recover prior spending is yet another constructive feature of our regulation, which balances the ability to execute critical work with strong regulatory oversight. In recognition of our balance sheet strength, we were pleased that last week, S&P affirmed our credit ratings and stable outlook. Importantly, they lowered our FFO to debt downgrade threshold to 14% from 15%. Noting the key driver of this action is the company's decreasing business risk. We're proud to see S&P's recognition of our leadership role in mitigating wildfire risk, especially in an environment where climate risk and credit thresholds across the industry are increasing. Lastly, I'll remind you that we've provided modeling sensitivities to help you quantify what cost recovery for the 2017 and 2018 events means for a few key metrics. Each $1 billion of recovery would improve our FFO to debt ratio by about 40 to 50 basis points and reduce interest expense by $35 million per year. These benefits don't only accrue to our owners. We believe customers will benefit by potentially avoiding as much as $4.9 billion of excess financing costs, a clear win for overall affordability. Let me conclude by saying that our confidence in meeting our financial targets remains strong. Underpinning this confidence in the near term and long term is our focus on execution. Execution to deliver on our earnings targets, execution to advance regulatory proceedings and execution of our cost management initiatives, the cornerstone for SCE's cost leadership and lowest system average rate among major IOUs in California. That concludes my remarks, and back to you, Sam.

Missy, 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.

I guess just to start with the charge. It's good that we moved past this mediation program deadline, but you did highlight an unfavorable litigation environment and settlements kind of exceeding previous estimates. Can you just maybe kind of talk about your confidence level that we wouldn't see another revision higher here as we get to the third quarter and knock out that remaining $800 million? Is this the kind of last remaining revision in your mind? Or how should we kind of think about as you progress to that third quarter deadline?

Nick, I appreciate the question. Look, I'll just start by pointing you to our disclosures, right? We've said all along that every quarter, we go back in, we test whether there's a need to change research and adjust them so that we are providing our best estimate. We really want to make sure we're doing this right. We did pass a pretty important milestone, as you said, with that Woolsey event. And so we now have the benefit of analyzing what came in, and we saw the factors that we commented on: both less drop-off in overall claims and higher expectation of awards. As we continue here, I think like I said in my comments, true certainty here will come with moving through this process as quickly as we can, doing it right, and getting to the finish line. I'm really pleased that we're certainly a lot closer to the finish line on TKM. We are approaching that important milestone with Woolsey, where we'll be ready to do our filing, and we continue to be on track to do that in Q3. Every quarter, we'll continue to test things. If we're giving you the best estimate we can, it means that it has probably an equal chance of reality being higher or being lower. So we'll continue to retest that every quarter. But again, our focus is on completing the process and getting this fully behind us.

And maybe, Nick, just one other thing to underscore Pedro's comment about completion, driving final certainty. I'll point out two numbers that we've already said today on the call; individual plaintiffs are the largest component of what's going on here. 97% of the TKM individual plaintiffs have been settled and 86% of the Woolsey individual plaintiffs have been settled. So that's really what's driving us to also comment that we're on track for a Q3 filing for Woolsey Cost recovery.

And then as I kind of think about the balance sheet impacts, and I think it's good to see that you're still committed to just only $100 million of equity a year here. That's not changing. You just got the 14% to 15% range as you talked about on FFO to debt side in your prepared remarks, just net of this charge, where do you stand in the ranges now? And then what are the drivers to kind of put you higher or lower as we get through the year and into '25?

Sure. I think the latest report that I've seen from S&P actually has us just over 14% FFO to debt. So inside or above their downward threshold range, 15% to 17% FFO to debt is still our objective. The financing plan that we provided last quarter is consistent with moving into that range over the next several years. We're making good progress on that as we continue to get claims put behind us but also as we continue to recover those minimal accounts, $4 billion over the last three years, $2 billion more through 2025. That, plus the growing rate base and the ability to earn on that and depreciation, et cetera, that's really moving us through that. And we tested a lot of different scenarios, and that's how we came up with $100 million of equity every year through 2028.

On the best estimate of losses for Woolsey, you spoke about a limited number of plaintiffs that have received extensions. Just wondering if you could share more detail about that, the kind of visibility you have into that because, obviously, those losses would probably be harder to estimate.

Yes. The process we followed with the February deadline involved some plaintiffs submitting complete information, while others submitted less than required or requested extensions. In this case, several plaintiffs received extensions. We have some insight into their claims and have grouped them, but we expect to gather more details as they reach their deadlines in the coming months. Our evaluation work is consistent with our approach from previous quarters, utilizing our extensive experience with various claims. As we continue to settle more claims, we gain more understanding, which we are applying to these new demands. We anticipate obtaining additional information as we move into the next quarter.

You mentioned filing stand-alone applications for the $2-plus billion of additional capital for NextGen ERP and the AMI 2.0 programs. Could you provide a more specific timeline for when you plan to submit these applications and when they could be incorporated into your plan? Additionally, how much extra equity might we expect to finance it?

Sure. We anticipate that the next-generation ERP application will be available in late 2024, while the AMI smart meter application is projected for 2025. Together, these initiatives are expected to require a couple of billion dollars in capital. When considering financing for the additional capital needs, SCE will continue to finance according to its authorized capital structure. We will monitor our credit metrics closely. We are currently on a strong growth trajectory within our credit metric range. If we can maintain this position, we will reduce the amount of equity needed for these additional capital projects.

Just wondering if there's anything to be watching for in terms of trends on transmission CapEx through the Cal ISO planning process or otherwise that you're thinking about?

Yes. Maybe I'll start on that one, and Steve Powell might have thoughts as well. So you've seen that the Cal ISO is really over the last few years fully engaged in the long-term planning process. I think they recognize along with other parties in the state that in order to help the state achieve its net-zero goals by 2045, there's a lot of work to be done. Our own countdown to 2045 white paper last fall had a pretty significant investment need statewide for the wires to make all of this work. So we estimate that the rate of transmission will need to be four times what they've been historically. So you've seen that there's been now a couple of plans that the Cal ISO has cycled through in the last couple of years. As Maria mentioned already, but you see there's something like $2 billion of capital for something like 17 projects where SCE is entitled to the right of first refusal as an incumbent to do the work. So we expect that SCE will do that work. In addition, Cal ISO has a competitive solicitation process for projects that are new but not extensions of existing projects. SCE now has one application pending waiting to hear on in this current process. But Steve, I know that since you engaged with Cal ISO on your team, maybe comment more on what's next in terms of their continued planning process.

Yes. So the CAISO runs its annual transmission planning process each year. And so you can look to each year having that plan come out. The most recent plan that was released for the '23-'24 cycle, most of the projects are up in Northern California, although there was about $90 million of incumbent projects for SCE to build in our territory. So each of those plans will identify additional opportunities for us, and we'll evaluate if we participate in future competitive solicitations on those. In the longer term, the CAISO also does a 20-year outlook. And the last 20-year outlook, which came out a couple of years ago, pointed towards about $30 billion of investment needed in transmission over the next 20 years. The CAISO is in the process of updating that outlook. They've put out some draft information recently but really the hub will final report in June that will give you more of the 20-year outlook, but it continues to show a need for more and more resources to fulfill the clean energy targets that were backed by a whole lot of transmission.

Just want to start off with a broader question. And just with summer approaching, can you provide an update on buyer conditions you're seeing across your territory right now? And I guess overall expectations into the season given all of the derisking that has been accomplished over time?

I'll answer your question quickly, and then I'll follow up with the real message I want you to walk away with. The quick answer is, I think the latest stuff I have seen published suggest that it seems to be an average or maybe even a little bit below average risk season. That's not the real message I want you to walk away with; we know that in the years ahead, with climate change, we're going to see increased, not decreased climate-driven wildfire risk conditions, but our adapting for tomorrow white paper a couple of years ago pointed to something like a 20% increase in climate-driven wildfire risk through 2050. The real headline here is the stuff I talked about in my prepared remarks: the amount of hardening we've done, the 85% to 88% risk that we've taken off the table. And that doesn't even include the risk taken off the table by the state having doubled down on its firefighting capabilities. So obviously, it's interesting, and I know investors ask us from time to time, how does this year look or how does any given year look. But frankly, I think that is less and less the question. And more and more, the question you should be asking is, how are we continuing to do in our hardening and our other measures? And I think we're doing well there.

And even with all of the risk reduction, we're constantly vigilant. So just to underscore that point, we're continuing not just to do more and more grid hardening but are also refining our models, looking at new technologies. I think that's some of what you can see when you look at the S&P report as well is just that ongoing attention that we are paying to every aspect of mitigating the risk.

We are leveraging new technologies, and it's encouraging to have S&P acknowledge our efforts. PSPS has been a significant tool for us, although it currently accounts for only about 10% of our overall risk reduction. We are actively seeking ways to improve it and lessen the impact on our customers. Additionally, I want to highlight that Steve Powell is leading our initiative to share our insights with the broader industry, as this issue goes beyond California and the western region; it is a national concern. We take pride in our involvement with EEI, where Steve co-chairs a CEO task force focused on disseminating best practices and discussing potential liability protections similar to what we achieved in California through AB 1054. We take our leadership role seriously, not only in protecting our customers but also in sharing our knowledge with others in the industry.

Got it. That kind of hits my second question, but maybe just to continue with that. On the national level, do you see movement in D.C.? And could we actually get policymakers moving in that direction to develop something that comprehensive but nationwide approach here? Just wondering given how divisive politics are today if you think that could actually be a motion at some point?

Yes. So through EEI, we're really engaged on that, with a number of Capitol Hill visits. Look, you're right; it's kind of hard to get a national budget past these days. It is a challenging environment on Capitol Hill. On the other hand, this is not a single state issue anymore. It's multiple states, red, blue and everything in between. There's increasing recognition that there is a challenge here that needs a national solution, but still framing that up. I'll point to the fact that there are examples for other risks across the economy where there is a national level solution. Think about managing nuclear operating risk and the Price-Anderson Act, as an example. Steve, I know you've been engaged in a number of these Capitol Hill discussions as well. Anything you'd add?

Right now, we are very focused on educating others about the evolving risk and the measures the industry is taking to manage the physical risk. Regarding financial risk, I understand that different states are handling it in various ways. We are looking for ways to integrate state actions with complementary federal efforts. There are interesting discussions happening in Congress about permitting to help utilities streamline processes in high-fire areas. As for a more financial solution, there is still much to be done to define the requirements, and it will take time. However, it will likely involve a combination of state and federal solutions.

And just a quick point of clarification, if I could, with regards to the deadline for the plaintiff extensions there. I think you might have said in the coming months; is there any specific date in time that we should be looking for there?

Right now, the deadlines are all over the next couple of months, but we'll keep you posted.

Thank you for joining us. This concludes the conference call. Have a good rest of the day. You may now disconnect.