Edison International (EIX) — Q2 2024 Earnings Call Transcript

Thank you, Julie, and welcome, everyone. Our speakers today are President and Chief Executive Officer, Pedro Pizarro, and Executive Vice President and Chief Financial Officer, Maria Rigatti. Also on the call are other members of the management team. Materials supporting today's call are available at www.edisoninvestor.com. These include our Form 10-Q, prepared remarks from Pedro and Maria, and the teleconference presentation. Tomorrow, we will distribute our regular business update presentation. During this call, we will make forward-looking statements about the outlook for Edison International and its subsidiaries. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our SEC filings. Please read these carefully. The presentation includes certain outlook assumptions as well as reconciliation of non-GAAP measures to the nearest GAAP measure. During the question-and-answer session, please limit yourself to one question and one follow-up. I will now turn the call over to Pedro.

Thanks a lot, Sam, and hello, everyone. Edison International's core EPS for the second quarter of 2024 was $1.23, bringing year-to-date core EPS to $2.37. With this strong start to the first half of the year, we are confident in reaffirming our 2024 core EPS guidance of $4.75 to $5.05. Based on the progress in SCE's 2025 General Rate Case, including many partial settlements, we are also confident in getting a strong outcome for customers. The funding authorized in the GRC to continue making investments in a reliable, resilient, and ready grid is the linchpin for achieving our 2025 EPS guidance and delivering a 5% to 7% EPS CAGR through 2028. My remarks today include four important insights: First, load growth trends are materializing sooner than expected, reinforcing SCE's substantial CapEx opportunities with potential upside. Second, SCE is now forecasting system average rate increases through 2028 to be closely aligned with inflation rates, ensuring more stable costs for customers. Third, the company's overall operational and financial risk profiles have significantly improved and are only getting better. Fourth, Edison International is leading the charge toward a carbon-neutral California with sustainability at the core of our strategy. Leading off with load growth trends, I highlighted last quarter that we are seeing 2% to 3% annual sales growth in the coming years, with an inflection point above 3% annual growth beginning in 2028. However, these demand trends are materializing sooner than expected. As you can see on Page 3, our 10-year load growth forecast has increased substantially in just the relatively short time since SCE's 2022 distribution system plan was prepared. We now expect 35% higher 10-year load growth, far exceeding all prior internal and external forecasts. One significant driver is more customers calling SCE to request load growth projects, including commercial developments, particularly logistics-related buildings, transportation electrification, and new residential housing. In parallel, forecasted policy-driven, electric vehicle, and building electrification demand has increased. We expect new policies will drive higher customer adoption in the near future, and we have incorporated this information so the grid is ready when customers reach out to us. We see two major implications from growth, showing up sooner and at a larger scale than anticipated. Over a 10-year system planning horizon, grid upgrades will need to be implemented several years ahead of schedule to accommodate the increased load. As SCE highlighted in its GRC request, serving customers with a reliable, resilient, and ready grid will require the utility to significantly expand the electric system through substantial investments that will drive continued rate base growth. 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 investor-owned utilities. You will notice that SCE's current system average rate of $0.267 per kilowatt-hour is actually lower than at the start of the year. On June 1, SCE reduced rates by about 2%, driven by removing historical costs that have been fully recovered in rates. SCE recently filed an application with the CPUC for approval of its 2025 fuel and purchase power costs, which are projected to be lower than in 2024. Based on current projections, this application would reduce the system average rate by another 9%. This offsets most of the increase in rates that will follow the 2025 GRC final decision. On Page 4, we now project SCE's rate increases through 2028 to be closely aligned with local inflation levels. To put this in context, let me emphasize two important underlying assumptions. This 2.6% projected rate growth incorporates both the requested increases in SCE's GRC and full recovery of SCE's legacy wildfire costs. As you will recall, SCE has recovered a significant amount of historical costs tracked in regulatory accounts over the last few years. These historical costs rolling out of rates, combined with rising electricity consumption, partially offset the increases I just mentioned. You have all witnessed how the company's overall operational and financial risk profiles have significantly improved in recent years. On Page 5, we reemphasize the estimated wildfire risk reduction of 85% to 88% compared to pre-2018 levels. As you know, we've been reporting on the $1 billion annual $3.5 billion over three years losses due to AB 1054. They are the threshold for accessing the Wildfire Insurance Fund and SCE's liability cap when we began reporting this metric. We are now also showing you the loss level that would result from hitting the liability cap in a single year, which is about $4 billion. The risk reduction of this scenario is over 90%. The differentiator for SCE's wildfire risk mitigation and operational risk profile is the substantial physical grid hardening it has completed. A key benefit of physical grid hardening is that it reduces the burden on customers arising from heavy reliance on operational measures like power shutoffs or fast trip settings. In just five and a half years, SCE has deployed approximately 5,900 miles of covered conductor. As you see on Page 6, combined with miles underground, SCE has 84% of its plant hardening complete, and that's permanent physical and observable risk mitigation. It is getting even better. By the end of 2025, SCE expects to be approaching 90% of total distribution lines in high fire risk areas being hardened. As you can see on Page 7, SCE is leading the way in physical risk reduction with its total hardened miles in high fire risk areas exceeding those of all other California investor-owned utilities combined. In addition to all the successful wildfire mitigation work by SCE and also by its peer utilities, the State of California itself has the strongest wildfire risk reduction profile in the nation. As outlined on Page 8, that is due to notable improvements via legislation, regulation, and suppression. California's legislature passed the landmark Assembly Bill 1054 in 2019, which codified the prudency standard for investor-owned utilities, created the $21 billion Wildfire Insurance Fund, and established a utility liability cap. These are now models informing other states as the threat of wildfires has spread nationwide. On regulation, the CPUC and other agencies have implemented processes for rigorously reviewing and approving wildfire mitigation plans and safety certifications. On suppression, California has consistently shown its commitment to resource allocation. CAL FIRE's budget has doubled since 2017 to 2018, along with an 80% increase in staffing. CAL FIRE has the largest civil aerial firefighting fleet in the world and recently contracted for 20 additional helicopters and four airplanes. SCE is also contributing to local fire agency suppression capabilities through the funding of the year-round Quick Reaction Force. This is made up of the world's largest fire suppression helicopters with unique night firefighting capabilities. This partnership with the LA County Fire Department, Orange County Fire Authority, and Ventura County Fire Department helps suppress fires regardless of how they start and it helps protect the communities SCE serves. This is the sixth straight year the utility has funded aerial suppression resources as part of its wildfire mitigation efforts. Turning to sustainability. We continue to lead the way toward a clean energy future. SCE is a leader in California's efforts to reduce greenhouse gas emissions while also focusing on the grid investments needed for a more resilient, equitable clean energy economy. I am proud of all that we've done to execute on our long-term net-zero commitment in alignment with California's ambitious policy goals. I encourage you to read our 2023 Sustainability Report for details about our accomplishments, our goals, and our long-term ESG commitments. Pages 9 and 10 highlight a few of our accomplishments. In 2023, SCE delivered 52% carbon-free power to customers, and that's 55% cleaner than the national average. SCE contracted approximately 2,200 megawatts of energy storage, bringing the total at year-end to about 7,200 megawatts, and that's currently standing at 8,100 megawatts. This is simply one of the largest portfolios in the nation. Lastly, the utility met or outperformed nearly all wildfire mitigation targets last year and invested heavily in hardening the grid, leading to the 85% to more than 90% risk reduction I discussed earlier. Let me conclude by saying that Edison International is leading the charge toward a carbon-neutral California. We're committed to ensuring that the clean energy transition remains reliable, resilient, affordable, equitable, and accessible to all customers and communities. With that, Maria will provide her financial report.

Thanks, Pedro, and good afternoon. In my comments today, I would like to emphasize four key financial messages. First, we are pleased with EIX's financial performance for the first half of the year. Combined with the outlook for the second half, Edison is on track to deliver yet another year of solid results for 2024. Second, SCE's regulatory outcomes this year have been positive. Based on the continuing progress on the two key ongoing CPUC proceedings, the 2025 GRC and TKM cost recovery, we are confident in getting good outcomes for customers. Third, with SCE having the lowest system average rate among California investor-owned utilities, it is best positioned to address load growth and resulting capital needs as customers' dependency on and use of electricity grows. Fourth, EIX's equity needs to fund our substantial capital program over several years are among the lowest in the industry. Let's begin with a brief review of our second quarter results. EIX reported core EPS of $1.23. As you can see from the year-on-year quarter variance analysis shown on Page 11, core earnings grew by $0.22. This EPS growth was primarily due to higher CPUC revenue authorized in Track 4 of the 2021 GRC, higher authorized rates of return, and the final decision on SCE's CEMA application. Partially offsetting these drivers was higher interest expense associated with debt for wildfire claims payments. EIX Parent and other were in line with the same period last year. On the regulatory front, we are pleased with the outcomes this year. For instance, as I just mentioned, the CPUC recently issued a favorable decision on SCE's CEMA application. Additionally, SCE received approval in July for interim rate recovery in its 2022 WMVM proceeding, enabling the collection of $210 million of the $384 million request in customer rates beginning in October. Also in July, the CPUC approved the Energy Division's resolution regarding the implementation of the cost of capital mechanism for 2024. When we look at where bond yields are today, it's clear that the interest rate environment that triggered the mechanism was sustained. Thus, the 10.75% ROE should stay in place also for 2025. These regulatory decisions, plus the numerous others we have received over the last few years, have significantly strengthened our balance sheet and credit metrics. Since 2021, SCE has recovered more than $4 billion with another approximately $2 billion expected through 2025, all of which you can see on Page 12. I would like to now comment on the two key ongoing regulatory proceedings, starting with SCE’s 2025 GRC. Page 13 provides an update on proceedings which remain on track. During Q2, SCE filed its update testimony, and all parties recently filed their opening brief. We are pleased with the tremendous work SCE has done to narrow the focus of the proceeding. SCE has reached partial settlements covering 12 areas of the GRC, representing nearly 20% of the O&M request and about 8% of the capital request. On the TKM cost recovery application, Cal Advocates was the only party to submit prepared testimony. They criticized the maturity of SCE's pre-fire mitigation measures leading up to the unprecedented 2017 fire season, but did not put forward a specific disallowance proposal. SCE served strong rebuttal testimony on July 11, identifying key flaws in Cal Advocate's testimony and highlighting the intervenor's heavy and incorrect reliance on hindsight in the review of the record. As for next steps, the ALJ extended the schedule, such as the motion for settlement approval or case management statement is due on August 7, and hearings will be in November or January. In summary, based on the evidence put forward so far in this proceeding, we reaffirm the strength of our cost recovery request. We look forward to keeping you informed on further developments on this front. Please turn to Page 14 for an update on the resolution of SCE's legacy wildfires. Having made substantial progress, SCE has now resolved 98% of TKM individual plaintiff claims and 92% of Woolsey individual plaintiff claims. SCE will file its Woolsey cost recovery application in the third quarter. SCE's capital and rate base forecasts shown on Pages 15 and 16 are consistent with last quarter's disclosures. SCE's 2025 GRC underpins our forecast as the utility continues to make investments necessary to meet the critical objectives of reliability, resiliency, and readiness to meet customers' needs today and in the future. In addition to our forecast, SCE continues to target filing standalone applications over the next couple of years that will give it opportunities to deploy capital above and beyond the rate case outcome. The NextGen ERP system application is tracking for late this year with the Advanced Metering 2.0 application expected in 2025. I would also like to mention that in May, CAISO selected SCE, in partnership with Lotus Infrastructure, as the winning bidder for the North of SONGS to Serrano transmission project. At expected completion in 2032, this project will add about $245 million to SCE's FERC rate base. This builds on the more than $2 billion of transmission spending that was directly awarded to SCE as the incumbent utility in CAISO's 2022-2023 transmission plan. Turning to EPS guidance. Page 17 shows our 2024 core EPS guidance and modeling considerations. We are pleased with the start to the quarter, and with the CEMA approved and no other CPUC decisions built into 2024 guidance, we are confident in achieving the range of $4.75 to $5.05. Also, I'm pleased to share that we've completed EIX's financing plan with the issuance of $500 million of debt at the end of June and having achieved our planned $100 million of equity via internal programs earlier in the year. I would now like to reemphasize that, for the 2025 through 2028 period, we have equity needs of only $400 million in total, even though we plan to deploy substantial amounts of capital. As you can see on the right side of Page 18, SCE's strong cash flow generation and the incremental debt to finance accretive growth address nearly all of our cash needs. We credit this to our strong financial discipline, efficient financing execution, and the significant memo account recovery I just mentioned. Let me conclude by saying that California's clean energy future depends on substantial investment in the grid as the economy depends even more on electricity. Affordability and equity will be key components to driving greater adoption of transportation and building electrification. With SCE having the lowest system average rate among California investor-owned utilities, it is very well positioned to make substantial capital investments as customers' dependency on and use of electricity grows. That concludes my remarks, and I'll pass it back to Sam.

Julie, 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.

Obviously, you've reached a partial settlement in the GRC representing 19% of O&M and 8% of the capital request, certainly a positive development, but still a good amount not settled on. Just wondering how you're thinking about the key debates remaining and what gives you confidence in a constructive final decision?

Michael, good to hear you. Let me just start. To me, I think the headline continues to be that, in this rate case, when you look at the ongoing intervener positions – now when you sum it all up, they still landed with rate base growth in line with our range. That I think is a very constructive place to be at the beginning of a case. Where we are with the case now. We will continue to work through issues. As you said, we have some partial settlements. I think the SCE team has done a very nice job, putting forth the case on why we need the investments we requested for a reliable, resilient, and ready grid, and we'll just continue to work our way through the process. Maria or Steve Powell, anything you would add?

I want to emphasize that we are still on track in terms of timing. We have successfully addressed the areas mentioned in the materials, allowing us to concentrate on a more limited range of issues. However, as Pedro pointed out, the proposals from the intervenors at this stage remain consistent with the lower end of our expectations. I believe there is significant potential for us to create benefits for customers.

And then secondly from me, you talked about load growth materializing faster than expected. Just wondering if you're expecting incremental investment in the planning period through 2028. Potentially, how much could we expect and when and how would you think about financing that incremental spending?

So Michael, our team is currently in the planning phase for a proposal that will be submitted soon. The team will continue to assess the specific plans our customers are presenting, which will enable us to determine when investments will be included in the capital plan and subsequently in the rate base. If we see these developments occurring within the GRC cycle, we have the capacity to reprioritize capital. We've mentioned this in the past and have incorporated flexibility into the rate case. Additionally, we'll explore other options that allow us to submit separate applications, and there are several paths we could take. Steve, you've been collaborating with the team on the plan, so would you like to share your insights?

Sure. So in terms of the load growth, we've certainly seen an acceleration of customer demand. And so we're still evaluating, I'd say, taking probability weighting those requests based on their completeness and figuring out how much additional structure will be needed to support them. We're constantly readjusting our plans based on various factors, and so the increase in customer demand has been important. It's been a fair amount of electrification load, but we're also seeing growth in residential, particularly from new home starts, which have accelerated the last couple of years beyond expectations. There's a fair amount of commercial industrial loads. So it's a pretty diverse set of load growth that we've seen, and we will continue to make adjustments, and certainly whether it's GRC or alternative funding approaches will be on the table. We continue to provide ideas into what's called the high DER proceeding at the Public Utilities Commission where they're still evaluating different ways that we can look for investment opportunities in the middle of a GRC cycle. So that's our approach right now.

Just a couple of quick ones here. Just on the legacy wildfire cost application, obviously, the constructive sign to see settlements, potential opportunities and moving procedural schedule to accommodate that. Can you just elaborate on any issues that remain debated that would go into hearing potentially? Would you settle for anything less than 100% and under what incentive would you do that?

Hey, Shar, this one, as you can imagine, it's a live proceeding. And we really can't comment on potential settlements beyond just saying that we're certainly open to that and always willing to engage with parties. And we think the team did a strong job in showing their prudency. But I don't think we're in a place where we can comment on specific elements of the case at this point. Apologies for that.

And Shar, just procedurally, August 7 is when either a settlement would be filed or we would file a case management statement. And in the case management statement, the issues that are still to be addressed during hearings and/or any other stipulations would then be part of that statement. And then the hearing will be scheduled for that November or January time frame. So that's the process that we'll be going through that you can monitor.

Okay, perfect. We'll look for that. You mentioned a small buyback program focused on share-based compensation. How are you thinking about capital allocation considering the recovery from the legacy wildfire claims, especially if that recovery potentially affects your credit targets and metrics?

Sure. Well, I mean obviously we have debt that's outstanding at SCE that went to fund the claims payments. As we get recovery, our proposal has been that we would securitize that. So we would be able to defease the debt that's already been issued. We can reallocate that debt to rate base financing, if you will, to ensure that we stay within our capital structure. The recovery does improve our credit metrics. Every $1 billion is 40 to 50 basis points of improved credit metrics. But I think as we go through that process, then we can start to look at, as refinancings of equity content securities come up at the holding company, where we can replace those, which are, of course, because they have equity content a little higher cost with regular debt, we'll take all of that into consideration as we look at the recovery from the wildfire claims. I will say, we will continue to have a 15% to 17% FFO-to-debt framework for the company.

I wanted to ask on a notable start on full-year '24, just given we're kind of halfway through the year. Are you kind of trending towards the higher end of your range? Do you just still have confidence in the midpoint at this point? Kind of what puts you higher?

Nick, it's Maria. We're very confident in our guidance. We've reaffirmed it. I think that over the course of the year, different quarters have events that happen within them. We are very confident in our guidance, and we think we're right on track.

Okay. And then just I guess a follow-up on Shar's question. Just you're talking about the load demand equation that could lead to accelerated CapEx. Just as the plan stands today, can you remind us if you were to, is there like a level that you could fund additional capital without additional equity?

Nick, I think that really depends on when the capital comes in and when we have to make the investments. As I said, we have that 15% to 17% FFO-to-debt financing framework that we work towards and where we are in that range will dictate whether we can continue to use our existing financing plan or if we need to do anything beyond that. We will, of course, as Steve pointed out earlier, we could re-prioritize some of the spending within our GRC. We have some flexibility there, and we've actually noted that in our GRC, or we could go beyond that and look at some other mechanisms to also get cost recovery on a timely basis as well.

Maybe a quick clarification on load growth. I was just wondering, is that already faster than what you were thinking last quarter? You mentioned the 2% to 3% load growth in the near term through 2028 and then accelerating above 3% beyond that. Are you now thinking that it's kind of higher within that range or even faster than you were just previously thinking?

At this point, we're still anticipating a 2% to 3% growth in the near term. However, for our 10-year forecast, we expect that growth to accelerate, and we are monitoring it closely in the meantime. It was quite interesting to note that our 10-year forecast increased by 35% in just two years. As Steve mentioned, the team is collecting customer requests, but not all of them will materialize. That's why they will likely evaluate and track these requests. We will keep providing updates if there are significant changes. For now, the near-term growth remains at 2% to 3%, while the long-term outlook shows an increase, and we will see how things develop in the interim.

I would just add that first, particularly with the new customer demand, the specific project certainly provides more certainty regarding the need for upfront investments during the GRC cycle. I want to highlight that the 2% to 3% growth we discussed last time refers to the total energy, the kilowatt-hour growth. This demand pertains to the specific local capacity needs of customers. Therefore, it is really driving the infrastructure for distribution-level upgrades rather than the total energy consumption. While both can move in the same direction, I believe this reinforces the outlook around the 2% to 3%. However, at this point, we do not anticipate it exceeding that range in the near term.

I was curious about your thoughts on the recent CPUC initiative to procure next-generation technologies in California, including long-duration energy storage, offshore wind, and geothermal. Do you have any early insights on whether utilities like yours would participate in any of these projects or procurements, and how this might reshape California's generation landscape over time?

Yeah. And David, I'll start with maybe a big picture comment, and Steve may have more to add here as well. At the highest level, if you go back to our count on to 2045 white paper, we see this need for California to be adding significant amounts of large-scale renewables and other clean resources. And so at one level, what the CPUC is doing in this proposal is to start filling in the blanks in terms of some of the near and midterm procurement. The team is still going through the details of that, right? And some things we want to look at are relative timing, what's the likelihood of the technology developing, and frankly that development being feasible within the time frames that the PUC has laid out. So more to come on that as our team evaluates what the PUC put out. But directionally, we certainly see the need to develop a whole host of resources to meet the demand that's coming.

I'd say, we agree with PUC on the need for some of these next-generation technologies, whether it's enhanced geothermal or offshore wind. They still need to be derisked, and they still need to prove they can be built on a timely and affordable basis. Appreciate that the state the PUC is directing the procurement again so we can get that process going. And they've asked the Department of Water Resources, or they're in the process of that proposal, having DWR go and do that procurement. So we want to make sure that procurement is done really effectively because ultimately this hits customer bills, and we've got to monitor we've got to manage the customer bills while also advancing the technologies. So that's our focus is making sure it gets done efficiently and effectively, and there's a lot of investment needed to happen across the state.

Hi everybody. As you're preparing to file the next-gen ERP application next quarter, would you be able to frame broadly the magnitude of the investment opportunity? And given the acceleration of the longer-term load forecast that you highlighted in your prepared remarks, does that have any implication for the attractiveness of the next-gen ERP system?

Yes. When we file the application, we are going to lay out of course the cost of the system, but also really importantly we're going to lay out the benefits, because that is really going to be a big component. The NextGen system will be, of course, related to the financial reporting aspect of the business, but also has a lot to do with work management and becoming more efficient in that regard. There'll be a lot of benefits that we can talk through when we file our application. In terms of whether or not it competes with load growth, we need to build out the infrastructure to meet the demand that we're seeing from our customers, but we also need to run an efficient T&D operation and do the financial statements appropriately, as you appreciate. I don't think they're in competition with each other. Also, I think it's really related to the point that Pedro made earlier in his prepared remarks about where we see the system average rate going over the next several years. When you get a chance to look at the materials, you'll be able to see that those rate increases are consistent with inflation, and we have built in our entire GRC request, the NextGen application, the AMI application, and 100% cost recovery on 1,718 wildfire claims. With all of that, we are still consistent with our projections of SAR forecast.

Thank you. And then one follow-up. In terms of the load growth forecast, the impact of EV growth, is there anything you're looking for from federal policy that could impact both growth in your service territory that's embedded in your guidance that you highlighted today?

One way I consider this, Ryan, is that we are significantly influenced by California's requirements and targets for electric vehicles and the aim for net-zero vehicles by 2035. This essentially shapes the demand we see, as it's a fundamental constraint. The federal government plays a role in a couple of ways. First, the incentives from the Inflation Reduction Act are very beneficial in reducing the cost of the transition for consumers. Both Edison and the industry as a whole are committed to maintaining those IRA benefits, regardless of which administration is in power in Washington. We've been conveying this message strongly. While there may be concerns from some groups about the potential reversal of the IRA, there is generally an understanding that these benefits are impacting all states, including both red and blue states, with a significant portion actually benefiting red states at this time. There's a belief that these incentives are positively affecting the economy. We hope our customers will continue to gain from these incentives, but we also recognize that California's commitment to the transition remains strong, irrespective of federal support. Another federal aspect to consider is the clean air provisions that favor California. However, I don't foresee California diverting its focus from promoting the adoption of electric vehicles. Does that address your question?

Hey, I have a quick question that you may not want to address. It's somewhat related to what Shar asked earlier. How should we interpret the TKM recovery? Specifically, what does it mean regarding the Cal Advocates' filed testimony? Can we view it similarly to a General Rate Case, where some parties may not agree to a settlement or object to it? I'm just trying to understand the best way to interpret this.

Yes, I think you started to answer with the last part of your question there. There are lots of opportunities for parties to voice their views in these proceedings. It is a little different from a rate from a general rate case. And so not reading a lot into this initial step or certainly the opportunity for other parties to express interest as we move along.

Great. That’s all I had. Congrats on a good quarter.

Thanks.

Yeah, thanks, Anthony.

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