Q4 2021 Edison International Earnings Call
Good afternoon, and welcome to the Edison International fourth quarter 2021 financial teleconference. My name is Missy and I'll be your operator today, when we get to the question and answer session. If you have a question press star one on your phone today's call is being recorded I would now like to turn the call over to Mr. Shamrock Vice.
Of Investor Relations. Mr. <unk>, you may begin your conference.
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 <unk> also on the call are other members of the management team.
I would like to mention that they are doing this call with executives in different locations. So please bear with us.
Is there any technical difficulties.
Materials supporting today's call are available at Www Dot Edison invest about coal.
These include our Form 10-K .
Third 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 cost up from Brazil's are set forth in our SEC filings. Please read these carefully.
Recitation includes certain outlook assumptions as Melissa 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.
Edison International reported core earnings per share of $4 59 for 2021, which exceeded the guidance range. We provided on last quarter's call and was higher than the $4 52, since we had a year ago.
We are introducing our 2022 EPS guidance range of $4 40 to $4 and $4 70.
And we are reiterating our high confidence in our longer term EPS growth target of 5% to 7% through 2025.
Maria will discuss our financial performance and outlook.
In my comments today I want to address three key themes that underpin the double digit total return potential for <unk> shares.
Want to start with the tremendous progress and results achieved by FTE in recent years in reducing wildfire risk.
And what gives us increased confidence for further risk reduction I will then highlight our clean energy transformation that is underway and the substantial capital investment opportunities over the next few years to support the state's goals.
Lastly, I will discuss our operational excellence culture that will enable us to deliver greater value for customers investors employees and other stakeholders.
All of these initiatives combined with our dividend yield present, an attractive total shareholder return potential and that's before even factoring in the increase in our price to earnings multiple that we believe is merited today by Sce's wildfire risk reduction and ongoing utility and government wildfire mitigation efforts.
I am extremely pleased to say that the 2020 one fire season marks the third consecutive year without a catastrophic wildfire associated with Sce's infrastructure.
Despite another severe wildfire season, and intensifying drought conditions in the state.
We believe this illustrates the accumulative effect of Sce's anticipates wildfire mitigation investments and practices over the last several years as shown on page three of the presentation.
During 2021, the utility continued its strong execution of its wildfire mitigation plan and in many cases exceeded program goals.
It is 2022 wildfire mitigation plan update SCE reiterated that covered conductor is one of the most effective measures to reduce wildfire N. P. S. P. S risks in its service area.
As shown on page four several factors contribute to our confidence in the covered conductor program.
Further SCE is evaluating the potential for additional enhanced mitigation, including underground in certain areas based on unique factors.
Reducing wildfire risk will remain a top priority for the company and this will require significant capital investment, including $2 $2 billion over the next two years that the DRC track one period.
Overall SCE estimates that its mitigation work through December of last year has reduced the probability of losses from catastrophic wildfire by 65% to 70% relative to pre 2018 levels and please note that this is an increase from the 55% to 65% we reported previously.
For mitigation work through June 2021.
As shown on page five SCE expects to further reduce risk with continued grid hardening investments, including deploying an additional 1100 miles of covered conductor this year.
This encouraging risk reduction metric does not take into account significant improvements at the state and federal levels to date and in progress.
The Governor's proposed budget continues the trend of increased wildfire suppression and prevention investment with Cal Fire's head count set to be 45% higher than just five years ago.
It also includes continued funding for aerial resources and the investments to date already have made Cal Fire's fleet.
Aircrafts with more than 60 aircrafts, the largest civil aerial firefighting fleet in the world.
The state budget would also add $1 $2 billion to the previously approved one and a half billion wildfire enforce resilience strategy to support for its health and fire prevention.
We were also pleased to see the bided administrations multibillion dollar plan to bolster fire prevention across the west.
57% of the forest lands in California are owned by the Federal government.
Protecting against the threat of extreme weather today at least the foundation for the increasingly reliable and resilient grid necessary for the clean energy transition.
U S E. One of the largest utilities in the country Edison International is leading this transition there was thought leadership and sce's programs to accelerate economy wide electrification.
On slide six I would like to highlight that Edison International has one of the strongest electrification profiles in the industry.
Starting with transportation electrification.
SCE has the largest programs among U S investor owned utilities in California is on the leading edge of electric vehicle adoption. In fact, one in seven Evs registered in with you in the U S or in Sce's service area.
<unk> adoption will be critical to achieving California's climate goals and we estimate this could add over 50 million megawatt hours of incremental electricity consumption by sce's customers by 2045.
Building electrification is another critical opportunity to reduce greenhouse gas emissions and it's the area of the California economy or at the least amount of progress has been made today.
Last December SCE proposed a $677 million program to jumpstart widespread adoption of electric heat pumps and buildings and then last month Governor Newsome budget proposed almost $1 billion to accelerate building de carbonization the.
The Governor's proposal is a welcome compliments to Sce's Glenn It's a meaningful addition to help meet California's climate goals.
Additionally, energy storage is going to be an important part of any electric led future to ensure reliability of the grid because.
As we've highlighted previously SCE is investing $1 billion to construct 535 megawatts of utility owned storage.
The CPUC has already approved this investment and the project is on track to be in service by August .
These projects in progress all help to advance the vision set forth in Sce's pathway 2045 analysis.
Underpinning the need to electrify the economy is substantial continued investment in the grid through 2045 in.
In late January the California Independent system, operator, released its first ever 20 year transmission outlook.
<unk> estimates over $30 billion of transmission investment is needed why 2040 to meet the state's climate goals.
We see this as generally consistent with Sce's pathway 2045 work and that identified over $40 billion of transmission investment Cal ISO white.
SCE estimates that <unk> outlook includes approximately $8 billion of transmission investments in our utility service areas, which supports the potential for continued long term rate base growth beyond 2025.
The senior team is going to be fully engaged in the Cal ISO processes that lie ahead, and those processes will turn this conceptual plan into real projects and they will be focused on bringing ideas to the Cal ISO favorable and maximize the value of existing transmission lines upgrades and new projects that will all make the clue.
The energy transition as affordable as possible for all California ISO customers.
In upcoming regulatory proceedings, including the 2021 Trc drag for it. So 2025, DRC SCE will provide greater visibility into the near term investments that are needed to ensure that we remain on track to help achieve the state's climate goals.
We achieved our ambitious long term goals.
Operational excellence is absolutely imperative and it's going to be a constant focus for our team.
For over a decade now SCE has proactively pursued cost reduction efforts to manage affordability for its customers.
This focus on cost management, along with broader operational excellence improvement.
It's all allowed the utility to absorb some of the rising cost to serve customers, which in recent years has largely been driven by investments to reduce wildfire risk and strengthen the grid reliability.
So I want to highlight that Sce's system average rate has grown less than local inflation over the last 20 years and Sce's average system rate is the lowest among the large California investor owned utilities.
Last year SCE advanced its operational capabilities with new systems, and new digital tools deployed across the company and this resulted in enhanced data quality at Bruce power line inspection and maintenance and enriched our ability is to gather and to act on customer feedback.
To further our capabilities and focus on operational excellence, we launched an employee led continuous improvement program late last year.
Our employees have been wonderful and they've enthusiastic we provided thousands of ideas that we believe are going to have real positive measurable impact on safety on affordability and on quality.
We expect that the ideas and FTE will implement over the next two years will enable delivering greater value for our customers for our investors for employees and for all of our other stakeholders.
Hi, I'm looking forward to telling you more about the results of this program in the future.
With that I'll turn it over to Maria for her financial report.
Thanks, Pedro and good afternoon, everyone.
My comments today will cover fourth quarter 2021 results, our capital expenditure and rate base forecast, our 2020 guidance an update on other financial topics.
Edison International reported core earnings of $1 16 per share for the fourth quarter.
Full year 2021 core EPS was $4 59, which exceeded our guidance range.
On page seven you can see Sce's key fourth quarter EPS drivers on the right hand side.
Core EPS increased year over year, primarily due to higher revenue from the 2021 G. R. D final decisions and income tax benefits from the settlement of a California tax audits, partially offset by higher O&M expenses and higher net financing costs.
The increase in O&M is due to a variety of miscellaneous items.
Net financing costs were higher primarily due to the debt issued throughout 2021 that belongs to the resolution of wildfire related claims.
At <unk> parent and other core loss per share was seven cents higher than fourth quarter 2020.
This was primarily due to dividends on the preferred equity issued at the parent in March and November of 2021.
Now, let's move to Sce's capital expenditure and rate base forecast.
As shown on page eight we continue to see significant capital expenditure opportunities at SCE driven by investments in the safety and reliability of the grid.
In 2022, we project the highest capital spending level in our history, which includes SCE the $1 billion investment in utility on storage to support summer 2022 reliability.
As shown on page nine our capital forecast results and projected rate base growth of seven 9% from 2021 to 2025.
We are confident in this range, which is driven by continued investment in wildfire mitigation infrastructure replacement and sce's programs to accelerate electrification.
Page 10 provides an update on the 2022 cost of capital proceeding.
The CPUC scoping memo separates the cost of capital mechanism to issue.
Were there extraordinary circumstances warrant a departure from the cost of capital mechanism and if so how does that the cost of capital for 2022.
S. T E recently submitted its opening testimony reiterating that extraordinary circumstances over the last couple of years warranty departure from the mechanism.
And recommending that the 2022 cost of capital components should be left unchanged.
Our earnings guidance is based on its position and in consideration of the wide range of potential outcomes in the proceeding.
I will address this when I discuss our 2022 earnings guidance.
Additionally, the CPUC rule that this proceeding is limited to 2022 and directed the utilities to file their cost of capital requests for 2023 through 2025 at the ready regularly scheduled time, which is in April of this year.
Turning to page 11, SCE continues to make solid progress settling individual plaintiff claims across the 2017 and 2018 wildfire and mudslide events.
In total the utility has resolved approximately 78% of the best estimate of total losses.
At the appropriate time, SCE will seek CPUC recovery of eligible and prudently incurred costs.
As a reminder, SCE is funding claims payments with that but it's outside it's ratemaking capital structure.
Turning to guidance pages, 12, and 13 show our 2022 guidance and the key assumptions for modeling purposes.
We are initiating in 2022 EPS guidance range of $4 40 to $4.70.
To address the components, let's start with the rate base, EPS, which we forecast at $5.34.
Given the status of Sce's cost of capital proceeding we are basing guidance on the current Dora Li of 10, 3%.
To help you better understand the sensitivity a 10 basis point change in ROE, resulting a four cent change in EPS.
After receiving a final decision from the CPUC will provide an update on guidance to incorporate any changes in our ROE and our outlook for the rest of the year.
Let's now discuss sce's operational variances, which add to rate base earnings. This is forecasted at a net contribution of 11 to 38 cents per share.
This includes 10 cents related to the currently authorized cost of debt and preferred equity that will be addressed in the 2022 cost of capital proceeding.
Consistent with our approach with <unk>. The currently authorized cost of debt and preferred are reflected in guidance.
As we expected the remaining variances are not as large as we've seen in the past.
Prior years benefited from items that arent expected to occur going forward.
For <unk> parent and other we expect a total expense of 70 to 73 per share.
The year over year increase is driven primarily by a full year of dividend expense and the $2 billion of preferred equity issued last year.
Lastly, we have 32 cents per share of FTE costs excluded from authorized.
The primary increase in this category is the interest expense on debt issued to fund wildfire claims payments.
As we previously communicated FTE will have a full year of interest on the debt issued during 2021 plus interest on debt issue throughout 2022 to fund additional settlements.
I would now like to provide the parent company's 2022 financing plans.
Turning to page 14, we project total financing needs of $1.2 billion, including the $300 million to $400 million of equity content. We previously discussed.
We continue to expect to issue securities with an annual average of up to $250 million of equity content from 2022 through 2025.
In 2022, the amount is higher than average because it S. T. E 1 billion dollar utility owned storage investment that was accelerated into this year.
However, this does not increase the total expected over the period.
Additionally, we expect to refinance the $700 million of maturing parent debt with new debt issuances.
Turning to page 15, we are confident in reiterating our 5% to 7% EPS CAGR from 2021 to 20 to 25.
This should result in 2025 earnings of approximately $5 50 to $5 90 per share.
We have provided modeling considerations for 2025 E. P S to give clarity behind our confidence in achieving this range.
As you can see in the table on the right. We expect 2025 EPS to be driven by strong growth in Sce's rate base earnings with offsets from increases in financing costs at the parent and cost to fund wildfire claims payments.
Our earnings growth is underpinned by the capital investment opportunity that FTE that will create a strong foundation for climate adaptation in the clean energy transition.
Thank you that concludes my remarks.
Leslie Please open the call for questions.
Reminder, we request you to limit yourself to one question and one follow up so everyone. In line has the opportunity to ask questions.
Yes, Sir if you would like to ask a question. Please press star one on your phone one moment for the first question. Please.
Our first question comes from Jeremy Tonet from Jpmorgan. Your line is open Sir.
Hi, good afternoon, it's actually rich Sunderland on for Jeremy Thanks for the time.
Hi, rich.
Maybe starting maybe starting off with the guidance drivers you outlined the 10 cents of cost of capital financing benefits just wanted to be clear on that component alone you said.
Youre expecting more likely to have kind of a steady state outcome in 2022 portion of cost of capital or I guess put simply not have to give that back to ratepayers I'm just any high level thoughts there would be helpful.
Sure.
Thanks for the question. So the way we developed our guidance is to base. It on the current cost of capital so to speak.
Basically the carryover no trigger the mechanism and having that continued through the end of 'twenty, two which would be the normal cycle. We know we're in the middle of the proceeding in that proceeding the the.
Sign Commission's ruling actually really closely defined the questions that can be considered one is was there an exciting event and then if there was how do we address the 2022 cost of capital at this point, we're in the middle of that then the preceding itself all of the hearings et cetera shouldn't.
Done by the end of March and then there would be a decision sometime thereafter. So what we're really doing is is it really just developing it from that basis to the extent that there are changes from the current cost of capital. We just wanted to lay out for you what the impact might be on an earnings for the year until we separated out into two parts. One is the our sensitivity.
And one is the.
The embedded cost of debt and price sensitivity and as we get through the proceeding we see where we stand because there can be a really wide continuum of outcomes. It could be you know no no impact all the way to you know sort of the trigger resetting or something else in the middle and as we get to understand what that outcome would be then we can take another.
Look at where we stand over the course of the year and we can provide an update the guidance.
Got it that's helpful color and then maybe separately the high and low end of your underground cost ranges on a dollar per mile basis could you parse out and maybe speak to that targeting a cost reduction or more representative of just a range of activity across your system.
So Richard I think that's been what the numbers. We showed have been based on prior experience, let me turn over to Steve Powell CEO at FCA to give more color there.
Yes Pedro.
Get that right. The numbers, we're showing are based on our experience over the last number of years.
It's also represented in our wildfire mitigation plan.
Those costs, certainly aren't things, where we're doing it at scale you know when we do an underground over the last number of years, it's us it's in the single digits or.
Up to 10 miles.
As we look at <unk> underground and the numbers show our averages a little over three and a half million per mile. I would expect if we were to do it at scale and it's especially if we were looking to do a broader underground and plan as we analyze.
Risk reduction the factors, we're looking at there as we look at E egress and the frequency of fires and our P. S. P. S thresholds in order what the wins are in a specific location.
We're evaluating probably hundreds of miles of us.
Opportunities for underground that would be at least a few years out.
And that will also consider coffee, so we'd be selecting ones that ideally would be lower cost, but its really driven on the risk side. So that band you see us backwards looking we still have work to do to figure out how much we could bring those costs down doing them in a in larger volumes and targeted at places, where we can manage the costs more effectively.
And rich what one really important thing that Steve has mentioned there is that.
We're looking at essentially hundreds, but it's not thousands of miles you'll continue to see covered conductor.
The mitigation of choice for most of our territories.
Just given the the terrain that we have the geography that specific factors and so it's really looking at where are there some mirror applications for underground drilling.
Would be the right choice from a risk basis, but again, it's probably hundreds not thousands.
Great. Thank you for your time today.
Yeah. Thanks rich.
Thank you. Our next question comes from Shar <unk> with Guggenheim Partners. Your line is open.
Sure Hi, Hi, good afternoon, Pedro and team, it's actually Constantine here picking up for sure. Thanks for taking the question.
Appreciate the updates today and just as you're moving closer to the wildfire claims resolution.
You seem to be on back on pace in terms of reduction of outstanding claims is there anything incremental you are seeing in terms of pace of settlement then along those lines maybe.
Do you have a sense of what constitutes being reasonably close to completion to start filings our discussions with the CPUC.
Yeah, maybe I'll start and Maria you can truly add here.
I'll, probably start with with something you've heard us say before and that's it's really hard to forecast timing on this but clearly as each quarter goes by you seem the continued progress we've made sale.
You know certainly the uncertainty cone keeps narrowing here.
But there's still uncertainty and that uncertainty includes timing.
No.
These cases are not uniform there they're unique case.
Specific and so that says it's hard to project.
I will give you insights around the potential pace on base in terms of what substantial completion my opinion or <unk>.
All of these.
I don't think we can really defined up but I believe the CPUC would expect us to have.
So pretty good visibility into what the total exposure is going to be so.
That would mean that all the vast majority of the cases for a given.
For given bundle and so by that I mean, you can imagine we'll see standing on its own two feet.
Seeing substantial completion of Wuxi pieces, I'm thinking the wuxi matter to the CPUC separately, you could imagine Thomas in clinic sign in the mudslides.
Other bundle. So I don't think we need to think of these as a joint bundle of all 17, and 18 events, but what was the logical cause.
Election is of cases for whatever that logical collection as you know we will see our Thomas go next time then.
And then we would need to see the vast majority of cases done. So we could have a good sense of total liabilities.
Maria anything you'd add or corrector.
Certainly not at all until that correct I'd just say maybe in addition to some of that is it's probably the case for sure and that it benefits us to have more clarity as well as to what the quantum is and just what the what the types of claims are that we've settled and could even bring that forward and there are fewer open or lease.
And when we get to the commission I think that helps just in terms of the the the preceding once it does start setting you know we're weighing all of that as we go forward it probably.
Probably doesn't have to have you know.
Every last person settled but certainly we think that there's a benefit to having the vast majority have been settled before we start the process and I think it's important to you didn't know what Pedro just add is that cognizant will they are separate events and would have a different set of facts that we would bring forward.
Certainly I appreciate that detail.
And as we're thinking about the tail end of your Capex plan or kind of the non GSE years can you discuss the magnitude of potential upsides that you're seeing we've seen the CPUC working on various non PRT investments like micro grids risks.
Risk mitigation and other policy items I'm, just curious how that's being implemented in your plans if at all.
I'll give you a very high level answer which is as we constructed that are 5% to 7% range for 2025.
The we took a look at the large number of opportunities that we opened the state around.
Around electrification or an expansion of the grid.
But the ones you mentioned is storage.
I think as you get into later years transmission starts being more important and all of those are supportive then of the upper end of the range.
So I don't think we're at a point certainly this early to say here are things that could take us beyond the range, but rather we look at all of that set of opportunities as being supportive of the 5% to 7% range.
Okay. So a bit of an all of the above approach makes a lot of appreciate your time today. Thank you, yes. Thanks Constantine.
Yeah.
Thank you. Our next question comes from Jonathan Arnold with vertical Research partners. Your line is open.
Hello, Jonathan.
Just.
Picking up on the legacy liabilities.
I think it went down from 2.2 to 1.6, you didn't change the overall accrual.
So the thing settled about $600 million in the quarter.
Yeah on par with the prior two quarters.
Is there any reason I wouldn't assume that.
Yes somewhere between two and three quarters from now you would be pretty much done with it.
Absent some big change in the accrual.
Yeah I'd go back to the answer I shared Wisconsin team there.
I think your math is right in terms of the pace we've experienced.
But we don't want to use that to say precisely so therefore.
Explains why quarters from now as you assume the same rate because again, Jonathan all of these cases are really unique or specific end.
So we don't want to be extrapolating precise timing.
You know based on the history. We've had we're working hard we're pleased with the progress that we're making.
But.
Just just can't give you that for them and answer.
Sorry, I know, there's a little unsatisfied right understand well, maybe I'll try something that you do have some control over the timing of.
When should we anticipate that you would.
Give you a 'twenty three guidance I know, you've just given US 22, but we're now in a more normal rate case cadence, presumably just what would be.
What's the new normal.
Yes, it's Jonathan.
Really what we're trying to do is kind of focus on that overall five year cycle of a 'twenty one through 'twenty five cycle and give people that visibility on that EPS CAGR over time, I think we'll we'll give our 'twenty three guidance I think in the St. We have the same schedule to give annual guidance that we have in the past and today was 22.
In Q4 will be in 'twenty three and.
We have started to provide a little bit more visibility into how we think about the long term. So when you do get a chance to look at the slide you'll see that 2025 now we've developed some of the piece parts for folks to use so they can take that and start to do modeling out on a longer term basis, but I think that annual look we'll do on the same schedule, we haven't had in the past.
Okay. Thank you Maria.
Thanks, Joe.
Thank you. Our next question comes from Angie <unk> from Seaport. Your line is open.
Thank you.
Hello.
Wanted to ask just one follow up to that Ah Slide 11, with the remaining claims for 2017 and 2018 when you show that there's 22%.
Of the best estimate is still outstanding can you tell us if it's roughly the same for Thomas and endlessly.
Meaning that it's roughly the same number or a percent the twice for both or can we expect that for instance, one of them becomes.
Ready for filing sooner.
Yeah. Thanks, Andrew for the question, we have not split that out and how we reported for a number of reasons.
So I don't think you can extrapolate from that which case might get to that CPUC line sooner.
Okay and then.
Bigger picture question so.
I understand you are in the midst of your 2022 cost of capital proceeding at we've seen the filings are by the consumer advocates with some.
Interesting points that he made about no link between the stock performance as a cost of equity.
Which is sort of an equity analyst is quite an interesting conclusion.
Just to confirm that you disagree with that right.
Yes, I do I hope so.
Hence my job I think.
But [laughter], but but also I mean, you guys are issuing equity to finance gross and and so that cost of equity and and the affordability of equity actually plays until until into your customer rates et cetera. So I think that you are in a particularly good.
<unk> to demonstrate the importance of the of that cost of equity.
I mean, we have this you know a number of new members of the commission very she loves the existing ones have gone to our cost of capital proceeding so far we have the.
The position of the consumer advocate. So is there anything you can tell.
Tell us to you know give us a sense that there is this sense of fairness and reasonable reasonably at the commission that will.
And up with Oh.
You know again as reasonable outcome at least of this 22, our cost of capital proceeding.
So Andy I mean.
All the points that you just made I think it you see reflected in the filings that we've already made and now the assigned commissioner was willing on the 2022 cost of capital question really made it clear that they want me utilities to go back and file for 'twenty three 'twenty five and that's I think our opportunity and as you say a lot of the commissioners have.
<unk> been through our cost of capital proceeding before that's our opportunity to really go back we're gonna be making similar arguments to the ones. We made back in August and then you know just recently in January but it's really an opportunity for us to underscore how all of this really flows through to customer rates at the end of the day and do you really need to have.
You have to have a cost of a ROE that's reflective of what the real cost of equity is but that the preceding itself really gives them a signal to the market around the jurisdiction itself and that ultimately in the long term that's important to affordability, so where we are going to be making all of those points I think we probably didnt make many of.
The point you just made when we get our filing this in January and will proceed from there even separately from the preceding of course, we have routine discussions with staff and energy Division, where we make all of those things point cow no cost like this if they are not handled appropriately if the decisions aren't appropriate that they come back and get you in.
The end of the day and it all ends up in customer rates.
And I think even more broadly than the Maria you got it right, but from an even broader perspective Angie.
We've seen now over the past number of years that this commission and more broadly the whole apparatus with governments at this stage.
Since the need for a financially healthy utilities.
No that's been tested and we've gone through some of the challenges around the wildfire cost recovery framework, we saw legislation passed and maybe its interest before and we think that's a good job of addressing that all of that stems from understanding that.
Seeking financially healthy utilities to do the work that we need to do and ultimately like Maria said to minimize customer costs in the long run.
So we would hope and expect that and all that that principle will be top of mind for commissioners unless it goes through the cost of capital proceeding.
Okay hopefully thank you thanks.
Thanks, Andrew.
Thank you. Our next question comes from Michael Lapidus with Goldman Sachs. Your line is open.
Hey, guys. Thank you for for for taking my questions and congrats on good guidance. Just curious speaking of the guidance when we look out to the out years, meaning kind of 2025 I'm just that you know the there are a handful of things in that and I'm thinking.
Uh huh.
SCE cost excluded from authorized that 35 cents, but also the 20 to 30 cents SCE operating variance. That's a benefit you don't assume let's take the 20 to 30 cents you don't assume that at some point, maybe future G. R. C future regulatory event that gets kind of caught back or.
The 35 cents and a lot of that's executive comp some of its interest doesn't get added back to rates.
Hey, Michael Thanks for the question.
So yeah think thinking out to 2025 and let's separate those two buckets. The same way you just did the operational variances and then the costs excluding from authorized I would say you know we think about those operational variances every year, when we give guidance and.
It's you know it can have some discrete things that you saw in our 'twenty two guidance you called out a few things like D C as well as no shareholder cost, but really it's a lot of different things across the board. It can be you know what exactly is coming into your capital plan that you are in terms of the type of assets. It can be the timing of regulatory proceedings and.
Do you have to true up after a regulatory proceeding so we're actually getting a very very detailed look every year and then coming back with the number as we move out in time, you know we have visibility into things it'll happen you know over the next the course of the next several years as well and that's really what we're thinking about in that number into and how to and how that might range from.
And from a lower number to a higher number when we think about you know.
O&M savings over time, we actually because for the very reason you said that 2025 years, the first year with GIC cycle really not making in a lot of O&M savings because we know that the work that we're doing is ultimately going to go back to the benefit of the customer same thing on the flip side in terms of the cost excluded from authorized look.
You know, we're going to make our arguments in every general rate case around things that should get recovered in rates that at least you know the patzke rate cases haven't been recovered in rates.
But we're going to we're going to push on that for the next rate case, but we're not presuming that that's going to happen, although that cut those costs not recovered and authorize you're right. Some of its legislatively driven some of it you know the fact that we're.
Is it paying interest expense on those those claims payments with wildfire claims payments and we're not making any assumptions right now that that would go away. We will certainly make claims to recover the costs, but we're not making any assumption right now that we would that that would occur.
Got it Okay Super helpful. And then Pedro one for you just trying to think about it.
How do you think about the role hydrogen verses hyper electrification of of industrial customers kind of how you think about the I don't want to call. It a battle, but it's really going to be a discussion that happens in the state of what's the right way to decarbonize the the larger users in the state.
Yeah, that's a great topic.
And I'll start with our pathway 2045 work right. If you go back to that you might recall that in that we talk about.
With a largest part of the emissions reductions coming from clean electricity and using that electricity across our society, but we do point out there that there will be some hard to electrify applications, where we will need low carbon fuels, you'll like hydrogen.
And by the way that's not a hydrogen and it's the same rates, we're talking about hydrogen made.
From a clean floors, and so therefore, probably not from methanation unless youre, assuming no carbon capture which yet you know my sense is that we also assume there'll be some level of carbon capture but.
The availability of that probably will.
She'd be dedicated for places, we absolutely need to be using fossil fuels.
So with hydrogen I think it's a lot of excitement about being able to drive down the cost of production from electrolysis you have the you know the hydrogen Earth shops, Oh, you have a.
A number of other announcements on that we are engaged in the work that so joined a five year project that the electric power Research Institute.
And the.
The gas Technology Institute have going on it's called the LCR I, the low carbon resources initiative, and that's digging deep into what's the potential for low carbon fuels like hydrogen and what are some of the technical issues to actually help them work through how do you think about the metallurgy of pipelines for example, how much hydrogen can be.
To accommodate on what Jim just you need for that so that's kind of a backdrop to get to the core of your question.
I don't think you sit here and tell you who it is going to be disaggregated. These applications that go fully electric in these applications to go hydrogen I think in general probably some of the heavier duty more heat consuming processes industrial processes.
You know it would be more likely to benefit from hydrogen perhaps some long haul transport.
It would be another application that would lend itself to high again, I think when you're looking at applications like light duty vehicles.
That is hard to see that really you know, making sense for hydrogen because electricity and you know, particularly as battery advances continue it's just such a much better vehicle no pun intended for those.
We definitely see some roll.
Final point to make is just to pick a little bit on Europe . Thank.
Could you just used the word competition between the two I'm not sure I see as quite as much competition in the sense that.
If the hydrogen is going to be clean then chances are it's going to be coming from clean electricity through electrolysis and so therefore, you see an important role for the electric grid in delivering would be likely be massive amounts of electric power.
Ill.
Electrolysis plants, if I can then deliver at the high.
And if you're into a pipeline.
There's still a lot of roll format.
For a robust modern grid and that's the business room. So we think it's a necessary and the hydrogen plant as well.
Got it thank you Pedro much appreciate it.
My pleasure.
Thank you. Our next question comes from Ryan Levine with Citi. Your line is open.
Good afternoon, Brian .
What portion of the $8 billion of potential electric transmission highlighted in the prepared remarks does that just didn't have right of ways to potentially use and are there any initiatives today in their way to enable those opportunities.
Yeah.
I'd give you a quick answer but turn it over to see fall.
This is a conceptual plan it actually gets translated into projects. So I don't think there's a beep.
Specific as you know the answer specific as your question about seats.
Check me on that.
Yes.
That's right the conceptual plan and a lot of cases is identifying general paths.
Where projects would end up.
As you look at the mix of projects that are identified and there. It is heavily based on new projects that.
Largely wouldn't be followed within the sort of right of first refusal for utilities given the current framework.
There is a lot more work to be done for those sort of conceptual projects and plan to be translated into.
Resource planning processes that are upstream of this but really into the queso is 10 year plans as we move forward. So a lot more work to be to be done.
I understand if more and more of the existing system that we own and would have right of first refusal around can be how much of that can be managed through upgrades versus how much is going to be a new but I think looking back at just the overall opportunity I think it's important that it really reinforces what our pathway has shown us is that large opportunity out there and now it's a matter of figuring out the most.
Cost effective ways to deliver it for customers.
Okay. So no right away as existing so you have to carry those independently.
I hearing that correctly.
Well it would depend on the on the ultimate projects and pads that these that these translate into and so.
Some of them may be close to some of our existing right of ways, but there is a lot more work to do to bring more clarity to what those projects ultimately will entail.
Okay. So the bottom line.
So we don't we don't know yet Ryan.
Some of it.
Accessible through efforts.
I appreciate that and then one clarifying question from earlier or the potential on their grounding few hundred miles and replace up or in addition to the current covered conductor miles.
Yeah. So so right now as we're looking at that we're focused on the places where we haven't already installed covered conductor.
So we've got.
Proximately 3000 miles of covered conductor installed as we look forward. We believe that there is thousands of more miles that need to be hardened one way or another and as we do that evaluation, we're going to be looking to figure out where underground he might make sense. So the focus right. Now is on those places where we haven't currently installed covered conductor because there's a lot more of that but aren't.
Need to do.
I appreciate the color. Thank you.
Okay. Thanks Ryan.
Thank you. Our next question comes from Julien Dumoulin Smith with Bank of America. Your line is open.
Hey, good afternoon. Thanks, so much for the time.
So.
Absolutely. Thank you. So first I would just add a little detail you're you're you've got about a dime in there that talks about financing benefits associated with 'twenty two 2022 our cost of capital proceeding can you elaborate on that what that is just.
I guess I understand the COC proceeding just what is it the 10 cents there.
Sure Julien So you know typically the cost of capital proceeding covers a three year cycle you make an estimate at the beginning of that three year cycle as to what the cost of debt will be and what the cost of pretzel D. Certainly a whole bunch of that is that.
That's already been issued but you're also using our forecast when you started three year cycle over the course of that three year cycle. You can start to see those cost diverge from the original forecast and so it's it's the benefit that you get because the actual embedded cost of your debt. Once you get the sort of the tail end of the cycle is less than what you anticipated.
The beginning of the cycle.
Got it alright excellent and then just if I can going back to like a higher level question here just as you answered a lot of the details of the pieces, but I'm just curious as you look at especially accelerating EV penetration for instance, amongst other factors I mean, what is the bill inflation percentage that you that you are.
Completing through the forecast period, and then what is your ability to mitigate that especially you know cognizant of of that resolution here et cetera, but really just sticking with that line of sight of of trying to amortize across more kilowatt hours.
Yes.
I'll give you a couple of thoughts first I don't think we've provided any sort of a firm estimate out there over the long run of what that inflation will look like or that the field pressure would look like.
I think we've commented that we certainly continue to see some overall pressure in the in the next few years as we get through the largest bow wave of being wildfire mitigation work and we do see then or.
Our path to returning to a more I'll call from quote normal path.
In terms of.
Our system.
Rate increases and bill increases.
That's one part of the answer.
But the other part of the answer though Julian is that you alluded to which is that you know.
With the push on electrification that'll bring in more kilowatt hours. That's why my remarks, I mentioned that the extent of kilowatt hours that we get at it just from electric vehicles alone through 2045 right.
And that as you know we don't we don't earn a dose because what we have decoupling, which is a good thing, but adding those kilowatt hours and the system will just help reduce freight pressure overall for all customers.
So the final part of the answer there and just as a really important one one in policy space.
We need to.
Consistently remind our customers and policymakers broadly.
That's the journey. We're on here is not just saying electric utility journey, it's an economy wide journey to get to net zero carbon.
And the benefit of works like our pathway 2045 analysis is that it showed that the cheapest way for the economy to get there is by using more clean electricity, making more investments in the grid to move that power around do we electrify a lot of the economy that will put upward pressure on bill right now not just the pressure coming from the investments team.
Made.
Maybe offset some by the electrification benefit but the built themselves will go up because consumers will be using more electricity for more things in their lives at the same time, we'll be reducing the amount of gasolines are you seeing maybe zero that out we'll be reducing the amounts of natural gas, but they're using so you might remember we mentioned before that we see the average customer spending.
One third less across your entire energy Bill in 2045 in real terms than they do today they spend more in electricity you'll spend less on other forms of energy and overall, that's the cheapest way for society to get to net zero.
And so that means that the conversation around affordability.
Needs to migrate from one this frankly very narrowly focused right now on the electric Bill to one that is more thoughtful than looking at the total cost across society and the total cost for the customer to Decarbonize and you know that that'd be means that we may need to see some build increases there a little bit above.
And in the long run.
In order to.
Have the cheapest approach to get through the zero target, which store important one other place where this is come up with.
You might recall the oral arguments at the prior SCE CEO , Kevin Payne made last year in the ERC proceeding you pointed out that affordability also includes not just the climate mitigation parts, but climate adaptation right and so you know the cost that are putting pressure on the electric Bill now are on wildfire mitigation.
Are we believe helping us avoid the cause for the whole economy of the aftermath of a catastrophic fire right and so that's also a cost reduction of our benefit to all society. That's getting captured through you know some increase in today's electric Bill I know I went a little farther the aperture that than your question, but I think that's all.
All interrelated.
Indeed, it's just even within that the effort uncovered conductors do you think that you can bring that took place to which it doesn't meaningfully contribute to customer bills, just given the offsets from insurance or just reduced costs over time.
Yeah, we.
You heard US say, we will continue to work on all all pieces of the puzzle here.
And I know, Steve and his team are focused on how do they continue to deploy covered conductor and you know, possibly some you know under grounding as well as the lowest cost possible we're focused on the <unk>.
Our operational performance and driving operational excellence in continuing the pathway that we set for a long time.
Improving our operations you know that means high reliability that means higher better customer experience more safety. It also means lower cost right. So I think our our cost position relative to our peers in California speaks for itself.
So we're not we're not just starting a new initiative here.
You know we are.
Chino in a long journey for us that also contributes to being able to do all this.
You know as a 40 as affordably as possible for the customer, but again you know as we look at the types of investments will be needed over the long run for both climate mitigation of climate adaptation.
That may well lead to jail.
No.
Rate increases that are at or maybe even a little bit about somewhat above inflation hopefully not the levels. We've seen for the last couple of years. Those were extraordinary just given the big bow wave of wildfire investment data.
Thanks Maria.
Truly it may go to Julian maybe I'll just jump in on one thing because you you had one specific I think question in there about like can we offset some of the cost.
On the capital plan with lower O&M, specifically insurance certainly our hope is that as we move through time and we can demonstrate to insurance carriers that are risk has been mitigated down we will see benefit which would flow directly through to the customer.
Outright now.
Marketing for our next policy here, so we'll see but we haven't seen.
One we didn't see quite as high a trajectory as we thought perhaps we were going to see when and if we went back to the forecast is a forecast that we were putting together in 2018 and what we're realizing today. So that's a good thing and actually is lower than the forecast we had for now but it's still high are right online is about 41%.
31 cents on the dollar when the line shrunk the other thing we're doing around that is not just waiting for the insurance companies to to to go see their demonstration of its production, but we're also pursuing customer funded self insurance, which as we mitigate risk you know would allow us to take premium for one year and rolling into the next you know basically the customer would not be out of pocket.
If it weren't of losses. So we're doing all of those things as well to try and sort of the the parallel to the covered conductor cost is potentially this reduction in some of the other risk mitigation efforts.
Great guys. Thanks for the detail.
Thanks Julien.
Thank you. Our next question comes from Paul Fremont with Mizuho. Your line is open.
Hello, Paul.
Hello, Thank you very much for taking my question.
Yes.
My first one is when I look at your equity and rate base assumptions.
Are they are assuming a certain amount of regulatory recovery of our wildfire expenses.
Or are they assuming that anything that you've written off.
Is is.
Gonna be excluded from those assumptions.
And when you say wildfire expenses, you mean that the liabilities.
Yes, yes, yeah, we we do not assume in here that we will be getting recovery on those wildfire.
Liabilities, however, I want to reiterate what I said earlier, we will be filing for recovery. So for all of the prudently incurred costs that we have we will go back and ask the commission to allow us to recover that in right. We have not built that into the into the fore count.
Okay. So that means anything that would be recovered then I would assume that would be upside then to.
To your rate base numbers.
That wouldn't be rate base, Paul that would that if you think about recoveries. It again I'm just make sure I'm thinking kind of on the same thing you mean recovery of the wildfire liabilities that we've been paying out.
That would not typically be something that would be a rate based assay that you know if you think about it as kind of like O&M. We it is a big number depending on you know what level of the commission is comfortable allowing us to recover. So we would have to think through ways to mitigate customer rate impacts at our language and let and legislation right now that we think would allow us to potential.
Just curious is that over time, if we were able to cover it but I don't think about it as a rate base asset at this point.
I'm, just thinking but it would be it would be earnings accretive or would it be earnings neutral. If you were to if you were to recover a portion of that liability through regulatory pursue if we were to recover a portion of a portion of that like right. Now for example, we have interest expense coming through in core earnings associated with the debt that's being used.
Finance the payment on those claims so if we were to recover that then that would come through earnings you would reverse that it would come through earnings in the future. The actual liability itself that we wrote off we wrote that off the noncore.
Great and then the other question I have is I think a part of the strategy.
That is being used by your northern neighbor.
In terms of under grounding is trying to use.
O&M savings that it believes it would be able to achieve on the on the vegetation management side as an offset to that to the cost of.
Actually under grounding our it system.
Do you see potential O&M savings.
With you're more limited plans to underground.
Now, let me turn it over to Steve for this one as well, but let me start by saying this is another place where its really important to remember the difference into drain in geography.
I think Patty and the team have been very.
Open up I, just see significant amount of veg management cost if they have a P G and H.
And so the terrain is much more a much.
Much more forest at our drain its more.
Grasslands are they have more concerns with trees falling into lives, we have more concerns with contact from object several supply blowing out right. So that's where the math is still debt towards covered conductor in our case.
But Steve.
What else would you say there.
Yes, I know Pedro the differences between the terrain and the risks that we face from the types of ignitions that each of our each of us have in our different territories is that huge driver of why the plans look so different.
To the extent that we were doing.
We ended up doing more underground Deane I.
I would expect where we're under grounding we would get some O&M savings in those specific areas for it not having to do vegetation management and potentially changes to the inspection approach for underground as well.
But it would just be for those places, where we were doing underground on the covered conductor side we.
We still need to keep you know trees and vegetation.
We need to be doing that work because trees falling into covered conductor if they could take it down if they're large trees would be an issue. So over time, we'll learn more about how.
Our O&M and vegetation management practices can can evolve and potentially have savings with covered conductor, but we're not just at that point, yet so I'd say that.
Covered conductor is really cost effective for us and has been it's been great to get the get it out so quickly to reduce the risk.
Upfront and we will have opportunities for more underground <unk>.
Great. That's it for me thank you.
Thanks, a lot.
It was the last question I will now turn the call back to Mr. Sam ROM Raj.
Well. Thank you for joining US. This concludes our conference call have a good rest of the day and stay safe you may now disconnect.