Q2 2019 Earnings Call
Good afternoon, and welcome to the Edison International's second quarter 2019 financial teleconference.
And I will be your call today.
Simply be question and answer session. If you have a question press star one on your phone todays call is being recorded I would now like to turn the call over to Mr., Sam Ramraj, Vice President of Investor Relations Mr. Roush you may begin your conference.
Thank you Vincent and welcome everyone. Our speakers today are president and Chief Executive Officer Pedro Pizarro.
And executive Vice President and Chief Financial Officer Officer, Murray had gotten also here are other members of the management team.
Materials supporting today's call are available at Www Dot Edison investment Dot 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.
Well, thank you Sam.
I would like to start by reflecting on the passing.
CE President Ron Nichols on June six after briefly battling gastric cancer.
All of US lost a great leader and a great friend.
Thanks to all of our investors and stakeholders, who joined US at reached out in mourning his passing and celebrating Lance life.
So turning to the business at hand.
Second quarter core earnings were $1.58 cents per share, which was 73 cents above the same period last year.
The increase in core earnings was primarily due to the adoption of in 2018 GRC final decision in this quarter and timing of regulatory deferrals related to wildfire insurance in wildfire mitigation costs. Therefore year over year comparisons are not particularly meaningful but Maria will discuss our financial performance in more detail during our remarks.
The final decision on our 2018, GRC authorizes a base revenue requirement of $5.1 billion for 2018.
And $16.4 billion over the 2018 to 2020 period.
During this period as seeing is rate base growth has a compound average growth rate of 8.4%.
This excludes wildfire mitigation spending and additional items pending regulatory approval like or charge ready to electric vehicle charging infrastructure program.
Turning to the California wildfire crisis, we remain focused on mitigating catastrophic wildfire risk and the impacts in our communities.
I will address the recent legislative actions and then cover the operational practices that etsy has undertaken to reduce wildfire risk.
Please turn to page two of the slide deck, we issued with our earnings.
We appreciate the significant leadership that governor Newsome and the legislature have shown and their willingness to act with urgency to address this wildfire crisis through the passage of assembly built in 54 on companion measures.
The bills build on the initial steps of Senate Bill nine a one to restore California's regulatory framework and provide the financial stability of utilities required to invest and system safety reliability and resiliency, while continuing to drive towards a clean energy future.
As with any major legislation, where multiple stakeholders have competing interests.
This wildfire bill package reflects compromises.
We supported the passage of Abbey 10, 54 in the related ABT 111.
And belief that careful implementation and potential future refinements will be critical to their success.
Amy Tenfifty fourth a comprehensive wildfire build that holds utilities accountable for mitigating wildfire risks and improves the regulatory compact by clarifying the determination of prudent wildfire operations to bill contains several important provisions to address wildfire liability risk.
First.
These responsibilities will transition to the new office of energy.
For the first seat this certification the Cpcs executive director most issue it within 30 days of an aisle use request if the IMU has an approved wildfire mitigation plan isn't good safety standing as the safety Committee of its board of directors composed of members with relevant safety experience.
And has established board of director level reporting to the CPC on safety issues.
Earlier today, the Cpcs executive director informed as CE by letter that we have met these requirements and have been granted our initial safety certification for the next 12 months.
In subsequent years ill you must meet these requirements and additionally have an executive incentive compensation structure to promote safety as a priority and to ensure public safety and utility financial stability.
The wildfire safety Division must approve the U.S safety certification within 90 days, if all the requirements are met.
Second the Bill establishes a wildfire safety advisory board to advise the wildfires safety Division.
The members of this board will have relevant expertise, including experience in the safe operation design and engineering of electrical infrastructure.
The third provision refinanced a process for IPO used to recover catastrophic wildfire costs, particularly considering factors outside the utilities control and changing the prudency standard.
Fourth.
The Bill establishes a 10.5 billion dollar wildfire liquidity fund to pay victim claims exceeding insurance or utility cost wildfires.
Funded by Io new customers through the extension of the department of water resources bond charge until 2036.
There is an option for the iron used to elect to participate in a broader insurance fund, which conveys additional benefits.
It is important to note that for an IPO you to benefit from the revised cost recovery standard a must opt to participate in the wildfire insurance fund.
Creation of the insurance fund requires both FC and STG and need to participate.
With all three Io easy electing to participate they will contribute a total of $10.5 billion.
Consisting of an upfront shareholder commitment of $7.5 billion and an annual contribution to $300 million, which is intended to match customers 10.5 billion dollar contribution over 10 years.
Once defined has established the revised cost recovery standard will apply and we will continue to apply even if the fund is extinguished.
Based on the 31.5% wildfire allocation ratio for CE, our upfront contribution translates to approximately $2.4 billion with the subsequent annual contributions totaling another approximately $950 million.
As CE notified the commission today up its commitment to make its initial annual contributions in order to establish to fund.
As CEO will make its initial contribution no later than September tech.
Maria will discuss our thoughts on our financing options in her remarks, which for now I will summarize as a balanced approach to fund the near term $2.4 billion increment likely with 50% holding company equity contributed to our CE and 50% operating company debt.
So 50 provision requires to large ill use to invest $5 billion in aggregate on wildfire risk mitigation capital expenditures with no equity return.
And authorizes financing of those mitigation costs as C share of these costs will be approximately $1.6 billion.
Finally.
For Bill so to cap on I'll use shareholder liability, even where the IMU is found to have been imprudent that is available only with a broader insurance fund.
The cap equals, 20% CMD equity rate base, which is around $2.5 billion for SC today.
Turning to our operations I would now like to address the actions we are taking to combat wildfires in our service territory.
For quite some time, even before the devastating fires and insurance and the Barber counties in December 2017.
We have had proactive programs that target wildfire risk.
As circumstances continue to change we have continued to evolve our practices for this new abnormal as it's been called.
Approximately 27% of our territory is in high fire risk areas or HF our aim.
We recently revised this down from an earlier estimate of approximately 35%.
SC East prior HF are a map was based on Cal Flyers fire hazard severity map.
When the CPSC developed a new fire threat map in early 2018.
Out of an abundance of caution we included the combination of the two maps in our HSR a footprint on so we could do to thoroughly valuation that we completed recently.
A foundational part of the longer term solution to reduce the risk of our equipment starting wildfires in these areas is to harden our infrastructure.
Over the course of the past 12 months, we have replaced over 200 circuit miles of overhead line with covered conductor.
Installed fast acting currently limiting fuses at more than 9000 locations.
And updated protective settings on over 1600 remote automatically closures and circuit breakers on our distribution circuits that traverse or HF our ace.
While we are making significant headway in our system hardening and refers it will take time to cover the remaining area.
In the more immediate term we remain focused on ensuring our grade is in the best possible through rigorous inspections and aggressive vegetation management, and then use proactive de energy station known as public safety power shut off for Psps.
Only when conditions warrant it.
Through our enhanced overhead inspection program, we have inspected more than 400000, electrical structures and high fire risk areas since December .
Fixing the highest risk findings immediately and remediating non threatening issues and have prioritized manner generally within six to 12 months, depending on the condition and the location of the findings.
In addition to our ground based inspections, we are doing aerial inspections using helicopters and drones.
Our vegetation management practices have been expanded at high fire risk areas, including widening clearance distances, and removing dead and dying trees.
In addition, we have an in house team of weather experts in our 24, seven situational awareness center to monitor local conditions as well as a fire scientists who has established a fuel sampling program to better understand potential fire risks in our service territory.
These risk monitoring activities also support our Psps program, which is a preventive measure to protect public safety.
Trained incident management teams lead our efforts during elevated fire risk conditions using circuit specific win criteria and a fire potential index or FPI.
That measures and predicts local vegetation fuel fuel moisture content humidity and other factors.
For circuits are forecast to be above the wind and FP thresholds, we patrolled alliance ready to find and fix any issues.
Ultimately.
The decision to shut power off is made based on real time measures of women NSPI and feedback from monitors in the field.
Once the Power's off we'll wait until the wind and FDI conditions clear before patrolling the lines and restoring power when it is safe to do so.
Overtime more system hardening should mean that we can lean on psps less frequently and only in more severe conditions.
I would now like to give you an update on key regulatory proceedings. The CPSC issued a scoping malmo in July or in our cost of capital filing.
In light of the passage of Baby Tenfifty four we are evaluating next steps, including the potential reduction of our requested return on equity.
A final decision on this proceeding is expected by the end of this year.
In May the commission issued final decisions on our 2019 wildfire mitigation plan and the energy station guidelines.
The currently approved W. MPS satisfies one of the requirements for the safety certification and 82 and 54.
As I mentioned earlier, our first approximately $1.6 billion of double year on peak spend will not earn on equity return.
Additionally, the CPSC issued a scoping memo in may for our proposed $582 million, great safety and resiliency program that we filed in September 2018.
In early July 2019, as CE and certain parties to the SRP proceeding agreed in principle to a settlement of all contest issues, which led to CPTC to take the scheduled dividend sure hearings off calendar.
SC and the settling parties anticipate finalizing executing and submitting a settlement agreements to the CDC by the end of this month.
If the CPC accepts the settlement agreement FC expects a formal decision approximately six months from the date of submission.
Let me conclude by saying that the safety of our customers our communities and our employees continues to be our top priority and a core value of Edison.
We are taking steps to reduce the risk of wildfires in our service territory through operational mitigation and we're also encouraged by the regulatory and legislative policy changes to our risk profile.
We will continue to make our communities safer.
And to manage the financial hurt the health of our utility to serve our customers and to help achieve California's public policy objectives and environmental goals.
With that I'll turn it over to Maria for her financial report Thanks, Jeff Good afternoon, everyone.
My comments today will cover second quarter results from 2019 and pack in the same period, a year ago, let's comment that our general rate case, our updated capital expenditure and rate base forecasts and other financial updates for ethane and JAKKS.
As Weve said year over year comparisons are difficult and the timing of the GRC.
Please turn to page three.
For the second quarter 2019, Edison International reported core earnings of one dollar and 58 cents per share an increase of 73 cents for the same period last year.
And the table on the right hand side, you will see that assay had a positive 75 cents core EPS variance year over year.
There are a few items that account for a majority of this area.
Upon receipt of the 2018 GRC filing decision in May as CE recorded the retroactive to 2018 impact which increased our earnings primarily due to the application of the 2018 GRC final decision to revenue depreciation and income tax expenses.
This GRC trop contributed 20 cents of positive earnings.
Additionally, higher 2019 revenue had a positive impact of 34 cents, including 28 cents in the CPC and six cents in park.
FERC revenues were higher primarily due to a change in estimate and the FERC formula rate mechanism.
Lower aluminum costs had a positive impact of 14 cents, primarily due to the timing of regulatory deferrals related to wildfire insurance and wildfire mitigation costs.
During the quarter certain wildfire mitigation costs reached the total authorized the GRC and we began to depart incremental costs there of transactional accounts.
Finally, lower depreciation and amortization any positive seven cents variance primarily due to the impact of this allowed historical capital expenditures and a change in depreciation rates and the adoption of the 2018 GRC final decision.
For the quarter, Yes experiment other heading negative two cents core earnings areas, mainly due to higher interest expense.
Please turn to page four.
For the first half of the year Edison International core earnings per share increased 56 cents to $2.21 per share.
This includes core earnings increases of 55 cents at Sep and one cents at EEI ex parent and other.
I'm not going to review the year to date financial results in detail, but SCS earnings analysis is largely consistent with second quarter results.
Except for higher I want them costs and higher net financing costs.
Oh, and then had a negative variance at four cents year over year.
Primarily due to higher wildfire mitigation costs, partially offset by timing of regulatory deferrals and cost recovery of wildfire insurance.
Net financing cost had a negative nine cents variance, primarily due to increased borrowings and higher interest on balancing account.
Please turn to page five.
As Pedro mentioned earlier, the CPC approved a final decision and ethane in 2018 GRC in May.
The decision authorized a CPC GRC revenue requirement of $5.12 billion in 2018 and identify changes to certain balancing account, including the expansion of the tax accounting then on account or Tana include the impacts of all differences between forecast and recorded tax expense.
Based on the 2018, GRC aesthete authorized revenue requirement and $5.45 billion and 2019 and $5.86 billion in 2020.
Representing an increase of $335 million and 2019 and $412 million in 2020.
Please turn to page six per se and capital expenditure forecast.
This forecast reflects planned CTC jurisdictional spending as approved by the 2018 GRC.
It also reflects significant other capital spending needs outside the GRC, particularly wildfire mitigation related capital expenditures under the grid safety and resiliency program or Gs in our team and the wildfire mitigation plan R.W. campaign.
As an update to our prior forecast, we now estimate approximately $390 million of wildfire related spending in 2019.
Additionally, we continue to expect wildfire mitigation capital expenditures in the range of $500 million to $700 million for 2020.
The CPC has approved the 2019 w. on pain and authorize tracking of costs related to the Gs in RP and the W. NTT memorandum accounts.
We have also proposed the balancing account for RG us an RP spending and are anticipating a decision from the CPC This year.
Under 80 tentative for SC He will not earn an equity return on the first approximately $1.6 billion of wildfire mitigation plan expenditure.
We will work with the CPC to implement this provision in light of the ongoing Gs in our key nwfp proceeding.
On page seven we have our rate base forecast that incorporates the GRC final decision as well as increases in for expense since the last update.
The GRC authorized as 2018, CPC jurisdictional rate base of $22.3 billion.
This corresponds to total 2018 rate base of $28.5 billion.
As the rate base grows at a compound annual rate of 8.4% from 2018 to 2020.
I would note that this current rate base forecast does not include any of our wildfire mitigation related capital spending or additional need for programs such as charge ready to.
On page eight you will see our key financial assumptions and AI X core EPS guidance for 2019.
Our revised EPS guidance range for 2019 at $4.61 to $4.81 per share with a midpoint of 471.
This compares with guidance of $4.72 to $4.92 per share. We provided after we obtained a final decision on the GRC and Meg.
I would note that this revised guidance is related to changes to our financing plan as you project funding the $2.4 billion initial contribution to the wildfire fun.
And there are no updates the overall operational results at both FC Eni ex parent.
On the left hand side, we have shown the buildup for core EPS guidance, starting the EPS for 2019 from the simplified rate base model.
As the variances are expected to have a positive impact of 41 cents, including 32 cents related to financing and other operational items.
The test year 2018, GRC truck at a positive contribution to EPS of 20 cents.
We booked this contribution in the second quarter.
Or ex parent and other we expect an earnings drag of 30 to 35 cents per share which includes approximately one penny per share per month related to direct operating expenses.
We are forecasting a total of 18 cents of EPS dilution from a financing plan announced last quarter as well as the financing plan required to support the $2.4 billion contribution to the wildfire.
I will discuss more about this in a minute.
At Edison Energy, we are working towards our target of achieving a breakeven run rate for earnings by the end of this year.
Let me provide an update on our 2019 financing plan.
As Pedro noted earlier, we have notified the condition of our commitment to provide initial contribution and subsequent annual contribution to the wildfire funds.
Following passage of 80 tend to before the rating agencies have reported on the credit supportive attributes of the wildfire fund and the legislation more broadly including changes to the cost recovery and prudency standards.
On our last earnings call I discussed the components of a 2019 financing plan, which included the issuance of $1 billion of holding company debt and $1.5 billion of common equity through an at the market our ATM equity program and the use of internal equity program.
This plan was designed to fund SCS requirements related to the requested increase an authorized equity layer and additional growth investment at the utility.
Based on our election to participate in the wildfire insurance fund created under 80 intensity for SC requires an additional $2.4 billion to fund the initial shareholder contribution.
Funding for this contribution will be in addition to the previously announced plan and together the combined financing need in 2019 is $4.9 billion.
Through the second quarter EA access issued $600 million of unsecured notes as part of the original $1 billion debt financing need identified in Q1.
We have not yet issued any equity under our ATM program and we intend to do so opportunistically.
As we've discussed in the past our overall approach to financing the business is different capital requirements in a balanced manner.
Our Q1 plan to fund the requested increase in the authorized equity layer and the capital investments at Sep is consistent with this philosophy.
Likewise this is how we will approach funding for the initial shareholder contribution to the wildfire fun.
We are evaluating a range of potential.
And as the funding options to support the incremental 2.4 billion dollar financing needs and anticipate the permanent capital raise will likely utilize 50% holding company equity contributed to etsy and 50% operating company debt.
As we have outlined we are focused on a balanced financing approach that maintains a healthy balance sheet and promotes investment grade ratings at both CE and EA access.
We believe this is the most effective way to support operations and future capital investments.
We will continue to share our financing needs as we progress other milestone beyond 2019, including the 2021 GRC our charge ready to application securitization activities related to 80 tend to before and potential wildfire liabilities.
That concludes our remarks.
Justin Please open the call.
For questions as a reminder, will be request you to limit yourself to one question and one follow up so everyone. In line has the opportunity to ask questions.
Thank you.
Just a question. Please press star one on your phone.
For the first question please.
What made your line is open.
Hey, good afternoon can you hear me.
Yeah, Hi, Julien I'm sorry.
Hey, good excellence little soft with the operator, there so I wasn't sure all right well. Thank you again for all the details here maybe to just kick it off I just want to understand little bit more on the timing for the combined financing of the 4.9, how do you think about the ATM usage and especially against the timeline for the cost of capital case do we need to see an outcome on that front before you decide to move forward with one five and then separately unrelated here just want to understand.
As you think about the 2.4 billion wildfire fund that ice as best I understand it is excluded from your off price capital structure can you talk about the decision to use a 50 50 funding for that versus just using a more of a more leverage capacity at the holdco.
Okay. So Joanna I think we really think about it is that internally and for 2018. So that concludes that the key line items that you just remarked on the equity layer and nothing utility as well as the contribution to the welfare fund, we're going to use the ATM Opportunistically I think we talked about that earlier in the year that continues to be the case I think the comment you made around the ability to exclude that the the amounts from the authorized capital structure. We are obviously, you know contributing some equity down into essie and they will issue. Some operating company that so that does take advantage of that elements of the legislation, but overall the mix of equity and debt that we talked about really reflects our philosophy around financing the business and the balanced way in which we're approaching a.
Got it but just to be clear about this the foreigner and that is the intention to issue the equity for the cost of capital equity injection by the end of the year as well.
That's correct.
Got it are excellent.
All right I'll leave it there.
Okay. Thanks.
Our next question is from <unk> from Citigroup go ahead. Your line is open.
Thanks, So much just to follow up a little bit on that in terms of the capital structure. If you don't get the 52%.
What happens in that case, you want to wait till you get the 52 per cent authorization before you issue or is there a pre funding plan as well.
So thanks populist Maria and so we talked about I think a little bit about that in Q1, obviously with all the events that happened in Q2 is probably a little bit you know more to digest, but the yeah. Our plan was to watch the cost of capital proceeding as it goes through the process over the course of the year and since Q1, there's been there have been sunbelt developments in terms of issuing scoping memo setting a schedule et cetera, Obviously Pedro mentioned earlier that we would also be thinking about the interplay between 80 tend to 54 and our our are we request as well so things are moving along and we developed the plan to use the ATM to reflect the fact that we would watch that evolve over time, we continue to believe that we're going to use the ATM opportunistically to address that need as well as you know we're going to be looking at all the tools and the timing frankly and options to fund the initial contribution to the welfare funds. So that generally speaking the philosophy.
Got you that's Super helpful. And then just secondly in terms of.
Connected to that if your capital structure does improve and you get to the 52 is that reflected in any of the numbers from a GRC perspective in terms of the revenue and all of that or do we need to update bad in our models to reflect a higher capital or equity layer.
So I mean, I don't know whats in your model, but the earnings would then reflect 52% not 48%, which we have currently the <unk> each year, we go in to that to the CPC and we filed the revenue requirement for the year. So if the <unk> is 2020 2020 and includes a 52% equity layer, we would update the revenue requirement for that digging here same thing for 21 et cetera.
Okay. So that decision and back that out you know you were showed revenue requirement once you file it depending on the decision from the the CPC.
That's correct.
All right. Thank you so much.
Our next question from Ali.
From Suntrust go ahead your line is open.
Thank you good afternoon.
Oh, Yes, Hi, Andrew My first question just to clarify.
When you're thinking about your current equity needs Oh, yeah. So the 1.5 billion stays as is and if he is doing 50% of the beep. One floor would also be equity so we'd be talking about <unk> point 7 billion in total one I wanted to be clear and then related to that have you checked in with the rating agencies are they comfortable with that mix and the amount of incremental debt that is implied in this matter.
So in response to your first question Ali Yes, the the 1.5 relates to the equity layer request that we have into the C.P.C.. We've indicated sort of 50 50 structure against the 2.4 billion dollar contribution to the wildfire fund so that would be one too. So yeah. That's two sevens and confirming your math there on in terms of the rating agencies and we have an ongoing dialogue dialogue with them you know throughout the course of the year, obviously, yeah lots of dialogue around 80 tend to before I'm pretty sure. They talk to I spoke on the phone as well and you know the Wehrmacht you know.
Across the board, including in their published reports about 80 tend to do for all the credit support of aspects that the wildfire insurance fund incorporate liquidity benefits the cap standards reasonable kind. That's I think that's been a very they come out very strongly in favor of that now we've just elected to hinged to contribute to the wildfire funds. So that was one of the things that they've been looking for they've also been looking for a safety certification. Obviously in major just mentioned that we got our safety certification today. So we think that that all of that is very supportive and we believe now that we have all these things in place that the third leg of the school is still rather is the financing plan and we believe that our financing plan aligns with the rating agencies published guidance around maintaining our financial risk profile.
If I could just follow on with Maria here as we develop that plan the Maria emphasize to develop it. It is a balanced plan. It's one that we think will preserve or financial health and it's one that frankly, we want to make sure that overtime. We continue to build the strength of the balance sheet and have a good chunk of sort of built into that so I know that's folks have been developing their models and we see reports and maybe you know.
Some folks might have thought perhaps we use more or less et cetera. We wanted to take a balanced approach that allows us to build that strengthened reserves. So no ability to always have some shock absorber in the system.
Got you and a quick follow up.
Where do we stand on the 17, and making wildfires, which it always should not go were then dish and eventually are you thinking for modeling purposes that that may be more equity needed as you will have to pay for those liabilities sometimes in the future.
You know I don't think we have substantial updates on 17 and 18 from Q1, you recall that at the end of 18, we took the accounting reserve for what we viewed as the low end of the estimable range potential liabilities there.
Because we signaled all along this could be a long process as we work our way through the litigation efforts of course, there's always of course, the possibility of parties wanting to enter settlement discussions you know would be premature to talk about that but just reflecting the fact that as you've seen cases historically, the often end up with some.
In terms of that so.
Nothing to update at this point other than to reinforce that we think that the reserve. We took at the end of last year still make sense in terms of the funding the loan or the ASML range and that will take some time to work through a complex set of proceedings.
There.
There are number of legal mice milestones et cetera from week to week or month to month, but nothing that we felt rose to a level of materiality for these disclosures.
Thank you.
Our next question from Steve Fleishman from Wolfe Research go ahead. Your line is open.
Yes, hi, Thank you so just a.
Pedro question for you just on your comment.
Careful implementation and potential future refinements.
The critical to the.
Laws success could you maybe give.
A little more color on what you might be referring to with those with those comments.
Sure and I think a number of you have heard us talk about the parallels to the energy crisis. Two decades ago that also included in solution new legislation that set up a new framework and then there was a period of time, where the CB you see in other agencies have to go implement the law has a lot of building blocks are illegal blogs or you want to think about it that have to come together in place here. We do we've already been I think encouraged by seeing a positive early steps to affect that.
We filed for initial.
Annual certification safety certification and already obtained that.
From the CPSC today.
That's a I think a good marker along the way there will be many more markers will be the creation of the wildfire safety Division initially inside the CPC and then later on being moved out to a new agency under the natural resources branches of the government.
They will be the creation of a wildfire safety board.
There will be you know the input from those entities into future wildfire mitigation plans.
So yes.
Bobby keyboard reciting the various legal terms of the appropriate legislation and things that we will all I think what do you see good implementation of those and good track record built and that will build I think the confidence that we that investors are customers a community sale in how the law is being implemented.
We didn't specify any specific potential future refinements, but the reality is that with any law that is large and complex as this one.
Frankly that was written and passed and signed by the Governor was such a good sense of urgency, which means that when we move quickly.
Yes, there there are often cleanups that need to be made some funds that can be small sometimes it can be a little less small sometimes it's just clarification of the construction of language and them. Although other times there might be maybe more significant things.
We're not ready at this point to enumerate a list of those but we acknowledge that it is really very feasible that given the complexity and time and while we were there will be some of those all of that helps you still feel differently.
Answer to the question.
Yes, no thats helpful. I have one follow up just on timing of financing.
And just.
The no the wildfire contributions not due till September and the equity ratio decision not to your end, but just we do have record stock market you have.
Very low interest rates and the like and your stocks ads.
Bounce that we saw with this legislation. So just why wouldn't you just get a lot of this financing opportunity as soon as possible.
Steve It's Maria you know, we obviously are watching the market, we want efficient execution, we're evaluating all the timing issues that you just raised but.
That's what we're doing right now were evaluating it.
Okay. Thank you.
Thanks.
Our next question from Paul Fremont from Mizuho go ahead. Your line is open.
Well.
Hi.
And congratulations on on getting that maybe 10, 54 and getting that all behind you.
In terms of.
In terms of.
How to think about the company on a longer term basis is there a level of echo to get that we should be thinking that the company is going to be targeting as you move forward in time.
No Paul this ramp.
I think at that more as we do think that.
Having a mess and Greg you know absent process, we've just gone through over the past year or two obviously, we have a strong commitment to investment grade ratings I thought that the nei acts and where we're still working through a process with the rating agencies in terms of how they will think about and sort of reposition California from a.
Strength.
Regulatory constructs et cetera, so as you move through that I think that you know.
Keep in mind or you can you can understand that we'll be targeting those investment grade ratings and I think the metrics themselves are important but equally important is how california looks and the rating agencies on go forward basis. So that's that makes the metric itself I think will be less specific about that and we'll just be focused on keeping keeping that investment grade rating solid.
Okay, so you're not going to have like numerical.
You're going to provide coming faster.
Not at this time now.
And then.
Going back to Ali's question.
In terms of.
When you do pay out claim to.
Claimants from the 17 and 18 fires.
Should we think about our funding formula that is similar to sort of the 50 50 that you're talking about for your initial contribution to the wildcard mitigation Khan.
Or.
How should we think about your approach towards towards funding those cash needs.
And maybe think about it in a couple of three different ways first and.
There is a lot of variables variables that would need to be taken into consideration to post 2019 years that you're referring to the wildfire liabilities, but we're going to be filing our 2021 GRC.
There is the issue around.
In the securitization for the wildfire mitigation related spending that's in aby tend to Q4.
We have other applications pending in front of it and find the commission that also required capital. So there is a lot of things to take into the mix.
Into consideration in addition to the liabilities. The first part of the liabilities present leaner get covered by insurance as a starting point in any event. So there is a lot of timing in there. There is a lot of different variables recall also that when we requested our capital waiver, we asked for some relief around including the charges and the financing for those potential liabilities in our capital structure. So there is a lot of different things that we're going to have to weigh in consider before we make a final determination as to how we financed that part of the go forward plan.
And I would just underscore that.
Just on the timing of the liabilities alone is a significant variable because it will depend on a court process for different cases that has only just begun.
And I guess, what I'm really trying to get at here.
Is there any expected potential equity may be on.
The 2.7 or is should we just think of the 2.7 is.
Yeah at the end of your equity base.
The 2019 plants, when we laid out I think and as I. Just noted there are a lot of variables as you move past this year.
And we're going to have to consider all of those variables were going to happen. So considering the timing annotate or just noted not just on the potential liabilities, but in all of the decisions that I just referred to so I think that that is sort of the go forward planning element that we'll share with you as we have more information we will continue to focus on our investment grade rating. So thats the other piece of the mix.
In terms of the decision making process.
Thank you.
Info.
Our next question is from Angie Storozynski from Macquarie Go ahead. Your line is open.
Hello, Andrew how are you so.
So I know you mentioned that there's going to be plenty of refinements of this new law, but.
But I'm my biggest concern is that.
It is $21 billion, which seems like a large amounts but.
We.
We're going through the the PGT bankruptcy, where they are mentioning $30 billion in liabilities related to one very large fire, but still in excess of that amount.
And the bill the the the building doesn't maybe talk about how the fund gets replenished.
So how should we think about it is it's that.
You know going forward.
The goal is still to have some sort of inverse condemnation change, which will be more supportive of of investor owned utilities in the state that was that.
You know, there's there's hope that this 21 billion basically supply sufficient for.
Oh, you do it isn't all future fires going forward.
Yes, let me, let me start trying to frame an answer here and Maria or Adam Eminem.
Rather serum it may have thoughts too.
I think for for starters, the 21 billion dollar fund.
Is expected to cover potential liabilities that they could be much larger at least 40 $45 billion and that's we think based on the the history of.
And how these cases go you often see settlements achieved that that have low discount built into them. In fact, the legislation itself as you might recall.
As a.
Essentially built in discounting for supervision claims of 40%.
Provides the possibility for settlements are higher but those would need to be.
Essentially approved by the way the fund manager.
So there is I think a clear expectation Andrey that there's a significant discount there and frankly, that's part of the.
The comp that appear across.
A lot of stakeholders lot of competing interests you know I think the governor Bobby said, it pretty well what do you gave his first because the conference call. The he gave Wendy.
Strike Force report came out and then if I recall correctly, you made a comment about everybody in California, having to bear some some fear here in terms of.
Dealing with this issue. So clearly there's a piece that shareholders are now having to contribute theres a piece or customers are contributing I think there's a piece that you know through the 40%. That's built in there we're seeing a discount being applied to the recoveries that insurers would get so.
I think its a PC or for everybody.
So I think that's the starting point in fact have been the ER.
Government the Governor's office team released some projections of the durability of the funding.
No those are out.
10 years out exceeded the 90% level.
So thats one piece of it.
I think the second piece is that the focus on durability over 10 years with an actuarial basis was rooted at least in part in the discussions that we heard on the idea of leaving California, and California utilities time to continue to harden our systems and so transportation is that the overall risk profile for the state, although we will never be zero.
We'll never be zero.
But that risk profile should decrease would improve significantly as all of us the utility side continue to.
Putting investment of ordering our in our infrastructure and it's not just US is other measures of the state this developing and implementing around better funding for fire suppression. The focus on better standards for homes and businesses buildings in high fire risk area of refinement, the fire maps and you're all of these things outdoors management really important wondering right. So this all goes to decreasing the risk of the sport coming out but at the spark comes out then decreasing the risk of that school sport turns into a massive wildfire.
Okay, 30 billion plows versus maybe more contained wildfire.
So I think thats the philosophy Youre right that there is not a specific replenishment mechanism.
In general.
For the fun and I think Theres, a sense that there was a significant accomplishment by the governor or the legislature implementing this first base that has visibility that's out and hopefully a decade or so and I'm sure. The state we will continue to check and adjust as it sees how that experience goes.
Great. Thank you.
Thanks.
Our next question is from Michael Lapides with Goldman Sachs.
Go ahead your line is open.
Hey, guys. Thanks for taking my question.
Real quickly.
Is there potential use of securitization to help cover.
2017 portion of the wildfire claims after insurance that you actually have to payout.
Yes. So you know that 2017 claims are wildfires are covered and as I know one Yemen and there in 2017, you can securitize.
To benefited the customer if they are amounts that have been disallowed.
But there is viewed as being would undermine the utilities financial stability.
The commission has gone through a proceeding to define how that would work and what the how you calculate the piece that would be basically too much for the utility to bear.
That person that calculation.
I would say.
Juan it's probably not as an example, and further clarity, but it's also something that I don't and I think at the end of the day went on to find particularly useful may recall that we said before that we did not and really necessarily be in a position to take advantage of that 2017 provision. So I don't really see securitization as a as a big opportunity for the 17 amounts the amount of wildfire mitigation related spending that we have to.
And basically implement without a return to our portion of the $5 billion. That's an Indian tenfifty four that is something that is.
Able to be securitized.
Got it but would you would effectively be net neutral on that.
That's right and right. Okay typical securitization bill just like storm recovery occurs in other jurisdictions et cetera.
Yep.
Okay. The.
The my second question is.
What is not in rate base growth guidance.
That over the next six to 12 six to 18 months, you think could get potentially get added to it you talked a little bit about it in the opening remarks, if you don't mind revisiting that that would be great I'm, just trying to make sure kind of the idea the puts and takes the items that are in it the items that are not in it.
Sure so.
Six to 12 months frankly, Michael is a fairly short timeframe. So.
I'm not sure that that.
This will be necessarily.
Additive in the next six to 12 months, so what's not in the rate base forecast right. Now is we havent included the wildfire mitigation related spending that we've identified for 19 and 20 that assets in our capex forecast, but not in our rate they forecast that is going to be potentially subject to.
That 80 tend to 54 provision we have to work with the commission to figure out how to implement that alongside our geos in RPM off our mitigation plan, but.
For clarification, it's not in our rate base numbers. We also have a charge ready to application pending in front of the commission. We're thinking we're going to get a decision on that later this year, it's about $560 million of capital or thereabouts, but remember that rolled out over a number of years. So the impact on rate basing that we're spending capex the impact on rate base over the next couple of years, probably pretty moderate.
Longer term you know, we're looking at energy storage at some point in the peso will develop a plan to bring it to meet the new the higher renewable portfolio standards, and we have an opportunity potentially to participate in that mix, but those are not six to 12 month issues those are longer term issue.
Got it okay.
And on the cost of capital pocket, what's the timeline and process from here I mean, the CBC has lots of things on its plate I'm just trying to think about how like prosecute all of the items and kind of where this one fits and the prioritization ranking.
Well, thus far they have been very diligent about holding to their schedule.
Comments are due from Interveners and from the utilities on August 1st.
And then they have a schedule and scoping them on a schedule that has the decision coming out before year end.
Got it thank you much appreciated.
Our next question from Greg Gordon from Evercore Go ahead. Your line is open.
The gross.
Hey, good afternoon.
Good question.
One follow up question will become when it comes to the wildfire mitigation spending where you you are not going to receive an equity return.
If we're thinking about modeling.
Spending in the recovery of that should we presume that.
You will recover at a cost of debt return on a 100% of them.
Investment in that you could finance it accordingly, such that Theres no negative arbitrage to your.
On your financing costs relative to your.
Ability to recover the capital or.
Did I hear differently that essentially would be sleeved and they would have no impact at all.
Yes, so the way the legislation is drafted is that it would basically be a securitization. So dedicated rate component that would allow us to reach to recover I mean with the return of our capital, but then the return on the debt, which would be presumably lower cost. So is structured in a way to be minimal minimize the cost to the customer. So yeah that would be neutral. We are we need to work with the commission to determine when those pieces would fall into place.
So that it wouldn't you potentially we could be implementing programs before the securitization actually took was issued debt was actually issued so we have to figure out what the commission how implemented but in the sort of like Big picture kind of response would be as basically designed to be neutral to us.
Okay, So you'll get a recovery youll get essentially be a debt return.
The debt that you issue will be recovered dollar for dollar and then you'll depreciate the assets.
The capital you've invested.
That's right.
Thanks.
And then when it comes to the <unk>.
Raising this equity at the parent level to put down into.
And you can issue debt at the C level to pay for the the wildfire insurance.
Contribution.
What's the accounting for this is this going to be a charge that you have to take.
That.
Well go against GAAP equity, but I think from my understanding of the legislation is from us.
In terms of accounting for your regulatory capital structure.
That this would done these financing cost would not be counted against.
Your regulatory capital structure for rate, making purposes I'm sitting here trying to model. This stuff frankly, and I am just I'd give you some guidance yes. So.
We're still evaluating the the accounting for it grant to be quite honest.
You know it could be a charge but.
Certainly wouldn't be more than the amount of the contribution, but we're actually frankly still working through that and determining how we would account for that that's the first question. So that the gap kind of response second part of your question is yes, there could be a charge for GAAP purposes, but under the legislation we would not have to take that hit in our regulatory accounting.
Okay. So if I'm looking to to to do side by side.
The gap sort of capital structure against regulatory and I presume that there was a charge I would reverse that charge for regulatory purposes, and my equity that's there.
Correct.
Sorry to get pedantic at the end of the call. Thank you.
Our next question is from Travis Miller from Morningstar Go ahead. Your line is open.
Good morning, good afternoon. Thank you.
I was wondering how you think real quick about the dividend with respect to any kind of equity needs or does that fit in.
And I think we understand the importance of the dividend to our shareholders. No question and obviously you know from prior quarters. When the dividend question with cash in a slightly different way or from a different angle.
We don't get ahead of our board on those issues, but our policy has been to grow the dividend. We will continue to manage over the longer term to that 40, 555% payout ratio range, but we understand the importance to our investors.
Okay, and then on the wildfire at or that you had requested in the cost of capital.
How do you think about that now or how do you think the commission will think about that now.
Post the legislation that presumably would lower your cost of equity.
Travis So I think we mentioned in her remarks, we're still evaluating that we had said all along that there was a.
Our new policy established through legislation, we we'd look at revisiting that for.
Redone potential reduction or even elimination, depending on how the risk profile changed so the honest with you we're still absorbing it quickly.
In evaluating that and I believe we have a deadline coming up.
Of August 1st for filing our comments in the cost of capital proceeding in the CBS .
Okay, Great home soon.
At this time there are no further questions I will now turn the call back to Mr. Sam.
Yes. Thank you for joining us today and please call us if you have any follow up questions. This concludes the conference call.
You may now disconnect.
That concludes today's conference. Thanks.
You may disconnect at this time.