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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon and welcome to the Edison International First Quarter 2018 Financial Teleconference. My name is Laurence and I'll be your operator today. Today's call is being recorded.
I would now like to turn the call over to Mr. Sam Ramraj, Vice President of Investor Relations. Mr. Ramraj, you may begin your conference.
Thank you, Laurence, and welcome, everyone. Our speakers today are President and Chief Executive Officer, Pedro Pizarro; and Executive Vice President and Chief Financial Officer, Maria Rigatti. Also here are other members of the management team.
Materials supporting today's call are available at www.edisoninvestor.com. These include our Form 10-Q, prepared remarks from Pedro and Maria, and the teleconference presentation. Tomorrow, we will distribute our regular business update presentation.
During this call, we will make forward-looking statements about the outlook for Edison International and its subsidiaries. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our SEC filings. Please read these carefully. The presentation includes certain outlook assumptions, as well as a 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, thanks, Sam, and good afternoon, everyone. Our first quarter core earnings were $0.80 per share, which was $0.31 below the first quarter last year. However, this comparison is not particularly meaningful because SCE has not received a decision in its 2018 General Rate Case. The main differences between this year and last year are the absence of tax benefits and stock option exercises that substantially boosted our first quarter results in 2017, and the incremental wildfire insurance premium expense. The implementation of the July 2017 cost of capital decision and the impact of tax reform on the parent company drag also affected earnings. Maria will cover this in more detail.
Before I move on, I want to express our continued sympathy for all those who lost loved ones and had their homes and lives impacted by the Southern California wildfires. SCE's primary focus has been on the safety and well-being of our customers, field crews, numerous first responders, and impacted communities by safely restoring power, setting up aid centers for affected communities, and contributing funds and employee volunteer hours to help with recovery.
With respect to the Southern California wildfires, a number of external agencies, including CAL FIRE, the Ventura County Fire Department, and the CPUC's Safety and Enforcement Division are investigating the potential origins and causes of the Thomas Fire. As we do in all wildfire matters, SCE is also conducting its own investigation. The investigations continue and we currently cannot predict when they will be completed.
We continue to make progress across the state on wildfire issues, including the application of inverse condemnation with strict liability. We are engaged with state leaders including the governor's office, legislative leaders, and stakeholders across the state on the solutions we believe are needed. First and foremost is the prevention and mitigation of catastrophic wildfires. Second, our state infrastructure must be hardened with stronger building codes for infrastructure and other assets such as homes in high fire risk areas. Third, when a catastrophic event occurs in spite of all of these efforts, we need thoughtful policies around how financial risks are allocated, including fire suppression costs and costs related to damages.
In order to help prevent and avoid the significant impacts of climate change and year-round wildfire seasons, the state must establish objective wildfire mitigation operating standards that meet or exceed industry best practices and are applicable to California's utilities and other critical infrastructure providers. If something goes wrong, regulators should use these clear standards when they determine if a utility properly ran its system. An updated standard of liability that considers degree of fault rather than the current standard of strict liability would ensure that there is a fair sharing of the increasing risk of climate change impacts across society.
We were heartened by the recent statement released by Governor Brown's office in conjunction with bipartisan legislative leaders. They are partnering on solutions that will make California more resilient against the impacts of natural disasters and climate change. The statement noted five key areas that they and the Joint Legislative Committee on Emergency Management will focus on to craft solutions, from updating liability rules and regulations for utilities, to enhancing prevention and mitigation efforts surrounding these events.
Since that statement, several hearings have occurred, and I am encouraged by the dialogue that we and other California IOUs are having with the legislature. As of the end of April, a number of wildfire bills passed legislative committees, including Senate Bills 819, 901, and 1088. At this stage in the legislative process, the individual bill numbers matter less than the substance. And we are fully engaged with the legislature on these issues, with a goal of achieving reforms that provide more transparency and additional efforts to mitigate catastrophic events.
While we are actively involved in the committee hearings underway, it's important to remember that implementation of solutions through a legislative process will take time and bill language can change during that process. The IOUs will continue to work with the legislature, the governor's office and key stakeholders on a comprehensive wildfire solution that addresses the issues of liability and cost recovery. This could be through existing bills or new legislative vehicles as they come up.
On the judicial pathway, we submitted a stipulation in the round fire case to extend the hearing on our motion for legal determination to June 15 in order to allow the parties to engage in confidential discussions regarding a potential resolution of the matter. Even if resolution is achieved in the round fire case, we do plan to challenge inverse condemnation and other appropriate cases including the Thomas Fire lawsuits.
On the regulatory pathway, SCE filed an application on April 3 requesting a Wildfire Expense Memorandum Account or WEMA to track certain incremental wildfire related costs. We are requesting establishment of a WEMA now because we are in the process of renewing wildfire insurance for 2018 to 2019, and anticipate that cost of this additional insurance may substantially exceed the amount currently authorized in rates or requested in our pending 2018 GRC.
In mid-April, ORA filed a protest to our motion in which we requested that the effective date of the WEMA be the date of the application. We also expect a protest from ORA by May 9, and by other parties as well, on the substantive aspects of the application. We have asked for an expedited timeline for this request and are awaiting a ruling. If our proposed schedule is accepted, a decision will be issued by August 2018.
I do want to note that we launched a webpage on edisoninvestor.com where you will be able to find certain documents and information related to the Southern California wildfires, which may be of interest to investors. We continue to believe that the state will ultimately address the risks and issues surrounding wildfires and other climate change impacts, because California's economy and ambitious environmental policies require strong healthy utilities.
Given this, I will highlight several regulatory proceedings that enable our investment to support California's 2030 goals to reduce greenhouse gas emissions and air pollution. In February, we discussed the final decision approving five of the six priority review projects that we proposed in our January 2017 transportation electrification filing.
On March 30, the CPUC issued a proposed decision on the standard review projects granting $208 million of our $554 million request for medium- and heavy-duty infrastructure program. The PD proposes installing make-ready infrastructure at a minimum of 700 sites to support at least 6,500 medium- or heavy-duty electric vehicles. SCE has filed comments opposing a proposed option for customer-owned charging infrastructure where the cost will be expensed by the utility provider, and advocating to remove minimum site requirements based on what we believe are incorrect cost estimates, which understate the infrastructure cost.
During the second quarter, we also plan to file a Charge Ready Phase II application. This will expand on our light-duty infrastructure pilot, which was launched in late May 2016. As of the end of March, agreements have been executed to deploy approximately 1,070 charging ports and we expect that approximately 1,250 chargers will be deployed by the time we complete the $22 million pilot.
Capital cost estimates for Charge Ready Phase II could be substantially more than our initial expectation of at least $200 million of rate base when we first envisioned the full program as SCE is currently reevaluating the scope and cost in light of the recent governor's order targeting 5 million electric vehicles by 2030, and our own estimates of 7 million vehicles needed to achieve the state's GHG goals. We will keep you updated on our progress.
On a related note, the U.S. Environmental Protection Agency recently issued a determination stating that the light-duty vehicle model year 2022 to 2025 standards are not appropriate and may require revisions. This determination initiates a rulemaking process to evaluate new standards. We support strong greenhouse gas emission standards, as well as California's authority to set its own standards which have been adopted by many other states. In fact, just this morning, California announced that it is leading 16 other states and the District of Columbia in suing the U.S. EPA to preserve the nation's single vehicle emissions standard. We also believe that federal review should ultimately recognize the opportunities for infrastructure investment and job creation that are afforded by deploying electric vehicle technologies and the beneficial environmental impact of these standards.
Moving on toward 2018 General Rate Case. We are looking forward to a proposed decision from the Administrative Law Judges. We cannot speculate on the timing for a proposed decision and subsequent commission decision, but remain optimistic about getting a final decision before year-end.
With respect to SONGS, we announced a revised settlement in late January that was a result of multiple mediation sessions with a diverse set of parties. We continue to work with the other parties to complete the steps in this proceeding and are hoping for a swift commission decision approving the revised settlement, especially since all the parties actively involved in the mediation joined the settlement.
As is usual in our regulated business, we have a few key proceedings pending and we are also working for the broad set of wildfire-related issues. Throughout all this, we continue to make progress in important long-term growth areas at our utility, like our core grid investments and transportation electrification. We play a critical and necessary role that ensures safe and reliable service for our part of the world's sixth largest economy and supports California's ambitious 2030 goals to reduce greenhouse gas emissions and air pollution. Our company will remain focused on improving our safety culture and broader operational excellence and on delivering strong solutions to be a key enabler of our state's long-term policy vision.
With that, Maria will provide her financial report.
Thank you, Pedro, and good afternoon, everyone. My comments today will cover first quarter 2018 results compared to the same period a year ago and other financial updates for SCE and EIX. As a reminder, until we receive a decision on the 2018 General Rate Case, we will continue to recognize revenue from CPUC activities largely based on 2017 authorized base revenue requirements with reserves taken for known items including the cost of capital decision last year and tax reform. Also for this quarter and the rest of 2018, we plan to provide our SCE key drivers analysis at the prior combined statutory tax rate of approximately 41% for both 2018 and 2017 for comparability purposes with the incremental impact of the reduced rate reflected only in the income tax line item. Therefore, the effects of tax reform will largely be removed from the variance so that we can focus on the financial and operational drivers of the business.
Let's begin with a look at our core earnings drivers. Please turn to page 2. For the first quarter 2018, Edison International reported core earnings of $0.80 per share, a decrease of $0.31 per share from the same period last year. From the table on the right-hand side, you will see that SCE had a negative $0.19 EPS variance year-over-year. SCE revenue was not an earnings driver this quarter. CPUC revenues were down $0.02 as a result of the 2017 cost of capital decision, and this was offset by higher FERC revenues as a result of higher expenses.
On an equivalent tax rate basis, our core EPS in the first quarter was impacted by $0.15 of higher expenses year-over-year. This was due to increased costs that are above the 2017 authorized levels at which we are recognizing revenue. Additionally, the impact of the lower 2018 tax rate on the incremental expenses resulted in $0.04 of lower tax yield and this is reflected in the income tax line.
The largest driver of the higher expenses is a $0.10 negative impact from higher operation and maintenance costs. This includes a $0.06 quarterly drag from the previously disclosed $121 million wildfire insurance premium, recovery of which has yet to be approved by the CPUC. This variance reflects the 41% statutory tax rate as discussed previously.
On March 14, we filed a Z-Factor advice letter with the CPUC requesting recovery of these costs, less the FERC jurisdictional portion and the $10 million deductible required by the process. We will continue to recognize the expense related to the incremental wildfire insurance premium until we receive a decision from the CPUC regarding this filing. The additional $0.04 of higher O&M over prior year is due to higher line clearing and other maintenance expenses.
The key EPS drivers table for SCE on the right-hand side of the slide shows other smaller contributing items. For the quarter, EIX Parent and Other had a negative $0.12 per share core earnings variance, mainly arising from the absence of tax benefits related to stock-based compensation that we saw in the first quarter of 2017. As a reminder, on a consolidated basis, we had $0.13 of tax benefits in the first quarter of last year. As we discussed on the fourth quarter call, we are also seeing additional drag from the lower tax shield at the Parent. We also had $0.13 per share of noncore charges. This was largely the result of a $0.15 per share impairment charge related to the sale of SoCore Energy. The sale was completed in mid-April.
Please turn to page 3. Our SCE capital expenditures forecast has remained unchanged from last quarter. As a reminder, while 2019 and 2020 capital expenditures remains at GRC request level, SCE has developed and is executing against a 2018 capital expenditure plan that will allow SCE to ramp up its capital spending program over the three-year GRC period to meet what is ultimately authorized in the decision while minimizing the associated risk of unauthorized spending.
However, I would like to point out two developments since the last quarter that could impact our forecast in the future. First, as Pedro noted, we received a proposed decision on the transportation electrification standard review project. In total, the proposed decision granted $208 million of the $554 million request which includes both capital and O&M costs. Neither our original request nor the resulting PD have been included in our capital forecast. We expect to include the program in our forecast when the final decision is issued.
Also, we received a proposed decision on the Alberhill System Project, which denied the certificate of public convenience and necessity based on the CPUC's conclusion that the project is not needed. We continue to believe the project is needed to serve forecasted local area demand and to increase reliability and operating flexibility. Last week, SCE filed comments requesting that the CPUC deny the proposed decision as currently proposed and instead grant the certificate for the project. The Alberhill System Project is included in our capital forecast, including $175 million of spending through 2020. SCE has already incurred certain capital expenditures of which $29 million may not be recoverable if the project is cancelled. We expect to update our forecast when we get a final decision.
Page 4 of the deck provides our rate base forecast which is unchanged from last quarter. The CPUC rate based forecast is based on the weighted average rate base that we requested in the GRC for the forward looking three-year period. That is it reflects our 2018 through 2020 request level capital expenditures.
Once SCE receives a final decision in the 2018 GRC, our rate base forecast will be updated to reflect the authorized levels. At that time, we will also update our capital expenditures for 2019 and 2020.
Page 5 is a recap of various items relating to our GRC, including the impact of updates related to tax reform and is unchanged from last quarter. On page 6, you will see our financial assumptions for 2018. We have laid out a few key items on this page that you should consider as you model 2018 and beyond. As a reminder, the information we provide on this slide reflects our new combined statutory rate of approximately 28%. I would like to reiterate that we will not be providing 2018 earnings guidance until we receive a final decision on the General Rate Case.
I want to provide a few comments on other financial topics. On the subject of FERC, there has not been material updates to our Formula Rate filings since the fourth quarter. FERC has directed the parties to have settlement discussions and the parties are scheduled to reconvene at FERC on May 15. Hearings will be held if the parties do not ultimately settle. We cannot speculate on the outcome of this proceeding or the timeline and will keep you updated as new information is presented.
At SCE, our average common equity component of total capitalization was 49.7% as of March 31, including the charge from the revised SONGS settlement. If approved by the CPUC, the revised settlement allows SCE to exclude the $448 million after-tax charge from its equity capitalization ratio which would bring our ratio to 50%.
EIX and SCE have worked to maintain a strong balance sheet and create financial flexibility. We are pleased that we are able to benefit from these prudently conservative balance sheets at both the holding company and SCE as we continue to invest in utilities and work through the new pressures created by wildfire cost recovery concerns. While we await the 2018 GRC decision, comparing results with prior-year periods will be somewhat less meaningful. We expect to report a true-up in the quarter we receive a proposed decision.
That concludes my remarks. Laurence, please open the call for questions.
Thank you. Our first question comes from Greg Gordon of Evercore. ISI. Your line is open.
Thanks. Good afternoon.
Hi, Greg.
Hi, Greg.
So just to review – I understand – I think you were pretty clear, but I was distracted for a moment on the wildfire insurance premium costs that you've incurred for this year. You're basically amortizing that amount just on a ratable basis over four quarters, is that correct, until you know better?
That's correct, Greg. That's correct, Greg.
All right. And then the second question was on the comment you just made relative to the equity ratio. Can you reiterate what you said with regard to the ability to not use the write-off against the equity ratio and what that might mean for the purposes of calculating your earnings power?
So 49.7% is the equity capitalization ratio with the charge included, so including the effects of the $448 million after-tax write-off. If the CPUC approves the settlement as it's written, then we would be able to, for purposes of the equity capitalization ratio, ignore that charge in that event which the equity capitalization ratio would be 50%.
Got you. Understood. And then, Pedro, can you talk me through maybe a little bit more what it is that you hope to specifically in an optimal outcome get from a legislative action here? Because we've been monitoring the process from afar, and so far the language that's been proposed in the bills doesn't really appear to be a demonstrable improvement to the current sort of uncertainty of the current framework?
And if you disagree with that, I'd love to hear your perspective on it. And if you agree with it, what do you think has to sort of improve or evolve to get to where we have a standard that prevents the PUC from using this 20/20 hindsight prudent manager standard to effectively disallow what should be recoverable costs?
Yeah. Greg, I think that's actually well said and I wouldn't disagree. It is very early in the game. And at this stage in the legislative process, as we look across the whole landscape of bills, the language that's being proposed, I think I even acknowledged in my remarks none of them deals squarely yet with the whole issue of reforming utility liability and the concept of inverse condemnation and strict liability.
It is early in the process. We were encouraged, as I mentioned in the remarks, by the fact that you've now had a few weeks back Governor Brown and the key legislative leaders, all come out and say that this is part of a broader issue that needs to be worked on for the state. And one of the five areas they mentioned was reforming the issue of how utilities are liable in these cases. So there isn't a vehicle today that actually has languages specific to this. There's, I think, a clear recognition in that governor and legislative leader statement that this is one of the elements that needs to be addressed. It's now May 1 and the reality is that there's a lot of time and process that takes place in Sacramento in any bill between now and the finish line.
I think that certainly the discussions that are being held in Sacramento lead me to believe and encourage me that there's good understanding and appreciation on the part of legislators of how important this piece is to the state and to utilities as enablers of a lot of what the state wants to do. But that has not yet translated into specific words on a page in a proposed bill that address the issue. I think this is something that is certainly working hard with the other utilities and other stakeholders to advocate strongly that this is something that will be really good to work on this year in this session. But I think as I said all along, it'll take time throughout the session and there might be some pieces that even spill over into the following session. At this point, though, it's just too early to comment on any one bill or what the vehicle would be that could end up getting amendments that could address the issue, and it's just something we're working and live radio every day in Sacramento.
Okay. Thank you both. Have a great day.
You bet. Thanks, Greg. Appreciate it.
Thank you.
Thank you. Our next question on the line comes from Julien Dumoulin-Smith from Bank of America. Your line is now open.
Hey. Good afternoon.
Hi, Julien.
Hi, Julien.
Hey. So I wanted to follow up here on the conversations. I understand they may be confidential with respect to the Round Fire, but just a little bit more of the context behind why move forward on the path to settle at this point in time given some of the various avenues that this could take from an inverse condemnation perspective. Is there something that differs with respect to the Thomas Fire and others that perhaps might not be obvious at the same time?
No, Julien, it's a good question and I think you got it right, right at the ear. The first part of the question, there's probably not a whole lot we can offer in terms of comment. Really, what I can say and, Adam Umanoff, our General Counsel, can do clean up here, if there's anything else that he would add. But all of these are very case specific, in particular, what we believe that the concerns about the application of inverse condemnation with strict liability, that's something that's cost-cutting. And you'll see the same theme show up, I believe, in multiple cases across the various utilities, right? You're seeing it in PG&E cases. You'll see it in our cases.
The circumstances that might lead to discussions among the various parties in any given case, those are pretty case-specific. So suffice it to say that in the case of Round Fire, there's a number of parties involved. There has been interest in having discussions that could lead potentially to a mutually beneficial outcome, may or may not, is about all I can say about that one, but it made sense to ask the courts to delay the date as you saw in our comments here to see whether in this specific case, it makes sense to consider a resolution or not.
Regardless of that, again, you will see us press hard on the topic, not only legislation in Sacramento per Greg's question, but for your question, you'll see us push it hard in Court cases in any and all of these fire-related cases wherever courts are applying inverse with strict liability. That's common. But certainly, we believe that the facts in general are strong. The facts are very strong in the Round Fire case, and so it was an issue about – that's an issue about the key specifics in this particular one where it might make sense to continue some discussions with parties confidentially. And Adam's giving me the eye sign that nothing to add. Okay.
All righty. Excellent. I'm sorry, were you going to add something?
No. Does that make sense?
Yeah. Indeed. I'll leave it there. And then secondly, if I can follow up on the WEMA side of things, can you elaborate a little bit on what is in the filing beyond insurance and how you think about that potentially over the next few years, and as well as kind of the inflation factor you're seeing on insurance as you look to gain recovery on that? And how to think about the magnitude and the potential to get recovery in future years?
Let me kick start this one and Maria or Adam or others may want to add. We see a number of costs potentially coming down the pike, leading with new insurance costs. So that's how we thought it was prudent and timely to make the request on the WEMA case. And in that one, in our filing, we requested that the effective date be the date of filing, again because we expect that there may be decisions coming down the pike shortly around insurance that would merit having that avenue to start recording costs right away.
So that deal becomes a vehicle that provides an avenue for a broader set of potential recovery items. In terms of the insurance market, I think Maria put this up in her comments, but without commenting to any specifics, certainly the data point that you saw around the $121 million premium or the $300 million tranche that we entered in December was a strong sign that this is a market that continues to tighten, both in terms of the pricing, as you saw from that data point, as well as this general availability.
So we continue to see that headwind ahead in terms of insurance. And therefore, I have a pretty strong expectation that the costs that we see ahead of us will likely exceed anything that we put into our 2018 General Rate Case filing back before this round of wildfires. And therefore, it's prudent to have the WEMA vehicle open. Maria, Adam, anything to add?
So there are a few things that we included in our WEMA request, Julien, around not just the insurance claims, but – I'm sorry, the insurance premiums, rather, but also payments to satisfy claims. We also included legal expenses associated with all of that, also financing costs because as we are incurring additional costs, we might have additional financing expenses as well. So we had that as a sort of broad range of items that we included in the WEMA. As Pedro pointed out, obviously the reason we asked for the WEMA to be effective as of the date of application is because we do see insurance costs continuing to be robust and in excess of what we have requested in our pending GRC. So, we did think it was important for us to make that request of the timing as well.
Right. But what's the pace of inflation, sorry, to clarify, if you kind of look at it and layer in incremental tranches?
So, we're out in the market right now and that wouldn't be, I think, the best thing for us to be talking about. We still have some numbers we need to get back from carriers.
Thank you all.
Thanks, Julien.
Thank you. Our next question on the line is from Jonathan Arnold of Deutsche Bank. Your line is now open.
Good afternoon, guys.
Hi, Jonathan.
So, one question I was going to ask, just a housekeeping item on the parent. Are you still expecting that kind of $0.25 to $0.30 ballpark for the year as the right zip code, and anything to say about profitability or kind of progress towards breakeven, et cetera at EEG?
So you'll see as you go through the slides that we provided that we have said again that $0.25 to $0.30 is parent company drag. We're still working EE towards a breakeven run rate by the end of 2019. That's pretty much included in that quarter as well, Jonathan.
No change there? And then just sort of mechanically with the WEMA application as it pertains to the insurance, obviously, you started booking the additional expense. But if successful – if it's granted, would you then end up deferring the incremental additional or would that include the $300 million coverage piece that was – I guess, predated the application? Just help us understand the mechanics of, if they grant that or not.
Sure. So the $121 million premium that we incurred last year, towards the end of last year, that's really covered in our Z Factor filing. So that's the recovery mechanism for that. The WEMA would be the recovery mechanism for insurance premiums going forward that are incremental to what's in the GRC, as well as some of those other categories that we've requested that I mentioned in response to the earlier question.
Okay. Great. And then just on the question of the legislature, we've obviously seen I think probably more activity going on in the Senate. And then there was the initial statement from the Governor back, I guess, in the middle of March now, Pedro, as you referenced. Has the administration sort of continued to be engaged on this? Because when they laid it out originally, they talked about a particular committee sort of taking the lead which doesn't seem to have done much. And in the meantime, these other committees have all been kind of busily moving the bill, as you mentioned, along. I was just curious, like do you think things are going to emerge more in the Senate? Is the assembly going to come into this late in the game? And where does the administration stand in your current estimation?
Yeah. Jonathan, I would say that all three of those bodies – the Governor's Office, the Senate, and the Assembly – are very engaged at this point. And obviously, there's roles that each play. Ultimately, any bill before becoming law needs to have Senate and Assembly versions, and it needs a signature from the Governor. And so I'll just say that I think all the relevant parties are involved. There's a sequency thing, and any one week you might see committee meetings on the Senate side and another week where you see committee meetings on the Assembly side, and discussions that take place in between but folks are engaged.
So your comments about that sort of subsequent to the sort of mid-March statement, that's still the continuing dialogue?
Yes, absolutely there is continuing dialogue. And not just with us, I mean, I think the Senate, the Assembly and the Governor's Office are talking, not just with utilities but they're talking with a lot of different parties. So remember, they're not just trying to solve the utility liability issue, they're seeking to solve the entire statewide issue, and we support that. I mean, you could – we're not just running a utility here, we're also residents of California. We want to see the state get this right. As a resident of the state, I need to see them also deal with prevention and deal with hardening of infrastructure and deal with all the things that the Governor and the legislative leaders outlined along with the utility liability piece. In the context of that, you're engaged with labor and you're engaged with environmental groups, you're engaged with their government agencies or expert in fires and forest management, and that's really critical and we see a lot of activity taking place. As with anything that involves the complexities of the legislature, and it is hard what these folks do, I can't guarantee any specific outcome but very encouraged that they are so engaged at this stage of the process.
And you did repeat your comments from last quarter that you could see some of this sort of still into next year, but I think I'm sensing you sound a little more upbeat than you did then perhaps, but that predated the Governor. So am I correct there?
Jonathan, I think the best way I can answer that and probably this will be a little bit of a non-answer, but I continue to be – I think we continue to be encouraged by the level of engagement. And I think there's a lot of focus on addressing this in an urgent way. I think since our last call and seeing that statement from the Governor, they've talked about doing things urgently. At the same time, we've all been around the block and recognize this complex stuff and there's a lot of pieces to this. And from a – making sure that we're just giving our investors perspective that are right down the middle of the fairway. I'm not going to guarantee that the A, B, C and D are all going to get done in 2018 or that C might slip into 2019. It's just too early at this stage of the process to be making comments about this one feels more likely than that one. What I can tell you, and I think it's consistent with before, just this time supported by more data points three months since the last call, we continue to see data points every week of the right conversations happening and the right folks engaged.
Perfect. Thanks, Pedro. Appreciate it.
Yeah. Thanks, Jonathan.
Thank you. Our next question on the line is from Christopher Turnure of J.P. Morgan. Your line is now open.
Hello?
Hello? Laurence, we may have lost him. You want to maybe try again?
Can you guys hear me?
Now, we can.
Now, we can.
All right. Sorry about that. Maria, you had talked about the Z... [Technical Difficulty] (40:12)
We did lose you again in case you can hear us.
One moment. Let me get Mr. Turnure back on the line. Mr. Turnure, you may now state...
Sorry. Can you guys hear me?
Yes.
Okay. So I'll try again here. The Z-Factor is the recovery method for the insurance premium from late last year and then future purchases would go through the WEMA account. Could you maybe step back, Maria, and give us a sense as to how historically insurance purchases had been recovered and what the plan is if you ultimately do not get approval for any of these premiums?
So historically, insurance premiums have routinely gone through our General Rate Case process. We have a program. I think you may have heard previously, typically June to June, it's part of the process. It's one of the costs that we include when we file our General Rate Case and we recover it that way. It has not been the case that – we have seen increasing wildfire insurance costs over the years, but they have been times in such a way that they fit into our General Rate Case process.
The Z-Factor filing is a process that is designed to accommodate costs that were effectively unforeseeable at the time that we filed our General Rate Case, so in this instance, a cost that was unforeseeable at the time that we filed our 2015 General Rate Case. We think it's very obvious that this cost is unforeseeable and that the impact of wildfires and climate change and increasing frequency and intensity of fires that's impacted the market and so we filed that. The process there is $10 million deductible, it's part of the FERC jurisdictional, and then the balance is requested from the CPUC. That balance was about $107 million.
The WEMA application is really about – it's effectively the Wildfire Expense Memorandum Account. That account – that process is – we've asked to establish the WEMA. We've asked it to be effective as of the date that we made the application. Doing it that way and getting approval of that timeframe would then allow us to incur additional or incremental wildfire premium costs above what's in our GRC and still be able to recover them without question around retroactive rate-making. That process – the different process in the Z-Factor, the Z-Factor is an advice letter, the WEMA application is an application.
We have been recording the premiums that we incurred last year because while we have some experience with the Z-Factor, we don't have anything that's exactly on point with this particular application. So no precedent in terms of using it, no precedent about wildfire insurance, and so you know that we have been recording the expense. It's been running through the P&L. We do think that we have very strong arguments in both the Z-Factor application and the WEMA application – the advise letter, rather, and the WEMA application that support approval of this. We'll have to go through the process to see whether or not the CPUC – when they act on it and what the answer is, of course.
Okay, great. That's a very comprehensive answer. I appreciate the detail on that. My second question goes to the judge's decision in the Butte Fire case from, I think, a week or so ago. That decision kind of talked about a number of factors, but clearly the CPUC decision from late November was not enough to get a change of opinion there and it seemed to defer to, precedent from higher courts as really the thing to lean on and the judge did not want to kind of overstep his bounds there. I was wondering if you can give us any kind of legal thoughts around there and any kind of read-throughs to your processes.
Probably the short way to describe it is I think this was an expected result at the trial court level. I think it has been a view that cases like this ultimately, regardless of whether the trial court level judgment is for or against, these cases likely end up in the appellate courts. And so, in that sense, I don't think it was necessarily surprising. I think the judge in the Butte case, in the tentative ruling believe that some of the prior cases, Barham and Pac. Bell applied here. And, as you said, they didn't see the CPUC decision on the San Diego WEMA creating a distinct situation. But I think the judge is basically pointing to the appellate court system in terms of some of the fundamental arguments that PG&E laid out. And so this is, I think, just a waypoint along the road. Adam, is there anything you would add or correct in that?
I mean, one comment I'd make – it's Adam Umanoff, the General Counsel – is this judge said, listen, if it's a policy issue look to the legislature to solve the policy concern. On the constitutional claims, I'm not going to make a decision. I'm going to follow past precedent and leave it to, as Pedro said, the appellate courts to make a decision on those constitutional claims. Expected, and there's now an opportunity to appeal to an appellate court the decision of this trial judge.
Okay. And anything within the decision that would slow the process maybe versus your expectations going in of the appeal?
Well, there's – you typically take a writ to appeal a decision like this to an appellate court, and that writ can be granted or denied by the appellate court. One of the factors in this case is the judge asked the parties whether or not this legal question should be certified as appropriate for an appeal. We'll see what his final ruling is. But if he does that, it won't bind an appellate court to accept the appeal, but it sort of improves the likelihood that that will happen. So there's a prospect that we may at least get an appellate court to hear the issue. Uncertain. We don't know until we see this judge's order and we see what decision is taken by an appellate court to hear an appeal.
And my layperson's understanding of that step by the judges is it's typically when you see cases being appealed, you get the party that did not prevail advancing that appeal. Here you have the judge in a sense making comments about the appropriateness or value of an appellate court considering the matter. So it's a little level of emphasis on it.
Agreed.
That's the legal view from the guy who did not go to law school.
Got you. And that sounds perhaps, at least directionally, better than an alternative to that.
Exactly.
Perfect. Okay. Thank you, guys, very much.
Thank you.
Thank you. Our next question comes from the line of Shar Pourreza from Guggenheim Partners. The line is now open.
Hey. Good afternoon, guys.
Hey, Shar.
You touched on actually most of the questions, but just real quick one on the investigation that you're sort of conducting. I understand that you obviously can't predict when it'll be completed. But sort of as you think about the process, what like phase in the process are you at? And sort of as you complete the investigation from a timing perspective, is it something you would release before CAL FIRE investigation results, or would you wait for CAL FIRE to come out prior to your conclusions?
There's probably not a lot we can comment on there, although on that last point, it's pretty safe to say that we would want to wait and see not only what CAL FIRE's view, but potentially the views of some of the other parties investigating the matter. But I think as a general statement, particularly in cases like this that has some complexity to them, they're all different, there isn't a cookie cutter as to the process necessarily or what the phase we're in, et cetera. Some level, still early days. We know, because we haven't seen a CAL FIRE report, that that investigation is continuing. We understand that the CPUC Safety and Enforcement Division is doing their investigation. We understand Ventura County Fire is doing theirs. We continue to look at information in terms of our investigation. So, a long-winded way of saying probably not a whole lot we can help with in terms of providing information or expectations on timing at this point, Shar, which I apologize for that, but it just is what it is.
No, it's okay. And then I'm just going to ask one more and I'm sure you're going to not be able to answer this one. But I know the timing question around legislation has come up a little bit and...
Yeah.
...it's very difficult for you to sort of assess when and what legislation. But when you sort of think about the bid-ask on sort of what you guys want versus a worst-case outcome, the amendments around 1088 seems somewhat restrictive and not highly constructive. And I actually argue that some of your prepared remarks may have been a little bit more cautious than I've heard before in the past, outside of sort of mentioning the governor's bipartisan support, i.e. comments. I mean, is it – given where we are in the year, I mean, it seems very maybe unlikely that you'll see something from a legislative standpoint get enacted, and is it something that we're likely going to see into next year? I mean, this is – it's been on everyone's minds and I know it's...
No. I know. I know. Although, it's funny, Shar, it sounds like Jonathan was reading my comments as more optimistic and you're reading them as more conservative. So I'll get you two in a room. But no, look, the intent of the prepared remarks and, hopefully, all you hearing us answer in this live Q&A, is really down the middle of the road. It's May 1 in a session that extends to August, on a matter that's very complex and it involves not just the utility liability piece, but all the other pieces that I was mentioning earlier. I'm not trying to signal any specific read left or right here, trying to be pretty transparent about – very encouraged that folks are engaged, right?
Just to be blunt and honest about it, three months ago we probably didn't know what level of engagement we'd be seeing at this stage. So, we're seeing good engagement. We're seeing supportive comments from the governor and legislative leaders. We're seeing a lot of folks discussing this in Sacramento. That's very encouraging. It's certainly very feasible that we could have legislation in this session, that certainly could be the case.
At the same time, it's complex. It's only May. August is a long ways away. And so I also don't want to paint an overly rosy picture here because we just don't know. A lot that still needs to be worked out. There's legislators' work, not only with utilities, but all the other stakeholders that are engaged on this. So I'm sorry, I don't think I gave you any new information there other than trying to strip all the color out of it and give you a sense of just really trying to paint a picture that's down in the middle of the road.
Hey, it's worth a shot. And then just lastly on your past renewal of maintaining and supporting the dividend, can you at least confirm that maybe part of that decision could've been based on your own internal investigation or is that – it's not somewhere you want to head?
I think when we talked about this – the common dividend issuance in the last call, we said that our board looked at a broad range of potential negative outcomes, that we certainly had homework going on at that time. And that homework includes every scrap of information that we had at hand at that point, including that statements that folks made and our own view of investigation, our own view of, again, not just investigation in the sense of what's the expected case or what's the more likely outcome. We deliberately used the words broad range of potential negative outcomes to communicate that I think our board was not necessarily hinging on this is where the midpoint is or this is an expected outcome. They looked at a broad range that was colored by everything we knew at that point. So, that's probably about as well as I can answer that.
Thank you very much. That's helpful. Thanks, guys.
You bet. Thanks, Shar. Take care.
Thank you.
Bye.
Thank you. Our next question comes from the line of Michael Lapides from Goldman Sachs. Your line is now open.
Hey, guys. Thank you for taking my question.
Sure, Michael.
Hi, Michael.
Just curious about the balance sheet, both at the parent level and the SoCalEd level. How much incremental capital spend do you think the parent balance sheet and the SoCalEd balance sheet could take if some of these things come through, meaning the incremental hardening to protect for future wildfires and significant electrification spend, and let's say you get your rate case passed. I'm just trying to think about how much could you actually spend on the capital side and grow rate base without necessarily needing external financing up at the parent?
Michael, it's Maria. So I think back when we first filed the General Rate Case, the 2018 General Rate Case and we had the request out there, we did say that we were able to absorb that with the existing balance sheet. I think that as we move forward in time, we have identified a number of other opportunities and the size of which is yet to be determined, frankly, because we are still going through the process on the medium and heavy duty TE application. We only have a PD there at this point. We haven't filed our Phase II Charge Ready application yet. But as Pedro mentioned, we're looking at that and what the size of that should be in light of the Governor's order around the 5 million electric vehicles and our view of the need for 7 million electric vehicles on the light duty side going forward.
So there are a number of other opportunities out there that – and you mentioned a few as well, the hardening of the infrastructure and the response to increasing wildfire risk. We have things that we talked about in the past as well, storage opportunities and the like. All of which are in support of the climate policies in California. I think at this point in time, first we'd have to size that basket of opportunity and get PDs or final decisions on those before we could really comment on the sort of balance sheet impact that that would have, because you line them all up, there's a lot of opportunity out there. We have to see, one, where the quantum is, and then over what time period the investment would be made because that's also a pretty important factor.
Yeah. That last point, I'd just like to put an accent on that because it's, I think, easy to focus on big headline numbers in terms of potential opportunity. But a lot of these, particularly the programs that are incremental that are not included in our General Rate Case, have a rose to them, right? And it's all about helping us to get to that 20%, 30% mark on greenhouse gas reduction. So there's a longer timeline to those that can also be part of managing the equation.
How do you think about how much in terms of – how do you think about how much potential wildfire-related costs if you start settling claims you could absorb knowing that there's likely going to be a little bit of regulatory lag before recovery would begin, before you would need incremental financing debt or equity up top at the HoldCo?
When we had our fourth quarter call, I think you may remember that we talked a lot about – or a little bit anyway, about sort of the balance sheet and the flexibility that we have. There is an impact, obviously, we see some reduced cash flow as a result of the SONGS settlement should be proved, and that impact as well as obviously the elimination of bonus depreciation, it has a casual impact. So there are a lot of moving pieces, Michael. I think that we would have to see what all of those pieces were and at what point in time each of them occurs back to the timing impacts. The timing differences or the timing of some of these outcomes or decisions actually does make a difference.
It's – and I think, Maria, you said this towards the tail end of your comments of how we are seeing the benefits of having been able to approach these storms with a strong balance sheet, and so that just give us a level of flexibility as we think about those impacts that will be different if we had been – had not been a stronger balance sheet as we went into it.
Got it. One last one. A totally different topic. There's a lot going on in California and a lot of it is related to things that would help reduce greenhouse gas emissions. And obviously, the renewable build continues unabated out there. Just curious, when do you see or when does the ISO see this potentially requiring a significant uptick again in transmission investment? It feels like the word transmission and investment are a little bit on the quiet side right now in California. But I know how the cycles work and eventually, that cycle will retake off somewhere down the road.
Yeah. That's something that the ISO, I think, will continue to study. Their last version of the transmission plan for the state, I think, acknowledged that it wasn't fully baking in the need for 50% renewables by 2030, for example. So that's homework yet to be done. So I think the short answer to that is stay tuned. At the same time, though, I think that the mix of resources we'll see across the state to serve that 2030 mark will be a very different mix from the mix we would've all guessed if we were doing this 10 years ago. It won't all just be all power, it won't all be just generation. You saw in the clean paper that SCE released end of last year that we see the state in order to meet the greenhouse gas reduction targets while at the lowest possible cost. We see it needing to rely on a pathway that's using 80% carbon-free resources, and in order to balance that which would mean a lot of renewables – not all of that 80% will be renewables but a lot of it will be. We see that needing a fair amount of storage to balance that out.
So I'll just say to point out that, whereas, if we were solving this 10 years ago, the answer would have probably been pretty quickly, it's just mix of renewables and gas-fired plants and those are all the options, and they all happen in the bulk power and you need transmission for all of them. I think in this new world we're headed into over the next decade, some of it may be that, but probably more of it will be distributed and a lot more of it will be storage than before, and that's going to alter how I think ultimately the ISO views the transmission need. So that's the long-winded version of saying, stay tuned.
Got it. Thank you, Pedro. Thank you, Maria. Much appreciated.
Yeah. You bet, Michael.
Thanks, Michael.
Well, Sam, I think we've come down to the bottom of the hour here.
Yeah. So we just want to thank you for joining us today, and please call if you have any follow-up questions. So that's going to conclude our call this afternoon, and thanks for dialing in everyone.
Thanks.
Thank you. And that concludes today's conference call. Thank you very much for your participation. You may now disconnect at this time. Have a great day.