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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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 2019 Financial Teleconference. My name is Michelle and I'll be your operator today. [Operator Instructions] Today's call is being recorded.
I would now like to turn the call over to Mr. Sam Ramraj, Vice President of Investor Relations. You may begin, sir. Thank you.
Thank you, Michelle, 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 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.
Thank you, Sam. Before I begin my business remarks, I want to pause to mourn the loss of one of our directors, Ellen Tauscher, who passed away last night. Ellen accomplished so much: she was one of the first and youngest women, at 25, to hold a seat on the New York Stock Exchange; a talented Congresswoman who built bridges across the aisle; a nuclear arms nonproliferation leader who truly made all world safer; a thoughtful director on the boards of multiple companies and national labs; an unstoppable cancer survivor who then led national efforts to help others; an inspiring mother for her daughter Katherine; and above all a deeply caring individual whom I, and all of us at Edison, will miss deeply
Well, knowing Ellen, I can sense that she's hearing me and smiling from a better place, but also telling me to get back to work, so let me turn to our quarterly update. First quarter core earnings were $0.63 per share, which was $0.17 below the first quarter last year, largely driven by increased wildfire mitigation costs. As we’ve mentioned before, year‐over‐year comparisons are not particularly meaningful because SCE did not receive the proposed decision in its 2018 General Rate Case until April 12th of this year.
Since our policy is to account for a regulatory decision in the period in which it is received, SCE recognized revenue from CPUC activities for both the first quarter 2018 and 2019 largely based on 2017 authorized base revenue requirements, with reserves taken for known items, including the 2017 cost of capital decision and tax reform.
If adopted, the GRC PD would result in base rate revenue requirements of $5.1 billion in 2018, $5.4 billion in 2019 and $5.8 billion in 2020. This is lower than our request. The primary drivers are lower depreciation; capital authorization lower than requested levels in the areas of infrastructure replacement, grid modernization and corporate real estate; and reductions in operating expenses for incentive compensation. Maria’s remarks will cover the proposed decision in more detail, our financial performance for the quarter, and other financial topics, but let me first give you a few policy observations.
We have reviewed the GRC PD carefully and have serious concerns in a few areas that will further erode the California regulatory framework if not corrected. First, there are several areas where the PD attempts to shift standard cost of service items unfairly to shareholders. Also, over the past 15 months, we’ve managed our business in the absence of a GRC decision. That required us to make pragmatic choices for expenditures and programs based on our assessment of the most effective way to deliver safe, reliable and affordable energy to our customers.
Receiving a very late proposed decision that does not acknowledge this is truly challenging. There are critical principles at stake and our comments will focus on the need to ensure a durable and predictable process, one that leads to timely decisions and gives us sufficient guidance and assurance of cost recovery for reasonable management decisions.
Turning to the California wildfire crisis, we first remain focused on mitigating catastrophic wildfire risk and impacts on our communities. Governor Newsom has recognized the need for urgent action, and initiated steps to strengthen California’s emergency preparedness and response capabilities, and build community preparedness and resilience.
Importantly, the Governor recently declared a state of emergency and directed his administration to expedite forest management projects to protect California’s most wildfire vulnerable communities. Governor Newsom also announced additional funding for public awareness campaigns to inform residents about local emergency action plans, aircraft acquisitions for firefighting, improved evacuation planning, and technology upgrades for fire prevention, preparedness, and response.
The Governor’s April 12th strike force report was comprehensive in addressing the key areas related to wildfire risks and issues, climate change and California’s energy sector. The report sets out a roadmap to reduce the incidence and severity of wildfires, renews the State’s commitment to clean energy, and outlines actions to hold utilities accountable for their conduct related to wildfires. The report acknowledges the important role of California’s investor owned utilities play in helping the State meet its clean energy and greenhouse gas emission reduction goals, and identifies potential measures to ensure the financial health of IOUs.
The strike force report notes that any successful approach for allocating wildfire cost responsibility among stakeholders should be based on several principles, including maintaining safe and affordable power, treating wildfire victims fairly and requiring equitable stakeholder contributions. The report also acknowledges the uncertainty surrounding cost recovery of wildfire liabilities, including the significant liquidity impact this can have on a utility. This uncertainty can, and has, resulted in lower credit ratings and higher financing costs, which in turn leads to higher rates paid by utility customers.
We are encouraged by the broad scope and sense of urgency of the Governor’s strike force report. It appropriately reflects the need to address wildfire liability through legal and regulatory reform, the need to restore confidence in California’s regulatory compact, and the importance of financially healthy IOUs to support the State’s policy goals.
Governor Newsom has pointed to the Commission on Catastrophic Wildfire Cost and Recovery as an important implementation vehicle. SB 901 tasked this Commission with making recommendations to the legislature on the equitable distribution of catastrophic wildfire costs and damages. In its first three meetings, the Commission heard testimony on several topics, including climate risk, CAL FIRE’s prevention efforts, customer rates, the existing wildfire liability regime, the state of the insurance markets for utilities and homeowners, utility risk financing options, and community needs around wildfire damages.
The Commission held its fourth meeting yesterday and established three work groups to assess: first, utility wildfire liability and cost recovery standards; second, a wildfire fund and/or other funding mechanisms; and third, homeowners’ insurance availability and affordability, and household and community wildfire mitigation and protection. The Commission is expected to submit its final report by the statutory July 1 deadline, or sooner, as requested by the Governor.
On the judicial front, we continue to challenge the application of inverse condemnation in the courts. We’ve pending motions challenging inverse in two cases arising out of the Liberty Fire. We argue that the fact that an IOU cannot broadly socialize costs runs directly counter to the rationale underlying the application of inverse condemnation.
Whatever the ultimate vehicle, whether executive, legislative, or judicial action, we believe three major components are needed in a comprehensive statewide plan: The first is enhanced prevention. We continue to reduce the risk of electrical equipment igniting wildfires and go beyond long‐standard industry practices to address the new conditions we are facing. This includes hardening the grid to significantly reduce potential fire ignitions; bolstering situational awareness capabilities; and expanding operational practices such as enhanced overhead inspections, vegetation management and emergency response protocols. We’ve detailed our actions in several recent SCE regulatory filings. We are also expanding the use of public safety power shutoffs when high wildfire risk conditions warrant targeted circuit shutdowns to protect the safety of our communities.
The second component reestablishes a fair regulatory compact for IOUs to recover prudently incurred costs in rates. A new framework must directly connect cost recovery following a wildfire to compliance with objective standards like the CPUC‐approved wildfire mitigation plans. If an IOU complies with its approved wildfire mitigation plan, the CPUC must find the company a prudent operator for purposes of cost recovery to remove financial uncertainty and support investment grade credit ratings.
Compliance with an approved wildfire mitigation plan is an appropriate standard to judge a utility’s wildfire risk management and mitigation operations, since perfection is an unreasonable and unrealistic standard regardless of the industry in question. In the Wildfire Mitigation Plan proposed decisions issued yesterday, the CPUC interpreted their ability to do this under existing legislation more narrowly than we would.
The Legislature should clarify that the CPUC should deny cost recovery for utility wildfire claims only if a utility’s non‐compliance with its wildfire mitigation plan was a significant cause of a wildfire and its damages, and any such denial should be in proportion to the non‐compliance’s contribution to damages relative to other factors that contributed to the wildfire and its impacts. A similar standard led the State and its utilities out of the Energy Crisis through AB 57, passed by the Legislature and enacted into law in 2001. Such a framework defining prudency through compliance with a detailed plan approved by the CPUC is a necessary component to restore the regulatory compact on a go-forward basis.
The third component is a viable wildfire cost recovery fund covering third‐party property damage in excess of utility insurance with broad risk and cost sharing. A fund would benefit property owners by providing relief quickly and with more certainty. SCE and other electric utilities play a key role in helping the State achieve its ambitious climate change and other environmental goals, while providing safe, reliable, affordable and clean energy service to customers. Investor‐owned utilities must therefore remain financially healthy to attract capital and invest in the important infrastructure needed for this essential role.
Related to that, SCE submitted its CPUC cost of capital application and an updated FERC return on equity filing earlier this month. In both proceedings, we are requesting a 6% adder to compensate investors for risks related to wildfire liability and significant regulatory uncertainties. I want to be clear, we do not consider this wildfire‐related increase to be a long‐ term solution. This is not an efficient or effective way to resolve the wildfire issue. It is a temporary necessity until the State implements a comprehensive solution that addresses wildfire risk.
In the CPUC cost of capital application, SCE is also requesting changes to its authorized capital structure to increase its common equity to 52% from 48% and reduce its preferred equity. The change will bring SCE more in line with other utilities in California and in other jurisdictions, which is especially important in the current business environment.
To address these capital structure changes and the ongoing, significant needs at SCE for infrastructure replacements and enhancement, we are implementing a new financing plan at EIX. This includes an at‐the‐market, or ATM, program. Between that and turning on internal programs, we plan to issue up to $1.5 billion of EIX equity to fund the increased equity layer at SCE. This will be the first EIX equity issuance since 1993; since that time our rate base has essentially tripled while our system average rate has grown less than the rate of inflation. We do not take new equity issuance lightly and believe that SCE’s growth opportunities to support California’s clean energy pathway merit this constructive step to optimize our capital structure. Maria will address this plan in more detail.
Let me now turn to updates on the December 2017 fires; there are no significant updates on the 2018 events. As we have mentioned previously, we believe the evidence shows there were at least two separate ignitions that led to two fires that together we have referred to in the past as the Thomas Fire, one in the Anlauf Canyon area and another near Koenigstein Road.
The Ventura County Fire Department, or VCFD, and CAL FIRE released a joint report on March 13 regarding the origin and cause of the fire that ignited in Anlauf Canyon, which they, and now we, are referring to as the Thomas fire. We will continue to refer to the fire that resulted from the Koenigstein Road ignition as the Koenigstein fire. In their March 13 report, the two agencies concluded that the Thomas fire was started by SCE power lines coming into contact during high winds, resulting in molten metal falling to the ground. However, the report does not state that molten metal was found on the ground in that location during their investigation.
SCE has been unable to determine that the ignition of the Thomas fire involved SCE equipment. In fact, SCE has evidence from publicly available radar data, which shows smoke in the air, that the ignition of the Thomas fire started at least 12 minutes prior to any issue involving SCE’s system, and at least 15 minutes prior to the start time indicated in the March 13 report. SCE believes the Thomas fire was independently responsible for a portion of the damages from the Thomas and Koenigstein fires.
On March 20th, VCFD and CAL FIRE released a report finding that SCE equipment was the cause of the Koenigstein fire. The company previously disclosed, in October of 2018, that witnesses reported a fire ignited along Koenigstein Road near an SCE power pole, and SCE believes its equipment was associated with this ignition. These two investigative reports do not provide a final resolution as to cause or responsibility. The courts will ultimately need to make that determination after a full review of all the evidence.
Let me conclude by saying that the safety of our customers, communities and employees is our top priority and a core value of Edison. Our employees work vigilantly year‐ round to strengthen our system and protect the public and themselves against a variety of natural and man‐made threats, under all working conditions. We are taking substantial steps to reduce the risk of wildfires in our service territory and continue to look for ways to enhance our operational practices and infrastructure.
We are also actively engaged with State leaders on comprehensive policies to collaboratively address statewide wildfire risks and establish a durable financial and operating framework for utilities. At the same time, we continue to invest in grid hardening and resiliency, as well as the other capital programs that support California’s world‐leading clean energy goals. We also continue our relentless focus on improving our operational execution capabilities across the board.
From our ongoing work to strengthen our safety culture, to our bridge funding program building out electric vehicle charging infrastructure, to improved technology driving more streamlined customer interactions, to promising work applying machine learning to our smart meter data to detect downed wires within minutes, we will not lose sight of the many important aspects of our business. While we are keenly focused on mitigating wildfire risk and reestablishing sound policy, these other elements are the foundation of our business for the long-term, and we will continue to deliver on them for both our customers and our investors.
With that, Maria will provide her financial report.
Thank you, Pedro, and good afternoon, everyone. My comments today will cover first quarter results for 2019 compared to the same period a year-ago, plus comments on the proposed decision in our General Rate Case, our updated capital expenditure and rate base forecasts, and other financial updates for SCE and EIX. As we’ve said, year-over-year comparisons are difficult given the timing of the GRC. Through the first quarter, we continued to recognize revenue from CPUC activities largely based on 2017 authorized base revenue requirements with reserves taken for known items including the 2017 cost of capital decision and tax reform. SCE will account for the impacts of the final decision in the 2018 GRC in the period in which that decision is received.
Please turn to Page 2. For the first quarter 2019, Edison International reported core earnings of $0.63 per share, a decline of $0.17 from the same period last year. From the table on the right‐hand side, you will see that SCE had a negative $0.20 core EPS variance year‐over‐year. There are a few items that account for the bulk of this variance.
To begin, higher revenues had a positive impact of $0.08, including $0.06 at the CPUC and $0.02 at FERC. Higher CPUC revenues primarily relate to customer refunds in 2018 for prior over‐collections, and incremental return on rate base recorded through the pole loading balancing account. FERC revenues were higher primarily due to higher operating costs
There was a negative impact of $0.18 due to higher O&M primarily due to wildfire mitigation costs, including enhanced overhead inspections and other preventative maintenance costs. Through our grid safety and resiliency program and 2019 wildfire mitigation plan filings, we’ve regulatory mechanisms in place to track and request recovery of these increased costs.
Through the course of the year, we will begin to defer incremental costs associated with wildfire mitigation, but this will not occur until the costs incurred exceed the total authorized in the GRC. The timing of the expenditures and the point at which the deferrals begin drives year‐ over‐year variances. I will speak more about this in a few minutes. Finally, we had a negative impact of $0.07 from higher financing costs due to increased borrowings and higher interest expense on balancing account over‐collections. For the quarter, EIX Parent and Other had a positive $0.03 core earnings variance due to lower corporate expenses and lower losses at the competitive business.
Please turn to Page 3. As Pedro mentioned earlier, we received a proposed decision on our 2018 GRC on April 12th. The PD, if adopted, would authorize $5.1 billion in 2018 revenue requirement, which is $432 million or 7.8% lower than our request. A significant portion of the reduction, or about $150 million, is associated with the recover -- recovery of lower depreciation expense.
Additionally, approximately $100 million is related to O&M reductions in incentive compensation for our employees and executives, a reduction that we’ve experienced in prior GRCs as well. The third driver of the revenue requirement reduction is related to the lower capital authorized by the PD. If the PD is adopted by the CPUC, SCE’s revenue requirement will increase by $320 million in 2019 and an additional $401 million in 2020.
The PD also identifies changes to certain balancing accounts, including the expansion of the Tax Accounting Memo Account, or TAMA, to include the impacts of all differences between forecast and recorded tax expense. The PD would also disallow certain historical spending, largely related to a number of infrastructure replacement programs and corporate real estate. I will address capital spending and rate base in a moment.
We will be filing formal comments on May 2. As Pedro noted, we have significant policy concerns in a few areas and are conducting meetings with the Commission to discuss these concerns. Slide 4 has a summary of the key topics that SCE will be addressing when we file comments in a few days.
Please turn to Page 5 for SCE’s capital expenditures forecast. The capital expenditures forecast reflects the proposed decision as well as other capital spending needs. The GRC PD approved CPUC capital spending of $2.8 billion for 2018 compared to our request of $3.6 billion. Overall, the PD authorizes 86% of the traditional capital expenditure programs and 34% of the grid modernization capital relative to our request.
As we’ve mentioned before, as we waited for the GRC decision, we developed our capital expenditure plans to meet our business objectives while still maintaining flexibility. Specifically, these plans allow SCE to execute its capital spending program over the 3‐year GRC period, that is 2018 through 2020, to meet what is ultimately authorized in the decision while minimizing the associated risk of unauthorized spending. We believe we will be able to reasonably balance our total capital spending over this timeframe.
We also have significant capital programs outside of the GRC, particularly related to wildfire mitigation. In 2019, we’ve approximately $350 million of wildfire‐related spending as discussed last quarter. For 2020, we expect wildfire mitigation capital expenditures in a range of $500 million to $700 million. We have approved memo accounts to track these costs and have requested a balancing account for our GS&RP spend. To the extent not recovered through balancing accounts, we expect that wildfire mitigation spending will be addressed in future GRCs.
On Page 6, we’ve updated our rate base forecast to reflect the 2018 GRC proposed decision. The PD proposes 2018 CPUC GRC‐jurisdictional rate base of $22.6 billion. This corresponds to total 2018 rate base of $28.4 billion. We expect to update the forecast when we receive a final decision. I would note that our current rate base forecast does not include any of our wildfire mitigation‐related capital spending.
On Page 7, you will see our financial assumptions for 2019. We will provide 2019 earnings guidance after we get a final decision on the GRC. In the meantime, we have laid out some additional information for your consideration as you model 2019 and beyond. This includes “Other Items” that reflect some considerations outside of the simplified rate base model and are noted in the bottom right hand side.
During the quarter, SCE secured additional wildfire insurance bringing total coverage to $1.2 billion for the period June 2019 to June 2020. These policies are subject to $115 million of co‐insurance. SCE expects its coverage for this period to also be subject to an initial self‐insured retention of $10 million per occurrence, but, based on policies currently in place, SCE's coverage for the period is subject to self‐insured retention of $50 million per occurrence.
Based on the current levels of co‐insurance and self‐insured retention, SCE has approximately $1 billion of insurance, after adjusting for these items. SCE may obtain additional wildfire insurance for this time period in the future. Based on policies currently in effect and prior to any regulatory deferral, the cost in 2019 is $399 million.
We have a memo account that was utilized in 2018 to record incremental insurance costs. Similar to 2018, we believe the incremental 2019 costs will be probable of recovery and so subject to deferral. However, the deferral of these costs will not begin until we’ve recorded amounts equal to the levels authorized for 2019. This is similar to the accounting treatment I noted earlier related to wildfire mitigation O&M costs. There too we have memo accounts that are utilized to track incremental wildfire mitigation costs, which we believe will be probable of recovery.
However, until we reach authorized levels, we will continue to expense costs as they are incurred. Given these mechanisms, full-year results are more representative and we will provide guidance and additional information regarding deferrals when we have a final GRC decision.
For EIX Parent and Other, we expect an earnings drag of $0.30 to $0.35 per share. Included in this is approximately one penny per share per month related to EIX operating expenses. The overall increase from last year is primarily due to higher forecasted interest expense driven by higher long‐term debt issuances and interest rates. At Edison Energy, we continue to work towards our target of achieving a break‐even run rate for earnings by the end of this year.
Please turn to Page 8. I would now like to discuss the recent FERC and CPUC filings that address regulatory cost of capital and authorized capital structure. As Pedro noted earlier, on April 11th, SCE submitted revisions to its transmission owner tariff filing with FERC. SCE has requested an overall return on equity of 18.40% consisting of a conventional ROE of 11.12%, CAISO and project‐based incentive adders of approximately 1.28% and a wildfire‐associated ROE component of 6% to compensate for this unique risk.
More recently, on April 22nd, SCE submitted its CPUC Cost of Capital Application. In this filing, SCE is requesting an overall return on equity of 16.6%, which reflects a base ROE of 10.6% and the additional 6% ROE related to wildfire risks similar to the FERC filing.
California is a leader in addressing climate change and air pollution, with both the legislature and CPUC advancing the effort toward a clean energy future. Investor owned utilities support and enable these objectives, but challenges and risks arise that do not exist in other jurisdictions at the scale we find them in California. We can manage these risks given our experience and understanding of the issues, but these are still differentiators.
These include the efforts related to the State’s aggressive clean energy goals such as the use of more varied, earlier stage and more expensive technologies, proliferation of distributed energy resources and the need to design and manage a grid to accommodate this, and various investment needs, including replacing the aging infrastructure. The increasingly deliberate nature of the regulatory process is also something that must be reflected in the cost of capital given the risks introduced by this regulatory lag.
Beyond these challenges, we face the additional risk imposed by the dramatic increase in catastrophic wildfires combined with uncertainty regarding cost recovery should a utility’s equipment be a substantial cause of a wildfire’s ignition. We’ve discussed the drivers for this risk before and Pedro has outlined the structures and solutions needed for a more appropriate allocation of this risk.
However, until a reasonable framework is implemented, the return on equity needs to reflect this additional risk. To be clear, we do not want a never‐ending series of ROE adders related to wildfire risk. The solution must be structural, but until that happens, we need to include this additional element in our cost of capital to reflect fairly the risks being underwritten by our investors.
In addition to cost of capital changes, we have also requested a change to our authorized capital structure. Currently our authorized capital structure reflects 48% common equity, 9% preferred equity and 43% debt. This will change to 52% common equity, 5% preferred equity and 43% debt, if approved. This change is more aligned with capital structures across California and in other jurisdictions. Importantly, it also provides support for our credit ratings as we continue to invest in the infrastructure needed to safely and reliably serve our customers.
SCE is also proposing to maintain the current Cost of Capital trigger mechanism, which provides for an automatic modification of ROE during the 3‐year cycle based on fluctuations in interest rates as measured by changes in the Moody’s utility bond index.
We understand the customer cost impact of our proposed cost of capital and capital structure, in particular, the impact of the wildfire‐related ROE component. However, this is necessary in order to address these unique risks as we continue to make the investments that support our customers’ needs and help California meet its environmental objectives. We will continue to work with stakeholders on a structural remedy to appropriately allocate this risk and when that happens, we will file to modify the risk adder included in our cost of capital.
Please turn to Page 9. The changes in our capital structure and ongoing investment needs at SCE drive the financing plan that Pedro mentioned earlier. EIX has historically maintained a strong balance sheet. As Pedro noted, our rate base has grown significantly over more than two decades through a combination of internally generated cash flow, retained earnings, debt financings and benefits from other items such as bonus depreciation.
The cost of capital application and the requested change in authorized capital structure to a 52% equity layer drives a need for up to $1.5 billion of additional equity at SCE. The PD highlights ongoing SCE rate base growth at a compound annual rate of 8% from 2018 to 2020. We also see additional capital needs beyond the 2018 GRC including grid resiliency expenditures and transportation electrification. We are developing our 2021 GRC capital requirements and expect to file in September.
Overall, our financing plan takes a balanced approach and utilizes both equity and debt in order to meet the requested increase in authorized equity layer and make capital investments at SCE. EIX has evaluated a range of potential funding options to efficiently finance the current need at SCE and we will maintain flexibility while we execute our 2019 financing plan.
The plan includes a number of components: Last Friday, EIX closed a $1 billion term loan to bridge our financing needs. The proceeds were split between a $750 million equity contribution to SCE, which was used to repay SCE’s outstanding term loan balance, and $250 million retained at EIX to pay off EIX’s outstanding commercial paper and for general corporate purposes. This holding company term loan will be repaid through a combination of equity and debt offerings that are part of our longer‐term financing plan.
We anticipate issuing up to $1.5 billion of common equity, through an at‐the‐market, or ATM, equity program and the use of internal equity programs. These equity programs have been sized to fund SCE’s equity requirements related to the requested increase in the authorized equity layer. The portion of the EIX term loan contributed to SCE last week, or $750 million, will be repaid with proceeds of the equity financing. This program provides us with greater flexibility in timing of issuances to meet capital needs, including the timing and status of the regulatory process associated with the cost of capital proceeding.
In addition, EIX will continue to utilize other tools to efficiently finance the business, including long‐term and short‐term debt financing based on debt maturity needs and other cash flow requirements. This includes an anticipated $1 billion long-term financing at the holding company to repay any remaining balance on the term loan, fund additional capital needs at the utility and other holding company requirements. We have significant capital needs and growth opportunities at SCE and our financing plan supports this. We will update and extend this forecast when we file our 2021 GRC in September.
That concludes my remarks.
Michelle, please open the call for questions. As a reminder, we request you to limit yourself to one question and one follow-up, so everyone in line has an opportunity to ask questions.
Yes. [Operator Instructions] Our first question comes from Agnieszka Storozynski from Macquarie. Your line is now open.
Thank you. So first the additional equity, so you don’t yet know if the increased equity layer will be approved and yet you’re already starting the ATM program. And secondly, the scope of capital proceeding would not kick in until the beginning of next year, right? So you’re adding this ROE adder even though we’re hopeful, I think we’re all hopeful that before the end of this year there's going to be either a legislature for a regulatory fix to wildfires. And so is this just a contingency or are you trying to send a message that it is unlikely, then those issues will be resolved before the end of this year. Thank you.
Angie, it's Pedro. Good to hear from you. Let me start with the back end of that around the adder and then Maria talk about the sequence on the ATM. Just remember reinforcing some of the comments that both Maria and I made, we asked for the adder in both the CPUC cost of capital and FERC RE proceedings, because we view that as appropriate compensation for the risks that our investors are being asked to take under the current framework. Very hopeful that the State will address that. I think I’ve said in prior calls that we remain confident that ultimately this will be resolved, because of [indiscernible] financially help the utilities, but sitting here we can't handicap a probability around whether it happens in this round or next round or what have you, right? So timing is, I think one of the question marks for us. We thought it was prudent and appropriate to go ahead and make these filings. Now that you get to the question of what’s the best way to start filling the ultimate need is different timing on the pieces, FERC ROE has a separate schedule from the CPUC cost of capital. But I think, I will let -- turn it over to Maria now, the bottom line here is flexibility, making sure that we take a nice glide path here that gives us flexibility and optimizes for investors and also for customers.
Thanks, Pedro. Yes, Angie I think that’s exactly right. We want to be flexible, we want to be disciplined, while the cost of capital proceeding has not yet been completed. Obviously, we’re in the early stages still. We want to be efficient and we will be measured in our approach to our financing plan. So we think that the ATM program initiated in 2019 really gives us that flexibility. We can meet those objectives. We can also move incrementally and address the need, while we’re still monitoring the process, the regulatory framework, how that proceeding itself is moving along. So I think that’s -- we’re trying to get at all of those objectives in terms of our financing plans.
Okay. Because I’m just -- in a sense would -- is it fair to say that if we’re assuming this equity dilution, we should be imputing your earnings power using a higher equity layer as well? Is that a way, so I’m just thinking that not to be too impute this to your earnings power if I were just dilute your earnings without giving you the benefit of the high earnings power, assuming this higher equity layer?
Well, certainly the equity layer is aimed at and sized towards the additional equity layer that we’ve requested from the CPUC, that’s for sure. Obviously, they haven't approved it yet, that’s why we’re taking a very measured approach in terms of the issuance and as you pointed out, potential for dilution.
Okay. Thank you.
Thanks, Angie.
Our next question will come from Praful Mehta from Citigroup Your line is now open.
Thanks so much. Hi, guys.
Hey, Praful.
Hi. So just clarify little bit on the equity issuance. From a timing perspective, are you willing to wait through the July 12 timing, which is the expected legislation because obviously if that goes through it helps the equity and kind of makes the issuance cost a lot lower. How do you think about -- I get the flexibility point, but how do we think about that in relation to the timing expected for the legislation?
Sure. Great question, Praful. So we definitely want to share with folks about our financing plan is for 2019. I don’t think we’re going to get pin down to exactly when we’re going to do, particular things and we did share with you that we just close the term loan at EIX on Friday. But I think once we share with the plan, the precise timing of the plan, I think is subject to a lot of different factor.
All right. I guess you want to hold off on being more specific, I get it. I guess the second question on the wildfire fund and I appreciate the three points that you laid out Pedro in terms of how you think about what’s needed. The wildfire fund as we understand that came out from that strike force seem like it was more short-term in nature as then it was funded at one-time, utilized to kind of deal with wildfires about three, four years at which point you’ve kind of dealt with the mitigation efforts are working and you don't need the fund anymore. Do you see the wildfire fund is something that is short-term in nature or do you see the wildfire fund is something that is needed more longer term to deal with the wildfire problem in California?
Yes, Praful, that’s a good question. And the short answer is it's the latter. This is a longer-term structure. Let me clarify there something in your question because the way that we read the strike force [indiscernible] a little different from the way you just described it. They actually propose two different funds. One, that’s what they call the liquidity only fund and then the second was the wildfire fund which we understood and viewed as a longer-term structure. The first one, the liquidity only fund in a sense that looks a lot different words and maybe the -- slightly the constructer. but it's a lot like what we’ve also been talking about in terms of the ability to securitize needs upfront, because we believe that can then mitigate cost impacts for customers, right? So we view that liquidity only fund essentially as a revolving fund of source to deal with the short-term needs to get cash out to fire victims with the wildfire fund and being that we’ve been thinking as a more traditional longer-term structure. Obviously, a lot of these are still to be worked out, not only the continuing strike force discussions, but importantly now and the different venue of the wildfire commission as I mentioned in my remarks already and then ultimately the legislature. But I wanted to clarify that that view to two different funds that have been suggested.
Got you. Thanks so much, guys. I will leave it to others to get into more detail as well.
Great. Thanks, Praful.
Our next call will come from Ali Agha from SunTrust. Your line is now open.
Hi, Ali.
Thank you. Good afternoon. First question, just to clarify again on the equity front. And I was unclear, embedded in that amount that you’ve laid out, is there some assumption about equity or cash, I should say, that you may need to pay for the wildfires or would that be a totally separate calculation for equity needs? Is that all built in and how much do the internal plans annually drip, etcetera provide for you?
So -- hi, Ali. It's Maria. The financing plan we talked about today is really aimed at the increased equity layer that we’ve requested from the CPUC and growth capital at SCE. So that's really what this plan is about. I think we will evaluate additional considerations as we move forward in time and find out frankly the answers to the type of questions that you just posed in terms of what’s happening on the wildfire front. In terms of internal programs, I would say you probably think about $50 million or $60 million a year. I mean it vary. We have had some years that are higher, some of the years that are lower, frankly.
Okay. And then second question, on the wildfire front, I just wanted to get a sense of the sequencing and tracking from our site, the government talked about getting something done by July 12 recess, but after that the session actually run still September 13. Just curious how you are looking at the sequencing? And the point that you made about the legal challenge to inverse condemnation, wondering if your legal folks have looked at that and what’s thoughts are about the merit of that?
Yes. So, let me start with the last one first and Adam Umanoff, our General Counsel is here. Because he -- if you want to add anything, Adam. I think the short answer to that, the legal challenge is we feel very comfortable in the strength of the argument that we made in the couple of court proceedings that I mentioned. And this really goes to the core assumption that the courts have made a decision going back to the [indiscernible] decision that looked at the application of inverse condemnation as that meet essentially to your -- to socialize the cause of this risk across a broad pool of customers and it assumes that utilities had ready recourse to collect those amounts from customers in the case of investor to the CPUC. The significant uncertainty that’s been raised towards that were the San Diego Gas & Electric 2017 decision really challenge that assumption and its one of the core tenets in our arguments in court. So if you’re asking do we feel strongly about the arguments, we feel they have strong merit. The answer is, making clear a yes. Now how -- what the court say with that, that’s a different process. Let me pause there. Adam, anything you would add or is that covered?
Other than given you an honorary law degree, no other comments.
Okay. And I think -- yes, thank you, Adam. On the timing question, lots of different venues and pieces here always to just kind to recap. We now have the strike force report. We understand that the various members of the strike force team still thinking and engaged etcetera. But I think on the other -- the major report out, -- I have the wildfire commission, my shorthand for the name of the commission continue its work. They have a statutory deadline on July 1st. The governor then challenged them to finish the process earlier. I believe that they’re at a minimum on track to meet their July 1 deadline or potentially coming a little sooner. You have then the challenge that the governor laid out for the legislature to have a package done by July 12, which is clearly an ambitious timeline. I think that it's certainly possible and it's not unreasonable to imagine a scenario where you have concrete recommendations coming out from the wildfire commission that then feed the legislative process and probably some parallel work and starting to develop language. You saw probably the announcement that came out, I believe, last week on the task force in the Senate appointed by the Senate President Pro Tempore, Toni Atkins and chaired by Bill Dodd. So presumably that’s another vehicle for developing language. So there's, I think the scenario that the governor laid out of having all it done by July 12. At the same time, as you pointed out the session goes on for couple more months after that. And so there is certainly the possibility that these complex issues could take longer for drafting and for the negotiations that go on in developing the bills. I will also say it is a more negative scenario, but I want to be transparent about it that in spite of the governor's leadership and timelines that he set, that this wasn’t get done. I think that will be an unfortunate outcome. It's one that if the state needs a speedy resolution of this issues, it's costing customers significantly sort of financial uncertainty on utilities, but I can't sit here and guarantee to you that the state will actually do all this in the timeline of the current legislative session. So we said all along that there's always a possibility that this goes longer, we hope not. But there's a possibility. So that’s the sequence as we see it, Ali. Maybe more detail than you wanted.
Great. No, that’s helpful. Thanks, Pedro.
You bet. Thank you, Ali.
Our next question will come from Julien Dumoulin-Smith from Bank of America Merrill Lynch. Your line is now open.
Hey, Julien.
Hey, it's Nick Campanella on for Julien.
Oh, hi, Nick.
Hi. Just to be a little clear on the 6% adder, I guess if we get some type of framework from the legislator that allows for a liquidity fund, some type of catastrophe fund. Is that enough to remove the 6% or is this more about an IC6. And if you could just kind of expand on what you’re looking forward to actually bring the outer down?
I think the short answer is that that was going to be in the details and we need to see actual steps taken before we can answer your question, Nick. Maybe there's slightly longer version of that is, there's a lot of pieces here. We pointed consistently though to the important need to address the issues around defining prudency which we believe is best done by linking at the compliance for CPUC approved wildfire mitigation plans, I mentioned in my remarks the analogy to the energy crisis, that’s how the state reformed its way out of the energy crisis by setting up a very similar structure that has survived very well for today. So that is really job one, right. And then linking cost recovery to that kind of framework. Wildfire fund is an important addition to that, but in our view you really need to solve the core problem. Now what you saw the problem through what we’ve been advocating here, that the framework I just discussed, where you saw that further upstream through maybe changes on the inverse condemnation strict viability standard. You saw that through court action in response to the judicial proceedings that Ali was asking about earlier. Lots of different ways to get there, but we believe you need to solve that core problem of ultimately cost recovery. Now once we see any and all of those steps, we can make judgment calls as to how much of the risk has that mitigated for investors and therefore, how --- what action can we take regarding the 6% adder. It could be one that maybe this is a great package, resolves it and we could actually pull request entirely or might be either it happens more gradually and we take steps along the way.
Thanks for that comprehensive answer. I just also want to ask about the insurance. I think you guys mentioned that there's $400 of cost for '19, ultimately some of that could get differed depending on the authorized levels of the GRC. What’s proposed right now versus those costs?
So when we filed our 2018 GRC -- that was back in 2016. We actually -- our program was a little bit different, but the allocation of insurance premium to wildfire policies was for the 2018 year about $75 million. That would then be subject to nutrition mechanism for the subsequent year. So $75 million plus, some sort of escalation for 2019. So it's in that ballpark. And then depending on what’s finally authorized, then the amounts above that subject to our belief that they’re probable of recovery would be deferred into a memo [ph] account that we already have available to us. And we will then go in subsequent to that and then move straight to the commission if they’re reasonable for recovery.
Appreciate it. That’s all for me. Thanks.
Thanks, Mike.
Your next question will come from Jonathan Arnold with Deutsche Bank. Your line is now open.
Good afternoon, guys.
Hi, there.
Just when I’m looking at slide 9, on the HoldCo financing plan, this may just be the way its laid out, but it makes it look as though the equity that you’re doing at EIX is basically to fund the higher equity layer at SCE and the debt is funding everything else. So that may just be a sort of graphic impression, because when you’re talking about it, it sounds like its more balanced than that.
Yes, so I think you have to put the bar at some place -- the pieces of the bar at some place. I will say, when we start the -- initiating the thought process, we’re thinking about what equity does that you need for the increase in the equity layer and then how much equity you need to provide for that. But you’re right, cash is somewhat fungible. And we’re trying to be flexible not only -- and balance not only in the types of products that we use, but then also the timing. We actually created a plan that gives us that flexibility in terms of timing, that’s why we did the term loan. So things coming in and out, you will see us pay down the term loan at the parent company, contribute the additional equity into SCE, that’s generally we’re trying to balance, flexible and give ourselves the right run way.
Okay, great. Thank you, Maria. But so taking a step further, as you look forward, and we think that you’re going to continue to invest in rate base growth and that may or may not be other calls on equity at SCE. How should we also think kind of those incremental investments in '20 and '21, would also be financed on a balanced basis or is the incremental HoldCo debt capacity you would look to access, sort of how should we think about the -- taking this financing plan and sort of rolling it forward a bit?
Yes. I think, Jonathan, that we’re really focused on right now solving or addressing the issue around the increased equity layer and the current capital investment needs at SCE. I think as we go forward, a lot of other things have to be taken into consideration before I can answer your question more definitively. Right now we have a lot of cash flow tied up in, for example, insurance. Once we start getting a recovery on that, that will have an impact. We will have to look and see what our 2021 GRC looks like and how much investment we have in there and the levels and the timing of that. The proceedings that our outside the GRC are also very impactful. So I think, as we go forward, we will be able to provide you some more information, but I think right now its early days.
So the HoldCo debt, you have some number that is maximum that you can carry there?
Yes, I wouldn’t say a maximum. I would say more around the philosophy. So we’re trying to, as we always have, maintain a strong resilient balance sheet. So that will continue to be one of our objectives. Obviously, there is the -- the current situation in California and people, the credit rating agencies' perception of California plays into that. As we move forward in time as we get more revolution around the wildfire issues, that could change as well. So I think it's a philosophy as much as anything else.
And Jonathan, just on that, I think it served our investors well that we had that kind of philosophy for many years. And dry powder is a good thing and I think continuing to have that sort of prudent approach at the HoldCo will be part and partial of how we think about this.
So it seems the answer to my two questions is kind of depends on the circumstances at the time and how things evolve.
Like everything in life. Thanks, Jonathan.
Okay. Can I ask one other on a different topic? Is that possible?
I think we -- make it a quick one here, but yes, multiple questions, Jonathan.
When you think about your reg [ph] asset that you did not manage to book on the wildfire charge, is there -- are there certain items that you’re looking forward that might change, that is the stress test proceeding for example critical in that decision.
No. I think Jonathan what we’ve talked about last quarter is objectively verifiable evidence or precedents, if you will. There could be things that come out, we’re just going to evaluate it every quarter. I wouldn’t say there's any one particular thing that’s sort of the go, no go decision on that.
Right. That’s really quick at that. Thank you.
Thanks, Jon.
Our last question will come from Michael Lapides with Goldman Sachs. Your line is now open.
Hey, guys. Thanks for taking my question. Just real quick, when I look at the rate base forecast for 2018, the $700 million versus your prior forecast, can you walk me through just the layers of that? Meaning what are the individual components of that? How much is disallowance of capital you’ve already spend versus other changes?
There were a number of things that the commission decided, in the proposed decision in any case, that they did not want to authorize. A lot of it relates to a few infrastructure programs, overhead conductor program, our 4 KV substation elimination program and corporate real estate. So a lot of that is in here. Separate from that, your question about what prior spending as an example was disallowed. If the PD is authorized as it stands today, we’d have approximately $185 million after tax disallowed from prior periods or prior spend. So I think it ranges across those various things, but those are the major point that are affecting rate case.
Got it. And then when I think about going forward rate base, the deltas the incremental $400 million is simply a delta in CapEx?
Yes, it's a program that we are not authorized as we carry them forward due to the attrition mechanism.
Fine. And one last thing. Just can you all remind me in prior rate cases has the commission ordered differed materially from the proposed decision in terms of the rate base amount? And this is all historical looking.
Yes, we have to give you precise numbers. If somebody has them in the room, but typically you will see its -- typically you will see changes between initial proposed decision and the final. I can tell you this every time, but it's not uncommon to have some level of changes already to the final. And, Michael, we are certainly going to be advocating for that, particularly given some of the core policy things that, I was mentioning earlier in my comments, we will certainly have strong comments about some of the changes we believe are needed.
Got it. Thank you, guys. Much appreciate it.
Thank you, Mike.
That was our last question. I will now turn the call back to Mr. Sam Ramraj.
Well, 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.
This concludes today’s conference. All participants may disconnect at this time. Thank you again for your participation in today's call.