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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 Second Quarter 2023 Financial Teleconference. My name is Fran, and I will 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. Mr. Ramraj, you may begin your conference.
Thank Fran, and welcome everyone. Our speakers today are President and Chief Executive officer, Pedro Pizarro; and Executive Vice President and Chief Financial Officer, Maria Rigatti. Also on the call are other members of the management team.
Materials supporting today's call are available at www.edisoninvestor.com. These include Form 10-K, prepared remarks from Pedro and Maria, and the teleconference presentation. Tomorrow we will distribute our regular business update presentation.
During this call, we will make forward-looking statements about the outlook for Edison International and its subsidiaries. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our SEC filings. Please read these carefully.
The presentation includes certain outlook assumptions, as well as reconciliation of non-GAAP measures to the nearest GAAP measure.
During the question-and-answer session, please limit yourself to one question and one follow-up.
I will now turn the call over to Pedro.
Well, thanks a lot, Sam, and good afternoon, everyone.
I would like to begin with three financial comments. First, driven by EIX’s impressive performance through June. We are confident in our 2023 core EPS guidance of $4.55 and $4.85. Second, we remain fully confident in and deeply committed to delivering our long-term EPS growth target of 5% to 7% from 2021 to 2025. This target incorporates all known business headwinds, but does not factor in potential tailwinds which could present significant upside.
Third, based on the strength of SCE’s 2025 GRC application, and other investment opportunities, we are providing EPS growth guidance of 5% to 7% or 2025, 2028, which provides the path towards $7 in earnings per share potential for 2028.
Underpinning this is the rate-based growth driven by the essential investments to advance California's clean energy transition. Importantly, these actions will maintain SCE’s cost leadership and the lowest system average rates for customers among California's investor-owned utilities for the foreseeable future. We are very proud of this commitment and I will show more about it later.
On the operational front, my two key messages today are: but, first SCE is strategically positioned to make substantial investments in the reliability, resiliency and readiness of the grid as outlined in its 2025 GRC application; and second SCE is well prepared for the wildfire season due to its successful grid hardening actions.
I will also emphasize that core to everything that we do is sustainability as Edison International remains at the forefront that the clean energy transition.
Please turn to Page 3. On May 12 SCE filed its 2025 GRC application. The overarching objectives are to ensure the grid is reliable resilient and ready. Reliable, so that it can meet customers’ needs today and in the future. Resilient to protect public safety and the integrity of the grid and ready, ready to support the widespread electrification and decarbonization needed to meet California's ambitious greenhouse gas reduction goals.
These GHG-reduction goals are not just “stretch targets” — they are deeply embedded in the fabric of California’s most important legislative and policy frameworks. Mindful of the longer-term costs of inaction when confronting the global climate crisis, SCE’s GRC reflects that urgent need for the state to rapidly electrify vast swaths of the economy, which is facing the fastest electricity demand growth in decades.
To meet these objectives, SCE requested a 2025 base revenue requirement of $10.3 billion; that’s an increase of $1.9 billion or about 12% over total 2024 rates. This also represents a system average rate increase of 9% and an average residential customer bill increase of 10%.
The 2025 through 2028 period will be critical to achieving California's 2030 and 2045 climate goals. SCE will continue to make substantial investments in wildfire mitigation to address the remaining wildfire risk on the system.
There is also a need to ramp up infrastructure replacement work, returning to historical levels of proactive replacement to safeguard reliability. Two key themes are always top-of-mind in any of SCE’s applications and in how the company runs. Those are operational excellence and affordability for customers.
We recognize that the investments in the grid are borne by customers, so we continuously look for ways to gain efficiencies and save customers money.
SCE has been building its capabilities in artificial intelligence and advancing the integration of technology into its operations. In 2018, SCE began to apply technology to some of its highest priority challenges including wildfire risk mitigation and data quality.
SCE has implemented several computer vision algorithms as part of the T&D aerial inspection process to scan images and detect defects like broken cross arms and other failure risks that could lead to outages or ignitions. The utility is now leveraging its images, other data, and these algorithms to develop other predictive models that can identify and refine asset data to more efficiently operate the grid, enhance fire spread modeling, and better prioritize grid hardening efforts.
Building on this and further leveraging tools such as artificial intelligence, robotic process automation and mobile solutions, SCE is ramping up its efforts around the customer experience, integrated grid planning and execution, and driving efficiencies in its support functions.
Examples include predicting customer issues before they call and proactively addressing them or diverting them to the lowest cost, most effective channel; leveraging speech and image recognition in inspections to automatically fill out surveys and focus the inspections; and using generative AI to create first drafts of everything from communications to data request responses.
I’m really proud that SCE is an early mover in implementing new technology that furthers its operational excellence and affordability goals.
Turning to page 4, let me give you a brief update on the 2017 and 2018 Wildfire and Mudslide Events. SCE is putting finishing touches on the TKM cost recovery application and expects to file in August. I reiterate that SCE will seek full CPUC cost recovery, excluding amounts already recovered or foregone under the agreement with the Safety and Enforcement Division.
SCE will show its strong, compelling case that it operated its system prudently and that it is in the public interest to authorize full cost recovery.
Looking at this year’s wildfire season, SCE's confidence in mitigating wildfires associated with its equipment continues to grow. Over the past couple of years, SCE has deployed covered conductor at a rate of approximately 100 miles per month and has now replaced nearly 5,000 circuit miles of bare wire with covered conductor since the inception of this program around four and a half years ago.
In addition to this CPUC-endorsed grid hardening measure, SCE completes 360-degree inspections of its transmission and distribution structures that represent up to 99% of risk each year prior to peak fire season and performs repairs and replacements.
SCE continues its robust vegetation management programs, inspecting 1.6 million trees across the service area annually and typically mitigating approximately 850,000. More than half of those trees are in high fire risk areas. In 2023, SCE plans to inspect over 130,000 trees that pose a threat of falling into SCE’s electrical equipment in the highest-risk locations.
Now let me give you some proof points of how well this is all working to reduce ignitions and their impacts. On fully covered segments, there have not been any ignitions due to failure of covered conductor. In 2021 and 2022, there were 98% fewer structures destroyed and 92% fewer acres burned than in 2017 and 2018. These and numerous other statistics are shown on page 5.
As it has since 2021, SCE uses a rigorous, insurance-industry modeling approach to estimate the probability of losses from catastrophic wildfires relative to the thresholds defined by AB 1054. Incorporating SCE’s latest mitigation data into the industry-leading North America Wildfire HD Model, Moody’s RMS now estimates SCE has reduced the probability of losses from catastrophic wildfires by 85%, compared to pre-2018 levels, as highlighted on page 6.
Importantly, the contribution from public safety power shutoffs continues to decline and is now only 10%. SCE has been expeditiously hardening its grid since 2018, with 76% of distribution lines in HFRA expected to be hardened by year-end, which you can see on page 7. SCE anticipates ramping down its flagship mitigation measure of covered conductor, beginning in 2025, and largely completing its targeted undergrounding work by the end of 2028.
Meanwhile, the State of California continues to allocate substantial funding to forest resiliency and to fire suppression, including CAL FIRE crews and aerial resources. We were pleased that the approved state budget maintained $2.7 billion, that was 98% of the original proposal over four years for critical investments restoring forest and wildland health to continue reducing the risk of catastrophic wildfires in the face of extreme climate conditions.
To put the state’s commitment in context, the total 2023 to’24 CAL FIRE budget of $4.1 billion is double what was originally enacted in the 2017 to ‘18 budget and CAL FIRE’s staffing has increased by 74% since then.
Edison International remains at the forefront of the clean energy transition and we continue to execute on our strategy and net-zero commitment. As climate change continues to challenge our world in unprecedented ways, I am confident in the strength of our team to lead the transition affordably and effectively.
We’re paving the way for a future powered by 100% carbon-free electricity and adapting our system to climate change, and supporting customers in reaching net-zero emissions. While the road ahead is long, our 2022 progress demonstrates our sense of urgency and our ongoing commitment to sustainability. I would encourage you to read our 2022 Sustainability Report for details about our accomplishments, goals, and long-term ESG commitments.
Let me highlight just a few commitments and these are covered on pages 8 and 9: In 2022, SCE delivered 45% carbon-free power to customers, installed electric vehicle charging infrastructure to enable customers to add more than 500 medium- and heavy-duty electric vehicles, and installed or contracted for more than 1,800 megawatts of energy storage.
By year-end, SCE’s energy storage portfolio totaled more than 5,000 megawatts, one of the largest in the nation. Our team continues to forge coalitions nationally and internationally to address climate change and we are proud to lead the way on these initiatives and partnerships and to support our stakeholders. Our future powered by clean electricity is upon us. So we stand fully ready to make this future a reality and we are going to do that reliably, affordably, and sustainably.
With that, let me turn it over to Maria.
Thanks, Peter and good afternoon, everyone. In my comments today, I will discuss second quarter results, our 2023 EPS guidance, and provide some additional insight into our long-term core EPS growth expectations.
Starting with the second quarter of 2023, EIX reported core EPS of $1.01. As you can see from the year-over-year quarterly variance analysis shown on page 10, SCE’s second quarter earnings saw a $0.13 increase. Among the major items, GRC attrition year revenue escalation added $0.19 year-over-year.
Additionally, higher FERC and other revenue added $0.04 and there was a $0.10 increase related to balancing account interest income. Partially offsetting this growth was an increase in interest expense of $0.16, driven by higher interest rates associated with funding wildfire claims payments.
At EIX Parent and Other, there was a negative variance of $0.06 primarily due to higher holding company interest expense.
Overall, we are pleased with our performance through the first half of the year and are confident in delivering on our full-year core EPS guidance of $4.55 to $4.85, laid out on page 11, which we are reaffirming today.
I will now discuss SCE’s capital expenditure forecast, shown on page 12. Following SCE’s 2025 GRC filing in May, we introduced our 2023 through 2028 capital plan of $38 to $43 billion, underpinned by spending covered by SCE’s 2021 and 2025 general rate cases.
During the 2025 GRC cycle, which extends through 2028, we project annual capital deployment to be in the $8 billion range, which is double the level from only six years ago. Over 85% of SCE’s investments are in its distribution grid. These are essential to meeting reliability, resiliency, and readiness objectives that support the widespread electrification and decarbonization needed to meet California’s greenhouse gas reduction goals.
You may ask, how do you plan to finance this significant step-up in CapEx? The vast majority will be financed with cash from operations and debt. Between 2025 and 2028, we expect our equity needs will be fulfilled using internal programs, which typically bring in about$100 million of equity annually, totaling about $400 million over the period.
We expect this financing plan to keep us within the 15% to 17% FFO-to-debt range through 2028. As a reminder, this financing plan does not incorporate potential cost recovery in the legacy wildfire proceedings.
I want to highlight that SCE’s capital expenditure forecast does not include substantial additional capital deployment opportunities. There is at least $2 billion of potential investment that SCE will request in standalone applications over the next couple of years. As you may recall, filing standalone applications in California is typical when major projects are still in early stages at the time GRC testimony is developed.
Let me give you some historical perspective. You can see on page 13 that SCE has obtained approvals of standalone applications for approximately $3 billion of capital spending over the past two rate case cycles. Discrete applications have contributed meaningful growth in the past, and we expect that to continue in the future.
To wrap up my comments on the upside opportunities, CAISO’s recently approved transmission plan identified 17 projects that upgrade SCE’s existing facilities. As the incumbent transmission owner, these projects represent at least $2.3 billion of FERC transmission investment for SCE. The CAISO plan also identified $3 billion of competitive projects in southern California that SCE will be able to compete for.
Turning to page 14, SCE’s GRC request supports approximately 6% to 8% rate base growth, starting from a 2023 base of $41.9 billion, which itself is nearly 20% higher than only two years ago. Rate base growth through 2028 is driven by the crucial grid infrastructure needed to facilitate California’s leading role in transitioning to a carbon-free economy.
Page 15 shows our progress in successfully executing the parent company’s 2023 financing plan. SCE and the parent issued debt during the quarter and both transactions were well within our average projected refinancing rates by 2025, further bolstering our confidence in achieving our 2025 EPS guidance.
Page 16 provides an update on the CPUC cost of capital mechanism. Given that the Moody’s BAA utility bond index is trading well above the deadband with only two months remaining in the annual measurement period, it is likely the mechanism will trigger. We believe an upward ROE adjustment is justified given the current interest rate environment has increased the utility cost of capital in line with the overall financial market.
Once triggered, SCE will file an advice letter to implement the adjustment to the 2024 ROE, and update the costs of debt and preferred equity. The CPUC equity ratio will remain at 52% on an adjusted basis, consistent with the proposed decision issued yesterday afternoon to extend SCE’s capital structure waiver for two years or until final decisions have been made on cost recovery for the 2017 and 2018 events.
I’ve previously discussed our operational excellence program and noted that we would share updates along the way. SCE’s employee-driven ideas have identified O&M savings for customers that are already reflected in the GRC request. We work tirelessly to continue fleshing out these ideas and finding additional benefits for customers, irrespective of the GRC cycle.
I’m pleased to share some tangible examples of our successful efforts to find efficiencies, which you can see on page 17.
Starting on the left side, in May, the CPUC approved SCE’s expanded wildfire self-insurance program, which saves customers approximately $160 million per year and has the potential for greater long-term savings.
In the category of work planning, we’ve successfully implemented our wildfire mitigation plan year in and year out and have continually found ways to improve. To give you an example, SCE programmatically inspects about 216,000 structures in high fire risk areas every year from the ground and the air, which in the past was performed by distinct teams.
We have transformed the program by combining ground and aerial inspections into a single, 360- degree inspection process. This reduces driving time in the field, benefits safety for field personnel, and improves overall quality and customer experience. Through this effort, we expect to generate nearly $55 million in cumulative O&M savings.
In the category of procurement, we are successfully finding ways to buy better. We recently re-evaluated the prescription benefit provider in our healthcare plans and switched vendors, achieving about $50 million of cumulative O&M savings, while maintaining the level of benefits and service for our employees.
These are just representative examples that clearly demonstrate the value our team can uncover and implement in a short period of time. We are excited about such opportunities to provide savings to customers, and we will continue to share additional examples with you in the future.
Turning to our financial commitments, we remain confident in our 5% to 7% EPS growth rate guidance from 2021 through 2025. I reiterate our management team’s steadfast focus on delivering this growth.
Additionally, for the 2025 to 2028 period, we expect to continue core EPS growth of 5% to 7%, which provides a pathway toward $7 earnings per share potential for 2028, shown on page 18. For you to further understand this pathway, we have also provided some key sensitivities on page 25 of the appendix. We see this long-term EPS growth as highly achievable for three primary reasons: First, the core driver for this earnings trajectory is SCE’s strong rate base growth.
Second, the headwinds we have navigated over the past couple of years will have mostly stabilized by 2025, allowing for a simplified growth story through 2028. These past headwinds included the cost of financing wildfire claims payments, driven by both the increase in legacy wildfire reserves and higher interest rate environment, the reduction in CPUC ROE, and issuance of preferred equity at the parent to strengthen the balance sheet.
Taking these into consideration, you can see that the midpoint of our 2025 guidance provides a stable platform for a strong long-term growth trajectory.
Third, this growth is achievable even without incorporating a few key items. We can achieve this growth at SCE’s current authorized ROEs and rate base forecast, without factoring in the additional capital potential I mentioned earlier or upside to the cost of capital by 2028.
Additionally, we have not incorporated potential cost recovery in the legacy wildfire proceedings, which clearly presents substantial upside value to our long-term earnings power and credit profile.
Based on these factors, I want to underscore we see 5% to 7% growth as highly achievable. We firmly believe we can achieve our targeted growth, both for 2025 and 2028, based on SCE’s significant investment to ensure the grid is reliable, resilient, and ready for California’s economy-wide clean energy transition.
That concludes my remarks. Back over to you, Sam.
Fran, please open the call for questions. As a reminder, we request you to limit yourself to one question and one follow-up, so everyone in line has the opportunity to ask questions.
[Operator Instructions] Our first question is from Ryan Levine with Citi. Sir, your line is open.
Thank you. In terms of your longer term growth outlook, what do you see as the biggest risk to achieving the longer-term 5% to 7% LF through 2028? And from a financing standpoint, you highlighted a couple billion dollars worth of upsides. To the extent that that were to materialize how would you look to fund that?
Yeah, so Ryan. Hi, nice to hear from you. In terms of your first question, what I really want to focus on is, you'd ask about risk to the 5% to 7% growth. We think that it's highly achievable. We also think that as we move forward into ‘25 through ’28 period that the story and the profile is much simplified. We've worked through a bunch of headwinds that we were dealing with in the ‘21 through ’25 period and we've managed through those and we are reaffirming our 5% to 7% percent growth rate.
And as we move into the next period, you'll see a lot of those things because they stabilized really allow us to focus on the key factors of our business, which frankly are rate base growth. And so when you ask about, if we get, we realized these other potential CapEx opportunities, some of which we will be filing for in the next year or so, what the equity program would need to look like, I think it really – we’ll have to take a look at that as when the dollars actually start to hit, because we're always targeting that 15% to 17% FFO to debt range.
The financing plan, we put in front of you during the comments earlier today is absolutely supportive of that 15% to 17% FFO to debt and as the other capital comes in, depending on where we are in that range, it will drive whether or not we need more equity. So I think we'll see when those dollars come in the door.
You know, Ryan this is Pedro, let me just underscore the first question. The need for this infrastructure build is so clear and strong. Thinking of that the team at SCE has done a nice job encapsulating that in the general rate case application, we will have other pieces as Maria discussed or the need will also be very strong. So to me, it kind of enter because it needs to be for infrastructure of that’s really needed for reliability and resiliency and readiness. And that's the big opportunity here and that's why we're so confident.
Great. In fact, I guess, one follow-up. In terms of the O&M cost outlook, you highlighted some changing vendors, more broadly, how are you seeing inflation pressures across your supply chain and then any color you could share around your outlook on the O&M cost base?
Sure, maybe we'll have Steve Powell kind of address what we're seeing with some of the vendors. He's the CEO of the utilities. Steve?
Yeah, so, we've got a lot of the vendors that we work with on multi-year agreements. So we are regularly going back to remarket as we get towards the end of those agreements. Certainly, over the last couple of years we've seen escalations in labor rates as well as on the material side. I think the global supply chain crunch has extended time frames for paying everything from customer meters to transformers to switchgear, which is also driving cost up.
And so, those are all - those are all things that our team is constantly getting ahead of the building inventories. It's also things that we are baking into our general rate case and we have inflation adjustment mechanisms in the rate case to take that into account. And so these are things that we've got the mechanisms to manage through our rate case. And we're constantly looking at different ways to work with our vendors to drive the cost of the services down.
I think as you are looking at longer term, we will also start seeing the benefits across the economy of things like the CHIPS laws Act, right. The focus of the federal government has had I'm bringing back manufacturing supply to domestically. So that's not a next year thing. And so, the answer to the question, what went into the near term? But I'm also a confident in the longer term supply chains will respond to market signals and the impact of, the CHIPS laws to act and other infrastructure bill et cetera in bringing back manufacturing for supply of critical components in the US will help.
Great. Thank you.
Well, thanks, Ryan.
Our next question from Shar Pourreza with Guggenheim Partners. Sir your line is open.
Hi, Shar.
Hey guys. Hey Pedro. I just want to get a sense here. Obviously claims cost recovery and CCM trigger, CAISO transmission opportunities, it's pretty significant, it's incremental. So I guess, should we be thinking about these opportunities to save their food at extending that 5% to 7% growth rate or could we see a step up increase assuming that we get some of these in plan.
Yeah, so maybe, Shar let's first check through some of them that you mentioned.
Yes. Yes.
So, the CAISO opportunities are significant as you say, $2.3 billion for the projects for which SCE is being the incumbent transmission owner, Those are largely going to be incurred, probably post 2028. So, that's a runway issue, right? You've talked about the CCM trigger. We absolutely believe that two months left as I said before, it's highly likely that the CCM will trigger.
And then, we think that it is fully supported by what's going on in the broad financial market. We are not relying on the CCM trigger for our 5% to 7% growth trajectories. So we will go through that process as we go through that process. I would also note that by the time we get to 2028 we are going to get another cost of capital cycle though.
So, you'll see some interplay there. And then in terms of claims cost recovery, as Pedro said earlier, we have been fully prudent and we will make a strong case for our cost recovery when we file our application, in August. The proceeds from that, of course, would be used to pay down existing debt at SCE.
And so you would see for sure, it will be a help to our earnings profile because interest expense is currently hitting the bottom-line would be authorized for recovery and also we will have an improvement on credit metrics. So I think you'll see a lot of improvements from all of those things and we'll take them as they come.
Perfect. And then, obviously, there's - one of your peers in this state is inching closer to selling part of its you do regulated Janko. There seems to be a lot of interest. There seems to be a wide amount of interest. You have a lot of CapEx, the stock still kind of trades at a bit of a healthy discount. Do you see other efficient ways to fund this capital increase versus having to rely on the equity markets, especially if you see the step up?
So first, I would note in terms of the equity financing plan that we put forward for ‘25 to ’28, we're really talking about our internal programs. So that's about a $100 million a year for you typically realize through that program. So just to cite that for you. In terms of looking at other opportunities beyond that for other forms of financing, we will certainly watch with interest what's going on up in the north.
But there's a regulatory process that we need to be gone through. And so I think it's just for us and observational point at this point in time.
To read, Shar, the core thing as Maria walked you through the strength of the capital program, the strong growth rate and we expect that we can do all of that with only the internal programs. So that's a – I think it's good strong statement about the very limited equity needs and how manageable we expect this to be.
No. It's fantastic. Thank you, Pedro and Maria. Appreciate the additional color guys. Have a good evening.
Thanks, Shar.
Our next question from Gregg Orrill with UBS. Sir, your line is open.
Hello Gregg.
Hey. Congratulations. The transmission CapEx. You highlighted from the CALISO awards. How does that process renew itself over time? How often do those occur? Should we be expecting more CapEx to be identified?
Yeah, let's have Steve talk about the CALISO’s planning process.
Right. So, the California Independent System Operator create - develops and approves these projects through their transmission planning process, which they're putting out updated plans on a regular basis going forward. They have a 20-year outlook that defines the big picture project that need to happen over a long time.
The last one they did identified about $30 billion of project need to happen over the next 20 years. Now they're going through and developing these ten-year plans. And right now, they're working through the process with the current approved plan of both gain the incumbent projects assigned. And so we know that we've got our $2.3 billion of projects we need to do and they run their competitive process for their competitive projects in the current planned ten year cycle.
There's three projects that are going out to bid that are worth approximately $3 billion based on their early estimates. I mean, those bids will go we do in the later in the fall and September and October and bids will be awarded next year. They'll work their way through that process. A new plan has been developed and put out another two years out and then they will continue to work that cycle as they did assign new projects on the horizon that are filling out what's in their long-term outlook.
Great. Thanks a lot.
Thanks, Gregg.
Our next question is from Angie Storozynski with Seaport and ma'am, your line is open.
Hello, Angie.
How are you? So, first with the operation of - so just so I understand. So if there is, if you will have, if you see upsides to earnings associated with the cost of capital or any other drivers, should I expect that there's some offsets from those operational variances? And I understand that a big portion of that this AC DC, but again, if their a portion that can go up and down depending of how much you basically need to meet your earnings goals?
Angie, that’s a great question and I think maybe I'll step back for a second and historically we've given you some of the information to kind of think through our business and our operating model, if you will. We've kind of bucketed things into a number of different line items. And one of the operational variances that you just referred to.
But when we think about our business, underneath those four line items, there's many, many more things that we're actually managing. And so, as we roll forward and we are thinking about ‘25 through ‘28, we've tried to actually provide you with some additional information that's more granular. That we’re hoping is going to be allow you to get more insight into our business.
So as an example, what have we talked about in that 2025 operational variances bucket? We've talked about AFEDC, we talked about the timing of regulatory approvals, we talk about operational efficiencies we've talked about depreciation and we kind of, given you some insights into that. If we roll forward to between ‘25 and ’28, you'll see the sensitivity is actually go right to, okay?
So what is the sensitivity around AFEDC? And if you see because our capital program is growing so rapidly and so robustly, but the time we get to 2028 AFEDC is like in the $0.45 range as opposed to being in the $0.30 to $0.35 range that it was before. We've given you some depreciation sensitivities that you can factor in.
Frankly, by the time we get to 2028, we don't actually see regular – the timing of regulatory proceedings or O&M variances as being the major drivers for that part of the model, if you will. So I think that's how we're trying to provide you with that additional information, as well as all the other sensitivities that people like to ask us about like, interest rate assumptions and things like that.
So, as I think that's hopefully a more granular approach to how we think about our business.
Thank you. Our next question from Anthony Crowdell with Mizuho. Sir, your line is open.
Hey, good afternoon, Maria. Good afternoon, Pedro. Just one quick question on slide 4 talking about the application of the key KM events. Just if you could maybe provide as much as you know on the timing of how long it will take for that application to play out?
And then more specifically, what type of - I guess Part D meet with parties ahead of time or any type of feedback you give us on your meeting with any of the interveners right now in the application. Thank you.
Yeah. Thanks, Anthony. We're going to be requesting or we expect we’ll request an 18 month timeline for the proceeding. It's a - we think that's an appropriate amount of time for something like this. I think at a very high level before we file any application, we'll meet with a range of stakeholders as appropriate tickets. Those are really more listening sessions than anything.
So I don't think we have anything that we will report back and we would be appropriate anyway, but just be aware that we are making sure folks understand the underpinning case here, right? We believe after having looked at all the evidence that we were prudent and we're providing visibility into the strength of our arguments as well as the process here.
And importantly, the need for a fair outcome in these cases. We recognize this is not just about getting cost recovery of costs that we think are appropriately recoverable. But we also recognize that this is a strong signal here, but California’s continued commitment to financially help the utilities. And so, we will do you'll see their application covers a range of issues around with the rationale for this battling terms of the merits of the case.
But the importance of this being, another key step in affirming the strength of the California regulatory framework.
Great. Thank you so much for taking my question.
Yeah, thanks, Anthony.
Our next question is from David Arcaro with Morgan Stanley and your line is open.
Hey, David.
Hey, thanks so much for taking my questions. Let me see. One, maybe a little bit of housekeeping item. I was just wondering if you could give any outlook for equity needs into 2024, it seems like we've got a good clarity around it. But just curious if there's any specific financing that we should be keeping an eye on for ’24?
I think we'll be relying on our internal programs in 2024, as well.
Okay, got it. So it should be I guess in that same $100 million, roughly cadence.
That's been what we've been realizing, yeah.
Okay? Got it. And then, I was just wondering longer term, I guess the rate base growth comes down as you look, if I just look at rate base growth ‘25 to ‘28 it's more like 5% to 7%. I know it's early on, but and that it kind of lines up then with the EPS growth in the 5% to 7% range.
Does that get tied in your mind or is the rate base growth just likely to escalade over time as new CapEx plans are identified?
I'm not sure I quite follow what you mean by tight. Can you expand on that a little bit?
Oh sure. I guess, you know, historically, you've had a gap between the rate base growth level and the EPS growth rate level. And I guess, at looking out further into the planned rate base growth ends up being kind of equating to EPS growth. I'm just wondering if that's just an early stage dynamic or if we start to see a gap widening out over time?
Thank you for clarifying. Yeah, I know we are very comfortable with that 5% to 7% EPS growth in combination with that 5% to 7% rate base growth. So, those things that have been happening here in the next five years is different than the last five years, right? And so, in the past, you've seen the gap actually widen out because of the things that, we were dealing with going from a lower amount of debt. For example, wildfire claims got to a higher amount having the interest rate environment on us during that period.
As we get into the ‘25 through ’28 period, things have stabilized. We have now - at the end of this quarter, we had $6 billion outstanding on Wildfire claims that. So everything is baked in and that period. If you think about even what we're refinancing around Wildfire claims debt during that five-year period, that debt was actually issued in the more recent interest rate environment. So the average of that average rate for the debt that we're refinancing is already about 4.6%. So you are seeing a lot of things sort of stabilize.
I think the other thing you are going to start to see is, at the parent company we’re obviously seeing our costs increase at a slower rate now and we will be looking to refinance through the - some of the outstanding maturities with more efficient vehicle that as you saw us do that earlier this year. Like for as an example, when we needed equity content securities, we moved away from preps into junior subordinated notes. And I think the one other thing that kind of drives the ability to have those two numbers EPS and rate base growth move together and as you'll see that the AFEDC is increasing quite strongly over that period. And that also makes difference.
Got it. Thanks. Very helpful. And just - sorry if this is a little repetitive, but just on operational variances, I see that AFEDC is rising from the ‘25 to ’28 period. Do - is there much change in the rest of the operational variances bucket between the ‘25 level where you have to find it versus where it'll end up in ‘28?
Yes, so we've also included a sensitivity there to depreciation. We talked about those depreciation variances before. And you can see where we now call that out for folks. So you can actually do a little bit of the investigation yourself. As we modify CapEx and we go from our request case to our range case, you can see that we've made a lot of simplifying assumptions.
So at a minimum, in the lower CapEx cases, you need to make a 15 - you may – you need to have an assumption about a $0.15 depreciation adjustment. So that variance is additive to some to the other numbers that you would get in terms of rate base growth.
I think, as we look out in time, the other things that we've talked about in terms of timing and regulatory proceedings and O&M efficiencies, we just don't see them as big drivers as we get out to 2028.
Okay. Understood. Thank you so much.
Thanks Dave.
Thank you. Our next question is from David Paz with Wolfe Research. And sir, your line is open.
Hello, David.
Yes. Hello guys. Thank you for the time. Just on the growth rates, can you maybe address where - would you be on the low end or lower half of your growth rate if the ROE remains at 10.05%.
We assume 10.05% across the entire range 5% to 7%. S,o it's embedded in all of our scenarios.
Okay. And then, forgive me if this slide here I am missing it. But what level of cash recoveries are you expecting aside from GRC in the TKM, which I know you're not expecting, but aside from those proceedings, what level of cash recovery to ‘28 has been embedded in your plan? I think for instance, you had $1 billion of recovery in 2024, in the slide earlier this year, I believe.
Any sense of what we should assume for cash recoveries through ’28?
Yeah. So in fact, over the past couple of years, we've actually recovered $3 billion in cash from these memo accounts that folks have heard us talk about before. Over the next two years, we expect to recover about $2 billion from those same types of accounts. And just to just to reiterating and clarify, maybe something that you mentioned, we are not assuming recovery on any of the ‘17, ‘18 Wildfire Legacy claims.
Right. Right. Got it. Okay. Thank you.
Our next question is from Nick Campanella with Barclays. Your line is open sir.
Hey everyone. I hope you're doing well. Good to reconnect. Thanks for my question. I guess, I'm sorry if I missed it, as well. But acknowledging that you reaffirm in ‘23 as well as the 570 midpoint for ‘25 just can you give us a sense of how to think about ‘24? Are you going to be in that 5% to 7% range?
Yeah. So, we have a number of things that we are going to be looking at moving pieces before we get formal guidance for 2024. So we still have our track for items that have to be resolved. We have other regulatory filings. I think frankly, when we are tracking interest rates, we will be looking at the CCM potentially triggering.
So, we will be providing that update when we give guidance. Now, I just do want to reiterate that that CCM trigger is relevant, but it's not relevant for our ‘21 through ‘25 or 25 or our ‘25 through ‘28 5% to 7% EPS CAGR.
Absolutely. And I guess, that's a good segue. Have similar question to Anthony just some CPUC process, but the CCM trigger can you just walk us through the timing. Obviously, I guess you filed an advice letter in October with the goal to have something out by year end. But just how do you kind of see it playing out?
Yeah, so the way the process works is, once the measurement period ends, so that that would be September 30th is the end. We would then in October be filing an advice letter. The Tier two advice letter which means it goes to the energy division. And the energy division can disposition the letter. People are permitted to protest if if they desire that and if they do, then the energy division will make a decision as to whether or not they will continue to be the entity that dispositions it or if they send it to an ALJ or the broader commission.
We believe that it is fully reasonable to have the trigger go - be triggered given the current environment. Remember that the interest rate changes that are going on right now are really fundamentally the reason why the commission adopted a CCM or a cost of capital mechanism, 12 or 14 years ago. It was to accommodate changes in a three-year cost of capital proceeding when the interest rate market and the interest rate environment changed.
So, we would continue to pursue that. We think that additionally not dissimilar to 2022 that there is no extraordinary event. The market is acting the way it is and the same manner with us is the broader financial market. So we will go through that process as we filed the advice letter.
Thanks for all the information.
Thanks, Nick.
Our next question from Julien Dumoulin-Smith with Bank of America. Your line is now open.
Hey. Good afternoon team. Thanks so much for the time we appreciate it very much. Hey, just coming back to the earlier question, just to understand a little bit more, you talk about depreciation sensitivity. Can you explain the - just how that contributes to the earnings variances in ‘28? I appreciate the sensitivity I wondered how that sensitivity might apply in this case? Where it might come from?
Sure. So, the sensitivity that we provided it's on the - in the appendix page. It gives you a range of outcomes. And there's two different elements at work there. We provide you with the capital forecast that is tied to our request – the request that we made in the general rate case. And when we do that, we have a lot of data from the general rate case that allows us to put that together. When we give you the other points on the curve, when we take CapEx down, just to provide you with a little bit more insight as to what that would look like in terms of rate base, we make some very simplifying assumptions.
So when we convert those lower CapEx levels into rate base, we made simplifying assumptions about the timing of when the CapEx is spent. We made simplifying assumptions about the type of CapEx that gets reduced. So, when we get to the lower end of the capital range, you end up with that depreciation variance again. So, at the lower end of the CapEx, you'll get a $0.15 - you will need to make a $0.15 adjustment.
And it's very similar to the depreciation variances that we talk about during the rate case cycle when CapEx turns out to be a little different than what's embedded in your actual authorize. The other piece of the sensitivity that we provided is, we've made a request in the general rate case or – and we made a depreciation proposal.
We know that sometimes, the outcomes of that may vary. And so, we've also given you a sensitivity as to what would happen to earnings and ultimately you can patch rate base, so what would happen to earnings if our depreciation proposal is modified from what's requested? So those are the two things.
Thank you for the clarity there. And just to follow up real quickly, to some of the equity capital ratio, given the waiver here, where do you stand today on that for the - at the utility level here? And what are you forecasting through the forecast period to be at ‘25 or ‘28 and ultimately what kind of time period are you forecasting it back to presumably post the conclusion of the proceeding to get back to operated level?
So, the proposed decision that we received yesterday extends our capital structure waiver. So, I guess, the most basic answer to your question is we are at 52% because we have the waiver. Roll that forward, we are not assuming that we will get any cost recovery for the ‘17 and ‘18 Legacy Wildfire claims and deaths.
So if you roll that forward and we don't get that then we would have to at the end of that process propose a plan to get back into conformance with the authorized capital structure. We can propose a plan that we think is appropriate. We could do a number of things. We could start with proposing that the differences be excluded because this is not rate base, right, so we exclude this permanently from our capital structure. There's some precedent there.
We know we got this that sort of treatment on the song settlement. More recently, we had that same treatment on the on the amounts that were disallowed on the SEB settlement. So that would be one approach that we would take. That would be our plan to be in conformance.
At the other end of the spectrum, we could also just move that debt up to the parent company, and then we would propose a timeline over which we would do it. And as we did that, we would not be impacting - we've already issued the equity to support all of those claims. So it could be a little bit more expensive, but it would be within our current credit metrics. And just as a reminder that the equity ratio is actually measured over a 36-month period.
Excellent. Thank you very much. Appreciate it.
Thank you.
Thank you. And now I'd like to turn the call back to Mr. Sam Ramraj for closing remarks. Thank you.
So, thank you for joining us. This concludes the conference call. Have a good rest of the day and stay safe. You may now disconnect.