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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 Third Quarter 2018 Financial Teleconference. My name is Ash and I'll be your operator today. Today's call is being recorded. I would now like to turn the call over to Mr. Sam Ramraj, Vice President of Investor Relations. Mr. Ramraj, you may begin your conference.
Thank you, Ash, 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.
Well, thanks a lot, Sam, and good afternoon everyone. Third quarter core earnings were $1.56 per share, $0.12 higher than the same period last year. This was mainly due to the regulatory deferral of certain O&M costs and tax benefits at SCE, partially offset by lower tax benefits at EIX Parent and Other. Please remember this comparison is not particularly meaningful because SCE he has not received a decision in its 2018 General Rate Case. Maria will provide more detail in her remarks.
As we continue to wait on proposed decisions and rulings from key proceedings, I would like to update you on some significant events that occurred in the third quarter.
On the legislative front, during the 2018 session, we advocated for reforms to mitigate the risk of catastrophic wildfires and fairly allocate financial responsibility among the multiple causes which contribute to wildfires. We focused on four key principles. The first was the establishment of an objective of wildfire management plan to guide system investments and new operating protocols. This would create more transparency and clarity with regard to prudency. The second principle was reform of inverse condemnation to transition from strict liability regardless of fault to a reasonableness standard. The third principle was reforming the current cost recovery structure at the CPUC to incorporate the concept that disallowance must be proportionate to the utility's contribution to a fire.
Finally we emphasize the continued importance of financially healthy utilities to meet California's ambitious climate change policies. With the end of the 2018 legislative session, I wanted to briefly review the key actions taken.
Senate Bill 901 was the most significant wildfire policy bill signed this year. We appreciate the legislature's attention to this critical and complex issue. Climate change has resulted in long-term drought conditions that weaken and kill trees due to bark beetle infestation and more severe weather events. At the same time, dry vegetation increases fuel on the ground which increases the risks of devastating wildfires. SB 901 includes many elements related to vegetation management and land use practices that will help mitigate this risk. Beyond that, the bill includes four key elements: wildfire mitigation plans, wildfire cost recovery considerations, securitization, and a 2017 stress test. The wildfire mitigation plans and cost recovery considerations are two constructive elements that increase clarity for the prudent manager standard and improve the regulatory construct to appropriately allocate financial responsibility. However, further work is required to establish a set of prudent manager standards for wildfire prevention and event response and reform current policies on post-event liability. These are essential to fairly balancing risk for Californians in the future.
The bill also establishes the Commission on Catastrophic Wildfire Cost and Recovery to identify additional elements that address the ever-increasing threat posed by wildfires in California including the equitable socialization of wildfire costs. The committee will be comprised of five members, three of whom will be appointed by the new governor. SCE will work with stakeholders as a thought partner and a resource as the state continues to address these issues.
Mitigation and prevention are the best defenses against future wildfires. In September, SCE filed its Grid Safety and Resiliency Program application. This was the result of an internal effort to review and strengthen our wildfire mitigation and prevention efforts in response to the new normal. Our approach aligns with the wildfire mitigation plans required by Senate Bill 901. This $582 million program proposes $407 million of capital spending in three key areas: grid hardening, operational enhancements, and situational awareness.
Most of the capital spend request is related to a covered conductor program to help mitigate the risk of ignitions in high fire risk areas. Our risk analysis has shown this to be more prudent from a cost-benefit perspective than other options. The requested program will replace 600 circuit miles of bare wire in high fire risk areas with insulated wire in the 2018 and 2020 period. SCE has identified another approximately 3,400 circuit miles of bare overhead conductor in high fire risk areas that will also merit re-conductoring beyond 2020 through future GRCs. Further, the request includes capital investment and O&M for several other areas that help reduce the risk of wildfire ignition. These requests are incremental to those contained in our pending 2018 GRC application. While we are in the initial phase of the proceeding, we believe these expenditures are necessary and have therefore started investing moderate amounts on these programs without waiting for CPUC review of our application.
However, we are requesting timely review of our application because our mitigation activities are significant and will involve substantial incremental costs over the coming years. To this end, we have requested a memorandum account be established as soon as possible to track initial costs and a balancing account to recover costs once the program is approved.
Turning to the 2017 wildfires, we continue to support the communities affected by these events by setting up a dedicated webpage for impacted customers and providing specially trained resources in our contact center. Additionally, our efforts to mitigate future wildfires are critical to the customers we serve. We are committed to helping our customers and communities recover and rebuild from these events and communicating directly with them is another key element of our support.
A number of external agencies have been investigating the potential origins and causes of the Thomas Fire and smaller fires that occurred in our service territory. As we do in all wildfire matters, SCE is also conducting its own reviews.
Determining wildfire origin and cause can be a complex and time-consuming process that examines items like possible ignition points and their locations, review of physical evidence in these locations and fire progression analysis that may become particularly important in the case of fires with multiple ignition points. Based on the progress of our ongoing work in these areas with the information currently available to us, we believe that the Thomas Fire, which developed in Ventura County in early December 2017, had at least two separate ignition points.
With respect to one of these ignition points, Koenigstein Road, SCE believes that its equipment was associated with this ignition. SCE is continuing to assess the progression of the fire from the Koenigstein Road ignition point and the extent of property and other damage that may be attributable to that ignition. At this time, SCE has not determined whether the separate ignition in the Anlauf Canyon area involved our equipment.
In the case of both general areas, CAL FIRE has removed SCE equipment. We have not been granted access, which has delayed the completion of our own review.
Given the uncertainty as to the contributing causes of the Thomas Fire, the complexities associated with multiple ignition points and the potential for separate damages to be attributable to fires ignited at separate ignition points, we are currently unable to reasonably estimate a range of losses that may be incurred. However, we do expect to incur material losses in connection with the Thomas Fire.
Given the importance of communicating not just with investors, but also with our communities and other stakeholders, we have echoed some of these disclosures in a separate press release issued simultaneously with today's earnings release.
In the meantime, SCE continues to support California's ambitious environmental policies. Senate Bill 100 augmented these policies by setting a goal for the state to reach 100% clean energy by 2045. The bill also requires California's utilities to source 60% of their energy from renewable energy sources by 2030. If implemented thoughtfully, SB 100's goals are broadly consistent with the targets we set out in our Clean Power and Electrification Pathway.
Last fall, SCE explored several of these scenarios to better understand feasibility, costs and trajectory to reach California's aggressive climate goals. We found the most feasible pathway to reach the State's 2030 goals to be an electric grid supplied by 80% carbon-free energy made reliable by up to 10 gigawatts of energy storage. This will support at least 7 million electric vehicles in California roads and nearly one-third of space and water heaters powered by electricity. We continue to implement and seek approval for key programs that we believe will help enable the states to meet these goals.
These include our approved medium- and heavy-duty vehicle charging infrastructure programs and our requests for a full-scale Charge Ready program that advances charging infrastructure needs for light-duty vehicles. We are currently in the early phases of implementing the medium- and heavy-duty vehicle transportation electrification programs and are actively engaged in the Charge Ready proceeding. In fact just yesterday, we received the scoping memo for the Charge Ready II application, which laid out the procedural schedule. We anticipate a final decision in the second or third quarter of 2019.
While we see significant investment related to California's climate policy, we are also very conscious of rate pressure on our customers. Residential rate design will be discussed again in 2019 at the CPUC. We received a positive position in early October in the Power Charge Indifference Adjustment or PCIA proceeding related to Community Choice Aggregation or CCA. The decision adopts revised inputs to the market price benchmark used to calculate the PCIA. It also provides for an annual true-up to ensure that any forecast-related errors in the annual PCIA are reconciled to minimize cost shifting from CCA customers to those customers who continue to receive power from SCE.
We continue to push forward on key regulatory proceedings that we believe are necessary to meet California's 2030 climate goals and lay the groundwork for 2045, while we address the uncertainty around the 2017 Wildfire outcome and we wait for a decision on our General Rate Case. At the same time, our company will continue to strive for improvement in our safety culture and broader operational excellence.
With that, I'll turn it over to Maria for her financial report.
Thank you, Pedro. Good afternoon, everyone. My comments today will cover the third quarter 2018 results compared to the same period a year ago and other financial updates for EIX and SCE. As we have communicated to you before, until we receive a decision on the 2018 General Rate Case, we will continue to recognize revenues from CPUC activity largely based on 2017 authorized base revenue requirements with reserves taken for known items including the cost of capital decision and Tax Reform. Also consistent with prior quarters, we are providing our SCE key driver analysis at the prior combined statutory tax rate of approximately 41% for both 2018 and 2017 for comparability purposes. Therefore, the effects of Tax Reform will largely be isolated so that we can focus on the underlying financial and operational drivers of the business.
Let's begin with a look at our core earnings drivers. Please turn to page 3.
For the third quarter 2018, Edison International reported core earnings of $1.56 per share, up $0.12 over the same period last year. From the table on the right-hand side, you will see that SCE had a positive $0.19 core EPS variance year-over-year. This variance was driven by $0.08 of lower operation and maintenance costs and $0.18 of income tax benefits versus the same period in the prior year.
The lower operation and maintenance expense is mainly due to the regulatory deferral of incremental line clearing and wildfire insurance costs. Higher income tax benefits were primarily related to the favorable impact of the lower 2018 tax rate on higher pre-tax income and true-ups related to the filing of our 2016 and 2017 tax returns.
The key EPS drivers table for SCE shows other smaller contributing items.
For the quarter, EIX Parent and Other had a negative $0.07 per share core earnings variance. This was largely due to a $0.5 negative variance at EIX Parent due to the absence of tax benefits from the same period last year and the impact of the lower 2018 tax rate resulting in a lower tax shield.
Please turn to page 4. I'm not going to review the year-to-date financial results in detail, but the earnings analysis is largely consistent with the third quarter results, except for higher operation and maintenance costs as compared to the same period last year.
The negative variance shown in the year-to-date period is primarily related to the net impact of costs that are not, at this point, being deferred into a regulatory asset. You may recall from the last earnings call that based on the outcome of the PG&E WEMA, we expected to be allowed to track our own incremental wildfire costs, including wildfire insurance premiums beginning at our April 3 application date.
Yesterday, we received a proposed decision in our WEMA application that does allow us to start tracking costs as of our application date. This proposed decision is subject to CPUC approval and these costs will ultimately be subject to a reasonableness review. As we discussed last quarter, SCE forecasted expenses of $92 million for liability insurance in its GRC for the 2018 Test Year. Approximately 80% is related to wildfire insurance. Overall, for 2018, premiums for the wildfire insurance we have obtained are approximately $237 million. In the third quarter, cumulative expenses for wildfire insurance for the period following our application date exceeded the Test Year 2018 amounts. As a result, we began to defer wildfire insurance costs.
As I have said previously, earnings comparisons pending a 2018 GRC decision are not meaningful.
We expect to report true-up when we receive a proposed decision. Once a proposed decision is issued, there is a regulatory requirement for a 30-day review and comment period before any final decision can be voted out.
We continue to expect a proposed decision by year-end, but based on the current CPUC meeting calendar, any proposed decision will need to be issued by November 13 in order to receive a final decision this year. As you know, we have established a memo account to track costs and the decision will be retroactive to January 1, 2018.
Please turn to page 5. In total, our SCE capital expenditures remained unchanged for the quarter on an aggregate basis. As a reminder, while 2019 and 2020 CPUC jurisdictional capital expenditures remain at the GRC request level, our 2018 capital expenditures aligned with our work execution plan for this year.
There are two items to note related to our capital spending plans. First, as we discussed previously, in May we received the final decision approving a $356 million medium- and heavy-duty vehicle transportation electrification program, of which $242 million is capital. We have now incorporated these expenditures into our forecast. The majority of that program's spend falls outside our forecast period; however, there is approximately $100 million of cumulative capital spending and an associated rate base increase of approximately $80 million through 2020.
Offsetting most of the near-term transportation electrification spending are adjustments to our FERC spending profile. During the quarter, we received a final decision on the Alberhill System Project. This decision holds the proceeding open and directs SCE to submit supplemental information on the project, including details of demand and load forecasts, and possible alternatives to the proposed project. We continue to believe the project as proposed is needed to serve forecasted local area demand and to increase reliability and operating flexibility. Given the ongoing analysis, we have deferred spending on the Alberhill System Project outside our forecast period.
Other projects that are not in our capital forecast include the proposed $760 million Charge Ready II application of which approximately $560 million is capital spending and our recently proposed $582 million Grid Safety and Resiliency application of which approximately $400 million is capital spending. We continue to work with the CPUC on these two proceedings and will update our forecast as necessary. Last, we expect to update our full forecast when we get a proposed decision on the 2018 GRC.
On page 6, rate base has remained largely the same except for a slight increase in 2020 related to the increase in capital spending from the medium- and heavy-duty vehicle transportation electrification education program, offset by FERC changes.
On page 7, you'll see our financial assumptions for 2018. We have laid out a few key items on this page that you should consider as you model 2018 and beyond. As a reminder, the information we provide on this slide reflects our new combined statutory tax rate of approximately 28%. Most of the information on this page has remained unchanged since last quarter. We do provide more detail regarding incremental wildfire insurance expenses, although we continue to expect our regulatory deferral to be $0.30 per share for the year.
Additionally, we no longer expect to receive energy efficiency incentives in 2018 due to a delay in the regulatory approval process. We now expect the incentives to be awarded in the first quarter 2019 and will update you further when we issue our 2019 EPS guidance.
I want to provide a few additional comments on other financial topics. At SCE, as of September 30, our average common equity component of total capitalization was 50%. During the third quarter of 2018, SCE file, and the CPUC made effective, a change to the calculation of the common equity component of SCE's capital structure moving from a 13-month to a 37-month weighted average basis. This corresponds to the standard period between cost of capital allocations. The 50% I noted reflects this change.
We continue to maintain a strong balance sheet at both the holding company and SCE. We also have the flexibility of these entities to obtain both short- and long-term debt while we continue to evaluate options as we work through uncertainty around the wildfire liability and cost recovery, await the 2018 General Rate Case decision and consider other requested capital programs such as Charge Ready II.
We continue to effectively access the capital markets to fund our rate base growth and other operational needs, while we also manage through the legislative, legal, regulatory, and operational solutions required to address the California wildfire issue. However, relative borrowing costs remain higher than we have experienced prior to the 2017 wildfires and will likely be further impacted by credit downgrades by Fitch and Moody's during the third quarter, which means increased costs to our customers.
That concludes my remarks.
Operator, 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.
Thank you. We will now begin the question-and-answer session of today's conference. Speakers, our first question comes from Ali Agha from SunTrust. Your line is now open.
Thank you. Good afternoon.
Hi, Ali.
Hi.
Hi. Pedro, first question, as you mentioned you have an ongoing internal wildfire investigation. And I just wanted to be clear, during your own internal investigation, have you found any procedural lapse or any other negligence on the part of your utility?
So, Ali, I think as I mentioned in my remarks this is an ongoing investigation and we're still missing crucial pieces of evidence including the equipment that CAL FIRE removed and we have not been able to access. So, we really don't have any conclusions that we can share in terms of causation of what happened. We know as we shared today that our equipment played a role in the Koenigstein Road ignition point, but that's all we've been able to conclude at this point, and we don't have any further conclusions on causation itself.
Okay. And my second question, I also want to just clarify something from your opening remarks. You mentioned that you do anticipate to have material losses for the Thomas Fire and I want to clarify, that is before you assume any cost recovery, or is that assuming the final impact to Edison post any cost recovery, et cetera?
Yeah. We wanted to signal to investors that we expect we will incur losses in the end; however, we just can't estimate what those might be right now. And you mentioned some of the reasons that we can't estimate them. I mean, just maybe dialing it back and going through the whole chain of things that will add up to a net exposure at the end of the day; first, we have just the final information in terms of claims, right. We're still getting claims through the legal process, so that's where exposure in a sense begins.
We also then have the information that is still being developed on what happened, right. And so today we shared one element that we now felt comfortable sharing, but we need to get into an understanding of what role – what things led to the actual cause of the event. As we go through the legal process, remember this will be litigation right? So litigation itself will create some limits in terms of what we can share as we go through the process and defend the company. But as we go through that process, what legal theories end up being found relevant by the court will matter. Is it inverse condemnation and the negligence approach, et cetera. Then we get to the fact that oftentimes these kind of cases don't end up going to final judgment but do end up settling, right. And so our exposure if we end up settling would be impacted by the balance of settlements, so the discount factor; as you often see discount factors in settlements in other cases.
And then finally, there's the question of CPUC cost recovery, which we would expect we'd be seeking cost recovery, but that would be a long process in and of itself; a process that typically happens after we've been through the bulk of the litigation or settlement progress and have a better understanding of what unrecovered amounts there may be beyond our insurance. So sorry to be a little more winded there, but I feel maybe helpful for you and for other investors on the line to understand that there's a whole sequence of events that will ultimately leave us with a final exposure. Today, we're saying, we do expect that we'd end up with a material exposure, but we're not able to estimate or provide a reasonable estimate of what that could be.
I understand. Thank you very much.
Thanks, Ali.
Thank you. Our next question comes from Praful Mehta from Citigroup. Your line is open.
Hey, Praful.
Thanks. Thanks so much. Hi, guys. I guess just drilling down a little bit more into this wildfire point. Is there, at this point, any view on the split of liability between the two ignition points? As in, will there be an ability to do that or do you think the fire is so blended together that in the end, the liabilities were kind of all – kind of get capped into one broader fire?
I think it's early to say. In some of the – maybe to echo some of the comments I made earlier. There is a lot of analysis that will take place, and then there will also be the going through the litigation process. Let me just point on one example the analysis that would be relevant here and that's fire progression, right? And what that means is, we're saying here that we are aware of at least two ignition points. We talked about two that we are aware of in Koenigstein and Anlauf Canyon. Those are somewhat removed from each other, right? So you can imagine that out of Koenigstein, there would have been some damage that ultimately would likely be attributed exclusively to Koenigstein because it happened within its near vicinity before the two fires merged, right?
Likewise, they might be damaged. It would be clearly attributable to the ignition at Anlauf Canyon because it would have been in its proximity. Fire progression that modeling that study that we're looking at right now just to point to one element here, looks at how did those two ignition points and the fires that emanated from them, how do they end up merging and to what extent is it clear, if it is, that if you then look at any point downstream as it were later on in the progression of the fire can one allocate responsibility to one or the other ignition points or whether it's exclusive (00:30:13) responsibility or whether it's a proportional responsibility based on how that fire may have progressed over time. That's a very complicated science. It's one of the things that we are looking at and that I mentioned.
But the results of that would be certainly one relevant element to answer your question of whether if ultimately there'll be a clear demarcation in terms of the responsibility for the overall fire damages between the two or more points. A little long winded there as well by just trying to illustrate how complicated this is, Praful, and that's one of the relevant factors that we and we expect plaintiffs also will be looking at in litigation.
Thanks, Pedro, and appreciate the complexity, so helpful color. And just in that context, again, mudslides, would that also then have the same logic, you will look at the progression and see which kind of point was close or tied to the mudslides and link liability with that?
Well, I think that's an even more fundamental question with the mudslides, which is to what extent will expert testimony establish that whether the mudslides were indeed catalyzed or influenced or impacted by the fires or whether those mudslides might have happened in any case given the torrential rains that took place in the period immediately preceding them. So we don't have conclusions there. But as you can imagine, our evaluation, our analysis is looking at the number of factors that may have preceded and potentially impacted the mudslides.
Now, to the extent that fires may be shown to be a factor, and again we – this is just an open question, at least for us, but if they were shown to be a factor, then I think that fire progression analysis could then be relevant in terms of looking all the way upstream at which ignition point may have had an impact on that or whether both ignition point had an impact but at different relative levels. Does that – I know we say question and one follow-up, but that's complex. Let me just ask any – do you have any clarification needed on that, or does that make sense?
It made sense to me, but I'm sure others will have follow-ups, but I'll allow for others to come back and ask questions and I'll come back in queue. Thanks so much, Pedro.
Great. Thanks, Praful.
Thank you. Our next question comes from Julien Dumoulin-Smith from Bank of America Merrill Lynch. Your line is now open.
Hi there, Julien?
Hey, good afternoon. Hey. So I'll take Praful up on that, perhaps, can you elaborate a little bit with respect to what's your understanding is: A, with regards to any other potential involvement on that particular Koenigstein Road, e.g. maybe cable companies and others? And then separately, can you elaborate a little bit on the precedents established around negligence when there's multiple initiation points?
Let me take an initial shot and Adam Umanoff, our General Counsel, may want to add here. In terms of your first question, I don't think we are able to opine further beyond the disclosure we made today. I'll just stick to the point that we made in the disclosures that we are now – based on the progress we've made in our evaluation with the information that we have, we can now say with a greater degree of certainty that our equipment was involved in Koenigstein. I don't think we have commented on other underlying factors and in fact, as I said earlier, the whole cause of the fire, what may have led our equipment to end up becoming a factor is something that we're still reviewing and we need, for example, to obtain access to our equipment that's being held by CAL FIRE before we can have a final determination. So I think that's all I can say about that one, Julien, on the point of other cases of negligence, Adam, you want to pipe in here?
So, Julien, I think as you probably know and we've certainly disclosed previously, there are various theories under which a plaintiff could seek recovery for damages caused by a wildfire. In the case of inverse condemnation claims, all the plaintiff has to show is that our equipment substantially caused the damage. A negligence claim is very different. In a negligence claim, the plaintiff needs to show that we breached our standard of care, which is generally we have to operate as a reasonable and prudent operator of our equipment that we design, operate, and maintain the equipment reasonably.
A negligence case will involve a dispute. Plaintiffs will argue that we were negligent – we didn't reasonably design, operate, and maintain equipment. We will defend based upon our claims that we did. And most of these cases involve expert testimony, experts on either side, the defendant and the plaintiff arguing the case as to whether or not the conduct was or was not negligent. Does that help?
Sure. And then with regards to – as a follow-up here on the memo account that you talked about for the $407 million of capital for the resiliency, can you talk about the timing that your expectations there? I mean, is your expectation there in filing for the memo that this could happen fairly rapidly, akin to what you've seen with the WEMA?
We were – Maria may have more to add here, but we – certainly, we're hoping that we can get a determination on the memo account establishment in the near term. I'm thinking we have proposed a schedule, that schedule that we proposed would have had a final decision on the final – the full program including the two-way balancing account by I believe August of next year. And I think as part of that schedule, the timing for the memo account would have been within, say, the end of this year or so. Maria, anything to add there or...?
No, I think that's it, Pedro.
Great. Thank you, all.
Thanks, Julien.
Thank you. Our next question comes from Jonathan Arnold from Deutsche Bank. Your line is now open.
Hi, Jonathan.
Good afternoon, guys. I think the – I have one question I just have – has been coming up is when you guys say that you feel you might have or you'll likely have material losses, that – you're not implying that you think that there's negligence, right? It could have occurred via inverse condemnation or negligence, doesn't really matter once you've decided your asset was the substantial cause, you probably will have a loss of one kind or another, is that...?
(00:37:31)
Yeah. And just to simplify, what we're saying is we expect we'll have some kind of loss that will be material. However, we're not commenting on how large that could be because I said and also Adam's comments were relevant to this, we'll be going into a litigation process that will include litigating the theory under which we are found liable and then probably in a much more basic point, while we have pointed to our equipment at Koenigstein being involved, as I said earlier, we have not provided any conclusions because we don't have any conclusions yet on what the costs would have been of that equipment as leading to the ignition, right.
We don't know to what extent we – if the negligence standard applied in court or later on showing and producing (00:38:31) at the PUC, we just don't have sufficient facts at hand to determine the degree to which we acted prudently and reasonably, and we probably won't know that until we have more pieces of information including access to the equipment that CAL FIRE currently has and that we haven't been able to see.
And just maybe to expand a little bit, Jonathan, so the material loss that Pedro mentioned in his prepared remarks that's related to the whole host of things that I and Pedro have already talked about as around the ignition point and the fact that the association of our equipment with that ignition point. But the other part of the analysis is insurance recovery and we have $1 billion of insurance for that period, and then, separately of an analysis of probability of recovery. That's more complex than the analysis of – in the insurance, obviously. But those are the other components that are – so we have to think about them in different buckets.
Yeah.
So does your statement and what you've just said, Maria, mean that you expect to have an exposure that exceeds your insurance and likelihood of recovery, or are you just talking about the sort of the number itself?
I think that we – as Pedro mentioned, we have not had access to the equipment yet that was at Koenigstein Road. There is a lot of information that we still need to obtain from third-party sources and others, things that will come up during the course of litigation. I think right now, we're still going through all of that. And as we get more information, we'll be able to develop a more specific response.
Okay. And then, if you – I think that was kind of a – oh, and one other thing, you said you're going to make – you're making moderate investments in the mitigation program, I mean, can you give us any quantification of moderate?
Sure. That's related to what we were calling our GS&RP, our Grid Safety and Resiliency Program, so that's the filing that we made not too long ago. It covers the year 2008 – balance of the year 2018, 2019, and 2020. Overall, that's about $407 million. I believe that the 2018 spending is in the $50 million or so range that's for the balance of the year. So that's what we're saying in terms of moderate expenditure.
Just one final thing, Maria. You said you would probably give a full update of your outlook when you got the PD on the rate case, I think, in your prepared remarks. Is that, which clearly could come any day, in which case might you even have such a thing at the EEI conference, for example?
So obviously, probably from the last time I'm sure you recall that the proposed decision is more than 1,000 pages typically, the ALJ ruling. We will work diligently to read as fast as we can and to update the capital spending for the period as well as the rate base outlook then for the period. It will still be a proposed decision, so we might have various caveats that we might want to associate with that update.
But yeah, we will be trying, obviously, as hard as we possibly can if something were to come out between now and then. I think that might have actually happened in the previous case where we got a proposed decision right before – or final decision right before EEI.
Okay. But I did hear you right that you would – the trigger in this case would be the PD not necessarily...?
Yeah. So we're going to update rate base and capital based on the proposed decision. Because it's a proposed decision, we may have commentary around things we may or may not agree with still at that point. But yes, that's what we will do.
Great. Thank you. Sorry for all the questions.
No, it's fine.
Thanks, Jonathan.
Thank you. Thank you. Our next question comes from Shahriar Pourreza from Guggenheim Partners. Your line is now open.
Hey. Good afternoon, guys. So let me just ask you, Pedro, just around this. I mean, when you guys made your dividend decision and you went through a pretty painstaking process and you came up with multiple scenarios and you sort of book-ended it, right? So I guess, my first question is, is what you're finding as things are progressing as data points come out, is this still sort of in line with your book-end scenario, i.e., material impact? Any thoughts around your dividend decision?
Yeah. Hey, Shahriar, thanks for the question. And just to remind everybody, I think you captured it well, we've communicated in our – and actually not just one, right, but in all of our prior dividend decisions since the wildfire topic came up, that we and our board have looked at a very broad range of potential scenarios and have not based our dividend decision on an expected outcome; rather, we've based it on being comfortable that we could satisfy all of our obligations under a very negative outcome.
I don't want to get ahead of our next quarterly decision, dividend decision. So I never want to get ahead of that. But I think that the disclosure that we're making today is certainly in line with the kinds of scenarios that we have explored in the past and that led to the dividend decisions we made previously.
Okay, got it, so that answers that. And then, just let me just on the more technicality. What triggered the disclosure, right? I mean, what – there's obviously I'm getting questions around the timing of why you disclosed today. The process is still really unclear. There's still parallel paths happening. Why not wait a little bit because this – does this leave you open to a lot of interpretations?
I appreciate that question, too. And, look, this is an ongoing review by our team. Just as you expect, it's an ongoing review by the folks at CAL FIRE and the folks at Ventura County Fire and the folks at the CPUC Safety and Enforcement Division. In our case, we've been working all along. We learn more almost literally every day and we felt that based on that learning curve that we've had over the past months, we thought it was appropriate for us to make this disclosure today on this particular piece of the fire.
Not just for anything – anything else or rather other than, the analysis, I mean, it's not just the analysis of talking to eyewitnesses, and I believe there's been some eyewitness' comments that have been captured in the press previously over the past several months, but it's not just that. It's looking at the equipment that we do have. As I've said we can't look at the equipment that we don't have, but we can look at fire indicators around the area and look at fire progression modeling. And all of these things that we're looking at, just trying to give you a flavor. It's not appropriate for us to go into those boring details given that this is litigation.
But we felt that that had progressed to a point where it made sense for us to make today's disclosure.
But I guess what I'm asking, Pedro, is why front-run CAL FIRE? Why not wait till they've finished their investigation?
Yeah. And I'm not sure we see this as necessarily front-running. Clearly CAL FIRE has pieces of evidence that we don't, and they'll come up with conclusions that in the end we may agree with or may not agree with. We view this as a much narrower decision in that it's about this one site. At this point, we felt that the evidence was very clear. Just the evidence that we had, the analysis that we had was very clear that our equipment was involved. And so, we thought it was appropriate to make that disclosure.
We don't see anything in the CAL FIRE report that would change the fact or our assessment that our equipment was involved; hence, made sense to disclose it. We don't view it as a front-running per se of the CAL FIRE process, and we continue to be ready, willing, and able to cooperate with CAL FIRE. We've been answering their questions and jointly be very responsive in that regard.
Got it. I'll let everyone else ask questions. Thanks, guys.
Hey. Thanks. Appreciate it.
Thank you. And our next question comes from Greg Gordon from Evercore ISI. Your line is now open.
Hi, Greg.
Thanks. Good afternoon. So when you say that you expect to incur a material loss that – just to be sure I understand the strict legal interpretation of that, that's before you start to assess whether or not your insurance would recover – would cover some or all of it before you assess whether or not there's a path for recovery through the PUC, et cetera? It's just how – it's a large enough gross number before all those other factors that you feel you have to disclose it, is that correct or incorrect?
That's correct. When you think about how – this is Maria, by the way, Greg. When you think about how you work through that on your financial statements, you actually do think about the liabilities separately from the asset. So that's the – I don't want to use the word progression, but that's the sequence of events on how you would think about it.
Now in some cases, insurance, I think, is a relatively straightforward bucket. I think in terms of cost recovery, we have to work through that and look at prior precedents and think through what this particular situation is and if it's – there's something here that there were similar facts and circumstances in the past before we would actually then book regulatory asset around that. So I think that you do have to go through sort of the thought process around each of those components individually.
Okay. Okay. And then to switch to a more financial topic on follow-up, looking at page 7, where you talked about financial assumptions and comparing that to what you said on the Q2 call, you on the Q2 call said you would expect incremental wildfire insurance costs $0.38 and you expect to defer $0.30. You're now saying that you expect to recover substantially all of them. So can you tell us what's changed there and then you've removed the $0.03 line item for energy efficiency, can you explain that as well?
Okay. So let's see maybe just to walk through, so we have here on page 7 that we continue to believe that it's $0.38 of incremental wildfire insurance. We believe that most incremental costs are probable of recovery. So if you recall the differentiating I'll call it the line in the sand, if you will, is the application date for our WEMA, so that's April 3. We did prior to filing that WEMA also filed the Z-Factor letter, which would actually cover us for more than the $0.30, but – where we cover the delta between – approximately the delta between $0.30 and $0.38, but because we didn't have precedents around the Z-Factor that we're exactly on point, we actually didn't defer the cost until we filed our WEMA, until we saw the PG&E WEMA decision. Obviously, subsequently yesterday we got our own decision. So then we said we could defer the costs.
The detail later on in that bullet is about the $0.14 that we've deferred so far in Q3. We expect to defer an additional $0.14 in Q4 and then $0.02 comes from the FERC, so that's the $0.30 versus the $0.38 with the $0.08 delta.
And then the energy efficiency?
Sorry. And then the energy efficiency, that's a – I would say that's a procedural issue, the Energy Division has not yet issued – they basically go through I'll call it all the math on energy efficiency and determine sort of what we would actually earn on those programs. They have been delayed, frankly, in issuing the document that goes through all of that. We thought we would get it earlier in the summer. It's now been delayed given the CPUC calendar.
For the balance of the year, we don't think it's likely that they will actually issue that. And then even when they do issue that, there's a comment period that's required as well. Therefore, we're looking for that in 2019. And we wouldn't accrue for that until we get all of that done.
Thank you.
Thanks, Greg.
Thank you. Our next question comes from Michael Lapides from Goldman Sachs. Your line is now open.
Hello, Michael.
Hey, guys. Hey, guys. Thanks for taking my question. How do you think about how much balance sheet capacity you have, whether it's to fund the incremental rate base growth or to fund potential liabilities or related to wildfires or some combination thereof? How do you think about how much incremental balance sheet either at the SCE level or at the HoldCo investing in SCE, do you think you have over the kind of the life of your kind of rate base and CapEx forecast?
Let me start with a real high level answer and turn over to Maria. But I think you've heard this message consistently from us. We have a strong balance sheet. We have strong capacity there. Maria mentioned in her comments continuing access to the short and longer term debt markets. We also acknowledge though that the wildfire liability being a key uncertainty, right, it will be helpful to understand over the long run what that final exposure really is because then we can think about how we best optimize the use of our balance sheet to cover that. We're confident that we have the balance sheets to cover that. How specifically we end up dealing with that specific liability, when we get to that point we can optimize around that; but, Maria, I'll just turn over to you.
Sure. So, Michael, I think we think about a number of different things in terms of it. So first, just maybe touch on a page or thing, we do have a number of things that we're balancing and thinking about. So it's the wildfire, the potential overall exposure there as well as any recovery that would be associated with that. There is the GRC – 2018 GRC decision and we're gearing up for the 2021 GRC at this point. So there is that, there are the capital requests and capital requirements that are happening outside of our GRC requests. So it's Charge Ready II, but it's the Grid Resiliency plan that we just filed. So there's a lot of things, I'll say on the investment side of the ledger and/or potentially the wildfire issue.
Got it.
(00:54:20)
...on the other side, I mean, what we're looking at is sort of debt capacity, it's both short-term and long-term debt capacity. We're looking at SCEs, equity capitalization rate, which right now is about – at the end of the quarter I think was 50%, so a little bit higher than what is required by the CPUC. And then we balance across a whole lot of different issues, what's the cost, where is the best place to finance. We will think about how the rating agencies will react to all of that and how do we stay aligned so that there's no undue impact between the holding company decisions and operating company decision.
So it's a lot of factors, Michael, and we will continue to assess them as we get more and more information around some of these other elements like the wildfire liability, GRC decision, capital investment requirements.
Can you remind us, what's your target when we think, I mean, FFO to debt level, meaning how do you think about what your goal is? And I don't mean in any necessarily one specific year, but I mean kind of on an ongoing basis, what your target credit metric is?
Yeah. So we don't typically talk about specific target number, I mean, obviously, a lot of that has to do with how the rating agencies view us. Obviously, how do they view California. There's been a little bit of stress around that recently.
We have been comfortable at the ratings that we have been at over the past any number of years now. Obviously, we just were downgraded recently but Edison International, so for example where Moody's has us a Baa1, and Southern California Edison is an A3. We're stable there. On the other hand, S&P we're BBB+ and negative outlook at both entities.
But generally speaking, put aside some of the noise that's been created by assessments of the wildfire issues, SB 901 ongoing, we're continuing improvements in the regulatory construct. We're comfortable in that range and we're also always alert to sort of any divergences between the holding company and the offering company.
Got it. And then one quick last regulatory one. How are you thinking about next year's cost to capital docket? I mean, is there a scenario, especially for you and your neighbor part of the north where intervenors would be willing to forgo the docket and maybe the commission would as well considering – it's hard to see the math coming out with dramatically lower authorized ROEs, especially for the neighbor to your north, but maybe you guys as well?
I think our base assumption right now based on what the commissioner said in the last cost of capital proceeding is that they want to have the benefit of going through a full proceeding because it's a re-education process for everyone. And I don't think any of the commissioners who are sitting today were here for the last full round of cost of capital discussions. So with that base scenario, you never say never, right? People can change minds or whatever. But I think at this point, the base scenario would be if we go to a full proceeding. And when we do, we will be very ready for that. The arguments that have ruled the day in the past in terms of the need for a California premium are even more acute today.
It's all frankly, all the good risks, right? The important risk that we will have to take to make sure that we're helping California do more renewables and more energy efficiency and the like. And now, add on to that, doing it with more electrification, different uses of the grid, more need to look at cybersecurity. And then of course, let's not forget, the large risk that still we have to deal with the wildfires. So all of those will, I think, add to the argument for a premium ROE.
Got it. Thank you, guys. Much appreciated.
Thank you. That was the last question, and now we'll return the call back to Mr. Sam Ramraj.
Thank you for joining us today, and please call us if you have any follow-up questions. This concludes the conference call. You may now disconnect.
That concludes today's conference. Thank you for your participation. You may disconnect at this time.