Edison International
NYSE:EIX
Earnings Call Analysis
Q4-2023 Analysis
Edison International
Reflecting on the past year, the company succeeded in managing business variability and delivered core EPS that exceeded the midpoint of expectations. The robust capital investment strategy includes a plan to invest between $38 to $43 billion from 2023 to 2028, focusing on the distribution grid and supporting California’s transition to a carbon-free economy. Investments will also include wildfire mitigation, infrastructure replacement, and growth in new service connections, among others. These capital expenditures have a high quality and low-risk profile with prior approved spending by the GRC.
Looking ahead, the company anticipates strong earnings growth, with an EPS guidance range of $4.75 to $5.05 for 2024. With the underlying business set on a strong trajectory, the 5% to 7% core EPS growth target for 2021 through 2025 stays on track despite the $325 million pretax interest burden, scaling back the EPS growth by 250 basis points. The significant investments in rate base earnings, capital expenditures, and rate base true-ups are integral to this growth, with an expectation that interest expenses from wildfire claims will moderate once claim settlements are substantially completed.
The company’s funding activities for 2024 are forecasted to be minimal, with a small portion of the annual equity needs already prefunded and the remainder expected to be managed internally. Additionally, debt refinancing plans are in place, with an expected issuance of $500 million to address maturing debt. The company maintains a strong stance on achieving its core EPS growth target of 5% to 7% from 2025 through 2028, which incorporates a modest equity requirement of $100 million annually. This forecast suggests a well-balanced approach to funding, reflecting a robust financial strategy and confidence in future performance. Prospects for value creation, cost recoveries from past events, and successful execution of operational excellence programs further reinforce this positive outlook.
The discussion indicated that investments in O&M would be strategically redirected towards initiatives promoting operational excellence. Such reinvestment, amounting to about $0.15 to $0.20, aims for long-term benefits and is part of an ongoing effort to improve system reliability and customer service, aligning with the company’s focus on reliability and affordability.
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Good afternoon, and welcome to the Edison International Fourth Quarter 2023 Financial Teleconference. My name is Sheila, 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 you, Sheila, 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 our 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 1 question and 1 follow-up. I will now turn the call over to Pedro.
Well, thank you, Sam, and good afternoon, everyone. Thanks for joining us. I am pleased to report that Edison International's core EPS for 2023 was $4.76, which was above the midpoint of our guidance range despite the pending CEMA decision shifting into 2024. This strong performance demonstrates our ability to manage the business and extends our track record of meeting annual EPS guidance over the last 2 decades, as shown on Page 3. Today, we are introducing 2024 EPS guidance of $4.75 to $5.05. This range incorporates a planned investment in O&M for reliability-focused activities and redeploy savings from prior years into operational excellence initiatives. The spending will benefit customers and therefore, shareholders in the long run. I also reaffirm our strong confidence we have in our long-term EPS growth targets of 5% to 7% for 2021 through 2025 and also 2025 to 2028. Maria will discuss our financial performance and outlook later on the call. Page 4 shows our accomplishments in 2023. First, we, once again, delivered on our annual EPS guidance. Second, SCE exceeded its wildfire mitigation plan target to install 1,100 circuit miles of covered conductor, bringing the total to more than 580 in just 5 years. We are proud of this progress, which combined with enhanced medication management, asset inspections and other programs has significantly reduced the need for public safety power shutoffs. Incorporating this progress into the independent wildfire risk model managed by Moody's RMS, you can see on Page 5 that SCE has achieved 85% to 88% risk reduction as compared to pre-2018 levels. Third, SCE filed its cost recovery application for the TKM events requesting $2.4 billion. SCE provided a compelling case that it prudently designed, managed and operated its equipment and that the associated costs were reasonably incurred. Lastly, we raised our annual dividend by 5.8%, reflecting the board and management's continued confidence and commitment to delivering on our EPS growth targets. Our dividend yield is in excess of 4% and remains a key component of our total return proposition. This marked the 20th consecutive annual increase in Edison International's dividend. Page 6 provides an update on the 2017 and 2018 wildfire resolution and our approach for 2024. I would like to emphasize 3 takeaways. First, SCE continues to make solid progress, and overall claims are settling in line with expectations. SCE revised the best estimate of total losses upward by $65 million with the majority of this based on a single settlement. The deadline in the Woolsey settlement protocol to provide complete claims packages was yesterday and SCE is now evaluating the responses. Second, the utility targets resolving more than 90% of Woolsey claims and filing the cost recovery application in Q3. Third, CPUC President, Reynolds, issued the scoping memo earlier this month for the TKM proceeding, which largely adopts SCE framing of the issues. We are encouraged for this ruling because the issues will be handled in a single phase, allowing for a final decision as soon as Q1 of 2025. Also the schedule provides an opportunity for parties to submit a settlement agreement. I would like to remind you that our financial assumptions for 2025 and beyond do not factor in the cost recovery applications, which would represent substantial value for the company and SCE's customers. Page 7 summarizes the key management focus areas for 2024. On the wildfire mitigation front, SCE plans to install an additional 1,050 miles of covered conductor in 2024, after which this program will start to ramp down. By the end of next year, SCE will be approaching a significant milestone, 90 hardening of its total distribution lines and its high fire risk area. You can see this depicted on Page 8. Also SCE will continue its GRC advocacy for funding critical investments that will enable efficient electrification and the state screen energy transition. I want to emphasize that distribution grid investment accounts for more than 85% of SCE's capital plan, and these investments are crucial for ensuring reliability, resiliency and readiness. The CPUC has consistently approved this type of spending in previous GRCs, reinforcing our confidence in SCE's request. As for the legal and financial categories, I just discussed our legal approach, including filing the Woolsey application in the third quarter, and Maria will discuss our financial targets shortly. We, at Edison, are equally focused on the long term. As we have highlighted in several industry-leading white papers, the grid will be a key enabler for realizing California's pathway to NetZero. To get there, it will be critical to rapidly expand the high-voltage transmission system and the localized distribution networks that serve customers. This aligns well with the underlying drivers of our investment outlook. As more and more vehicles and buildings are electrified, the electricity demand will increase by 80% over the next 20 years, which will benefit customer affordability through a 40% decrease in their total energy costs across electricity, gasoline and natural gas. After years of flat demand, SCE is projecting an uptick in electricity usage of about 2% annually over the coming years. To accelerate the development of new markets over time, SCE has developed innovative proposals, including its nation-leading suite of transportation electrification programs. Recently, although the CPUC denied SCE's building electrification application due to their near-term affordability pressures, it acknowledge SCE's leadership and proposing programs to accelerate much-needed building decarbonization. The utility will continue to evaluate the results of other building electrification pilots it has in progress, and we'll also look for different ways to support the state in advancing its green energy priorities. Another area where we continue to innovate is building our digital and AI capabilities to drive greater efficiency. We are investing in technologies to improve our data analytics skills to enhance decision-making and strengthen operational excellence. For example, we are using generative AI to improve inspections, customer experience and grid planning. Today, our team is also using AI for research, workflow automations and code development. In SCE's customer service operations, AI is enabling call center agents to retrieve information faster, performing speech and sentiment analytics and supporting billing operations. We will continue this proactive approach to capture value using new technology. To conclude, our operational agenda is driven by safety first, reliability, affordability and resiliency in our overall utility operations, including SCE's wildfire mitigation and industry-leading covered conductor program. Our financial agenda is very clear: deliver on our 2024 EPS guidance and achieve our EPS target for 2025. Our team and I are very committed to executing strongly, and we will continue to share our progress with you. And with that, let me turn it over to Maria for her financial report.
Thanks, Pedro, and good afternoon, everyone. In my comments today, I will discuss fourth quarter and full year 2020 results, SCE's CapEx and rate base opportunities and 2024 EPS guidance. I want to reaffirm our unwavering confidence in achieving our long-term EPS growth target of 5% to 7% from 2021 to 2025. I'll elaborate on factors underpinning this confidence shortly. Let me begin with fourth quarter results. EIX reported core EPS of $1.28. As you can see from the year-over-year quarterly variance analysis shown on Page 9, core earnings grew by $0.13, primarily due to higher GRC revenue and lower O&M, partially offset by an increase in interest expense. The parent company also had a gain on preferred stock repurchases. For the full year, EIX's core EPS of $4.76 was above the midpoint of our guidance range. For context, you will recall that we identified 2 specific items in this guidance. The pending CEMA decision and the tender offer for EIX' preferred stocks. The CEMA decision shifted into 2024 and the gain on the preferred stock repurchase was $0.04. I'm also pleased to inform you that our operational excellence initiatives are off to a solid start, and we are seeing this translate into higher operating efficiency throughout the business. This was reflected in better-than-expected SCE operational variances. Summing up our 2023 performance. The key takeaway is that we continue to manage the variability in the business and, yet again, deliver core EPS above the midpoint. Page 10 shows the components of our performance versus guidance. Turning to SCE's capital and rate base forecast shown on Pages 11 and 12, I want to emphasize 2 messages. First, SCE has a robust and high-quality capital investment plan for 2023 through 2028. The utility plans to invest $38 billion to $43 billion, the majority of which is in the distribution grid. This spending covers several critical areas, including infrastructure replacement, wildfire mitigation, load growth, new service connections and inspections and maintenance. This type of spending has been approved in prior GRCs, so we view these as high quality and lower risk. Moreover, they directly support California's leading role in transitioning to a carbon-free economy. Second, these forecasts do not incorporate substantial additional long-term CapEx opportunities in several areas. The utility will file stand-alone applications with the CPUC for the next-gen ERP and AMI 2.0 programs once they have been fully developed. On the FERC side, SCE is the incumbent transmission owner for 17 projects approved in CISO's transmission plan, which we expect will result in more than $2 billion of investments. Turning to 2024 EPS guidance. The range of $4.75 to $5.05 and modeling considerations are outlined on Page 13. As you can see, rate base earnings growth is strong, though our EPS guidance implies modest growth for the year. There are 3 primary reasons for this. First, interest expense on the wildfire settlement-related debt grows by about $0.16, driven by refinancing $2.1 billion of maturities and issuing additional debt to fund the balance of the claims resolutions. I want to be very clear that the utility expects to seek full CPUC cost recovery of all eligible claims payments, including financing costs. Second, SCE operational variance is $0.15 to $0.34 lower year-over-year. As we've noted, this captures SCE's variations from authorized levels. including such items as AFUDC, O&M, depreciation, financing and true-ups from regulatory approval. Pedro talked earlier about the planned increase in O&M as SCE's spends on targeted reliability-focused activities and redeploy savings into operational excellence initiatives. This accounts for 15% to 20% of the total year-over-year change. The utility continues to spend in its operations, including distribution, customer service and IT to support reliability and benefit customers in the long run. Third, parents and other costs are higher, primarily due to the absence of the gain on last year's preferred stock repurchase and also having a full year of interest on the junior subordinated notes issued in excess of the amounts needed to fund the repurchase. Turning to Page 14. I want to emphasize the strong underlying business growth that is being masked by the growing interest expense on wildfire claims debt. As you see on the chart, we are on track to achieve 5% to 7% core EPS growth for 2021 through 2025. This is despite the burden of about $325 million of pretax interest or $0.61 per share, which reduces our core EPS growth by 250 basis points over this period. On the other hand, this illustrates the substantial potential value from successful resolution of the cost recovery proceeding. I would now like to address the big increase in 2025 core EPS and share some insight into what makes us confident in delivering on our commitments. To do this, we are going beyond our typical 1-year forward guidance and providing a bridge between the midpoints of 2024 and 2025 core EPS guidance, which is on Page 15. The biggest contributor to earnings growth comes from an increase in rate base earnings. You will recall that for the last several years, we've been projecting rate base to increase by 11% to 14% in 2025. This step-up has 2 components. The first relates to the 2025 GRC, which in total drives $0.63 of the change. The drivers for this increase are 2025 CapEx and rate base true-ups including differences in the timing and mix of capital deployed over the prior rate case cycle. The second component relates to non-GRC applications to recover past wildfire mitigation and other spending as well as FERC jurisdictional investments. This represents the remaining $0.15. A significant portion of this relates to covered conductor insulation and other mitigation spending above what was authorized in SCE's 2021 GRC. Outside the rate base EPS, I want to underscore that operational variances are not a key driver, and its contribution is in line with historical levels. Further, we see wildfire interest expense moderating as the claim settlement process should be substantially complete and SCE has only $300 million of wildfire debt maturing in 2025. Let me summarize by saying that our confidence is underpinned by these growth drivers, further bolstered by the fact that headwinds in '24 are expected to moderate going into 2025. Turn to Page 16. Following an active year of capital market execution in 2023, our planned 2024 financing activities are minimal. In December, EIX prefunded $75 million of the $100 million annual equity need with our junior subordinated notes offering. The remainder will be addressed through internal programs by the end of Q1. As for the rest of the parent's funding needs, we expect to issue $500 million of debt to refinance the maturity. Turning to Page 17. We are also reiterating our core EPS growth target of 5% to 7% for 2025 through 2028, which only requires $100 million of equity per year. On the right side of the page, we've now laid out the consolidated sources and uses for this period. Let me conclude by saying our confidence in meeting our 2024 and 2025 EPS targets remain strong. Additionally, there are also potential value creation opportunities that are not factored into our guidance metrics or the company's equity value. These are cost recoveries for the 2017 and 2018 events, successfully executing our operational excellence program. The cornerstone for SCE's cost leadership and lowest system average rate among major IOUs in California and incremental CPUC and FERC growth investment opportunities. We look forward to executing on our plans and sharing progress on the next quarterly earnings call. That concludes my remarks, and I'll pass it back over to Sam.
Sheila, please open the call for questions. As a reminder, we request you to limit yourself to 1 question and 1 follow-up so everyone in line has the opportunity to ask questions.
[Operator Instructions] Our first question will come from Shar Pourreza with Guggenheim Partners. Shar, we're not able to hear you in conference, please check your mute feature.
Can you hear me now?
Can you hear us? You're fine.
Yes sir.
Sorry about that little technical issues. Pedro, just wanted to start off components of the '24 drivers, in particular, maybe that $0.15 to $0.20 of O&M reinvestment. When you referenced redeploying the savings in the future, would that be 1 for 1 with the $0.15 to $0.20? And I guess what time frame would that impact?
So I think the -- I'll start and Maria can continue here, but we're focusing on what we are investing in '24, and we see that being an investment in systems, processes, our continued work on operational excellence that we think will accrue benefits for customers over the long haul. So it's really all about making sure that we are thinking long term and doing good things for the business. This is not like 1 big bang. It's multiple opportunities. So we think we've discussed with investors in the past, consistent with our operational excellence work.
Yes, Shar. I think Pedro has captured a lot of it in that response. I'd also focus on the fact that the spending that we're doing, the reinvestment that we're doing, we talk a lot about affordability, but we also talk a lot about reliability for our customers. So you're seeing us put the money to work in reliability efforts, so grid remediation, generation, as well as the operational excellence initiative that will provide value over a long-term period. So I think it's those things that we're really focused on in 2024. And you'll continue to see us make those investments as we move forward.
Got it. Okay. Great. And then just I appreciate you calling out the wildfire debt drag that is impacting results, the $0.61 a [ jag ]. I guess, how do you plan to update your assumptions on that portion going forward, especially as we're now well in progress with the TKM recovery?
Sure. So as you know, we are not assuming any recovery in our long-term EPS forecast. We have submitted a very compelling case, and we're making progress and have the scoping memo now, but we haven't incorporated anything there in terms of the benefit. We have provided interest rate assumptions. We don't really have some refinancings in '24. As I mentioned earlier, we only have $300 million of refinancing coming due in 2025. But the interest rate forecast that we have today embedded there is pretty consistent with what we're seeing. So as we continue down that path, we'll just be providing sort of quarterly updates on the activity around the cost recovery application.
Next, we'll hear from Steve Fleishman with Wolfe Research.
So the -- just wanted to -- you talked in the past about the kind of higher cost of Cap at all would be -- a lot of that would be offset with likely reinvesting in the business and the like. So just as we look at the guidance for '24, I guess, '25. Could you just kind of go back to the prior comment, and how to think of it from that standpoint?
Sure, Steve, it's Maria. So what we've talked about in the past around the cost of capital negative in the trigger is that obviously, that's driven by interest rates and the interest rate environment that we're in. And as we look forward, we do view that cost of capital mechanism in the trigger as being a hedge against interest rate changes on the expense side of the equation, if you will, but also an opportunity to reinvest in the business, again, looking at that longer-term affordability. So as you think about changes year-over-year, you can see, as we already talked about in 2024, you can see that we're taking dollars and we're reinvesting them in the business. As you look forward to 2025, I think there's a really interesting chart, and I want to highlight it. As you look forward to 2025, we have updated the rate base earnings in 2025. Makes sense. The cost of capital mechanism is triggered we've updated our tariff sheet when -- and on our next rate change, we'll be implementing the cost of -- the new cost of capital to makes sense to update rate base earnings. And then we've gone through the rest of the buckets in '25 and also updated them first to reflect the changes in interest rates, the hedge aspect of the cost of capital mechanism. So you see that our cost excluded from authorized have been updated. That's largely wildfire debt interest expense. We've also taken a look at all of the other buckets, the operational variances, et cetera. But when you look at what's happening between '24 and '25, the increase in earnings is driven by rate base growth. SCE operational variances in line with historical levels, not a significant driver. EIX parent and other, not a significant driver of year-over-year growth into 2025. And frankly, now by 2025, the wildfire debt will have also stabilized, not a significant driver. So that's how I think about the cost of capital mechanism and then how it rolls through all the different components.
Okay. Just 1 follow-up. You mentioned the FERC transmission projects that are not in your plan. Kind of when would we have a sense of whether you're likely to get those? And would they kind of become part of your plan?
Sure. So we are the incumbent transmission owner for 17 of the projects, the CISO has included in our plan. That's $2 billion plus. That is largely post-2028. So as we continue to refine the cost estimates because although we are the incoming transmission owner, we are doing the engineering currently as we continue to update that and get a firmer view of the specific cost, we'll roll that out. But again, a lot of the spending is post-2028. In terms of the competitive bids that were out for bid or the competitive projects that were out for bid last year, we did bid on 2 projects and should know sometime in the spring, whether or not we've been selected.
And Steve, I think a reminder beyond those projects that have been identified by ISO. If you go back to our count on to '24, '25 white paper from last year, as we looked across all of California, we see this continued need to invest in the grid over the long term through 2045 with the pace of transmission editions needing to be 4x statewide what it's been historically and the pace of distribution additions needing to be 10x. So it's been historically. So we see a lot of work for the utility in the 2 decades ahead.
Our next question will come from Nick Campanella with Barclays.
Especially the EPS bridge, I just had a question on that. Just the $0.30 true-up in the '25 EPS bridge, is that just very unique to '25? Or does any of that kind of continue through '26? Because I just know there's a lot of programs and true-ups outside of traditional GRC.
Yes. Great, Nick. So you're talking about the rate base true-up that we show on that bridge in the DAC rate. And so when you think about that, there are different components to rate base. As I said earlier, rate base is the driver for earnings growth between 2024 and 2025. Two buckets around rate base growth. One is related to the 2025 GRC and the other is related to non-GRC applications, if you will. I'll break down the GRC, the 225 GRC-related item, a little bit more. Some of that's just 2025 CapEx. We spend it, it goes into rate base. The prior spending and the true-ups really reflect, as an example, over the course of a rate case cycle, the actual mix of capital that we've deployed or assets that we've deployed, it's a little different than what's in authorized. So we have true-ups around that prior period spending. We also have some non-CapEx-related items that get trued up in a rate case or get as they say, litigated in a rate case. Those could be things like taxes or the manner in which customer deposits are treated. So there's a number of things in there. Those are not atypical for a rate case proceeding. The second piece, the non-GRC piece of it, the applications there. Those also relate to prior period spend, but those are things that we're going to seek recovery for outside of the general rate case, and we should be filing something relatively soon, in fact, particularly around the items that relate to prior period covered conductor spend. So those -- that's the flavor of the rate base. I think it's really important to note also that -- so it's rate base growth it's, rate base earnings, but it covers actually a pretty diverse bucket of different elements. And so we think that, that diversity also helps strengthen the move from '24 to '25.
Okay. I appreciate the color. That's helpful. And then I guess just a little bit of a follow-up on Steve's question, just thinking through as you wrap in some of these upside factors to the plan, just what's the type of balance sheet capacity that you have to do that and sustain higher CapEx? And how do we think about incremental equity funding, if at all?
Sure. So we did include a sources and uses this time for the '25 to '28 period. We have a very strong commitment to our balance sheet. And I think you've seen us demonstrate that commitment with the financing decisions we made in the past, but also the balance sheet has been strengthened by all of the wildfire mitigation that we've deployed. It's really made a difference, I think. As we move forward in time, we add capital to the capital plan, SCE will, of course, fund it for their authorized capital structure. And we're in the 15% to 17% FFO-to-debt range. So the EIX component of the financing plan, we'll just have to see where we are in that 15% to 17% FFO-to-debt range, and we'll make our decision based on our metrics.
Our next question will come from Anthony Crowdell with Mizuho.
I think I just have maybe 1 quick follow-up. I want to connect to Slide 14 on Slide 6. When I look at Slide 14, it looks like interest increase, and I believe that just as you're funding more of the liabilities. Does the, I guess, stability in the interest expenses, you show $0.61 in '24, $0.61 in '25. Is that stability in the interest expense more related to hedges? Or is it related to on Slide 6 that the claims are coming in slower, and it's requiring less funding.
So it's probably not either, exactly. Basically...
Hopefully 2, sorry.
It's a third choice. We have some maturities that are coming up in 2024. So that's built into the '24 number, obviously also built into the 25% number. Also, as we continue to settle claims, the way we've modeled this is that we will be substantially complete with that by the end of 2024. And so you're really not seeing big increases in the debt. There is a maturity that will have to be refinanced in 2025, but it's only $300 million. So that's really -- those are the drivers for why the number stays pretty constant. And we would expect that as we get closer and closer to the end.
Great. And then just last follow-up on the claims. I believe in your prepared remarks, you stated that the increase of $65 million. And I apologize if I heard this incorrectly, it was related to 1 claim. Just could you give additional color on that, if that was the -- correct, I heard that?
What I said was that the majority of it was from 1 claim, Anthony. And what we're seeing is that as we went to that as a 1 claim and then I think just a small number of other claims made up the balance of that. We're seeing that our research modeling continues to be robust, but we had a couple of unique outliers that required an adjustment at this time.
Our next question will come from Mike Lonegan with Evercore ISI.
Planned asset sales related to the tower attachments. Just wondering what your expectation is on when a scoping memo will be issued. And if you could comment on the level of interest you're seeing from potential buyers, and you still expect to receive proceeds mid-'24 and '25.
Great, Michael. Thanks. So we are waiting for the scoping memo. We've gone through various aspects of the proceeding thus far. We know where interveners have focused their questions. to some extent, they focus a little bit on safety, but I think that we easily address that. There's no change from a safety posture due to this transaction. We've also taken a look at the sharing mechanism that's been proposed obviously, we embedded a sharing mechanism with customers that's already part and parcel of our tariff structure around these types of assets but they did raise some questions around that. So like you were waiting for the scoping memo, we're hopeful that it will come out relatively soon, but that is the next step in the process. As you recall, the request that we made was to treat the sale in a particular manner that would not require a very large application to follow on to the first one. that will be decided as we go through, and we could see things go quickly and do something this year, but certainly couldn't go into 2025 in terms of the sale. We won't really start marketing until we actually know what the regulatory schedule will be because we think that's more productive from a transaction perspective.
Great. And then secondly for me, just a general question. You've highlighted that by the end of 2025, you expect 90% of your distribution lines that are located in high fire risk areas to be hardened. And have said that wildfire mitigation spend is stabilizing. My question is, I would think, presumably, there are areas that are not currently categorized as high risk that could potentially become higher risk over the long term. Things seem to be evolving pretty quickly. I was just wondering, have you done analysis, or do you have plans to do proactive work on areas that could emergent [Indiscernible] event that they develop that way faster than expected.
Yes. I'll give you a couple of reactions to that. And it's a good question, Michael. Clearly, we continue to monitor how the landscape is changing. We do that in partnership with fire agencies when like OEIS. So to the extent that additional areas are designated HFRA, high fire risk areas, in the future, then we would make sure that we're using the same standards that we use for high fire risk areas today. We do expect that as climate change continues to drive more extreme weather. If you go back to our adapting for tomorrow white paper, by 2050, we see something like a 20% increase in wildfire risk statewide. But that said, it's -- this is where we're relying on the hardening. And so certainly, if we see more areas come into that high-risk fold, then we will apply the same sort of methodology to them. The other thing I'd say is that as we progress in our normal investment, we are we've had this big push due to the rapid hardening in HFRA, but we've also upgraded our standards for just generic replacements. And so we'll also see hardening to take place more organically as we continue our bread-and-butter infrastructure replacement throughout the system.
Next, we will hear from Ryan Levine with Citi.
Hoping to ask on AI, you highlighted it in your prepared remarks, how material do you see the cost-cutting opportunity to be for Edison? And then more broadly, given some of your role in AI. Do you see a lot of shared information to address that commercial opportunity for the industry?
Yes. And I'd say, I'm getting perspectives of that on that, not only for my EEI colleagues, but as I engage with CEOs across the economy, right, the business roundtable Business Council, it is a big topic for everybody, a big focus area. I think that this is a long-term opportunity, Ryan. And we're really excited about it. I feel proud that Edison -- I think is one of the early movers certainly in our sector. And so the kinds of examples you heard me describe where we have had some pilots. We've moved from pilots we're actually implementing permanent additions to things like what I mentioned in the customer call center support. It's a real long-term efficiency opportunity. But we're still very early days, right? And so handicapping, I know it's going to be significant. How quickly can they really get deployed? How quickly does the technology mature, pinning that then against more specific cost estimates. I think this is something we will continue to see probably at least the next 2 or 3 rate cases over time at SCE. So it is -- there's going to be a curve to that. And we're moving quickly with the pieces we're working on right now, and we're seeing impact from them, but it will take a while for that to mature and to long-term savings where we can say, here's ex sense an EPS that's coming from that or here's the millions of dollars that we're able to save customers in a future rate case.
Great. And I can ask 1 follow-up on the transmission opportunity. Is there any disclosure you're able to share around right of ways or resources that you have to make an argument for winning the 2 outstanding bids that you highlighted?
Right. I'm just going to say that the CISO has all of our information, and we'll let them go through before we make a lot of detailed statements about our bid.
Sorry, we can't go into more detail right now.
Our next question will come from Angie Storozynski with Seaport.
Okay. So can I just ask about what happened with the benefit from the cost of capital? Because I understand that there is reinvestment happening in '24, I get that. But why doesn't it reappear that I mean, again, it should be just a onetime offset, no. I mean, again, I mean, is it somewhat GRC truing up the costs here? Again, why am I not seeing the benefit in '25?.
Sure. So we did provide sort of a bridge between 2020 midpoint to 2025 midpoint. And I think the way that we've discussed the cost of capital mechanism before is that it is it triggered because of the interest rate environment. And so we view it as in part a hedge against interest rate movements. We also view it as an opportunity to make investments. And those investments could be purely around creating longer-term affordability, which then provides more opportunity to invest in rate base, but also around the liability, which we know is a top focus for our customers as well as for our regulator. If you think about what we've updated for 2025, we took the rate base update that's associated with the cost of capital mechanism. We also took a look at where interest rates have moved, which is, again, the hedge, the other part of the cost of capital is on the expense side. And we updated our cost excluded authorize. There's movements were largely related to wildfire claims debt. That's stabilizing, of course, post-2024, but you can see that we've updated that. We looked at the operational variances again as well, and we've seen that those are pretty much flat year-over-year, a little bit of increase year-over-year with 2024, so in line with historical levels. Obviously, as Pedro noted, we're working on a lot of different operational excellence efforts. And so we're going to continue to make those investments so that ultimately, we get more of those benefits out on the other side, but those are the ways that we thought about the update to 2025 and really wanted to highlight that if you look at 2024 and then you look at 2025, it's that rate base growth that is driving earnings. And that is ultimately in the long term, the earnings growth trajectory for the company is always going to be tied to rate base growth. And so I think that, that really clarifies sort of the stability and the foundation for our long-term earnings trajectory.
I understand. But here's my question. So if you recall in the previous couple of calls, we've always had this discussion about is this really incremental to the the earnings range for '25 versus some offsets to that number? And so I'm just wondering if the same is going to be true now with the $0.61 that you're guys showing on Slide 14, which is the earnings drag associated with the wildfire claims. So again, obviously, depends on the recovery of those costs. But I'm just wondering if is $0.61 really the upside scenario here? Or is there something that's going to eat into this potential benefit, assuming that you get recovery of all of the wildfire cost?
So I think we've been really explicit. I think there's even a chart that shows the progression even from 2001 to 2025 in terms of what that earnings drag is related to the wildfire debt. Not trying to mask anything at this point. We've laid out the maturity schedule that we have related with wildfire debt. We've incorporated -- we basically -- as I noted earlier, we've assumed that we will be pretty much done with the wildfire claims payments by the end of this year. And so all of those amounts plus the refinancings that we'll do this year and next year are baked into that number. So I don't think that we're talking about anything that is sort of an area where you would see something unexpected happens. We haven't incorporated -- we're talking a little bit about offsets and the like. We have not incorporated any benefit from the cost recovery application and recovery of those claims payments. So there is nothing that would eat into that $0.61 in a negative way. Cost recovery obviously creates a benefit because then that interest expense would be offset by authorized revenue. So it actually, I think, in terms of your question would go the other way.
Okay. And then separately on the transmission ROE, from just the assumption about a [ 10.3 ] transmission ROE. Is there any concern that there's any substantial downside to that ROE is only looking at what happened with PG&E and the ISO adder, et cetera. How comfortable are you with that level?
Well, we are comfortable. We have a black box settlement. Our settlement doesn't have references to the CISO adder or the like. So that [ 10.3 ] is the number that we have. Interveners can ask us at this point to go in and file another rate case or another FERC formula rate case. They haven't done so to this point. Obviously, the interest rate environment is significantly different than the last time that we settled the case. So I guess there's potential risk on both sides, right?
Our next question comes from Jeremy Tonet with JPMorgan.
I just want to come back to an earlier point. Apologies if I missed it here, but with regards to the '25 bridge and the prior spending true-ups of $0.37, is that a number that recurs going forward, or should we expect in '26 to that to drop off?
I see your question, sorry, and I probably didn't understand it clearly the first time. No, those are going to be rate-based earnings. So that -- the [ $1.78 ] is just the increase from rate base earnings. In the next year, those things will still be in rate base. So we'll just be -- if you look back at the chart that we have that shows rate base year by year, we were bridging from the midpoint, but it's all -- it's a cumulative number as you go forward. Each year, the rate base will just embed the change that happened in '25 and then whatever incremental CapEx we have on top of that in the current year.
Got it. That's helpful. And another smaller point, if you will, just turning to Slide 26, in looking at the 2025 core earnings per share component ranges in the SCE cost excluded from authorized, it seems like that goes up by a quarter or so versus '23, and I was just wondering what would be some of the drivers there? Is it looks like the interest rate assumption was unchanged. So just wondering component feeding into that.
Yes. So that is largely related to wildfire claims debt. And as we've been updating the amounts that we have to pay for claims, we needed to update that. And there has been volatility as we've gone in and refinanced some of the claims. So it's really the driver and the difference relative to the prior is really about wildfire claims payment related debt. Again, our view, and we talked about this on the last earnings call as well, is that the cost of capital mechanism, which is driven by the interest rate environment, has a corollary on the expense side, and so the CCM is really a hedge against the ongoing interest rate movements.
Sorry, just to clarify that. I didn't mean versus -- '23 versus the prior '25. I think that number changed?.
Yes, it did. And it is still really -- I understood your question, sorry. It is related to increases in wildfire claims related debt.
Our next question will come from Greg Orrill with UBS.
Just sorry, if this is sort of old ground. But with the deadline to file a claim for the Woolsey recovery, how does that impact, if at all, the the best estimate of total losses that you have?
So Gregg, we, as you know, every quarter, take a look at all of the information that we have and then tie that back to what we think about our best estimate. The process that you just referred to ended yesterday. The team is in the process now of evaluating all of the responses that have been submitted. And so over the course of the next quarter, we'll be taking a look at that, and we will update folks as we get through that on to the next earnings call.
Our next question will come from David Arcaro with Morgan Stanley.
I want to get your perspective on the building electrification proposal, I guess, how are you positioning that type of an opportunity? Is that something that you could approach in a different way, refile in the future, look for maybe a different strategy or funding or affordability considerations just as you look at maybe other strategies for investing in building electrification going forward.
Thanks, David. That's a great question. And first, let me just probably repeat myself a little bit here. But when we think about the building electrification application, I think SCE has done a really nice job of 2 things: one, identifying a big gap in deployment; and secondly, coming up with a solution that basically had a cost benefit of 1, right? So that is actually pretty attractive when you have an emerging technology like heat pumps. And to the second thing they was developing this application with that cost benefit of 1 that we not only set on its own 2 feet, but it was going to create a demand signal that would be very powerful to then help manufacturers go off and scale and capture those economies of scale that you get as you increase the volumes that you're producing. We saw this phenomenon, right, collectively in California, and more broadly, we saw the phenomenon with solar. And the early RPS targets helped drive down solar manufacturing costs. we've seen a phenomenon with battery sales, right, which have come down in cost dramatically. I think they're probably 10% of the cost that used to be a decade ago. And that hasn't happened with heat pumps yet, hence, the building notification application. We appreciated that the commission created SEE for creativity, and I agree. And -- but they felt these near-term pressures, affordability and passing the application. They also pointed out to some of the other funding that they thought was available and perhaps they didn't think that SCE had factored in sufficiently. I, again, respectfully disagree with that view, I think SCE has factored that in. And what's ironic about it is that that very same week, actually, a few days before the PUC voted out that final decision, the governor unfortunately cut out something like $200 million from his budget proposal for building electrification. And so to me, that just shows that here one of the key gaps that we identified in our mind to get white paper a few years ago. Building electrification, if you think about total greenhouse gas emissions in the state, buildings account for about 10% of greenhouse gas emissions, but we saw building electrification being able to make up about 1/4 of the gap that we saw in terms of new decarbonization steps needed between we filed that -- or published a white paper, I don't know, 2, 3 years ago in 2030. So sorry for a long preamble, but it kind of gives you a context of how important we think building electrification is. So what are we doing now? Well, for us, let me just remind you that, that denial of BA doesn't impact at all the 5% to 7% EPS growth targets we have for '25 and for '28. That would have been incremental on top of that. And it certainly does not impact the merit of SCE's '25 GRC application because the infrastructure investment that called for there is absolutely needed regardless of what happened with the -- but our team will continue to look at how is the gap shaping up for the state. I was state doing in terms of meeting its 2030 legislative target 40% economy-wide reduction in greenhouse gas emissions 1990 levels. How is this at doing in terms of getting to NetZero by 2045. And we expect we'll continue to see building electrification, be a laggard in terms of the progress in the States. So our team is already thinking about are there other opportunities to help the state help itself. And whether that's another application like this one, we certainly wouldn't go back out with the same thing, no point to that. But we'll continue to think creatively about is it an application standalone? Are there other funding sources that can be tapped by the existing today, but that maybe haven't been quite fully tapped yet. Other things that SCE can do so utility. Are there things that SCE can encourage others to help address the gap thinking about the whole space right now, and we'll keep you posted. Does that help, David?
Yes. Yes, that's a helpful perspective. It doesn't seem like the opportunity goes away...
Well, the need certainly doesn't go away. That's increasing, right?
Right. Yes. Yes, makes sense. Great. And then I guess my only other kind of lingering question here, and maybe I'll have to follow up separately. But just on that cost excluded from authorized -- sorry, Maria, to go back to this. But just are there any other moving pieces in that $0.25 versus the last slide deck. Did the amount of wildfire claims debt go up meaningfully. I would have thought that, that was not changing too much kind of quarter-to-quarter here. And then it looked like the interest rate assumption was flat between the slides there. So sorry, just curious if there was anything else that was missing.
So you'll recall that in Q3, when we did have the more sizable increase in the reserve, we didn't really update every single line item in the 2025 rack up because we knew that we would be able to manage within the range. So -- but now that we've got the CCM sort of, as I said, integrated into our tariffs, it will be implemented in rates, we wanted to go through line by line and provide a fresher update. So that's what's going on.
Our next question will come from Julien Dumoulin-Smith with Bank of America.
So let me just ask a little bit of a follow-up from Angie here vis-a-vis the cost of capital here. Just when you think about it maybe in the reverse here, if you will, if there were to be further durations on the cost of capital, it sounds like there are puts and takes that you could manage around here to keep numbers intact, right? I get that the full extent upwards wasn't necessarily reflected in a linear fashion in the outlook for a variety of reasons. I just wanted to clarify that piece. And then I got a quick follow-up on the long term here.
Sure. Yes...
Kind of get pulled in into that.
Julien, I think it actually, if you think about what happened in 2023, where we manage the variability that we saw in the business and came out at $4.76, which is above the midpoint of our guidance range. We always have things that we're managing in the business, and we would do that to the extent that we needed to relative to the cost of capital. But I want to just reemphasize the cost of capital mechanism triggered because of the interest rate environment we're in, like I'll reflect again that the Energy division did disposition our advice letter and indicated that it would be -- that the change would be implemented. They went through and responded to all of the intervenor commentary around sort of interveners perspectives on why they think it shouldn't be implemented. And they did a very thorough job of responding to each point. It does now have to be resolved through the CPUC at large, but none of the facts have changed and we continue to move forward with it. And again, it's in our tariff sheets, and it will be implemented in our next rate change.
And I would just say it's an opportunity a little shameless plug, but this kind of goes back to Page 3 in the deck. We manage the business. We have met or exceeded our guidance for the last 2 decade, and now we plan to continue doing that, Julien.
I hear you on that one. Excellent and well done. Maybe just speaking of guidance on long-term outlook, just real quickly on the EPS profile, right? So you have this [ '25 to '28 ]. You've talked a little bit with Jeremy earlier about the continuity of that $0.37 from $0.25 to $0.26. How do you think about the earnings profile from [ '25 to ]. '28 ] That might go back to some of the variances the cadence, the GRC itself. Any comments that you offer?
Sure. And I think I just want to reiterate that $0.37 is part of our rate base in each year. So if you do the rate base math, the way you've always done it, you'll capture that true-up and the ongoing impact of that. So I just want to make sure I say that one more time to clarify for folks. In terms of the ongoing through 2028 trajectory, I'm going to take it back again to rate base now. earnings here are driven by rate base. And we see that growth trajectory all the way through 2028. We've given you the range. We've given you the numbers that relate to the request. We've given you some sensitivities around what the moving pieces are. But fundamentally, the wildfire claims debt expense has stabilized, right? Because now we're getting to the tail end of all of that. So that's stabilized, it doesn't create that not in the beginning, but in at the end sort of dynamic we had in 2021 through 2025. And as we've said before, O&M efficiency are not a driver for '25 through '28.
Yes. And Julien, again, same thing for '28 is for '25. We've shared with you our target of 5% to 7% growth rate to '28, and o growth rate will be someplace in that 5% to 7% range. For '25, you're going to see a growth rate for us. It's it be 5% to 7%. It's not 3%, it's not 4%, it's going to be 5% to 7%. So we're going to meet our guidance and deliver on our expectations for you all.
I will now turn the call back over to Sam Ramraj, for closing remarks.
Thank you for joining us. This concludes the conference call. Have a good rest of the day. You may now disconnect.