Edison International
Q4 2018 Earnings Call Transcript

Published: 1 Mar 2019

[Operator:]

Good afternoon and welcome to the Edison International Fourth Quarter 2018 Financial Teleconference. My name is Caron and I'll be your operator today. [Operator Instructions] Today's call is being recorded. I would now like to turn the call over to Sam Ramraj, Vice President of Investor Relations. Mr. Ramraj, you may begin your conference.

[Sam Ramraj:]

Thank you, Caron, 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.

[Pedro J. Pizarro:]

Thanks, Sam, and good afternoon, everyone. As we review the results for 2018, I would like to reiterate that our thoughts are with all those across the state who are affected by the wildfire crisis. Our company’s number one priority continues to be the safety of our public, our customers and our employees, and we remain committed to supporting our communities affected by these events. Turning to our financial results, Edison International’s core earnings for 2018 were $4.15 per share compared to $4.50 a year ago. As I have mentioned before, comparison of year-over-year results is not particularly meaningful because SCE has not received a decision in its 2018 General Rate Case. For the fourth quarter, EIX reported core earnings of $0.94 per share. This excludes non-core items, mainly a $1.8 billion after-tax charge related to existing and expected claims arising from the wildfire and mudslide events that occurred in SCE’s service territory in 2017 and 2018. I will explain the accounting rationale for this later in my comments, and Maria will cover our overall financial performance in more detail in her remarks. Today, the Board of Directors of Edison International declared its first quarter 2019 common stock dividend of $61.25 cents per share. In making its decision to declare the dividend, the Board again evaluated a broad range of potential negative outcomes pertaining to the wildfires in 2017 and 2018, and the mudslides in Montecito in 2018 and determined that the California law requirements for the declaration were met. The Board’s evaluation took into consideration a broad range of potentially unrecovered wildfire-related costs and financing scenarios, including potential outcomes worse than what are reflected in the charge accrued as of the fourth quarter 2018. Mitigating increased wildfire risk and its related financial impacts continues to be our top priority. Catastrophic wildfires across our state have caused billions of dollars of property damage and taken over a hundred lives. It is evident that the risk conditions in which all of California’s utilities deploy and operate electric infrastructure have changed significantly. From an operational standpoint, SCE has taken substantial steps to reduce the risk of wildfires in our service territory. We are going beyond long-standing industry practices to address the conditions we are facing. The foundation we are laying to mitigate the risk of utility equipment-ignited fires is reflected in several recent regulatory filings. These include our Grid Safety and Resiliency Program that we filed with the Commission last September, the Risk Assessment and Mitigation Phase of our 2021 GRC filed in November, and our proposed Wildfire Mitigation Plan which was filed earlier this month. These filings detailed the near and long-term actions that SCE is taking to significantly reduce the risk of fires starting, and effectively fortify the system against future impacts of climate change. Specifically, SCE’s Wildfire Mitigation Plan focuses on three key areas

[Maria C. Rigatti:]

Thank you, Pedro and good afternoon, everyone. My comments today will cover fourth quarter and full-year results for 2018 compared to the same period a year ago, our updated capital expenditure forecast, and other financial updates for SCE and EIX. As we’ve communicated to you before, until we receive a decision on the 2018 General Rate Case, we will continue to recognize revenues from CPUC activities 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 drivers analysis at the prior combined statutory tax rate of approximately 41% for both 2018 and 2017 for comparability purposes. Before we take a look at our core earnings drivers, let me provide a bit more detail regarding the $1.8 billion non-core charge related to the 2017/2018 wildfires and mudslide events that Pedro mentioned earlier. Please turn to page 2. 9 We have recorded a gross charge related to these events of $4.7 billion prior to recoveries and taxes which represents the lower end of a reasonably estimated range of outcomes. We have also recorded a $2 billion insurance receivable and a $135 million regulatory asset related to FERC recovery. The combination of these results in the $1.8 billion after-tax charge. Considering the San Diego WEMA decision and the uncertainty regarding how the CPUC will interpret and apply its prudency standard in wildfire cost-recovery proceedings, we have not at this time recorded a regulatory asset related to CPUC recovery. We will continue to evaluate the probability of recovery based on available evidence, including guidance from the Wildfire Commission and new judicial, legislative and regulatory decisions. Please turn to page 3. For the fourth quarter 2018, Edison International reported core earnings of $0.94 per share, a decline of $0.16 from the same period last year. From the table on the right-hand side, you will see that SCE had a negative $0.14 core EPS variance year-over-year. There are a few items that account for the bulk of this variance. To begin, lower revenues had a negative impact of $0.06 cents. This includes lower CPUC revenue of $0.04 due to the recognition of revenues largely based on 2017 authorized base revenue requirements with reserves for known items and lower FERC and other operating revenue of $0.02. There was also a negative impact of $0.03 due to higher O&M. This is primarily related to increased vegetation management costs. We had a negative impact of $0.04 from higher financing costs due to increased borrowings and higher interest expense on balancing accounts, partially offset by higher AFUDC equity. Finally, increased income tax benefits were largely offset by an increase in property taxes and other expenses. For the quarter, EIX Parent and Other had a negative $0.02 core earnings variance related primarily to two items. First, a negative variance of $0.04 related to a goodwill impairment at Edison Energy. The impairment reflects a shift in the business model since we purchased the companies which make up Edison Energy in 2015 to our more measured proof-of-concept approach. This was partially offset by an income tax benefit of $0.02 primarily related to a reduction in uncertain tax positions that resulted from the settlement of our 1994 through $2.6 California tax audit partially offset by the lower 2018 corporate tax rate on pre-tax loss. Please turn to Page 4. For the full year, Edison International core earnings per share decreased $0.35 from the prior year. This includes core earnings decreases of $0.16 and $0.19 at SCE and EIX Parent and Other, respectively. Significant drivers at SCE include higher O&M expenses of $0.13 related to increased wildfire insurance premiums and vegetation management costs as well as a negative variance of $0.12 cents due to higher net financing costs. These were largely offset by a tax benefit of $0.19, primarily from higher income tax benefits, including true-ups related to the filing of our 2016 and 2017 tax returns. At EIX Parent and Other, the majority of the $0.19 decrease in core earnings was due to the absence of tax benefits in 2018 relative to 2017, largely related to stock-based compensation and federal tax settlements. As I have mentioned previously, earnings comparisons pending a 2018 GRC decision are not meaningful. We expect to record a true-up when we receive a decision and we have established a memo account to track costs. The decision will be retroactive to January 1, 2018. Please turn to Page 5. While we continue to wait for a decision on SCE’s 2018 general rate case, SCE has developed, and is executing against, a capital expenditure plan for 2019 in support of our business objectives. This plan will allow SCE to execute its capital spending program over the three-year GRC period, that is 2018 through 2020, to meet what is ultimately authorized in the decision while minimizing the associated risk of unauthorized spending. Our total 2019 CapEx forecast is $4.5 billion and includes $346 million for wildfire related programs largely related to the GS&RP we filed last year and the Wildfire Mitigation Plan we filed in early February. We have accelerated some activities included in our GS&RP into 2019. This acceleration will primarily target our covered conductor program. We will track this spending through various memorandum accounts and pursue cost recovery through current and subsequent CPUC proceedings. Given the significance of wildfire-related risks and the need for skilled resources to complete activities, SCE may reallocate spending authorized in the 2018 GRC to maximize wildfire mitigation efforts. For 2020, we continue to present our capital forecast at the request level included in our 2018 GRC. While we wait for our 2018 GRC decision, over the long-term, we continue to see SCE investing at least $4 billion per year and adding at least $2 billion per year of rate base for the foreseeable future. As SCE focuses on investments in the grid and resiliency and continues to be a key enabler of California’s ambitious climate change policies. On Page 6, our rate base remains essentially the same from the last forecast and it is still shown at our GRC request levels. I would note that we expect to update our full forecast when we get a proposed decision on the 2018 GRC. On Page 7, you will see our financial assumptions for 2019. As I mentioned in prior quarters, we will not be providing earnings guidance for 2019 until we receive a final decision on the GRC. However, we have laid out some additional information on this page that you may consider as you model 2019 and beyond. This includes, other items that reflect some considerations outside of the simplified rate base model. The approval of the Z-factor filing related to recovery of previously-incurred wildfire insurance premiums will create a benefit of approximately $0.05 per share in the first quarter of 2019. Additionally, we expect energy efficiency incentives of $0.05 for 2019. This includes $0.03 related to a 2018 CPUC approval that was delayed and which we now expect in the first or second quarter of this year. We are still in settlement discussions regarding our 2018 FERC Formula Rate. However, we plan to file a new Formula Rate with an updated cost of capital to reflect the impacts of recent events in California since FERC procedures require a new filing when requesting a rate increase. For EIX Parent and Other, we expect an earnings drag of $0.30 to $0.35 per share. Included in this is approximately one penny per share per month related to EIX operating expenses. The overall increase from last year is primarily due to higher forecasted interest expense driven by higher long-term debt issuances and rates. At Edison Energy, we continue to work towards our target of achieving a break-even run rate for earnings by the end of this year. I now want to provide a few comments on other financial topics. Let me start with our wildfire insurance coverage. Market conditions are more difficult than last year and we continue to see a decline in the number of insurance providers willing to underwrite policies in California. We have also included co-insurance in the structure in order to more effectively obtain coverage. SCE has secured new wildfire-specific insurance coverage of approximately $700 million from early February through the end of May, subject to $10 million of self-insurance and up to $15 million of co-insurance. SCE has also initiated efforts to place coverage for the period starting June 1st and currently has $750 million of wildfire-specific insurance coverage from that date through June 30, 2020, subject to a $10 million of self-insurance and up to $115 million of co-insurance. We will continue our efforts to secure additional coverage in amounts generally in line with previous years for the period June 2019 through June 2020. The 2019 wildfire insurance cost, prior to any regulatory deferrals, would be $321 million for the current policies. Over time, we have worked diligently to maintain a strong and flexible balance sheet. SCE will continue to access the capital markets to support its large investment program. Both SCE’s and EIX’s credit ratings have been negatively impacted as the rating agencies consider the ability of the regulators and legislators to provide a durable framework for wildfire cost recovery. As we work with state and regulatory officials to find a solution to the current problem, SCE will continue to use its first mortgage bond secured debt structure when issuing new debt as well as other options such as commercial paper and term loans to meet short-term requirements. EIX continues to have access to the debt capital markets although currently investors require much higher spreads than were necessary for previous debt issuances. As you are aware, SCE is required to maintain an authorized capital structure under its CPUC jurisdiction and the current authorized equity level is 48% calculated over a rolling 37-month period. As of December 31st, SCE is in compliance with this requirement with a 49.7% average equity ratio. In addition, SCE is required to file an application for waiver if in any month, its actual equity ratio, or spot ratio, falls 1% below its authorized level. Based on the non-cash charge related to wildfires included in the year-end financial statements, our spot ratio has fallen below this level and SCE filed an application notifying the CPUC. The waiver requests exclusion of any equity charges resulting from the 2017 and 2018 wildfires and mudslides as well as any debt issued to finance payment of these claims. We have requested that these adjustments to the calculation of SCE’s regulatory capital structure remain in effect until a determination is made regarding recovery of costs related to these events. While the CPUC reviews the waiver application, SCE is considered in compliance with the capital structure rules and therefore continues to issue debt and make dividends in the ordinary course of business and considering its capital spending and other needs. As discussed, we continue to have significant capital needs, those that will ultimately be authorized in our 2018 GRC as well as additional capital needs related to wildfire prevention and mitigation and programs that support the environmental objectives of the state. Our upcoming Cost of Capital proceeding will be an important venue to demonstrate the critical nature of the work that investor-owned utilities undertake in California and the need to support financially healthy utilities. It is imperative that we maintain a robust capital structure and strengthen our investment grade credit ratings and be positioned to continue to attract capital to support our customers’ needs. We will be evaluating and requesting the appropriate level of equity return and capital structure changes to achieve these objectives. We look forward to giving you an update after our Cost of Capital filing in April. That concludes my remarks.

[Sam Ramraj:]

Caron, please open the question -- call for questions. As a reminder, we request you to limit yourself to one question and one follow-up, so everyone in line has the opportunity to ask questions.

[Operator:]

Thank you [Operator Instructions] Our first question comes from Jonathan Arnold of Deutsche Bank. Your line is now open.

[Jonathan Arnold:]

Good morning -- good afternoon guys.

[Pedro J. Pizarro:]

Hi, Jonathan.

[Maria C. Rigatti:]

Hi, Jonathan.

[Jonathan Arnold:]

Don’t know which way this are. I guess, is it possible, Pedro, can you give us some insight into the background to the taking of this charge today based -- it doesn’t seem to us for where we sit as there is much new information that’s being publicly announced. And so I’m just curious sort of what you know today that you didn’t know last quarter that prompts the charge of this pie?

[Pedro J. Pizarro:]

Well, Jon, let me start with that and thanks for the question. We tried to provide you a framing of that in both my remarks and Maria's. And let me just sum it up again by saying, we're looking at the totality of the -- not only the events themselves or continuing internal evaluation of the facts, but we're also looking at the number of claims that are being filed, the potential for litigation, litigation history in similar cases. And so when you put it all that together, we determine that we face a potential material liability here and under the accounting rules we felt that it was appropriate to disclose that through the reserve and in this case with the accounting rules, you need to have somebody that is first probable -- and believe it's probable. And secondly, it needs to be estimable. In this case, we believe we can estimate the number we provided today as the lower end of the range for potential outcomes. To be honest with you, I think we indicated this, we will be very hard pressed to try and estimate an upper end of the range. And so we provided investors the combination of the disclosure with the reserve in it as well as disclosure that says that actual results could be different. Importantly, and we covered this in our comments, but just to make sure that the folks understood the rationale on this one, there's the gross exposure, the gross of total reserve, there's a netting out from that of insurers, we are confident in our ability to access our $2 billion through our insurance policies. And then we also netted out FERC recovery amounts. But importantly, we did not net out -- we were not able to create a regulatory asset for CPUC recoveries. And as I explained, this is really due to the deep uncertainty that was created by the CPUC's flawed decision on the San Diego WEMA case. So given that that is the one major data point that we have here in California in terms of how the CPUC would handle cases and the fact that they essentially adopted a perfection standard as opposed to a prudency standard, they allocated zero cost recoveries in San Diego instead of some proportionate cost recovery based on a more detail examination of level of prudency. Given all of that, we did not feel it was appropriate to record a regulatory asset for CPC recoveries offsetting some portion of the overall liability. So that’s how we ended up with a $1.8 billion after-tax charge. Maria, I don't know if there's anything you would add to that?

[Maria C. Rigatti:]

No.

[Pedro J. Pizarro:]

No?

[Jonathan Arnold:]

Perfect. That's very, very helpful. Thank you, Pedro. And for my follow-up, could I just ask, what happens from a practical standpoint if the legislature and/or the CPUC don't move quickly enough to convince the rating agencies to keep your investment grade ahead of next fire season? Can we -- could you just review what the implications of a downgrade would be if it came to that.

[Pedro J. Pizarro:]

Jon, I will kick it off and sure Maria will have more here. But from a rating agency perspective, rating agencies as you know are independent, they’ve been publishing their views on the subject. I think most recently S&P's report was frankly fairly pointed about, in their view which we share, the need for action at the state level to reform the overall liability framework. And they indicated a strong likelihood of further potential downgrades if there isn't reforms at the state level in the near-term, which will take, I mean, months, not years. And so, I will let Maria talk about the implications where we -- to be downgraded below investment grade. It becomes an issue of cost. We believe there is access there, but certainly at a very different cost ultimately due to the consumer. Just before turning it over to Maria, little commenting on what happens down in Sacramento, it feel like I’m repeating myself in terms of prior calls, but once again, it feels like it's early days later down in the card, but it's early days again, right. We now have the Wildfire Commission that has just been formed and had its first meeting, as I mentioned in my comments, we have the Governor having created his Strike Team. Those are advisors to the Strike Team getting organized. You've seen the comments that the governor has made. It seems like there is an understanding, certainly in the part of the Governor and his administration that this is a substantial issue, not just for utilities, but clearly to the broader objectives in the California economy. And so it feels like the case for action is certainly being articulated. But how that translates into specific recommendations, particularly along the areas that we are stressing leading to reform that the cost recovery framework, and also looking at additional potential vehicles like potential for our Wildfire Insurance Fund or needs for securitization, potential exposures of the like, lot of devils in those details and we will be very engaged, but it is difficult to handicap at this point when -- specifically where that might be addressed in Sacramento. Maria, maybe on the implications?

[Maria C. Rigatti:]

Sure. So, Jonathan, obviously there is the cost issue associated with the downgrade and [indiscernible] market and see where costs would go at lower ratings. I would note that for SCE and also it's going to bleed through into their cost of capital filing because as their debt costs increase that's going to be part of the filing that we make and ultimately demonstrate to the CPUC and that will -- at some point in time when that case is concluded, it would then flow back through to their cost of capital. So there is a connection there. I think the other thing that people usually are considering when they ask about implications of a downgrade would be collateral posting. We have disclosure around -- we had disclosure around that for a while. If we get downgraded below investment grade under our PPAs, I'm going to say, there is about a $25 million impact. Obviously, that's somewhat related to where prices are at the time, but that's at the point in time that we did the calculations that $25 million. There is another amount that we would have proposed around some of our environmental remediation, a few other cats and dogs, but I’m going to really round numbers; it's about $100 million thereabouts. So that's -- I think those are the two primary cost implications of a downgrade.

[Jonathan Arnold:]

Perfect. Thanks. Thank you for the very cool answers.

[Pedro J. Pizarro:]

Thanks, Jonathan.

[Maria C. Rigatti:]

Thank you.

[Operator:]

Thank you. Our next question comes from Praful Mehta from Citigroup. Your line is now open.

[Pedro J. Pizarro:]

Hi, Praful.

[Praful Mehta:]

Hi. So maybe just to get this out of the way, dividends, is there -- if there is no wildfire litigation that’s done this year, but there is also no wildfire. There is no risk of dividends at this point as we understand it or are there any other scenarios if there is a downgrade that could impact dividends in anyway?

[Pedro J. Pizarro:]

Praful, I think you will -- sorry, this is going to sound repetitive, but once again, the Board took a look at a broad range of potential negative outcomes and determined that we met all the conditions to continue to issue this dividend. So we told you before, we never make that decision until the quarter when we make it for that quarter's dividend installment. But I think you should read into the comments today that once again the Board looked at a broad spectrum of potential bad outcomes and feel comfortable with this next dividend.

[Praful Mehta:]

Got you. Fair enough, that’s super clear. And then, secondly, in terms of the charge, I know that the language says lower-end and you've highlighted a couple of times of the charges, the lower end of the range that you've looked at. Is there any color you can provide on what other elements that would make it go up to the higher end or -- brought in the upper end of your range of outcomes that could increase the charge? Any color on that would be helpful.

[Maria C. Rigatti:]

So, Praful, I think as Pedro noted earlier, we actually can't estimate a high-end of the range. I think the accounting rules are pretty clear. You obviously -- we as an organization did look at a lot of different factors, looked at a lot of different components, did check data points across the board from its vailable from the insurance commissioner to what we're seeing in our litigation. But it is as per the accounting rules, the lower end of a reasonably estimated range of outcomes. I think that's as much as we can share with you. We went through a diligent process, but that’s the evaluation at the time.

[Praful Mehta:]

Fair enough. And just one -- last clarification, on the regulatory asset point that you mentioned where you're not creating regulatory asset for any recovery related to the charge that you've taken. You highlighted the WEMA case, but since the WEMA case the Senate Bill 901 did expand what the CPUC can do in terms of review and gave them broader scope to allow for recovery. Is your -- should we read into that that you believe that the Senate Bill 901's broader provisions aren't sufficient and there is still enough uncertainty that you didn't feel comfortable taking the regulatory asset related to the charge.

[Maria C. Rigatti:]

So Praful -- so we rely on objectively verifiable evidence and very heavily emphasizes prior precedents. So the WEMA cases is a very strong prior precedent. I think what I noted in my prepared remarks was that we will continue to evaluate the situation based on additional information as it becomes available whether that’s from the Wildfire Cost Recovery Commission, other legislative or judicial regulatory proceedings, etcetera. But I think there is a very strong emphasis when you come to these conclusions on actual precedents.

[Praful Mehta:]

Got you. Super helpful. Thank you, guys.

[Pedro J. Pizarro:]

See you Praful.

[Operator:]

Thank you. Our next question comes from Michael Lapides of Goldman Sachs. Sir, your line is now open.

[Michael Lapides:]

Hey, guys. Thank you for taking my question. Real quickly, can you talk to us about the status -- Pedro, you referenced the litigation regarding inverse condemnation in the application. Can you give us an update regarding the status of that litigation, where it stands in the process and what are next steps from here?

[Adam S. Umanoff:]

Why don't I take this one, Pedro? This is Adam Umanoff, the General Counsel. We have made motions in most of our wildfire cases, challenging the application of inverse condemnation. By and large those notions have not been granted by the trial courts. We currently have pending motions in two Liberty fire related cases. The Liberty fire was a smaller fire in our service territory. We appealed denials of our motions in the Thomas Fire, but those appeals are discretionary. The appellate court can, with or without reason, accept the review or reject it. And to date, no appellate court has taken a review, discretionary review. So we have not had an opportunity to take these issues up to the appellate courts for review.

[Michael Lapides:]

Got it. And can we -- is there a scenario where this winds up in federal court or is this primarily in your view, a state court, state jurisdiction and it's simply a question of will a certain case -- any of the cases, your case, the San Diego Gas & Electric 2007 wildfire related one, will any of those actually get picked up by the Supreme Court, and we get clarity of that -- the state Supreme Court and we get clarity at that level regarding inverse condemnation?

[Adam S. Umanoff:]

So for appeals to be heard by the appellate courts is a matter of right, as opposed to a discretionary appeal. You have to have a verdict, a jury deciding that inverse damages are payable. We are not in that position. SCE is not in that position. I will note that in one of the cases that PG&E has, there is a current verdict, directed verdict on inverse, which if they get relief from the stay and the bankruptcy, could be appealed. Ultimately that appeal would have to be heard by the appellate court. You led off by asking, can you get into federal court? As a practical matter, in our cases, the path to the federal court is largely through appeals up to the California Supreme Court, which if unsuccessful would give you an opportunity to appeal to the US Supreme Court.

[Michael Lapides:]

Meaning, and your appeal would be some things along the line of a takings clause related case or something like that?

[Adam S. Umanoff:]

Yes, we have a number of legal arguments, the policy argument of -- under the Takings Clause is one. We have a due process argument as well. The bottom line is, we believe firmly as a matter of the principle underlining inverse condemnation that you must be able to socialize broadly, inverse costs if the standard of inverse condemnation is applied to create liability. And because we cannot automatically socialize those costs, but rather we have to get approval of our regulator, we think it is unfair under various theories for that -- the inverse condemnation standard to be applied.

[Michael Lapides:]

Got it. Thank you. Much appreciated.

[Pedro J. Pizarro:]

Thanks, Michael. Operator Thank you. Our next question comes from Ali Agha of SunTrust. Sir, your line is now open.

[Pedro J. Pizarro:]

Hi Ali.

[Ali Agha:]

Thank you. Hey, good afternoon, Pedro. First question, Pedro, as you outlined there are a number of initiatives the governor has talked; the Task Force, there is the bills and the legislature etcetera. From your vantage point, what do you think is the most important and likely path through this process? Is it that Commission that's been set up and looking at that, I mean what’s the confidence that something does take place before the end of the session, which I believe is end of August, correct me there, but just to understand how do we tracking this from your vantage point?

[Pedro J. Pizarro:]

So, thanks for the question, Ali. Technically, the legislative sessions is actually a two-year session, so going into next year. Difficult for us to handicap again, specific pathways or specific [indiscernible] release around them. You have heard consistently from our Company and you will continue to hear a level of confidence that over time in the future, this will be resolved because the state needs financially healthy utilities to keep the lights on in the world's fifth largest economy and to help reduce greenhouse gas emissions in order to something climate change. So we continue to see that as the ultimate proof point that there will be high confidence of ultimate reforms. As you've heard from me, probably over the last year, 1.5, while I have that personal sense of confidence, I cannot translate that into a handicapping of, and therefore it will happen through this vehicle by this date. And I think that’s where we remain. The Wildfire Commission will be a very important vehicle. I think there's a number of quality appointments to that and they've had their first meeting and they're setting a process and it seems like they're setting up the right kind of scope for the questions that that Commission needs to address. It's been encouraging to hear the governor talk about trying to accelerate the timeline earlier than the July timeline that was provided in SB 901. Ultimately, legislative action may be needed. And so, Wildfire Commission will make recommendations to the Legislature, but then the legislature needs to pick up them. The governor will need to provide leadership in order to frame that for the legislature. And the fact that he has created a Strike Team and they've staffed it up both with folks internally led by the Chief of Staff. So this is really being led at the highest level of the Governor's administration and with a number of outside advisors. Those are all good indications that this administration is taking this seriously, and looking at their range of things that need to be done. We talked earlier about some of the things that we are -- we believe are important, probably first and foremost among those is fixing, resolving the issue with the liability framework for investor-owned utilities. And I shall -- I would say even for utilities more broadly because the municipals also face exposure here. So it's probably about all I can say, I'm not sure I've given you any new data points, maybe a little bit from framing around, there are multiple pieces of the puzzle here that will be important and it does just start with leadership from the Governor and I think his early signals have been encouraging.

[Ali Agha:]

But, just to clarify that -- thank you for that, Pedro. I mean is it fair to say logically that nothing concrete probably happens until after the Wildfire Commission recommendations are in?

[Pedro J. Pizarro:]

I don't want to give you anything -- that firm in conclusive because I do think anything could happen. Certainly one path would be that the Wildfire Commission makes recommendations and then you have the legislative process. On the other hand, you've seen the Strike Team that the Governor created have -- in fact the Governor mentioned in his State of the State address, a 60-day timeline and with 60 days that's about half of the time that the legislature allocated to the Wildfire Commission's process. So, we have to see what the Governor develops in terms of proposals in which I would speculate would include vehicles for those proposals. Maybe one final point in all this is that, we do have the issue in the state right now and impacts the state as a whole of the PG&E bankruptcy and one of the tenets of Chapter 11 is that the debtor needs to have a plan of reorganization that will create sufficient confidence that the bidder won't find itself in Chapter 11 within a short time period. We believe that, not only do we, as Edison need reform of this framework, we believe it will be integral to PG&E having a successful point of reorganization themselves. So I think that does add to the imperative here for the state.

[Ali Agha:]

Great. And then second question, you talked about the charge, you talked about the fact that your ratio is currently a spot level below the right level and that this is sort of the lower end of outcomes. When in your thinking does equity -- on equity needs, external equity needs come into it. You've talked about a fair amount of debt and so on, but when are you thinking equity needs to come into the equation?

[Pedro J. Pizarro:]

So, Ali, [indiscernible] accounting there because that second question felt like number three or four, but just having a little fun with you. I think, Maria commented on the fact that the cost of capital proceeding will be a very good frame in place to think about the overall capital structure.

[Maria C. Rigatti:]

Yes, I think Ali, obviously there is a lot of stuff going on in the state. There is all the things that we've just been talking about in terms of the wildfires and when that will be resolved. But we have a lot of other unknowns that are coming out. We're going to get our TRC decision. We have capital requirements related to proceeding, they're actually separate and apart from our GRC. So as we are getting that information we will be able to provide a more fulsome response, but in particular, in our cost of capital proceeding, we would expect that we would be able to share more information with you. We're developing that right now. It's going to be filed at the end of April. And I think, that that would be a good point at which to continue the discussion.

[Pedro J. Pizarro:]

Thanks, Ali. Appreciate it.

[Ali Agha:]

Thank you.

[Operator:]

Our next question comes from Julien Dumoulin-Smith of Bank of America. Your line is now open.

[Julien Dumoulin-Smith:]

Hey, good afternoon, everyone.

[Pedro J. Pizarro:]

Hi there.

[Julien Dumoulin-Smith:]

Hey. So, I wanted to follow-up on this waiver you all are seeking with respect to capital structure. Just wanted to understand what does that involve? I suppose it's ultimately to the extent to which it does get approved, how do you come to them with the plan on improving that to get back to authorize equity over time? What are the tools at-hand there? And also what are the consequences if they don't approve the waiver. I just want to understand that as well. And especially, how that waiver works with respect to the charge, if there is any latitude, if they don't too?

[Maria C. Rigatti:]

Okay. So, I will say that the charge is not a CPUC issue. It's not a waiver issue. The charge related to our GAAP accounting. So put that to the side, right. The waiver is -- and we filed it so that's out there and I think the Commission's looks at it at this point right now. But the way that’s structured, if you think about the fact that our spot equity ratio is more than 1% below our authorized in this level and that’s because frankly, we have a charge, but we don't have a corresponding CPUC regulatory asset. And our discussion in our application with the Commission is that, you should disregard both the charge and any financing associated with the charge, debt financing to pay claims, until we get through a proceeding that would then determine our ability to recover that through rate. So I think when you think about the waiver, it's really about -- the initial point of the waiver is that we have an uncertainty due to this WEMA decision that doesn't permit us to book a regulatory asset. So we are asking for, I will say, a period of time, until we get a decision on that whereby we would just exclude the calculation from our charge -- the charge from our calculation rather. So I think that's one. I think, what does the commission do in the meantime as they're reviewing application and reviewing a waiver, we were in compliance with the plan. If you look at our 37 month average -- weighted-average equity ratio, it's 49.7%. So we're still actually in compliance with the peace of the authorized capital structure or the tenant of the authorized capital structure that's actually applicable. That's the piece we have to comply with 37 month average. This is more of an -- this -- I would say falls more into the context, I noted that -- I notice to the Commission. And then, as we get through that process and they determine yes, we will take your application. Okay, we will continue on. If at some point they determine that they do not want to accept our application, then we will have to see are we still in compliance with the 37 month average. And if we are not, typically what would happen if you would then provide a plan to the Commission as to how you would get back into compliance. There is a lot of other moving pieces at the same time, I referred to our cost of capital proceeding just a few minutes ago. So there is going to be a lot of things that happen in there, before we get to the point at which the Commission is going to need a plan from us.

[Julien Dumoulin-Smith:]

Got it. All right. Excellent. And then just coming back to some of the nuances on the charge specifically and the allocation, just on the FERC allocation, how should we think about the percentage there? Should we take that on the notional 47 or on some kind of netted basis? And then, also just within that, the charge itself is, I know it's the low end, but what is reflected even in that low-end in terms of subrogation claims or assumptions on settlements etcetera. I just want to make sure we understand that a little bit more specifically here, beyond just the insurance netting.

[Maria C. Rigatti:]

So when you think about the gross charge basically, before you would recover from your customers, first you would get recovery from all the other third parties. So in this case, insurance and then the FERC regulatory assets is really based on -- you allocate the FERC based on your labor allocator that you use for, more generally speaking, when you are separating cost into the FERC and CPUC jurisdiction. So that’s how I would think about the FERC asset. And then as to other things that went into our estimate of the charge, I think it's just kind of that’s what we said before. We looked at all the information that we have available, whether it's from the Insurance Commissioner or whether it's through the process of litigation and we make a determination based on the risks that we see in litigation, prior experiences that we either had or observed around settling and things like that, and that's how we came to the conclusion.

[Julien Dumoulin-Smith:]

It's roughly 3% of the growth?

[Maria C. Rigatti:]

Are you taking about FERC?

[Julien Dumoulin-Smith:]

Yes.

[Maria C. Rigatti:]

5%.

[Julien Dumoulin-Smith:]

Thank you all.

[Operator:]

That was the last question. I will now turn the call back to Mr. Sam Ramraj.

[Sam Ramraj:]

Thank you for joining us today. And please call us if you have any follow-up questions. This concludes the conference call and you may now disconnect.