Edison International
Q1 2015 Earnings Call Transcript

Published: 29 Apr 2015

[Operator:]

Good afternoon, and welcome to the Edison International first quarter 2015 financial teleconference. My name is Angie, and I'll be your operator today. [Operator instructions] I would now like to turn the call over to Mr. Scott Cunningham, Vice President of Investor Relations. Mr. Cunningham, you may begin.

[Scott Cunningham:]

Thanks, Angie, and good afternoon, everyone. Our principal speakers today will be Chairman and Chief Executive Officer, Ted Craver; and Executive Vice President and Chief Financial Officer, Jim Scilacci. Also here are other members of the management team. The presentation that accompanies Jim's comments, the earnings press release, and our Form 10-Q are available on our website at www.edisoninvestor.com. Also, starting this quarter, we have posted Ted's and Jim's prepared remarks on the website and filed it in 8-K, so that you can follow their comments. Later this week, we will distribute our regular business update presentation for use in upcoming investor meeting. During this call, we will make forward-looking statements about the future 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 Q&A, please limit yourself to one question and one follow-up. I'll now turn the call over to Ted.

[Theodore Craver:]

Thank you, Scott, and good afternoon, everyone. Our first quarter core earnings were $0.90 per share, unchanged from the first quarter of the previous year. Because SCE has not received a decision in its 2015 General Rate Case, comparisons of results are not particularly meaningful. Jim Scilacci will cover the specifics. I'm certain that what is on your minds now more than anything else is the filing we will make tomorrow with the California Public Utilities Commission, regarding communications with CPUC decision-makers during the SONGS settlement process. Although, we are still finalizing our response, I want to make some comments about what we expect to file. Since our work on the filing is still on going, there is some small risk that I will have to supplement what I say today, but it is outweighed by our desire to be transparent. First, we do not expect to file any additional late ex parte notices. We conducted a thorough process to identify and review communications and internal documents concerning the settlement of the SONGS OII between CPUC decision-makers and personnel at SCE and EIX, who could reasonably be expected to have engaged in such communications. As specified in the ALJs' order, we looked at documents from the period between March 1, 2013 a few weeks before the Warsaw meeting, and November 30, 2014, a short while after the settlement was approved by the PUC. This is a mammoth undertaking, involving an initial broad pool of slightly more than 2 million emails and documents, and then winnowing that group down in successive levels of review to isolate documents relating to the SONGS OII and the settlement process. I've come to learn how these types of document searches and reviews are done. It is very complicated. It requires real care in setting up the parameters for searching and sifting, given the huge number of documents that could potentially be relevant. It also involves some judgments about search parameters. We used multiple levels of review and a lot of checking and rechecking of work. We used an outside law firm to conduct this work. All of this was done in a sincere attempt to do a thorough, complete and proper job. We believe we have done so. Our filing tomorrow will provide details on the search criteria and the multi-layered review and checking process used. This work will result in us providing a couple dozen emails in our response to the CPUC. As I said, we do not expect to make any additional late ex parte notices. That said, we are providing in our response quite a bit of additional information in an effort to be transparent and forthcoming on contacts between CPUC decision-makers and SCE and EIX executives on SONGS related matters. I want to highlight some of the additional information we intend to provide. We are providing a chronology of key events relating to the SONGS settlement, covering the period from the initiation of the OII to the commission approval of the settlement. We are also providing a summary and the relevant documents, where we had communications with CPUC decision-makers, even though those communications fell outside of the criteria for filing ex parte notices. These cover things like

[William Scilacci:]

Thanks, Ted. Good afternoon, everyone. I'll cover the following topic in my remarks. First quarter result, our updated capital spending and rate base forecast and our financing plans. I'll lead off my comments with a general statement about attempting to compare 2015 to 2014 earnings, because SCE is yet to receive a General Rate Case decision. The utility is recording revenues largely based on 2014 authorized levels. In the quarter SCE receives a final GRC decision, we will record a cumulative adjustment retroactive to January 1, 2015. As Ted mentioned, earnings comparisons will not be useful until we report full year 2015 earnings. In the meantime, we believe the simplified rate base model is the best starting point to model full year earnings. Please turn to Page 2 of the presentation. As Ted said, core earnings are unchanged year-over-year at $0.90 per share. GAAP or basic earnings per share are $0.38 per share higher. This is primarily due to non-core items last year related to the SONGS OII settlement of $0.29 per share and $0.07 per share related to EME. This quarter, we also had $0.02 per share of income under the HLBV accounting treatment for solar tax equity financings. As explained in our last call, Edison Energy has tax equity investors. We are required to allocate income under the hypothetical liquidation at book value accounting method. Since this income does not relate to project performance, we classified it as non-core. Edison Energy is included in EIX parent and other results. Edison International parent company costs are flat at $0.03 per share with slightly higher corporate expenses are offset by earnings from Edison Mission Group, as we continue to monetize Edison Capital's affordable housing portfolio. With respect to our quarterly results, let me clarify the presentation of two items in our results. First, as I previously mentioned, we are recording CPUC revenues at 2014 authorized level, pending a General Rate Case decision. We used this approach except for one modification. We deferred $36 million of authorized revenues or $0.07 per share allocated to the first quarter related to incremental repair deductions pending the outcome of the GRC. There is an offsetting $0.07 per share of income tax benefits shown separately on the slide. Since we don't know how the general rate case will treat repair deductions, we decided it was prudent not to recognize these benefits. The $0.07 is above repair deductions that are included in the 2015 GRC filing. Second, let me clarify the presentation of SONGS, which is addressed in footnote 4 to this slide. During the first quarter of 2015, we began to amortize the SONGS regulatory asset and recorded property taxes, which are recovered through revenues. During the first quarter of last year, we had O&M costs and property taxes that were recovered through GRC revenues. Neither of these affected net income, so we have excluded them from earnings drivers. A fuller description of these items is included in our 10-Q. Let me also note that beginning January 1, 2015, SONGS costs are classified as decommissioning expense, and recorded as a reduction in our asset retirement obligations. Turning back to our slide. We did benefit from $0.07 per share of higher FERC revenues, primarily related to rate base growth and recovery of higher operating costs. Looking at costs, O&M is $0.01 per share higher. Depreciation and amortization costs are $0.04 per share higher from an increase in transmission and distribution investments. Net financing cost benefited by $0.02 per share largely from higher AFUDC equity income. This reflects a higher AFUDC rate and a slightly higher construction work in progress balance. After adjusting for the incremental repair deductions, SCE had lower tax benefits of $0.04 per share. The lower tax benefits relate principally to higher flow-through tax benefits related to higher repair deductions last year. Although our results are better than most analyst estimates, I suspect this is largely due to difficulty in estimating quarterly profile of revenues and earnings from our 2014 authorized revenue requirement. Other than perhaps a favorable AFUDC equity earnings trend, which could remain a factor for the rest of the year, first quarter results are largely consistent, with this simplified rate base model, we encourage investors to use as a starting point. Please turn to Page 3. We have revised our three-year forecast reflecting the removal of the Coolwater-Lugo transmission project. This 220 kV project, planned in San Bernardino County, was intended to support additional utility-scale renewable projects and overall grid reliability. In mid-March, the California Independent System Operator determined that this project is not necessary to provide full capacity deliverability, but would conduct additional studies to assess potential need for all or portions of the project for future system requirements. In the interim, the CAISO requested that the CPUC suspend its approval to proceed with the project. SCE supports the suspension, given the changing circumstances. Last week, the CPUC issued a proposed decision that recommends dismissing the Coolwater-Lugo application on the basis that sufficient deliverability now exists. The Coolwater-Lugo project was forecasted to cost $740 million, of which the most recent forecast had $584 million of expenditures falling within the 2015 through 2017 forecast period. Partially offsetting this are costs and timing updates for a number of other smaller FERC projects. The net result is a decrease of approximately $300 million in FERC CapEx in our capital spending forecast. For your information, we have provided the prior forecast at the bottom of the slide. Lastly, SCE has FERC pre-approval for prudently incurred abandoned plant costs. We will continue to finance SCE's growth consistent with our authorized capital structure. Periodically, SCE will issue long-term debt and preferred stock to support its growing rate base. Of course, retained earnings will provide common equity needs. SCE's 13-month weighted average common equity component was 48.4%. With the cash flow benefits from bonus depreciation expected to commence later this year, SCE may have only modest additional financing requirements this year. Please turn to Page 4. Our rate base growth forecast remains 7% to 9% compounded annually during the forecast period. The FERC capital spending changes have a minor impact on the average rate base forecasts for each year. And SCE continues to have a number of growth programs, such as storage, electric vehicle charging, and the grid of the future projects that will remain important sources of growth well into the next decade. Please turn to Page 5. We have included in this slide some of the important 2015 earnings considerations that we introduced on our last call. The only change is a minor revision to the 2015 rate base forecast that I have discussed earlier. To reiterate our prior statements, we don't plan on issuing 2015 guidance until after SCE receives a General Rate Case decision. I'll finish with a couple of reminders on Edison International's investment thesis. Please turn to Page 6. First, we continue to emphasize a lower-risk SCE investment program focused on the wires business, both for reliability spending and for adapting the grid to the new technologies and needs that we've spoken about for some time. To meet these investment requirements while keeping rate increases moderate, we'll require sustained SCE productivity improvements. Our base financing case remains no common equity issuance to support SCE's investment program. Finally, we continue to see the opportunity for above-average dividend growth potential to complement SCE's earnings growth. Of course, our plan is to increase the dividend back to our target payout ratio in steps over time. Thanks. Operator, let's get started with Q&A.

[Operator:]

[Operator Instructions] Our first question comes from Daniel Eggers from Credit Suisse.

[Daniel Eggers:]

I'll pass on the SONGS questions, as there's a lot of folks asked those questions. But I wanted to first ask with the July filing on kind of the distribution network of the future, what else should we expect in that filing? And prospectively, how quickly could that start to flow through your CapEx program and into rate, as you guys devise that plan right now?

[William Scilacci:]

We're still working through that. The plan is to have a rather comprehensive filing on May 1, and we're hoping to include some potential investment parameters in terms of scale potentially. And we're trying to figure out how ultimately to work that into our capital plans. Now, as you remember, we have a general rate case coming up in 2018. And as the way it works, we have to file for that '18 rate case next year in late '16, and we're still working through it. So we haven't made a final decision. It will certainly be included, we would think now, in '18 general rate case that we'll see at the end of next year. So I'll pause here, and look to Pedro or Maria, to see if they want to add anything more.

[Pedro Pizarro:]

No. I think you covered it well, Jim. Dan, the PUC has specified a number of areas they want to see in the filings, so actually working through all of that. But your question is more about what are the impact in terms of capital spend, and we'll address that there, but largely the rate case is in the future.

[Theodore Craver:]

We should clarify. The filing is not May 1.

[William Scilacci:]

It's dated July 1.

[Daniel Eggers:]

And then, I guess, just one another question, just specific to the quarter. There is a lot of O&M savings year-on-year, this year versus last. I know you guys are trying to hold up earnings until the GRC gets resolved. But how does that rebalance this year? Will you guys have a big catch up in O&M toward the backend of this year or is this going to be banged for this year and you kind of get on a normal cycle or more normal cycle next year?

[William Scilacci:]

I think the safest thing to say, until you can get a general rate case decision, after that we'll be able to figure out what's normal. Until then, we're just speculating.

[Operator:]

Greg Gordon from Evercore ISI.

[Greg Gordon:]

Can you just tell us after you make your filing tomorrow, what the expected procedural schedule is going to look like at the commission? And do you expect that you'll still be able to get a final decision by May 30? It can be current open proceeding or it's already been delayed once, so is there a chance, given just the amount of the documents that you're giving to them and the limited amount of time between now and May 30 that we'll see another delay in that final decision date?

[William Scilacci:]

So, Greg, this is Jim. We'll have, Adam Umanoff, answer that question for you. Adam is our General Counsel.

[Adam Umanoff:]

It's difficult to really answer that question. We really can't speculate how quickly the CPUC will move to consider what we file and reach a final decision. They certainly extended the deadline to the end of May to give them additional time to consider just this filing. We're hopeful that it will be wrapped in that timeframe, but we can't be sure.

[Greg Gordon:]

After you file, is there a comment period, where we will see responses from different parties to the case or do you file the documents and then next step will be some sort of pronouncement by the commission?

[Adam Umanoff:]

Again, I'm speculating, but I would suspect to see folks file additional comments based upon what we've produced.

[Greg Gordon:]

Question on a completely different subject. On the Coolwater-Lugo CapEx coming out, and you guys have indicated for some time, and I think this is sort of wrapped up into this filing coming on the grid of the future that you see a very long runway of necessary capital expenditures at or around or even potentially above the current sort of $4 billion plus-or-minus a year that you're spending, because the deferral or potential cancellation of the Coolwater-Lugo line just sort of opened up an opportunity for you to move other spending that's necessary forward. And if so, at what point would you reassess that or when will we get an update or should we just assume over the next three-year period that that CapEx is out, and we should do the rate base math based on the current guidance?

[William Scilacci:]

I think my general impression was, we already saw a little bit of a shifting that was going on with the adjustment, because there was almost $600 million that came out of the forecast period and the net was $300 million. That's the normal course that will occur. And we've got some other things in the works, as obviously the electric vehicle charging application in is processing its way through the PUC. There is some storage opportunities. And the grid of the future likely could be outside this period, the '15 through '17 period, but we're still working through that. So I think we will stay consistent with what we previously said before, that the capital expenditures are going to be in that $4 billion-ish range for the foreseeable future. And it will be probably later next year, before we can give you some additional visibility, because that's when ultimately the GRC filing will go in and that will cover '18, '19 and '20.

[Operator:]

Michael Lapides from Goldman Sachs.

[Michael Lapides:]

Just real quick question, thinking about bonus depreciation, Jim, you made a comment about it. Just curious, can you refresh us, what's in your expectation for bonus DNA in 2015? And is that already flowing through rate basis part of the ongoing rate case?

[William Scilacci:]

It is. We've revised our general rate case, showing earlier in the year in the update proceeding, so that incorporate in our current numbers. And the reason why we referred to it that we see that impact later in the year is that we file our tax return in the September timeframe, and the cash flow benefit starts flowing through from that.

[Michael Lapides:]

One other, just a little bit of a follow-up. If we see kind of any further downward changes in terms of capital spending, does this have a corresponding impact potentially on the pace of change you and the Board might make in terms of dividend growth?

[William Scilacci:]

I think I alluded to in my last statement from Greg's question, that I don't really see a change in the level of capital expenditures going forward. And so that would be consistent with our current plans to step up our dividend, in steps over time, get back to our targeted payout ratio. So I don't really see a change, Michael.

[Operator:]

Julien Dumoulin from UBS.

[Julien Dumoulin:]

So I wanted to ask you a quick question here on rate base trajectory, right. So I appreciate that it's still early days. You've talked about the filing prospectively. You talk about sort of backfilling the CapEx. How do you feel about the current range below the low and high-end of the 7% and 9%, beyond the current forecast period? I mean, would it be appropriate to say that you're setting up to be in that range, while not formally committing yourself to that?

[William Scilacci:]

Well, just the math of it, if we're staying in that $4 billion trajectory, the compound annual growth rate mathematically would slightly adjust over time downward. It's just the math. But I can't tell you how much and how we're going to fill it in, it really will depend upon how the capital expenditures workout and will be filed with the commission later next year.

[Julien Dumoulin:]

And then a clarification to a prior question. So in terms of cost savings in the current quarter, I know it's challenging, and so maybe if you look last year, there was about $0.23 give or take. Is there any good way to kind of frame the current period vis-à-vis the cost savings and magnitude that we could see sort of maintained?

[William Scilacci:]

That's a tough one. And not that I wanted to duck the question, until we get a general rate case decision, it's really hard to say. And we had embedded in our general rate case some assumptions regarding cost savings that we voluntary passed along to the customers. And we will continue to look for additional cost savings, but we'll have to wait for general rate case decision before we really know.

[Julien Dumoulin:]

And ducking that one perhaps, if I may. In terms of M&A and strategically position of the company, how do think about sort of opportunities in California? And specifically thinking about the company outside of California, you mentioned competitive transmission, but in terms of getting a bigger footprint down the line or is that in the thought process at all?

[Theodore Craver:]

I'm going to give you a wholly unsatisfying answer, because my lawyers will kick me hard if I say anything other than we don't comment on M&A matters.

[Operator:]

Steve Fleishman from Wolfe Research.

[Steve Fleishman:]

Jim, you mentioned the higher AFUDC rate going on this year. Could you just talk more about what's causing the higher AFUDC rate? Is that something that will continue on beyond 2015?

[William Scilacci:]

Well, it's hard to speculate beyond. But remember, we did the regulatory asset financing earlier in the year bringing cash in, and which has the effect of reducing the amount of short-term borrowings we might carry, which tend to reduce the AFUDC rate. And I also mentioned that the flip balance was slightly higher, so it's a combination of a higher rate and a slightly higher balance that led to the overall slightly higher AFUDC equity earnings. If it's going to continue, I just can't speculate on that now. It's going to be so variable in terms of what happens to the general rate case, what level of capital expenditures is ultimately authorized by the commission, and so forth. So I just can't speculate it at this point in time.

[Steve Fleishman:]

And then just on the GRC. Is there any way to get a sense of timing on when we might get ALJ on that?

[Theodore Craver:]

I'd love to tell you, but we just don't know, sorry.

[Operator:]

Ali Agha from the SunTrust.

[Ali Agha:]

Jim, wanted to clarify, as you had mentioned the best way to think about 2015 is earnings driver, is really looking at the rate base model. And also on a full year basis, whenever you think about that, given all the extra tax benefits and another incremental savings beyond authorized ROEs that you were getting in '14, the sense is you're starting off from a lower earnings base or will have a lower earnings base in '15 versus '14 and grow from there. So with that as a backdrop, can you explain to me, maybe I've missed this, why we're ending out with the flat earnings comparison in the first quarter, if we are sticking to general rate base model?

[Theodore Craver:]

There is a lot of pushes and takes are going here and it really has to do with how they authorize '14. And until you really have a general rate case decision, I think what I was trying to imply earlier on my comments it's just very, very hard to compare '14 to '15 given the situation we've got now. So I will just like to say that let's just wait until we get a general rate case decision. And we'll sort through it and give you a better indication of what's the potential power, once the commission gives us a final decision.

[Ali Agha:]

And then secondly, just to clarify the point on the process as far as SONGS is concerned, is it fair to say that the rehearing forum is really the forum where ultimately this whatever final decision comes out, it comes out from there. The reason I ask that is one of the parties, I don't know which, TURN or ORAs asking for some additional fines to be incurred. Is that all part of this rehearing proceeding or are there multiple or other proceedings we need to be aware of as well.

[Adam Umanoff:]

The proceeding that is active is the request for rehearing that's before the California Public Utility Commission. There were, as I think you know a Federal Court lawsuit brought by one of the opponents that was in District Court. It was recently dismissed by the District Court, so the action right now is before the California Public Utility Commission. Once the decision is rendered by the California Public Utility Commission, of course an opponent who might be dissatisfied with the decision can appeal to the courts. But none of that activity is currently pending.

[Ali Agha:]

Just to clarify that, I am sorry, so any party that's asking for additional fines based on the email disclosures, et cetera, that is all part of this rehearing proceeding?

[Adam Umanoff:]

It's a part of the rehearing proceeding and related filings. For example, two example two days ago, the Alliance for Nuclear Responsibility filed an additional petition for modification in this docket, in the SONGS OII docket, but that along with the current request for rehearing, we would expect those all to be disposed off roughly at the same time by the California Public Utility Commission.

[Operator:]

Travis Miller from Morningstar.

[Travis Miller:]

Just wondering, when we're thinking about California specifically how do you think about the investments through Edison Energy and SCE when we're thinking about these new technologies, new age grid technologies. How you think about allocating capital to opportunities through SCE or through Edison Energy in California?

[William Scilacci:]

I think primarily within the utility we see that's where the principle opportunity to invest in the distribution system resides. And that's where we see quite a bit of modernization and expansion of the distribution system taking place. So I would expect the bulk of the investment would primarily take place at SCE. At Edison Energy or on the competitive side, so whether that's Edison Transmission or some of the CNI Energy Services or some of the other areas that we're looking at, that's really opportunistic and its based on the standard parameters that we've used over the years for investment on the competitive side. If we see something that gives us a positive rate of return after considering cost of capital and risk, then we would seek to invest in those things, so long as it stays in the basic electric footprint that we have. So I think you should expect most of the capital would be dedicated to the SCE activities. Public policy makers in California are certainly keen to see the utilities facilitate. The policy objectives are moving to a low carbon economy. That requires modernizing the system and allowing it to facilitate a number of the new technologies and that's where the bulk of the effort will probably be over the next few years.

[Travis Miller:]

And do you think if you got approval to invest those money at SCE and you take away the filing here this summer. Could you carry lessons learned, so to speak, from SCE investments there, storage EV, et cetera, to Edison Energy investments outside of California? Is that a potential business model thinking that you could take lessons learned or would think about Edison Energy as completely separate type of investments?

[Theodore Craver:]

This will be a fairly complicated answer. I would say, broadly, strategically, most definitely Edison International is in the electricity business and we look for opportunities not just in SCE's territory, but throughout. I think a lot of the changes that we see taking see place in the electric industry are in fact often occurring here in California. So there is definitely, I'll say, a general strategic leaning opportunity that comes from that. We have to be careful on some of the specifics there though. Remember, a lot of the investments that are being made in SCE are being funded by customer rates, customer payments and we always have to be extremely careful about any bleed over a specific information or assets or value from the utility to the unregulated side. All of that is captured underneath our affiliate rules, but so long as we're really careful and cognizant on that, I'd say, your broader point, if you will, the strategic learning point is a valid one and one that we are actively trying to look for other opportunities outside of California.

[Operator:]

Ashar Khan from Visium.

[Ashar Khan:]

My questions have been asked. The only one I have, Jim, is this $0.07 that you said that you deferred. Is that $0.07 something, which is on an annualized basis or a quarterly basis? I was just trying to get a little bit better understanding of that $0.07?

[William Scilacci:]

That was $0.07 in the quarter, Ashar.

[Ashar Khan:]

So can we analyze that number?

[William Scilacci:]

I don't know, because really ultimately it depends on what the GRC decision ultimately turns out. So I think it would be dangerous to try to analyze it until we get a full decision out here.

[Operator:]

John Alli from Castleton Investment Management.

[John Alli:]

Ashar actually asked my questions, I'll just follow-up offline.

[Operator:]

I'm showing no further questions. At this time, I'd like to turn the call back over to Mr. Cunningham. End of Q&A

[Scott Cunningham:]

Thanks, everyone, for participating today. And don't hesitate to call up if you have any follow-up questions. Thanks very much. Good evening.

[Operator:]

Thank you. That does conclude today's conference. Thank you for your participation. You may now disconnect from the audio portion.