Edison International (NYSE:EIX) Q4 2023 Earnings Call Transcript

Edison International (NYSE:EIX) Q4 2023 Earnings Call Transcript February 22, 2024

Edison International isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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.

Sam Ramraj: 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 Form 10-K, prepared remarks from Pedro and Maria, and the teleconference presentation. Tomorrow we will distribute our regular business update presentation. During this call, we will make forward-looking statements about the outlook for Edison International and its subsidiaries. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our SEC filings.

Please read these carefully. The presentation includes certain outlook assumptions, as well as reconciliation of non-GAAP measures to the nearest GAAP measure. During the question-and-answer session, please limit yourself to one question and one follow-up. I will now turn the call over to Pedro.

Pedro Pizarro: 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 two 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 redeploys savings from prior years into operational excellence initiatives. This spending will benefit customers and therefore shareholders in the long run.

I also reaffirm the strong confidence we have in our long-term EPS growth targets of 5 to 7% for 2021 through 2025, and 2025 through 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 5, 580 in just five years. We are proud of this progress, which, combined with enhanced vegetation 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 three 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’s framing of the issues. We are encouraged by this ruling because the issues will be handled in a single phase, allowing for a final decision as soon as Q1, 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 in 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’s clean 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 net zero. To get there, it will be critical to rapidly expand the high-voltage transmission system and 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 acknowledged SCE’s leadership in 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 look for different ways to support the state in advancing its clean 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 you Maria for her financial report.

Maria Rigatti: Thanks Pedro and good afternoon, everyone. In my comments today, I will discuss fourth quarter and full year 2023 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 the 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’ll recall that we identified two specific items in this guidance, the pending CEMA decision and the tender offer for EIX’s preferred stock. 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 continued 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 forecasts shown on pages 11 and 12, I want to emphasize two 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 standalone applications with the CPUC for the NextGen 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 CAISO’s transmission plan, which we expect will result in more than $2 billion of investment. 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 three primary reasons for this. First, interest expense on 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 approvals. Pedro talked earlier about the planned increase in O&M as SCE spends on targeted reliability-focused activities and redeploys savings into operational excellence initiatives. This accounts for $0.15 to $0.20 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, Parent & 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 proceedings.

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 commitment. To do this, we are going beyond our typical one-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 two 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 investment. This represents the remaining $0.15. A significant portion of this relates to covered conductor installation 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 claims 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 2024 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 pre-funded $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 a 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 remains 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 recovery 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.

Sam Ramraj: Sheila, please open the call for questions. As a reminder, we request you to limit yourself to one question and one follow up so everyone in line have the opportunity to ask questions.

See also 20 Most Valuable Digital Health Companies In The US and 25 Safest Cities in Asia to Visit In 2024.

Q&A Session

Operator: [Operator Instructions] Our first question will come from Shar Pourreza with Guggenheim Partners.

Shar Pourreza: Can you hear me now? Sorry about those little technical issues. Pedro, just wanted to start off on the components of the ‘24 drivers, in particular maybe that $0.15 to $0.20 cents of O&M reinvestment. When you reference redeploying the savings in the future, would that be one for one with the $0.15 to $0.20? And I guess what timeframe would that impact?

Pedro Pizarro: So I think I’ll start, Maria. I can continue here. But we’re focusing on what we are investing in ‘24 and we see that being an investment in systems, processes, or continued work and 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 one big bang. It’s multiple opportunities. So I think we’ve discussed with investors in the past consistent with our operational excellence work.

Maria Rigatti: Yes, Shar, I think Pedro 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 initiatives 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.

Shar Pourreza: Got it. Okay, great. And then just appreciate you calling out the wildfire debt drag that is impacting results, the $0.61 of drag. 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. Thanks.

Maria Rigatti: 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 you know 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 — we have some refinancings in ‘24. As I mentioned earlier, we only have $300 million of refinancings 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.

Operator: Next, we’ll hear from Steve Fleishman with Wolfe Research.

Steve Fleishman: Hi. Good afternoon. Hi there. Hi, Pedro. So the — just wanted to — you talked in the past about the kind of higher cost of capital would be, why that would be offset with likely reinvesting the business and the likes. So just as we look at the guidance for ‘24, and I guess ‘25, could you just kind of go back to that prior comment and have a think of it from that standpoint?

Maria Rigatti: Sure, Steve. It’s Maria. So what we’ve talked about in the past around the cost of capital mechanism and the trigger is that obviously that’s your, might interest rates and the interest rate environment that we’re in. And as we look forward, we do view that cost of capital mechanism and 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 you can see that we are taking dollars and we are reinvesting them in 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-based earnings in 2025. Makes sense. The cost of capital mechanism is triggered. We’ve updated our tariff sheets. Our next rate change will be implementing the new cost of capital. So it makes sense to update rate-based earnings. And then we’ve gone through the rest of the buckets in 2025 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 has 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 2024 and 2025, the increase in earnings is driven by rate-based growth. SCE operational variances in line with historical levels, not a significant driver. EIX parents 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 of the different components.

Steve Fleishman: Okay. Thank you. Just one 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?

Maria Rigatti: Sure. So we are the incumbent transmission owner for 17 of the projects that CAISO has included in their 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 incumbent transmission owner, we are doing the engineering work currently, as we continue to update that and get a firmer view of the specific cost, we will roll that out but again 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 two projects and should know sometime in the spring whether or not we’ve been selected.

Pedro Pizarro: And, Steve, I think a reminder beyond those projects that have been identified by ISO, to go back to our countdown to 2045 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 of issues needing to be 4x statewide what it’s been historically and the pace of distribution of issues needing to be 10x what it’s been historically. So we see a lot of work for the utility in the two decades ahead. Great.

Operator: Our next question will come from Nick Campanella with Barclays.

Nick Campanella: Hey, thanks a lot for taking the questions and all the updates today. Hey, good afternoon. Especially the EPS bridge, I just had a question on that. Just the $0.30 of 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 notice a lot of programs and true-ups outside of traditional GRC. Thanks.

Maria Rigatti: Yes, great, Nick. So you’re talking about the rate-based true-up that we show on that bridge in the deck, right? And so when you think about that, there are different components to rate-based. As I said earlier, rate-based is the driver for earnings growth between 2024 and 2025. Two buckets around rate-based 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 2025 GRC related item, a little bit more. Some of that is just 2025 CapEx. We spend it, it goes into rate-based. 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 is a little different than what’s unauthorized.

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 amount 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 that’s the flavor of the rate base. I think it’s really important to note also that, so it’s rate-based growth, it’s rate-based 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.

Nick Campanella: 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 to stay in higher CapEx, and how do we think about incremental equity funding, if at all?

Maria Rigatti: Sure, so we did include a source 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 and 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.

Operator: Our next question will come from Anthony Crowdell with Mizuho.

Anthony Crowdell: Hey, good afternoon. I think I just have to be one quick follow-up. I want to connect slide 14 and slide 6. When I look at slide 14, it looks like interest expense increase, and I believe that just as you’re funding more of the liabilities. There’s the, I guess, stability in the interest expense as 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?

Maria Rigatti: So it’s probably not either exactly, Anthony. Basically,

Anthony Crowdell: I hope it too, sorry.

Maria Rigatti: 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 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.

Anthony Crowdell: 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, was related to one claim. Could you give additional color on that if that was the correct way, I heard that?

Pedro Pizarro: What I said was that the majority of it was from one claim, Anthony. And what we’re seeing is that as we went to that, it was one 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 unique outliers that required an adjustment this time.

Operator: Our next question will come from Michael Lonegan with Evercore ISI.

Michael Lonegan: Hi. Thanks for taking my question. I’m planning to ask that to 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 do you still expect to receive proceeds in ‘24 and into ‘25.

Maria Rigatti: 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’ve easily addressed that there’s no change in the, from the safety posture due to this transaction. They’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 tower 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’ll come out relatively soon, but that is the next step in the process.

As you recall, the request that we made was to treat this sale in a particular manner that would not require a very large application to follow along 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 could go into 2025 in terms of a 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.

Michael Lonegan: Great, thank you. And then secondly from 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 high-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 emerge as high-risk in the event that they develop that way faster than expected?