Edison International (EIX) Q4 2013 Earnings Report, Transcript and Summary

Good afternoon, my name is Shirley [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to the Edison International Fourth Quarter 2013 Financial Teleconference. [Operator Instructions]. Today's call is being recorded and I would now like to turn call over to Mr. Scott Cunningham, Vice President of Investor Relations. Thank you. Mr. Cunningham, you may begin.

Thanks, Shirley, and good afternoon everyone. We apologize for the short delay on the start of the call. Our principal speakers today will be Chairman and Chief Executive Officer, Ted Craver; Executive Vice President and Chief Financial Officer, Jim Scilacci. Also with us are other members of the management team. The presentation that accompanies Jim's comments, the earnings press release and our Form 10-K are available on our website at www.edisoninvestor.com. During this call, we will make forward-looking statements about the financial outlook for Edison International and its subsidiaries and about other future events. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our SEC filings. We encourage you to read these carefully. The presentation includes certain outlook assumptions, as well as reconciliation of non-GAAP measures to the nearest GAAP measure. When we get to Q&A, please limit yourself to one question and one follow-up. If you have further questions, please return to the queue. With that, I'll now turn the call over to Ted Craver. Theodore (Ted) Craver Jr.: Thank you, Scott, and good afternoon everyone. Today Edison International reported full year quarter earnings of $3.80, $0.10 above the high end of our earnings guidance range. Core earnings for 2013 were down slightly from last year's $3.92 per share, reflecting in part, the impact of closing the San Onofre nuclear plant. We also introduced 2014 earnings guidance, core earnings guidance of $3.60 to $3.80 per share. Jim will provide additional information on all of this shortly. In the last several investor calls, my remarks have centered on our three key strategic priorities; delivering long term growth in earnings and dividends, resolving the uncertainties of EME and SONGS and positioning our company to capitalize on transformative change in our industry.…

Thanks Ted and good afternoon everyone. My comments focus on the following topics; financial results, updates on capital spending, rate base on fuel and purchase power, and 2014 earnings guidance. Please turn to page 2; for the fourth quarter of 2013, core earnings are $0.81 per share. The comparison to the fourth quarter last year is not particularly helpful, because SCE's 2012 CPUC general rate case decision was recorded in the fourth quarter of last year. The quarter-over-quarter comparison is summarized at the right of the slide. The earnings drivers are the same things we have been discussing all year. For SCE< the year-over-year comparison is more informative. Before I go there, I want to comment on fourth quarter results at the holding company. EIX recorded $0.02 per share of earnings, $0.08 better than last year, largely due to $0.06 per share of higher earnings from Edison Capital. As we had previously mentioned, Edison Capital has a small investment portfolio, including affordable housing investments. This portfolio con to wind down and periodically, we will record income from sales or distributions. It is difficult to predict the timing and amount of income from the remaining portfolio and we have not and will not include any income in our guidance numbers. As a reminder, holding company costs generally run a bit more than $0.01 per month. In addition to the Edison Capital income, the holding company also had $0.02 per share of lower cost in taxes. A non-core item of $0.11 per share in discontinued operations is from Edison Mission Energy, for ongoing adjustments to income taxes. As a result, we moved the accounting for EME to discontinued operations following its bankruptcy, filed in the fourth quarter of 2012. For the end of 2013, we now have recorded $70 million from adjustments…

Thank you. (Operator Instructions). Our first question comes from Mr. Dan Eggers.

Good afternoon guys. Theodore (Ted) Craver Jr.: Hi Dan.

I guess question number one, just as it relates to the GRC with all the ERRA balance announcement over cost of [ph] revenues that you guys have put out there in projections for higher gas prices and renewables. What sort of bill inflation are you guys projecting for kind of 2014, 2015, 2016 for customers based on plan?

Good question. Generally, when we talk with investors, its our goal to target somewhere between 3% and 5% annual increases in the total bill. So you have to take -- you got different pieces, you got fuel and purchase power, base rates, transmission and the like. But 3% to 5% is the internal objective that we try to target. Now, for 2014, I am not sure exactly where that comes in, maybe slightly higher, but we will be working that as we go through the regulatory process.

Okay, got it. And then I guess just on the OII process, with OII-3, kind of each 1 and 2 seeming to kind of try to long, are there still expectations that three can have some visibility in the second quarter, and so it can just kind of drift later into the summer, before there is kind of visibilities to where the commission's haven't?

I think the key thing, Dan, is where do you put the scoping memo to come out, and based on Ted's comments, we anticipate that somewhere before the end of the first quarter, maybe slightly later, we should see something from the Commission and that will be really a good indicator of what's the timeframe for all this to be.

Okay. Thank you guys.

Okay.

Our next question comes from Mr. Julien Smith. Your line is now open.

Good afternoon. Theodore (Ted) Craver Jr.: Hi Julien.

Hey, could you follow-up on the last question, just given balancing accounts and all that. From a cash flow perspective how do you think about this year, and the use of short term debt, just given prior comments on prior calls?

It's a good question. Right now we have very limited amount that's been used on our lines, that was in my script, was about $175 million of commercial paper that was outstanding at the end of the year. And that will ebb and flow, as we go through the course of the year, and it really sort of dictated -- that was dictated by our capital expenditures and the timeliness of decision making around the ERRA decision, and just normal fuel and purchase power fluctuations that occur at an important time. So its really hard to predict at the end of the year, where we will be, because you have so many unknowns that have to be decided here. So I will pause here and let Linda or Ron to see if you want to add anything else to the answer?

Okay. As we go through the course of the year, we will watch that and slide. The key things are, the decisions that need to come from the commission, which will affect in our liquidity.

Got you. Are there any chunky items outside of that, that affects cash flow that might not be otherwise intuitive?

The only other thing I did mention, it could be one -- at the holding company, if you see the approval of the settlement, we could use commercial paper volumes or drawings on our bank lines at the holding company, to make the initial payment to the creditors, that's $225 million at the close. Then we have -- you monetize tax benefits during the course of the year. September is when we typically file our tax return. So we will just have to look to see what happens, in terms of what we actually receive and what we are able to monetize, based on the tax positions of the utility and the consolidated entity. And then at the utility, I think I covered this. There is nothing really that jumps out. With these financings [indiscernible] thing that occurs at the utility. We typically build up some short term borrowings, and then go out and issue $300 million, $400 million, $500 million of long term debt, and then that will be used to repay commercial paper borrowings. So that's the normal trend. Ron?

The greenhouse gas revenues and costs, those can be chunky as well.

Got you. And just a quick clarifications on the slides, on the transmission spending, I know you guys revised that upwards. Anything pending there again, just leftover? Is that all taken care of at this point?

There is lot of things going on in that area in terms of what's pending. We still have some more work to do on Tehachapi, in terms of getting cost approvals. We just recently got one -- Ron, why don't you go ahead and fill in the details around what the recent cost increases were approved for one of the projects, and for Tehachapi?

We submitted an advice letter on our Devers-Colorado project to raise the cost cap that was approved by the commission. We now appeal. That project will come within that cost cap, and that positions us well for the ultimate cost recovery at FERC. Tehachapi, we will submit our revised costs by probably the end of this year, to reflect Chino Hills, the FAA and then cost increases that we have experienced over time; that's likely to be an application and a little lengthier process. But again, ultimate cost recovery is at FERC. The other items that has come in on our transmission projects, is the commission did approve our petition to modify and put the voltage control equipment back into the project which they had previously taken out, which from a schedule perspective, was helpful for us.

Right. In aggregate, what is that in total dollars if you could kind of summarize what the pending is, if there is an event there?

On voltage control?

Or credit in aggregate, but specifically.

It's shown in the chart, everything is in there.

Great. Thank you very much.

Okay Julien.

Our next call comes from Mr. Michael Lapides from Goldman Sachs. Your line is now open.

Hey guys. Thank you for taking my questions today. Quickly, in the prepared remarks, you talked about some of the incremental capital opportunities that actually weren't in the capital spending guidance levels, and one of the things you touched on, with the Cal-ISO potential incremental transmission. Can you give a little more color around that, both in terms of process for the uncertainty about what that could be, if anything, and just size and scale? Theodore (Ted) Craver Jr.: Yeah, we wanted to give you a sense further -- some things that are on the, I'd say, the periphery of our capital expenditures forecast; because those are a little bit further out in time. And Ron is going to pick up the detail in what we are actually -- there is a particular project, an economic project that we are looking at right now.

Yeah, from a reliability perspective, I believe the plan does include our [indiscernible], but as Jim pointed out, that's down the track, way later in the decade. The Delaney-Colorado river line was also included in the plants, since that is a economic line, that would be subject to competition and determinates in our territory, we have every intention of participating.

Meaning, that project is in your current CapEx guidance, or in the plan submitted by Cal-ISO but not necessarily, included in your outlook?

Its in the plan, just come out by the Cal-ISO, it was not incorporated into our capital spending plans yet.

Michael, [indiscernible] go back, that was the old Devers DPV2 line, Arizona portion. So it has come back as an economic line.

And how big of a -- what are we talking in terms of capital and in terms of years to build?

We are still working on it, but that's still yet to be determined.

Got it. Okay, thanks guys. Much appreciated.

Our next question comes from Gregg Orrill. Your line is now open.

Thank you. Theodore (Ted) Craver Jr.: Hi Gregg.

Just was wondering if there was an update on San Onofre settlement talks, that there is still a path for that regarding the OIIs? Theodore (Ted) Craver Jr.: We really don't have anything that we can talk about on that one. Sorry.

Thank you.

Our next question comes from Stephen Byrd from Morgan Stanley. Your line is now open.

Good afternoon. Theodore (Ted) Craver Jr.: Hi Stephen.

I wanted to talk actually about the longer term point you raised about transformative sector change, and you mentioned legislative advocacy AB 327 implementation. I wondered if you could just talk broadly to -- as you see the [indiscernible] debate and the key change that needs to be made, to make sure that as renewables are brought on to the grid, they are done so in a thoughtful way. Theodore (Ted) Craver Jr.: Well I kind of touched on it in my remarks. Basically AB 327 reinstated the California Public Utilities Authority to do rate design, and give them some general parameters around fixed charge, reducing the number of tiers, deciding what the grandfather in period would be to our existing distributed generation projects using that metering, that energy metering and what the new net energy metering tariff will be, few other things in there as well. But those are the main parts. So that's now going to be -- decide to give a number of proceedings before the California Public Utilities Commission. I think our general point of view was, the legislator clearly made their intentions around this clear, both the Senate and the Assembly passed the legislation with super majorities, signed by the governor. So there is pretty clear indication of what the overall direction should be. The details are going to unfold over the next few years here. I think we feel that broadly speaking, the value of that legislation in the upcoming activity by the PUS is that, it should meaningfully address what we see as subsidies, and more importantly cost shifting among sectors within the retail residential rates; and that should be, I think a net benefit for fairness for all customers. The other part that we see that's beneficial is, it's a good move towards establishing some level of fixed charge. We have large fixed costs associated with maintaining the reliability of the grid, and this just recognizes some of that. So those are kind of the broad policy points that we expect to see, implemented through AB 327 and the PUC actions related to that.

Understood. Is there any sense of the time table over which that deliberation process will take place? Theodore (Ted) Craver Jr.: Well it will probably be over the course of some years. It won't be all this year, but there will be some important moves, even as early as here in 2014.

Great. Thank you very much. Theodore (Ted) Craver Jr.: You're welcome.

Our next question comes from Mr. Ali Agha. Your line is now open.

Thank you. Good afternoon. Theodore (Ted) Craver Jr.: Hey Ali.

Hey. Jim, you mentioned in your remarks, that your rate base numbers obviously exclude SONGS, but once the phase two decision comes out, you will relook at those rate base numbers. Would that also be a time for you to relook at your guidance for 2014, depending on what you do with that SONGS rate base?

I think clearly if the commission came out and allowed some portion of SONGS to be considered useful and actually receive the return on common equity as the important piece, and for that matter, because we have excluded $0.07, you can see in the guidance for 2014 for debt and preferred stock, surely we would go ahead and adjust guidance for that purpose.

Okay. And second question, can you remind us at the end of the year, what was the equity ratio at Edison, that's used for rate making purposes?

The weighted average, 30 month average was 49.2%, Linda? She is saying yes.

49.2%. Got it. Thank you.

You're welcome.

Our next question comes from Ashar Khan. Your line is now open.

Jim, I was just trying to understand, if I did my math right. Just that though we have a negative on the purchase power, but overall, if we take everything together, we have over collected by an amount, that's what you mentioned in the slides?

I think I said it was approximately $500 million over collected in all our balancing accounts.

So that means if the commission came in and -- if they found some portion of it used or useful on all that, the over collection would be much higher, right, if we get credit from somewhere or the other, right? Am I correct or wrong?

Its more complicated on that answer. So let's separate fuel and purchase power out from base rates and decommissioning. That's why this thing has gotten so confusing. Its hard to track each piece. So you may know, we are continuing to collect end rates at the whole authorized base rates for SONGS, as if we are continuing to operate, and we are not recognizing earnings, [indiscernible] the depreciation, and so, we are collecting all those dollars, waiting for an ultimate determination, as part of the rate making process through the investigation of the OII. So these are all separate buckets, and frankly, I think it was yesterday or the day before, we sent a letter to the commission to say, that you have all these different proceedings going on simultaneously. Here is our roadmap, how we want all these things to come together, so you can determine what the rate adjustments need to be; because you are over collected in some areas, under collected in others. You also have decommissioning that's going on separately. They haven't authorized us to tap into the decommissioning trust. But in theory, since June 6, we have been decommissioning San Onofre. So the dollars that need to come in and in our disclosures, whenever we have a chance to look at them, there is at least a couple of hundred million dollars of decommissioning funds for 2013 alone, and then we are going to look to 2014 for additional dollars, that need to be taken into consideration. So the net-net-net of all this has to be worked out, and its going to take us some time to get there.

Okay. And if I can just end up with one thing, Ted mentioned that we should hear from NEIL after their June board meeting. So is that the first time we can hear, how much money they would give us. Is that what we should expect to hear some kind of a figure from them, and that would assume that we would get something in the second half of the year? Theodore (Ted) Craver Jr.: Well that's when we are going to hear from NEIL, that will be our first opportunity to hear from them, after our board meeting. So all they are really signaling there, is that's the timeframe for getting the first reaction from NEIL.

Okay. But Ted, usually, once they come with a decision, when do they pay out? Is it pretty soon, or is there some historic? I forgot it. Theodore (Ted) Craver Jr.: I don't think we'd want to signal a speedy resolution here. It is just the nature of the beast that tends to be slow.

Okay. Thank you.

Our next question comes from Mr. Jonathan Arnold from Deutsche Bank. Your line is now open.

Good evening guys. Theodore (Ted) Craver Jr.: Hey Jonathan.

Quick one, just on the SONGS decommissioning, slide 24. I am not entirely sure if this is new, but you have a bullet that's saying estimated decommissioning period may be accelerated? Could you just explain what would be the turbulence, as to whether that would happen, and what are you referring to?

Yeah, remember the original plan, and I will throw it out to Linda and Ron to give some more details, whereas to [ph] decommission the plant after we shut it down in 2022. That's what plants had incorporated to begin with. And so we are now looking at various things that we could do to accelerate the timeframe, and that really has to do with, getting the spend through a lot of the pools as quickly as possible and into dry gas storage. So I will pause there, and Linda or Ron, would you like to fill in some more details?

I will just add to that, that we are going through a very detailed decommissioning cost estimate and part of that process, we are looking at optimizing the dollars around decommissioning.

So Jonathan, I think you should take from us that, once we finish that detailed review, we will come out with a new time frame, a new dollar amount. We expect the contributions would be depleted going forward. $423 million in total annual contributions right now are in rate recovery from the commission, and so we will be looking at that. But there is a lot of moving parts here, and the timeframe of the removal of the spent fuel, the rate of return, there is a whole bunch of issues we are looking, and there is probably eight or nine key assumptions here, escalation of costs going forward. So this number is going to change, as we go forward here, and the last time we talked about it, we had over $3 billion interest for San Onofre currently, and the cost estimate was slightly over that amount. So we were nearly fully funded, and the final cost studies will give us a better picture of where we are.

Okay. Then Jim, maybe on a higher level, but you took these extra potential capital spending items you talked about. You talked about some of the transmission, I think they are no longer storage, that was part of that too?

Yes.

And when you -- can you talk maybe a little bit on that piece, and then, as you aggregate all of that together, is this something we should think of sort of sustaining you in the 7% to 9% rate base drag over the longer period? Is this something that could be incremental over the sort of latter part of the decade? Just how should we think about how we mold that into everything else you're doing, if some of it goes ahead?

It’s a good question. I think we need to back up and look at our capital spending in total. What has been happening, and you can see it through the charts, the level of distribution spending is stepping up to meet the replacement rates that we need to be at. So that's just holes in wires, underground cables, holes, so that's why that's going up. In transmission, it has been coming off, as we have been furnishing some of the large renewable lines, and we just have a little bit of legacy generation that's ongoing. So these other things we are looking at and considering, we haven't made any decisions. So there is the potential to may be add a little bit to the total level of capital expenditures, but its going to take us a little while to work through these things, the preferred resources and the storage are the first ones on the horizon that we need to decide what we want to do. On some of the storage related items, they are in the distribution system, which we feel that we are well suited for, because that's really down to the basic wires of the business that we want to control, generally going forward. So I can't give you a number, but we are certainly thinking hard about it, and we are launching that growth rate. We are trying to balance all the things here too, in terms of the ultimate level of growth, and we want to grow the dividends, so all this plays in together.

Could I just ask one other, might be a third question, but just one the -- as you see the distributed solar movement gathering pace. And obviously still, relatively small versus the overall base. But I know you have made some investments outside of California. Is there a structure or a sort of market design, destination, where you could see yourselves competing in that business? Theodore (Ted) Craver Jr.: May be I will break it into two parts. One, whether its distributed solar, or let's call it more broadly, distributed energy resources, that would include solar, include efficiency programs, include storage, all of those things. We see, actually, a significant investment that needs to be made in the distribution system here in California, to really prepare the system for integrating an increase in distributing energy resources. Jim alluded a little bit in his comments, we are clearly in the best position to do that, given our ownership of the distribution system. So that's part one, we see a pretty significant investment opportunity on that side. Its very much in-sync with public policy here in California, and very much in-sync with our own strategy. The second part is, whether we'd be able to participate in distributed energy resources, again, using a broader definition of that, might just -- things like we have rooftop solar, but broader distributed energy resources outside of the territory. At this point, we are certainly working on that. We have, what we think are some interesting beginnings in that area. I have kind of taken pains in the past to say, we are doing this kind of one step at a time, its not bet the ranch type of deal. But I think we do see some interesting opportunities there primarily be aimed at commercial and industrial customers, and would be not just in our territory, but outside.

So you could be inside the territory; because initially, you sounded like you are talking outside territory? Theodore (Ted) Craver Jr.: It could be either one, of course, our primary interest initially is, understanding what the opportunities are on a broader scale, outside of just our constraints of the 2000 square mile territory.

Thank you. Theodore (Ted) Craver Jr.: You're welcome.

Our next question comes from John Cohen. Your line is now open.

Hey good afternoon. I was just wondering if you can give us an update as to what the process is for SONGS replacement capacity procurement? Is there a level that's going to come from a nascent generation versus transmission. What's the timing around all that?

Ron's going to handle that.

The commission has been approving through our long term procurement plan proceeding the amount of generation that we are going to go out to bid for, both ourselves and San Diego, those numbers are all public and available. I don't remember them quite off the top of my head. They did fold into the Cal-ISOs transmission plan. So it is being coordinated in that fashion. Our procurement teams are getting ready to do that, and then we have also taking on, as Ted alluded to, the preferred resources, pilot in South Orange County, where we will put together a package of replacement options with preferred resources, such as demand response, solar, storage, and the like, and pilot our team is aggressively putting together, to fold in and that will reduce the amount of generation that we ultimately will have to buy through the market.

Okay great. Thanks very much.

Our last question comes from Travis Miller. Your line is now open.

Good afternoon. Theodore (Ted) Craver Jr.: Hey Travis.

A follow-up on a couple of these questions on all distributed generation, etcetera, etcetera. What do you think is the timing element for that, and if you guys do move slowly as you characterized it. Are we talking about five years before its material, 10 years before its material, when does this become an earnings, material earnings driver, all this other stuff? Theodore (Ted) Craver Jr.: This is Ted. We are definitely interested in the answer of that question as well. I think the honest answer is, its really hard to tell at this early stage. So we are -- we think it would be foolish to kind of turn a blind eye to it, and not focus on it. This is one of those things that could potentially change how the industry is structured. So its something we are involved in. We intend to remain involved in it. But the pace with which that could happen, whether really proves itself out, that's very much an open question. That's why again, we are going to take pains to make the statement. The core value proposition of the company remains very much centered on the exceptionally strong growth story that we see within Southern California Edison, particularly ensuring that the distribution system is resilient and reliable, and we see a significant investment required there to do that, and we think there are ways to continue to address the cost side of the equation, so that we don't have a big impact on rates for customers. That's the core value proposition. These other activities, they remain things that we are actively involved in, and we will continue to be actively involved in, but its really hard to predict at this early stage, what the pace will be and whether they will be meaningful, or when they will be meaningful.

Got it. Okay. Thanks so much. Theodore (Ted) Craver Jr.: You're welcome.

Okay. Our last question comes from Mr. Michael Lapides again. Your line is open.

Hey. I was just curious what the resolution of [indiscernible], an opportunity to reduce the costs at the parent. Kind of that $0.15 level, it is kind of in that range for a number of years. But now you don't have the non-regulated subsidiary? Theodore (Ted) Craver Jr.: Actually we have been addressing that. I don't remember the exact numbers, but we had something in the neighborhood of 80 people within the Holding Company from senior officers to clerical folks. So it has always been a very modest sized group. With the EME difficulties, we started addressing that, and have brought that down, actually basically about in line, percentage wise with the reduction in staff that we had occurred at Southern California Edison over the last couple of years. So it has been something we have addressed. These just aren't particularly big numbers. But most of the costs there relate to financing, and stuff other than what I will call overhead costs. It’s a great question, but its actually not a particularly meaningful number. I think Jim actually mentioned, we are averaging somewhere, including financing and all the rest of the stuff, we are averaging somewhere around a penny a month, so $0.12 currently.

Got it. Okay. Thank you, Ted, much appreciated. Theodore (Ted) Craver Jr.: You're welcome Michael.

With the last question, I would now like to turn the call back to Mr. Cunningham.

Thanks very much for joining and please don't hesitate to call, if you any other questions. Theodore (Ted) Craver Jr.: Thank you.

This now concludes today's conference. All lines may disconnect at this time.