Edison International (EIX) Theodore F. Craver, Jr. on Q4 2015 Results - Earnings Call Transcript

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Edison International (NYSE:EIX)

Q4 2015 Earnings Call

February 23, 2016 4:30 pm ET

Executives

Scott S. Cunningham - Vice President-Investor Relations

Theodore F. Craver, Jr. - Chairman, President & Chief Executive Officer

Jim Scilacci - Chief Financial Officer & Executive Vice President

Pedro J. Pizarro - President & Director, Southern California Edison Co.

Adam S. Umanoff - Executive Vice President & General Counsel

Analysts

Julien Dumoulin-Smith - UBS Securities LLC

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

Michael Lapides - Goldman Sachs & Co.

Steve Fleishman - Wolfe Research LLC

Praful Mehta - Citigroup Global Markets, Inc. (Broker)

Ali Agha - SunTrust Robinson Humphrey, Inc.

Ashar Khan - Visium Asset Management LP

Operator

Good afternoon and welcome to the Edison International Fourth Quarter 2015 Financial Teleconference. My name is Mary and I will be your operator today. Today's call is being recorded.

I would now like to turn the call over to Mr. Scott Cunningham, Vice President of Investor Relations. Mr. Cunningham, you may begin your conference.

Scott S. Cunningham - Vice President-Investor Relations

Thanks, Mary, and welcome, 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.

Materials supporting today's call are available at www.edisoninvestor.com. These include our Form 10-Q, Ted's and Jim's prepared remarks, and the presentation that accompanies Jim's comments. Tomorrow afternoon, we will distribute our regular business update presentation.

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 expectation. 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 F. Craver, Jr. - Chairman, President & Chief Executive Officer

Thank you, Scott, and good afternoon, everyone. In my remarks today, I will touch briefly on our 2015 performance and then focus on Southern California Edison's and Edison Energy Group's, long-term growth opportunity. Closing out one year and starting a new one is a natural time to reflect on some of the longer-term themes.

Full year 2015 core earnings were $4.10 per share, $0.23 above the high end of our core earnings guidance range. We also introduced today our 2016 core earnings guidance range of $3.81 to $4.01 per share which reflects SCE's strong rate base growth, a continuing focus on improvements in operational efficiency and ongoing energy efficiency incentives.

We believe that SCE's rate base is the best proxy for long-term earnings growth potential. As Jim will soon describe in more detail, we have updated our forecast of SCE's rate base through 2017. Rate base for 2015 increased $300 million and our forecast for 2016 rate base also increased by $300 million. The rate base for 2017 increased by $100 million. It seems some investors have been expecting a substantial decline in rate base due to bonus depreciation, but the effect of bonus depreciation is less, and there are other offsets.

Bonus depreciation did not have any significant impact on 2015. Impacts pick up somewhat in 2016 and 2017. Bonus depreciation impacts are more than offset by a higher rate base from our distribution pole loading program on which we earn a rate of return, as prescribed in SCE's 2015 general rate case. Jim will provide a more fulsome explanation, but the bottom line is that we expect rate base to be slightly higher in 2017 than our previous forecast after taking into account the final general rate case decision and the full effect of bonus depreciation.

Customers will see the benefits of SCE's continuing efforts to reduce cost. Through these efforts, together with lower fuel and purchase power cost, the NEIL insurance settlement of our San Onofre claims and the 2015 GRC, customers will receive on average a reduction in 2016 rates of 8%. This is a significant benefit for our customers and something we are very pleased to deliver to them.

SCE's share of the $400 million NEIL settlement was $313 million. After legal expenses, 95% went to customers. This is another example of the benefits of the San Onofre settlement unanimously approved by the CPUC in 2014.

The last major step in implementing the settlement will be resolution of our pending and arbitration case with Mitsubishi Heavy Industries. Hearings before the three-judge panel are expected this spring. We still expect a decision late this year. As we've said previously, we are under confidentiality provisions during the litigation process, so we don't expect to have further updates unless there is some material development.

The CPUC's December decision on ex-parte communications completed its consideration of the matters of the SONGS OII. The challenges to the Commission's approval of the settlement remain pending. We have no estimates on the timeframe to decide those challenges.

In the meantime, we are focused on the safety commissioning of San Onofre. Based on our current decommissioning cost estimates, our decommissioning trust funds are adequately funded and not expected to require any further customer contributions.

Our December dividend increase of $0.25, the second in as many years, equates to a 47% payout based on the midpoint of our 2016 SCE earnings guidance. We continue to see an excellent dividend growth opportunity as we grow SCE earnings and move up through our current targeted payout ratio of 45% to 55% of SCE's earnings.

I won't attempt a prediction of future dividend increases, but I will describe our thinking. Our earnings growth is largely driven by long-term rate base growth. After depreciation, capital spending of approximately $4 billion a year will translate into rate base growing by roughly $2 billion a year. This would yield a 7% annual rate base growth potential for some years to come, and if we have higher annual CapEx, we will have a higher rate base growth rate. Additionally, moving the dividend payout ratio further up in our targeted 45% to 55% range only adds to the potential annual dividend growth rate.

We believe that we are well-positioned for sustained growth in rate base and earnings at SCE. We have positioned SCE as a wires-focused business, consistent with our views on industry transformation and in alignment with California's public policy objectives to move the state to a low carbon economy.

We see more opportunities for growth than we do threats in the changes occurring in our industry. Recently, we have taken steps to further position Edison Energy Group to develop those opportunities.

We are focused on finding those areas where customers' needs are unmet, that match well with our competitive advantages, and that hold promise for scaling-up sufficiently. Edison Energy Group continues to expand into businesses that meet this profile, including distributed solar generation, energy services for commercial and industrial companies, providing new sources of water, and competitive transmission.

Our SoCore Energy subsidiary added more commercial rooftop solar customers in 2015, and now has nearly 250 projects operating in 16 states. It has expanded beyond rooftop installations to ground-mounted projects serving both community solar and rural electric cooperatives. SoCore also piloted an innovative project for Cinemark Theaters that combined its rooftop solar panels with energy storage from Tesla Energy.

We continue to build out an integrated energy services platform, which we call Edison Energy, to address the needs of commercial and industrial companies. Our market research has led us to conclude that the largest commercial and industrial companies with multi-state operations are underserved nationally in their energy needs and struggle to deal locally with many different utilities, tariffs and new technologies.

We believe we possess several competitive advantages to succeed with customers in this new and quickly evolving power environment. Our roots are as developers, operators and investors in complex infrastructure. We have deep technical, commercial and regulatory experience and knowledge of the power system. Our brand and substantial size gives customers confidence in our ability to deliver and contrasts with the dizzying array of untested start-ups.

Our platform was expanded through some recent smaller acquisitions in the area of energy engineering and in consulting, that was Eneractive Solutions; energy procurement advisory services, which was Delta Energy; and sourcing off-site renewable energy, which was Altenex. Edison Energy now counts one quarter of the Fortune 50 companies as clients, including General Motors, Microsoft, and Procter & Gamble. Next month, Edison Energy will launch marketing efforts to larger C&I companies, emphasizing its abilities as a comprehensive, integrated energy service solution provider.

Today, these new businesses are small, even though we think the opportunities could be significant. Currently, the vast majority of our capital is dedicated to our core business, modernizing the electric grid at SCE and to moving up our dividend ratio, payout ratio closer to the industry norm. Our approach to these new businesses will be disciplined, focused on small initial investments to understand strategic fit, profit drivers, and scalability. We have allocated some capital to testing and building our new businesses, but it is currently only around 1% to 2% of the total capital deployed at Edison International.

We are gaining confidence that there is indeed a market need for these new businesses and that they can be profitable. The major question is whether these businesses can be scaled up sufficiently to be significant to a company our size. If performance warrants and the opportunities continue to look sizeable, we are in a position to increase our commitment. We are encouraged but, ultimately, we will be driven by results.

So, to summarize, our strategy has three themes. Theme one, operate with excellence, meaning, we operate our existing business with a focus on controlling costs and customer rates and improving service to our utility customers. Theme two, build the 21st century power network. This means we invest in our existing business and manage the unprecedented changes in policy and technology. And theme three is to expand our growth potential. We systematically explore new growth opportunities by making disciplined investments where industry changes are producing unmet customer need, where we believe Edison has competitive advantages and where scalable opportunities exist.

Concentrating on these three strategic themes will allow us to remain relevant to our existing customers, produce higher than industry average growth in earnings and dividends, and provide the flexibility to adapt and grow in a climate of rapid change.

So, that's it for the big themes. Let me now turn the call over to Jim.

Jim Scilacci - Chief Financial Officer & Executive Vice President

Thanks, Ted. Good afternoon, everyone. My remarks will cover fourth quarter and full year results, our updated capital spending and rate base forecasts, and our 2016 earnings guidance.

I'll start with SCE's fourth quarter operating results. Please turn to page 2 of the presentation. SCE's fourth quarter 2015 earnings are $0.89 per share, down $0.20 per share from last year, but well ahead of the $0.66 per share implied by the midpoint of our 2015 earnings guidance.

Looking at the year-over-year comparison, two items from last year stand out. First is the $0.15 per share income tax variance, as shown in the right table. As part of the 2015 general rate case decision, differences in tax repair benefits for 2015 through 2017 flow through the tax accounting memorandum account or TAMA and do not affect earnings. Second is last year's $0.05 per share benefit from resolution of an income tax item from the 2012 GRC. This was recorded in revenues last year and is part of the $0.15 per share revenue variance.

A key item, and something that was not included in our 2015 earnings guidance, is an $0.08 per share benefit from a new balancing account for SCE's distribution pole inspection and replacement program. Let me provide some additional background. The 2015 GRC established a new balancing account to track costs to inspect distribution poles and to repair or replace them as needed. This is called the Pole Loading and Deteriorated Pole Balancing Account, or simply the pole loading balancing account.

Balancing account allows SCE to true up from actual O&M and capital expenditures. For 2015, actual capital expenditures substantially exceeded amounts included in the GRC decision. Because of the lateness of the GRC decision, the Commission did not limit expenditures for 2015, but did limit expenditures for 2016 and 2017.

Switching now from pole capital expenditures to rate base, the 2015 GRC decision included a pole loading rate base forecast of $296 million. Based on actual expenditures since the inception of the program, the 2015 rate base for poles increased to $625 million. As a result of the higher rate base, SCE recorded additional revenues through the pole loading balancing account to earn its authorized rate of return on the incremental rate base of $329 million.

The additional $0.08 per share of earnings is based on both equity and debt returns at the blended authorized rate of 7.9%. The balancing account impact was finalized as part of our year-end reporting cycle and was not previously included in our earnings guidance. The balance of the revenue variance largely reflects the implementation of the 2015 GRC, which lowered authorized revenues, as expected.

For the fourth quarter, O&M is a net positive $0.07 per share. O&M includes both the ex-parte penalty of $0.05 per share and $0.03 for additional severance costs as part of SCE's ongoing operational excellence efforts. The balance of O&M benefits are from lower transmission, distribution and legal costs. Lower net financing costs are a benefit of $0.03 per share. The incremental tax benefits from 2014 that I mentioned drive the unfavorable tax comparison.

One important item that was not a key earnings driver in the quarter is bonus depreciation from the 2015 tax law change. Bonus depreciation did reduce average rate base, but only by a nominal amount, or a net $31 million. The nominal impact is much less than our general statement that a 50% bonus extension could reduce rate base by $400 million each year.

I've come to the conclusion that it's very difficult to effectively estimate the impact of bonus extension until you do the detailed analysis. The fact is, there are second and third order effects that can occur making our general statement accurate only with a controlled set of assumptions.

With this preamble, there are three primary factors that reduced the impact of bonus deprecation on 2015 versus our prior forecast. First, under normalization rules, bonus depreciation is pro-rated in the first year in which capital additions are estimated to be put into service. Second, certain 2015 capital additions relate to work that began in 2014 and are eligible under 2014 bonus depreciation and thus were included in our prior rate case forecast. Third, the shift in tax payments caused 2015 working cash to increase. For rate making purposes, working cash is a component of rate base.

Later in my presentation, I will provide a complete reconciliation of rate base changes for 2015 through 2017.

As part of the key earnings drivers, revenues and income taxes are lower due to the higher tax repair deductions recorded through the pole loading and TAMA accounts. The higher tax repair deductions in 2015 do not affect earnings and are not shown on the right side of the slide as they are netted out. The total impact for the quarter is $0.45 per share in lower revenues and income taxes. For the holding company, costs are unchanged at $0.01 per share.

For SCE non-core items in the quarter include the previously announced $1.18 per share charge related to the write-down of the regulatory assets for incremental tax repair deductions for the 2012 through 2014 period. It also includes a $0.04 per share benefit from the NEIL insurance settlement and legal cost recoveries related to SONGS.

Holding company non-core items include a $0.03 per share gain on the sale of Edison Capital's affordable housing portfolio at year-end and a $0.01 per share related to accounting for income tax attributes related to SoCore's tax equity financing. Discontinued operations include a $0.02 per share EME-related cost for changes in net liabilities for retirement plans and additional insurance recoveries. Page 15 has a detailed summary of all non-core items.

Please turn to page 3. Full-year 2015 core earnings are $4.10 per share, down $0.49 from a year ago. SCE's 2015 earnings largely reflect the impacts of the 2015 GRC decision, especially the treatment of excess tax repair deductions, together with the other fourth quarter key drivers I mentioned earlier. Excluding the tax repair deductions now tracked in the pole loading and TAMA accounts, CPUC jurisdictional revenue is down $0.39 per share while FERC revenue is up $0.14 per share.

Among the key cost components, the favorable O&M trend relates largely to the positive fourth quarter factors discussed previously. The favorable net financing costs are mainly from higher AFUDC earnings that we have been reporting all year. The major driver of lower earnings this year is the loss of tax repair benefits.

In 2014, we recognized $0.41 of tax repair benefits. In 2015, these benefits either flow through the pole loading or TAMA accounts without impacting earnings. Full-year holding company costs are $0.01 per share above last year due to higher income taxes and expenses.

Please turn to page 4. This slide walks through the key differences between our 2015 core earnings of $4.10 per share versus the midpoint of our guidance of $3.82. First, you'll see the $0.08 per share related to the $329 million increase in pole loading rate base I discussed earlier. The additional equity return is $0.05 and the debt and preferred return is $0.03 per share.

O&M is favorable $0.08 per share due mainly to the factors I mentioned earlier. The other financing benefit is AFUDC at $0.01 per share. Taxes are the other driver due to the implementation of the TAMA account and clarification of treatment of tax items that would otherwise negatively impact earnings but now flow through this account. Holding company costs are at $0.05 per share positive variance due to higher income from Edison Capital and income tax benefits.

Please turn to page 5. SCE's capital spending forecast increased slightly, adding $300 million in 2016 and $100 million in 2017, as Ted has already mentioned. The 2016 change principally relates to an updated estimate for pole loading expenditures up to the cap provided in the 2015 GRC decision and for cumulative spending in 2016 and 2017.

This incremental spend will flow into rate base as you will see in a minute. The 2017 increase relates to modest changes in the scope and timing of FERC transmission investments. SCE's current forecast does not include any incremental spending on distribution resources plan activities. The forecast also excludes any energy storage investments or Phase 2 of the Charge Ready program.

Please turn to page 6. A third major transmission project, the Mesa Substation, has been included in our capital spending forecasts for some time, but has advanced sufficiently through the regulatory approval process that we felt it appropriate to describe more fully. This is the replacement of a 220 kV substation with a 500 kV substation. It will provide additional transmission import capability, allowing greater flexibility in the siting of new generation and reducing the amount of new generation required to meet local reliability needs in the Western Los Angeles Basin. This is a Cal ISO approved project.

Please turn to page seven. This page shows the increase in SCE's rate base forecast that Ted mentioned. I will explain the changes in a moment. The two-year compound annual growth rate for both the Outlook and Range cases is 7%. With the complexity associated with the extension of bonus deprecation and the normal changes to our capital expenditures flowing into rate base, we felt it would be helpful to provide a more fulsome reconciliation of rate base changes.

Please turn to page eight. For 2015, we ended the year with $329 million of additional rate base from pole loading capital expenditures. As I mentioned earlier, the extension of bonus for 2015 is lost in the rounding. We estimate the impact of bonus depreciation to be about $300 million in 2016 and $700 million in 2017 relative to our prior forecast.

The incremental additions to rate base from a pole loading account activity is about $600 million in 2016 and about $700 million in 2017. In effect, the impact of bonus is offset by the change in the pole loading rate base. Net, net, net, relative to our prior forecast, rate base increases $300 million in 2016 and $100 million in 2017. Lastly, we plan to update our capital spending and rate base forecasts through 2020 when we file our next general rate case in early September.

Please turn to page nine. Today, we introduced 2016 earnings guidance with a midpoint of $3.91 per share with a range of plus or minus $0.10 per share. For SCE, we start with the rate base forecast of $25.1 billion shown on page 7. The rate base math yields earnings of $3.81 per share. While a number of positive variance in 2015 may not recur in 2016, we do expect additional earnings contribution from the energy efficiency of $0.05 per share. We also anticipate incremental productivity and financing benefits of $0.17 per share. This implies earnings of $4.09 per share at SCE.

Lastly, we deduct $0.18 per share for holding company costs with no range. In the past, I've talked about holding company costs of roughly $0.15 per year and, on our last call, we pointed out that the sale of Edison Capital would eliminate the earnings contribution this business provided. The $0.10 per share loss for 2015 included $0.06 of income from Edison Capital. The increase over 2015 relates primarily to higher financing costs.

Please turn to page 10. The last slide reinforces our view that EIX has one of the better opportunities among large cap utilities for rate base, earnings, and dividend growth.

Thanks, and I'll now turn the call over to the operator to moderate the Q&A.

Question-and-Answer Session

Operator

Thank you. Our first question coming from the line of Julien Dumoulin-Smith of UBS. Your line open.

Julien Dumoulin-Smith - UBS Securities LLC

Hi, good afternoon, and congratulations.

Theodore F. Craver, Jr. - Chairman, President & Chief Executive Officer

Thanks, Julien.

Julien Dumoulin-Smith - UBS Securities LLC

Great. So first, Ted, let's start with your opening comments on the call at the services side of the business. I'd be curious, as you see that scaling, you've done some acquisitions here, what kind of earnings power could we'd be looking at over the years? What kind of contributions and when do you see that happening?

Theodore F. Craver, Jr. - Chairman, President & Chief Executive Officer

It's a great question and words were chosen pretty carefully to indicate. At this point, we want to try to do more in the testing side, make sure that we actually think that we've got a business here that really makes sense and that is scalable. It's that last part that I think we're spending most of our time on now.

Assuming it's scalable and assuming we can make those kinds of investments that would really allow us to fully capture the opportunity, to be relevant to a company our size, we've generally thought that the suite of businesses on the Edison Energy side, so not just energy services stuff I spent a lot of my comments on, but really the whole group of companies there, this probably got to be, just as a general rule of thumb, I'd say it's got to be somewhere in the 10% to be significant or meaningful to a company our size.

So I think, we want to see steady progress in that direction. We want to see that these things are capable of actually scaling to that size. But assuming that things continue on in the path at least we see in these very early days, that's the type of magnitude that we would be looking for.

Julien Dumoulin-Smith - UBS Securities LLC

Got it. Excellent. And turning to the numbers a little bit, just as a follow-up quickly, can you elaborate a little bit more, Jim, on the rate base offset here on 2015, just as you think about the number being supposedly less than you had initially supposed or at least thrown out there? What's the exact accounting there?

Jim Scilacci - Chief Financial Officer & Executive Vice President

So, there's a couple of things going on. Bonus depreciation did not have impact in 2015 because of the items that I ticked through. There's a number of things that really offset it, the biggest piece being the proration bonus depreciation in the first year and the overlap of those that float from 2014 into 2015 that we had already accounted for. And the biggest thing here is the pole loading program.

We picked up a little over $300 million of rate base from pole loading that was not included in our prior forecast that we included now based on our year-end review and that's the biggest offset for 2015. And you can see bonus growing in 2016 and 2017 as you expect. It would be at 50% and it reaches up to $700 million impact by 2017. But really what's happening in the pole loading program in a sense is offsetting the bonus depreciation and it gets up to – pole loading gets up to $700 million.

And so, the only changes really going on are the small changes in and around what's happening with FERC and a little bit of the CPUC. So, we do have an increase in rate base, ultimately through 2016 and 2017, but the bonus depreciation is offset by the pole loading program. So, page 8, if you don't have it there, really kind of describes the full details of how rate base changed over this three-year period and I think it's probably the most helpful tool.

Julien Dumoulin-Smith - UBS Securities LLC

Indeed. Thank you.

Jim Scilacci - Chief Financial Officer & Executive Vice President

All right, Julien.

Operator

Thank you. Our next question coming from the Jonathan Arnold of Deutsche Bank. Your line is open.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

Yeah. Good afternoon, guys.

Jim Scilacci - Chief Financial Officer & Executive Vice President

Hey, Jonathan.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

Just a quick one, follow-up on the pole loading. And I think you mentioned the year-end review, Jim. Can you just talk us through a little bit how that processed and it seems like you would have known about this when we can kind of met you at EEI, for example. So, I was just curious kind of how it sort of changed so much.

Jim Scilacci - Chief Financial Officer & Executive Vice President

It's a darn good question. In going through the general rate case decision, there was some confusion over how it actually operate and it came after further review in discussion that we were picking up – there was no limit to capital expenditures from the inception of the program through 2015. And the actual final decision included, really for all intention purposes, an estimate of pole loading based on some preliminary work. And because we were able to true up for actual capital expenditures, that delta fell out when we went through and reviewed it in more detail.

So, as you recall, as we were going through the guidance as we got into the third quarter, I think for all intention purposes, we are so focused on repair deductions in getting all that accounting right and understanding it, that we didn't fully appreciate what was happening with pole loading, and so we picked it up as far as our fourth quarter accounting enclosure.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

Okay. Thanks for that. And then just on the $0.18 drag, the parent and other for 2016, would you – in terms of getting a sense of how much these other businesses are a drag on numbers today, obviously, hopefully, there'll potentially be an opportunity at some point, how much of that $0.18 is associated with investments you're making in early stage businesses? If you weren't making them would be there...

Jim Scilacci - Chief Financial Officer & Executive Vice President

Yeah. No, it's a good question. And what's happened in the last couple of year, Edison Capital, the sell down on that portfolio has been masking some of the ongoing costs that are occurring at the holding company. And for all intents and purposes, the change, I mentioned in my comments that we've guided people that the holding company cost on an annual basis taking out Edison Capital had been running at about $0.15 and that we bumped that up to $0.18. And the delta is primarily financing cost, not Edison Energy.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

Okay. And do you see the Edison Energy costs kind of ticking higher before the net kind of comes – moves in the other direction, I guess?

Jim Scilacci - Chief Financial Officer & Executive Vice President

We're going to grow the businesses, but we also expect earnings from the businesses, too. So that, we'll have to see how it plays out going forward, and you can see we didn't have growth year-over-year from Edison Energy and we acquired three businesses. They have ongoing earnings. So our goal ultimately would be a source of earnings not use. So we'll have to see how things develop as we move down the road here.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

Okay. Great. And one other topic, we read recently that there is kind of a new resource planning regime coming at the PUC out of SB 350 requiring integrated resource plans. Could you talk a little bit about that and how you see it changing how you've operated, if at all?

Theodore F. Craver, Jr. - Chairman, President & Chief Executive Officer

I'd like to turn that question over to Pedro.

Pedro J. Pizarro - President & Director, Southern California Edison Co.

Hey, Jonathan. It's Pedro Pizarro. How are you?

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

Good. Thank you.

Pedro J. Pizarro - President & Director, Southern California Edison Co.

So, SB 350, the bill that implemented the 50% renewables by 2030 for the state along with some actions on electric transportation calls for an integrated resource planning process. It's early days for that, Jonathan. It will work its way through the CPUC. Our view of that and view of the legislative intent in it is that it will help provide the PUC and state agencies a macro view, a planning perspective of how all the pieces fit together. We don't see necessarily they're significantly changing the nuts and bolts of the procurement process that we have because it's a pretty well prescribed process for that.

I think as we understand the intent, it's more of a macro view on how the pieces will fit together across different kinds of renewable resources, transmission, et cetera, but in reality, the details will be worked out through the PUC process.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

Any sense of when you would have to file (38:43) such a plan?

Pedro J. Pizarro - President & Director, Southern California Edison Co.

I don't know, Jonathan. I know that that's just beginning to work its way through the PUC. I believe there's been some scoping work there. So, probably within a year or so will be the likely timeline.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

Great, all right. Thanks a lot.

Pedro J. Pizarro - President & Director, Southern California Edison Co.

It's not a next month kind of item.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

Perfect. Got it. Thank you.

Pedro J. Pizarro - President & Director, Southern California Edison Co.

Sure.

Operator

Thank you. Our next question comes from the line of Michael Lapides of Goldman Sachs. Your line is open.

Michael Lapides - Goldman Sachs & Co.

Hey, guys. Congrats to a good year and start to 2016. One question for Jim, one for Ted. Jim, just curious the $0.17 at SoCal had in guidance for 2016 for what sounds like a combination of O&M management as well as some financing benefit, how should people think about the that longer-term, meaning after 2016, whether you'll be able to keep that in 2017 or 2018, whether we should assume some of that continues in the 2017, but eventually that all kind of flows back to customers?

Jim Scilacci - Chief Financial Officer & Executive Vice President

You're correct. In 2017, it's the third year of the rate case cycle, the three-year rate case cycle, so you would expect us to hopefully retain some portion of that going forward. And 2018 is the general rate case, the test year. So the benefits we've derived over the prior rate case cycle flows to the customers.

But again our goal would be to seek additional operational savings. There's more work to be done and we'll continue to focus on that, so we would hope to achieve some level of savings. I'm not going to predict what those might be.

And the other piece here, the embedded cost of debt, we wouldn't file a general – our cost of capital proceeding would be effective and we'd litigated in 2017 for 1/1/2018 effectiveness assuming we don't extend it again. And so we would expect in 2018 that we would true up the embedded cost of debt at that time, unless we extend it again. So there is a...

Michael Lapides - Goldman Sachs & Co.

Got it....

Jim Scilacci - Chief Financial Officer & Executive Vice President

...a number of the things that will be going up and down and we will just have to depend – our purpose here is to try to find additional savings, but a lot of it will toss back in 2018 as we reset our rates.

Michael Lapides - Goldman Sachs & Co.

Got it. And Ted, when you are kind of looking at it and at the distribution resource plan for the future, the different utilities have taken different tacks about how much they want to put out in the public domain or how much they want to put in front of the regulator, about what the spending levels could be. You've been much more robust in terms of kind of spending through 2017 and then spending from 2018 to 2020. How do you expect the regulatory process to play out and when do you expect to get some certainty and actually put some capital to work on this?

Theodore F. Craver, Jr. - Chairman, President & Chief Executive Officer

I think probably the short answer is, based on what reaction we've gotten so far on the distribution resources plan, it looks like it's going to be probably more of a discussion in the 2018 to 2020 rate case. It's possible some other things will move in there. I mean, we've had some things such as the Charge Ready program and a few of these, but I think the bulk of the discussion around what those expenditures for modernizing the grid would look like. And...

Michael Lapides - Goldman Sachs & Co.

So in other words, that spend in the 2015 to 2017 timeframe, is that spend you don't actually expect to get approval to do the just a couple of hundred million dollar level?

Theodore F. Craver, Jr. - Chairman, President & Chief Executive Officer

Yeah. I've not seen a ready vehicle for being able to make any significant investments in the near term. So absent that, I think most of the discussion would be in the 2018 to 2020 period with the upcoming rate case.

Michael Lapides - Goldman Sachs & Co.

Got it. Thank you, guys. Much appreciated.

Theodore F. Craver, Jr. - Chairman, President & Chief Executive Officer

You're welcome.

Jim Scilacci - Chief Financial Officer & Executive Vice President

Thanks, Michael.

Operator

Thank you. Our next question coming from Steve Fleishman of Wolfe Research. Your line is open.

Steve Fleishman - Wolfe Research LLC

Yeah. Hi, good afternoon, guys. Just, Ted, on the dividend commentary, just wanted to clarify, obviously it's the same payout range of 45% to 55%. I think, the language you used was through the payout range and kind of I think you at some point even said targeting more over time toward the industry averages. Are you kind of implying that you're now targeting at least the high end of this range and may be looking to raise the range over time?

Theodore F. Craver, Jr. - Chairman, President & Chief Executive Officer

Yeah. In probably, as Jim likes to say, my usual way trying to be clear, but vague. I guess I would – what I'm trying to point out are a couple of things. One, just the rate base mechanism that converts into earnings suggests to us this kind of 7-ish, 7% kind of a growth opportunity that would translate through to dividends, but we're at the bottom end of the range based on the midpoint of the 2016 earnings guidance range that we just gave. Depending on where earnings actually come out depending on how we would look at moving our way through the 45% to 55%, we would kind of view that 7% as more of a floor than anything else. So that was the principal point that I was trying to insinuate in there.

In terms of whether we're trying to get to a specific point in the 45% to 55%, I clearly was not trying to give a specific point that we were targeting there. 45% to 55%, we feel, has been the appropriate range, given that we have a higher than industry average rate base growth and higher than industry average earnings growth rate. These things kind of ultimately balance together, but for the foreseeable future, we think we'll have a – we'll continue to have a higher than industry average rate base in earnings growth and so the 45% to 55% seems to still be about the right range.

Steve Fleishman - Wolfe Research LLC

Okay. Great. And then one other question on the productivity and financing savings. Should I assume this is the just ongoing efforts that you guys keep having to reduce costs in the business, if not kind of like one-time in nature in 2016? And thus, all else equal that should continue at least until we get to the next rate case?

Jim Scilacci - Chief Financial Officer & Executive Vice President

Yes.

Steve Fleishman - Wolfe Research LLC

Okay. Thank you.

Jim Scilacci - Chief Financial Officer & Executive Vice President

Thanks.

Operator

Thank you. Our next question coming from the line of Praful Mehta of Citigroup. Your line is open.

Praful Mehta - Citigroup Global Markets, Inc. (Broker)

Thank you. Hi, guys.

Jim Scilacci - Chief Financial Officer & Executive Vice President

Good afternoon.

Praful Mehta - Citigroup Global Markets, Inc. (Broker)

Good afternoon. So a quick question on growth rates and it's good to see the 7% through 2017, I guess the importance of DRP is what I'm trying to get to from the 2018 timeframe. What I'm trying to figure out, what proportion, I guess, of your CapEx spend will be DRP related and is there any concern that that DRP component can get pushed out or delayed in terms of CapEx spend for the next cycle?

Jim Scilacci - Chief Financial Officer & Executive Vice President

It's a darn good question. We've said repeatedly that we think the capital expenditures are going to be in that $4 billion plus or $4-ish billion range for the foreseeable future and all I can give you until we file our 2018 GRC is a sense that part of the component that could push the spending higher is DRP, but this year will be important – the balance of this year gathering from the PUC, what they're thinking about the DRP we will include in our GRC an appropriate level. And there are some other things that are pluses and minuses. Ted mentioned it. I had it in my script.

We've got the Charge Ready program. It's flowing through. That's on a separate track and we need to get through the Phase 1 before we can add the additional – potentially up to $300 million of capital expenditures for that program. I also said, we didn't have any storage-related expenditures in there. So, there's a number of things that are in the mix, and when you get into a GRC, you take a look at all the factors, you want to make sure that your rates are appropriate that you're not putting up – pushing out the other edge for what you can afford from an affordability perspective.

So, we'll take all those things into consideration, and, of course, we're going to pass back the benefits that we've realized in the current GRC cycle, and so we will have to see how all things work out. So it's hard to predict beyond that 4-plus-ish range going forward until we actually file the GRC in September.

Praful Mehta - Citigroup Global Markets, Inc. (Broker)

Got you. Thanks, Jim. And just quickly a much more detailed question, but one of the offsets, I guess, you mentioned the bonus depreciation with this working cash. Can you just give us some context of what it is, and how do you see that like in future years? Is that a component in like 2016, 2017 as well, and what's the kind of size or order of magnitude of working cash?

Jim Scilacci - Chief Financial Officer & Executive Vice President

Well, that's a long answer. But if I could simplify, as a company, we invest cash and it has to do with when you make ultimately payments and we have this part of the GRC, if you'd like to read all about it, there's a section in the GRC filing that's called the lead-lag study. And as a result of changes, as a result of bonus, it affected the lead-lag study and provided essentially more rate base for us. And I'm going to stop there, unless you want the gory details, which I'm going to lose my ability pretty quickly. But if you want more details, we'll be happy to take you through it after the call and we'll give you some more information.

Praful Mehta - Citigroup Global Markets, Inc. (Broker)

Got you. That'll be helpful. Thanks, Jim. I appreciate it.

Jim Scilacci - Chief Financial Officer & Executive Vice President

Okay.

Operator

Thank you. Our next question coming from the line of Ali Agha of SunTrust. Your line is open.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Thank you. Good afternoon.

Jim Scilacci - Chief Financial Officer & Executive Vice President

Good afternoon, Ali.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Hey, Jim or Ted, when you talk about this potential run-rate of CapEx $4 billion plus annually going forward. If you kind of reverse that with the cash flow benefits, I guess, from bonus depreciation, how do you look at your capacity to wrap up that CapEx before you run into, say, issuing new equity or before rate impacts get too big in your mindful customers? What kind of, I guess, cushion do you have, if you had the opportunity to go above $4 billion and still not have to issue equity and still keep the rate impact? What do you think is fairly reasonable?

Jim Scilacci - Chief Financial Officer & Executive Vice President

Well. It's a tough question. That's really a financially modeling one. And you have to take in other factors, too. You have to look at debt capacity at the utility, how much short-term debt you could use. You can look at debt capacity at the holding company and there are just factors that you're balancing accounts, how it changes your cash. As you know, now we're fairly over collected in our balancing accounts.

So you have to look at all these things and then crank that through the model in terms of what you're trying to do in terms of capital expenditures and then how you're targeting rate base and then rate growth. So it's a very complicated set of factors that the important thing the management team here will do between now and September is try to get all these dials just right and as we prepare for and file our 2018 GRC. So it's not a satisfactory answer, but there is just so many components to go into it.

Theodore F. Craver, Jr. - Chairman, President & Chief Executive Officer

Hey, Ali, this is Ted. I think one piece that we have said at various points with investors is that the high-level and without getting lost too much in any specifics for one year versus another, things are in equilibrium, assuming around this 50% equity debt capital structure and around a 45% to 55% dividend payout. You're about in equilibrium when you have long-term growth in the 6% to 8% range. You start getting much higher than that, it starts getting – you need other things to help out.

And in the past, when we had an extremely high growth rate, when we were in that 10% to 12% we did have a number of unusual things. That's where the global tax settlement deal really helped us out, bonus depreciation, and those types of things. Absent those, we would have really run too hot and we would have to issue equity.

The other part that you mentioned, which I think is really worth of emphasizing again here, increasingly, I think the focus is to try to really hold the line on customer rates. If we look at the long-term trajectory, the history here, last 20 years, we've actually managed to keep customer rates at or below the rate of inflation, and we definitely want to at least continue that. If anything, we'd like to be able to have rates stay flat. But fundamentally, our goal is to try to keep it more around the rate of inflation or lower.

If you get too hot a growth rate in here, especially given the relatively modest growth in energy consumption, you're going to really put pressure on rates. So that becomes, as much as anything else, kind of the governor on what we want to have in the way of growth. So, customer rates, equity, long-term growth rate all of that kind of boils down to you want to focus to stay somewhere in this kind of 6% to 8% range. Get much hotter than that, you're going to have issue equity or have pressure on rates.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Okay, very helpful. Second question, with regards to where we stand on SONGS, just to understand the process, now it appears we're really waiting for the ALJ decision and that sets the clock with regards to the Commission or Board, et cetera. Is that it or are anything else pending or anything else you can point to for us to try to monitor this from our vantage point?

Adam S. Umanoff - Executive Vice President & General Counsel

This is Adam Umanoff, the General Counsel at EIX. There really isn't anything else we can point you to. There is a request for rehearing and their petitions for modification that are pending. Until the ALJ rules on the petitions for modification, and that goes up to the Commission, and until the Commission rules on the request for rehearing, there is really no other action to consider.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Understood. Thank you.

Jim Scilacci - Chief Financial Officer & Executive Vice President

Okay, Ali.

Operator

Thank you. Our next question coming from the line of Ashar Khan of Visium. Your line is open.

Ashar Khan - Visium Asset Management LP

Good afternoon and congrats. Jim, as I guess one thing which we are trying to fathom is everything is now trading on 2018, and if I'm correct, you mentioned you will provide the 2018 rate base in September when you file the rate case, but I just wanted to get a couple of things right. So, you said, if you spend about $4 billion, that adds to approximately like $2 billion of rate base and that should allow you to keep your 7% EPS CAGR or rate base CAGR going from 2017 to 2018. Is that correct, that's what I heard?

Jim Scilacci - Chief Financial Officer & Executive Vice President

So, just a clarification, the 7% CAGR was from 2015 through 2017.

Ashar Khan - Visium Asset Management LP

Okay.

Jim Scilacci - Chief Financial Officer & Executive Vice President

Since we don't have any other numbers out there, we're just giving you the indication of $4 billion-ish is the appropriate level of capital expenditures going beyond 2017.

Ashar Khan - Visium Asset Management LP

But $4 billion is equal to $2 billion in rate base, right? That's the correct math?

Jim Scilacci - Chief Financial Officer & Executive Vice President

It is a rough rule of thumb, yes.

Ashar Khan - Visium Asset Management LP

Okay. And secondly, you also alluded to, I just want to mention, if I got it right is that, you do expect the efficiency savings, the savings that you have like $0.17 right now, productivity and financing benefits, you don't expect them to go to zero in 2018. You expect there to be some level, you don't know what, probably not as high as $0.17, but there should be some level of those savings still there in the next rate cycle, is that fair?

Jim Scilacci - Chief Financial Officer & Executive Vice President

That would be our hope.

Ashar Khan - Visium Asset Management LP

Okay. Thank you.

Operator

Thank you. That was the last question. I will now turn the call back to Mr. Cunningham.

Scott S. Cunningham - Vice President-Investor Relations

Thanks very much, everyone, for participating. And don't hesitate to call us, Investor Relations, if you have any follow-up questions. Thanks and good evening.

Operator

Thank you. And that concludes today's conference. Thank you all for joining. You may now disconnect.

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