愛迪生國際 (EIX) 2017 Q2 法說會逐字稿

Good afternoon, and welcome to the Edison International Second Quarter 2017 Financial Teleconference. My name is Natalie, 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.

Thank you, and welcome, everyone. Our speakers today are President and Chief Executive Officer, Pedro Pizarro; and Executive Vice President and Chief Financial Officer, Maria Rigatti. Also here are other members of the management team.

Materials supporting today's call are available at www.edisoninvestor.com. These include our Form 10-Q, prepared remarks from Pedro and Maria and the teleconference presentation. Tomorrow, we will distribute our regular business update presentation.

During the 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. (Operator Instructions)

I will now turn the call over to Pedro.

Thank you, Sam, and good afternoon, everyone. Before we start the review of the quarter, I would like to welcome Sam again as our new Vice President of Investor Relations. Sam joined our team in June, and some of you have already had the chance to speak with him on the phone during this past month. Sam has significant investor relations experience with 15 years on the corporate side and prior experiences as a sell side analyst. And I will admit I have also enjoyed kidding Sam a bit about how his move from the oil industry to the electric sector is very well aligned with California's transportation electrification policy objectives. So Sam, welcome again.

Now onto the quarter. Edison International reported second quarter earnings of $0.85 per share, which were slightly below last year's second quarter earnings of $0.86 per share. Typically, we make decisions about adjustments to guidance after we have third quarter results, but we are making an exception in this instance. We have previously indicated that there is a bias toward the upper half of the range. We have now adjusted guidance to a midpoint of $4.23 per share primarily to incorporate the tax benefits related to share-based compensation, which we discussed earlier this year. And Maria will cover this in more detail in her remarks.

My comments today will focus on SCE's key regulatory proceedings and long-term growth opportunities. I will also provide an update on our recently announced restructuring at Edison Energy.

Let me start with the SCE 2018 General Rate Case. As requested by the administrative law judges, SCE entered into initial settlement discussions on the rate case in the May to June time frame. As is always the case, there are a number of intervenors involved. While we remain open to a settlement, at this time, we are continuing with the litigation process and participating in evidentiary hearings, which started July 13 and are scheduled through early August.

Now just before our last earnings call, the Office of Ratepayer Advocates, or ORA, had submitted their testimony. Then in early May, all other intervenors, including The Utility Reform Network, or TURN, submitted their testimony. Each of ORA and TURN addressed a range of issues in the General Rate Case, and you will recall that ORA's recommendation yielded 6.6% annual rate base growth through 2020. Now this was based on acceptance of about 9% of our traditional capital spending recommendations and 0 capital spending for grid modernization. In comparison, TURN's overall capital spending recommendations would yield annual rate base growth of 6.0% through 2020. This includes TURN's support for about 85% of our traditional capital spending and approximately 22% of our grid modernization capital spending recommendations. Embedded in TURN's testimony are proposed rate base adjustments of approximately $700 million of historical capital expenditures related to certain distribution infrastructure replacement programs.

On June 16, SCE filed its rebuttal testimony, which reiterated key points of our original application, including a continued focus on infrastructure reliability investment and the first element of the long-term grid modernization initiative. We did lower our capital request by approximately $420 million, of which $300 million was related to grid modernization programs and the remainder related to operation support and other small programs. Over the course of the past 18 to 24 months since the initial testimony was prepared, SCE refined its analysis based on additional engineering studies, pilot projects and more detailed financial evaluations, and therefore, modified the timing and approaches to upgrading certain elements of the distribution system. We continue to believe that these programs will benefit customers, and SCE expects to include these and other capital expenditures in future GRCs. Overall, these changes have modified our rate base growth to 8.3% from the original request of 8.6%. Again, Maria will go into more detail related to our capital spending forecast.

Now we continue to believe that California's 2030 greenhouse gas emission goals will require proactive steps to integrate renewable energy and distributed energy resources into the grid. Because it will take many years to modernize the grid to meet these requirements, we must start now by identifying early no regrets investments that will improve reliability and safety for customers and will also keep us on the path of being a key enabler of California's climate change policies.

In addition to our General Rate Case, SCE is pursuing additional programs around transportation, electrification and energy storage in support of California's 2030 greenhouse gas emission goals, totaling $1 billion of additional capital spending opportunities outside of our current forecast. With respect to the transportation electrification application filed in January, SCE is still expecting a decision on $20 million of priority review projects by this October and then looking to April 2018 for a final decision on the requested $550 million project related to charging infrastructure for medium and heavy-duty vehicles.

Also, as a reminder, the IOUs received a final commission decision in April implementing Assembly Bill 2868, which requires the IOUs to propose programs and investments for up to 500 megawatts of distributed energy storage systems. This amount is above and beyond the existing 1,325 megawatt target. SCE's portion is approximately 166 megawatts. Now not all of this increment will create rate base earning opportunities, but more detail will come as SCE evaluates different approaches and submits its proposal.

Next, let me discuss the cost of capital proceeding. We are pleased that the CPUC recently approved the original cost of capital settlement submitted by the 4 investor-owned energy utilities, ORA and TURN. The implementation of California's energy policies requires a significant commitment by SCE and others in the state to drive power procurement, capital spending and energy efficiency. We continue to play an important role in long-term contracting for renewables and, increasingly, energy storage to meet our customers and our state's needs. Safety and reliability are always at the forefront of our capital spending plans, and we must now implement those plans in the context of also building a modern grid to integrate distributed energy resources that our customers are choosing and that our regulators are supporting. Achieving California's climate change policies means we must attract the capital needed for infrastructure reliability and enabling a low-carbon grid. All of these activities require SCE and the other utilities to forge new and truly innovative approaches that support a premium return on equity relative to utilities in other states. Our new cost of capital will go into effect on January 1, 2018, and we will go back to the commission in April of 2019 with our next cost of capital application where we will continue the discussion on these key topics.

Going further on the broader theme of California's climate change policies, many of you have heard me talk about SCE being a key enabler of California's goals. In early June, we joined the state of California and other states, cities and companies when we signed an open letter to the international community supporting the Paris accord on climate change, which underscores our continued work on greenhouse gas reduction efforts.

This also reflects California's national and international leadership in addressing greenhouse gas emissions through ambitious clean energy and environmental programs. California took its next major step on Tuesday, when Governor Brown signed Assembly Bill 398 to extend the greenhouse gas cap-and-trade program. SCE supported AB 398 and I attended the signing ceremony, which took place in the same location where Governor Schwarzenegger signed the original AB 32 cap-and-trade legislation 10 years ago. AB 398, which passed the legislature with a 2/3 supermajority vote keeps the cap-and-trade program largely intact and extends it to 2030, but with some modifications of the program's administration.

The legislature is continuing the theme with the proposed Senate Bill 100, which would accelerate the Renewables Portfolio Standard to 50% by 2026; establish a target of 60% renewable resources by 2030; and require all electricity sold at retail to be from 0-carbon resources by 2045. We support the broad objective of the legislation, but SCE is currently working with the bill's sponsors to seek changes that will ensure that reliability and customer rate impacts are appropriately considered. Additionally, we would like the bill to include language to provide flexibility to study and revisit its targets if necessary in the future.

Moving on to the status of the SONGS regulatory proceeding. Since our last earnings call, the commission approved our request to extend the deadline to report on the status of the meet-and-confer process to August 15. In addition, SCE filed a redacted version of the MHI arbitration decision on June 7 for awareness by the commission and the public. We are taking the meet-and-confer process seriously. However, we are also prepared to return to litigation if the meet-and-confer process is ultimately not successful and the CPUC takes that step. Now the meet-and-confer process is confidential, so we are therefore just not in a position to provide any further details during today's question-and-answer session.

Let's now turn to our competitive businesses at Edison Energy Group, where there have been some developments that I would like to discuss.

As part of our ongoing strategic review of our competitive businesses, we streamlined the organizational structure of Edison Energy Group to focus on near-term needs rather than the longer-term potential scale. In addition to this organizational realignment, we are also evaluating various options for SoCore, our solar business. This could result in a sale of the business as there may be other parties who are better able to maximize the value of the SoCore platform given its scale and our current tax position. We have retained an adviser to assist in the effort and we'll provide more detail as we move forward.

I want to make it clear that we remain committed to establishing successful competitive businesses that complement our regulated business at SCE. We have heard from our commercial and industrial customers that they value the independent insight we bring regarding their energy needs. Therefore, we will continue the -- our commitment to growing our existing Edison Energy service lines and to establishing a new portfolio advisory service line along with the supporting data analytics platform for large energy users nationally. While we have not yet selected a specific date, we plan to come back to investors in September on an Edison Insights call with more details about our plans for the competitive businesses coming out of our strategic review of Edison Energy Group.

Now I want to close by thanking Ron Litzinger, who has announced that he will retire by year-end. Ron has been the first leader of Edison Energy Group and has been an important part of SCE and Edison Mission Energy at key times in their history. I appreciate -- really appreciate that Ron will be able to work with us in the months ahead to ensure a smooth transition as we recruit a new head of Edison Energy who will report to Drew Murphy.

We will have more opportunities to fully celebrate Ron's great career as we approach the end of the year.

I will now turn the call over to Maria for an update on the quarter.

Thank you, Pedro, and good afternoon, everyone. Before we discuss results, I'd also like to welcome Sam. We're all looking forward to working with him.

Turning to other topics. My comments today will cover second quarter and year-to-date results, updated earnings guidance, and our updated capital expenditure and rate base forecast.

Let's begin by looking at the key SCE earnings drivers for the quarter shown on the right of the slide. So please turn to Page 2 of the presentation.

Overall, SCE revenue was not an earnings driver this quarter. Higher revenue from the normal attrition mechanism and SCE's current General Rate Case generated a positive $0.11 per share variance compared to last year's second quarter, but other CPUC and FERC revenue offset this amount. As part of our rebuttal testimony filed in the General Rate Case on June 16, we included an update to account for a prior assignment of certain compensation costs to customers instead of shareholders. SCE expects to refund $17 million, or $0.03 per share, to customers. This refund reduced other CPUC revenue in the second quarter. FERC revenue was lower due to $0.04 per share of items that were offset by lower operating costs and thus had no earnings impact. This was largely related to amortization in 2016 for the Coolwater-Lugo transmission project, which was offset by higher depreciation.

SCE continues to see lower operations and maintenance expenses quarter-over-quarter due to the ongoing implementation of various operational and service excellence initiatives. These initiatives contributed $0.03 per share to earnings in the quarter.

Higher depreciation is to be expected due to SCE's major capital spending program, but was partially offset by the Coolwater-Lugo project recovery in 2016 mentioned previously. Net financing costs were also higher by $0.01 per share mainly due to increased borrowings to finance our capital program.

Higher income tax versus last year contributed a negative $0.05 per share, which is mainly attributable to the 2016 timing of recognition for the recovery of flow-through taxes. In total, this results in an overall SCE earnings decrease of $0.04 per share.

For the quarter, EIX Parent and Other had a positive $0.03 per share earnings variance, mainly driven by a $0.02 per share benefit at the holding company from an IRS settlement of prior year period. Edison Energy Group contributed $0.01 per share to the positive variance mainly due to the absence of a $0.04 per share charge related to the 2016 buyout of an earn out provision, offset by a $0.03 per share goodwill impairment on SoCore Energy related to the decision to evaluate strategic options for the business, including a sale, which Pedro already discussed.

As a reminder, as a result of our 2016 adoption of the new FASB accounting rules on share-based payments, comparisons with the second quarter of 2016 are on an adjusted basis. Previously, we had reported $0.85 per share of core earnings in the second quarter of 2016; this is now $0.86 per share as adjusted. The adjusted quarterly earnings schedule is again included in the presentation appendix.

Please turn to Page 3. I won't go into detail on the year-to-date results because many of the quarterly earnings drivers are also relevant in the year-to-date period. One element that was not a driver in the second quarter but has contributed to earnings variances in the year-to-date period is the tax benefits related to share-based compensation that we realized largely in the first quarter.

Please turn to Page 4. As Pedro mentioned earlier, we are updating guidance to incorporate the tax benefits related to share-based compensation that we recorded in the first half of 2017 and the $0.03 per share SoCore impairment recorded in the second quarter. Our new range is $4.13 to $4.33 per share with a midpoint of $4.23 per share. We continue to experience success around our operational and service excellence initiatives and cost control and effectiveness more generally. However, we have not made any adjustments to guidance at this point related to these items as we continue to evaluate the various efforts and other work that may be required. We will update guidance in the third quarter as it has been our practice to reflect any additional changes following the summer season.

Please turn to Page 5. In June, after we submitted our rebuttal testimony, we provided an updated capital spending forecast in our business update. The reduction of $420 million reflected the General Rate Case capital adjustments between 2018 and 2020. As Pedro noted, $300 million was related to grid modernization and the remainder to operations support and other small programs. Today, we are providing an additional update for our 2017 capital expenditure forecast, which reflects trends that we've seen in the first 6 months for both CPUC and for capital spending.

As we noted during the first quarter earnings call, SCE capital expenditures for 2017 have been trending lower than the $4.2 billion in our original forecast. We currently see 2017 capital expenditures to be $3.8 billion, generally reflecting the lack of approval of a grid modernization memorandum account, lower-than-expected new customer meters and delays in transmission spending. As we continue to refine our grid modernization spending estimates and review the work embedded in the plan, we have identified and focused on projects that have significant reliability benefit in addition to supporting our ability to integrate distributed energy resources. We have therefore included these projects in our traditional distribution capital spending. There are no significant changes to the 2018 through 2020 GRC period subsequent to our rebuttal testimony.

Please turn to Page 6. I won't spend a lot of time on Page 6 as there were no changes from our prior June forecast. The main driver of our forecast is the General Rate Case rebuttal testimony. Our rate base forecast is based on the authorized weighted average rate base that is set in each General Rate Case for the forward-looking 3-year period. Once SCE receives a final decision in the 2018 General Rate Case, our rate base forecast would be trued up along with our capital expenditures. From a FERC perspective, our rate base also remain largely the same as the majority of the capital spending decrease is tied to projects that are expected to close outside of the forecast period. Despite these short-term discrepancies, over the long term, we continue to see SCE investing at least $4 billion per year and adding at least $2 billion per year of rate base for the foreseeable future as SCE continues to implement its [wires-focused] business strategy.

Please turn to Page 7. As Pedro discussed in his comments, we received a final decision on the cost of capital proceeding for 2018 and 2019. SCE's return on equity will be adjusted to 10.3% from 10.45%, and we will true-up the cost of debt and preferred equity. We expect to file an advice letter in September with our forecasted cost of debt and preferred equity for 2018 and 2019. This true-up will include our actual cost of debt and preferred equity as of August as well as a forecast of debt and preferred equity costs through the end of 2018. The cost of capital adjustment mechanism, or trigger mechanism, will be effective for 2019. That is, the cost of capital will remain fixed in 2018 with a possibility of the adjustment mechanism functioning in 2019.

We will implement the new cost of capital starting on January 1, 2018. SCE continues to maintain a strong balance sheet and significant financial flexibility. Our weighted average common equity component of total capitalization is 50.2% as of June 30. We continue to maintain what we believe is a prudently conservative balance sheet at both SCE and at the holding company.

That concludes my remarks. Natalie, please open the call for questions.

(Operator Instructions) Our first question comes from Ali Agha of SunTrust.

My first question, with regards to the new 2017 guidance, if you take the midpoint of the guidance, the new midpoint, that's implying that second half '17 earnings will be essentially flat with second half '16. Will you explain why that theoretically would be the case?

Ali, this is Maria. So we provided the guidance. We wanted to update guidance to incorporate the discrete items around the share-based compensation tax benefit as well as the SoCore impairment. We've included in the guidance from the get-go earlier in the year the $0.31 of operational benefit, both -- and financing benefits. As we continue through the year, we're going to keep an eye on all of those things. And as we get through the summer period, we will revisit that and see if we need to make any adjustments. But for now, I think that's where we are on guidance.

Okay, but Maria, there's nothing that would be driving flat comparisons, right? Just fundamentally speaking.

We are doing the work that we've been doing every year. I think that we are looking at continuing to find ways to keep the O&M cost, et cetera in line. And I think as we get through this period, we're going to take another look at guidance and we'll be back to you with that.

Okay. And my second question. With regards to the GRC and the rate base outlook, are you expecting -- first of all, I wanted to just clarify that, I mean, from Pedro's remarks, that given where we are in the hearings that are going on, the settlement probably is not a high probability item. But then as you're going through this process, is there a possibility of further refinement to the CapEx and the rate base numbers before we reach the finish line from your perspective?

Ali, let me take the first part of that and turn to Maria and Ron Nichols for the second. On the possibility of settlement, we're not really handicapping the possibility. We acknowledge that there's been discussions, we don't have a comprehensive settlement at this point and we're focused on the hearings. We always remain open minded, but not really providing any sort of handicapping or probability assessment.

Yes, I think where we are right now, Ali, is in the middle of -- or probably closer to the end of the evidentiary hearing. We did file our rebuttal testimony, which had some updates in it. At this point, we would be anticipating that we would make updates when we get a final -- a proposed decision or a final decision.

Our next question comes from Praful Mehta of Citigroup.

I wanted to just touch on Edison Energy and the state of the solar business. If you could just give some context around -- you said you've already hired, I guess, bankers to run the process. Where we are in that process in terms of timing and just size and scale of the business? And also user proceeds, is it just capital that will help fund the utility growth or are you looking at something else?

Let me kick it off and then Maria can fill in some of the details here. And Praful, so as I said in my remarks, we have engaged an adviser (inaudible) as early in the process here. And the point is to explore all options. And I think as I mentioned in my comments, we really want to make sure we have an open mind. We think it's an interesting business. And frankly, solar will be a big part of the electric energy economy in the decades ahead. But given where we are at this point in time, and particularly, where we are, still at tax appetite, et cetera, we just want to explore whether there are other options, including the potential for a sale. Maybe, Maria can fill in some in terms of the scale.

Sure. Praful, so you know that scale of these businesses currently is not material relative to the rest of the company's own terms of use of proceeds. We would see what happens at the time we completed a transaction. If we do, I would say you can think about it more on general corporate purposes as opposed to anything else.

Got you. Fair enough. Just gave the context which is helpful. And then broadly, we're all looking forward to the broader Edison Energy discussion as well in September. But just to understand from that context, everything is on the table in terms of, like, more strategic decisions around, "Do we want to stay in this business?" or is it more, "What are the milestones that we want to achieve in terms of how we want to kind of grow or build this business going forward?"

Yes, I'd say it's more the latter because we are -- I think I mentioned in my comments, we think this is an interesting business and one that we want to prove out. I'm honestly a little worried that by the time we get to the September meeting, some of this may be anticlimactic because (inaudible) rocket science. But we're hoping to give you some just interesting weight points in terms of -- with more of the proof points that we see for the business and the timescale for getting it to earnings neutral, which is sooner rather than later. But we want to give you some more context around it and also some more views on what the long-range potential scale could be for the business. So I want to make sure we set expectations right here. We're excited about it. We got a lot of work to do and we have business to prove out. And so the discussion will focus in filling in some of the blanks that we haven't been able to fill in to date and provide some of the metrics and milestones we'll be using. So I think it will be an interesting discussion, but I also don't want folks to think there's a big cliffhanger or something like that. So does that quite cut the cards here yet.

Got you. Fair enough. And just finally, quickly, on this grid modernization topic. It looks like at least in the current process given its initial phases of the total grid modernization CapEx spend, it's more challenging and more difficult to get a bunch of that approved or at least in terms of the support that you need from the customer advocates. Is that something you see as more of an education process almost in terms of how this kind of goes over time and over time, as people understand what grid mod is and why it's needed, you get more support going forward?

I think it's important to start by saying -- and again, Maria or Kevin Payne or Ron Nichols may want to say more here. But it's important to start by saying that -- at least my interpretation of the discussion right now, I don't think anybody is doubting that this state is committed to having a very different energy system and going towards 2030, cleaning the energy resources including a lot of the economy and using electrification to do that and having a lot more use of distributive resources as part of the supply stack and as part of customer uses. I think the question the -- some of the intervenors are raising is one more of pace. And we believe that our proposal has responded to the data points the commission has put out to-date on the sense of urgency around this. And mind you, again, given that we view grid modernization as being essential towards driving the dramatic changes that will be needed across the California economy to get that 40% greenhouse gas reduction by 2030, 12.5 years from now. We believe that the pace that we proposed in the GRC is merited. But again, I think that the abatement is more about when, not if. And I think we're all waiting to see how the commission comes out in terms of their guidance. We had hoped we would've had guidance to the DRP proceeding by this point. But I think it's not happened yet. And so we might expect a decision more, like, in the third quarter. We certainly will look for guidance in terms of how the commission handles our proposals in the rate case, but it's more about that. Ron, would you like to add, or Kevin?

I would just add that there is a bit -- has been a bit of an education process and we'll see how that plays out in the process. But it's making sure that the parties are aware that grid modernization also has very significant reliability and safety benefits in addition to what it does for distributed resources.

Our next question comes from Michael Lapides of Goldman Sachs.

I have a simple one, and you guys might laugh at me when I ask this one. But if I look at Slide 5, your capital spending forecast, the 2017 amount is down about $300 million, $400 million. But when I then look at the next slide, the rate base slide, nothing actually changes. Can you walk me through that again? Am I missing something here? Is it because this is the first couple $100 million of a 5- or 7-year project and therefore it wouldn't have actually booked a rate base until after 2020? Or is there some other moving part that I'm just not following here?

So there's 2 pieces to the answer, Michael. This is Maria. The first piece is just what you said. The FERC spend doesn't actually close until after the forecast period. So you wouldn't see it in rate base until after that, so that's one piece of it. The other piece of it around the CPUC spend is that this is -- 2017 is authorized, '18 through '20 is part of our rate case. As we get a final decision in the rate case, we will be rolling through any changes to capital and to -- et cetera.

Got it, okay. But the FERC spending in 2017, you still would've earned AFUDC on that $300 million to $400 million. You just simply won't get that noncash earnings power over the next couple of years until you actually ramp that project up?

So correct. The whole $400 million is not FERC, by the way. But yes, we will get AFUDC but that's the non-cash aspect of it.

Got it, okay. And then second question. When you get out to -- let's say you're 2018 through 2020 CapEx at almost $5 billion a year happens at that level and not at a lower level like intervenors suggest. Will SCE need cash from the parent? Meaning will the parent need to inject more cash than it has been historically into SCE to fund SCE's rate base growth?

I think from a planning perspective, it's a little early days to identify that sort of need. SCE has a fair amount of flexibility built in at the operating company level, so it has that extra layer of equity, but also, importantly, has a very robust or ability to have very robust short-term debt program, so (inaudible) program, which it can utilize to fill in the blanks as well. So we'll have to really see what the cash needs are at the utility. And since they have so much flexibility, I think it will be pretty premature to estimate that.

And Maria, one thing to add there. I know you've heard us emphasize before. As Maria said, there's a number of tools that we could use to address that as we get out there and as we see what actually gets approved in the rate case. But even in the book end case where we got everything that we ask for, we still don't foresee any need to issue equity at EIX level to support SCE capital program. So that -- I think you've heard us say that before but that's an important part of the message. And by the way, Michael, nobody's laughing at you inside the room. This stuff is complicated.

Our next question comes from Shah Pourreza of Guggenheim Partners.

Sorry if this was -- obviously, this has been addressed a lot. But on sort of the modernization spend, it's such a big piece of the growth in sort of this rate case here. I know it's a factor of timing, but is it a factor of are you dealing with intervenors that want it layered in on the next rate case? Or are they thinking more sort of back-end loaded? And I'm kind of curious, the revision you've done on sort of the capital side of this, did that impact some of the settlement discussions and why we don't see something before you file and before the hearing start, I guess?

I'll kick it off by saying it's probably hard to speculate where any one intervenor is coming from and I think we're focused on what happens in this case. I think the other thing I'd throw in here is that as we move forward into future rate cases, I'm not even sure we would have a separate grid modernization request, we have grid modernization, but the grid will be becoming more modern. And so the kind of design principles we've embedded in this particular request, I think at some point, whether it's an x rate case or maybe one after that, we'll get more and more baked into our overall request because that will -- we will be doing all the grid modern as opposed to having a separate grid mod request. In terms of what drove the change in -- update, and I'll turn it now to Kevin Payne here in a minute to give you a little more color. But it really was about the fact that with the benefit of an extra 1.5 years, couple of years and the fact that this stuff is all, frankly, fairly new in terms of design and we have some pilots, et cetera. We know a lot more than we wanted to bake into the update. So it was something we did on its own stand-alone basis as opposed to connected to any sort of discussions. Kevin, more detail you can fill in?

Yes, sure. That's right. I mean, we -- I think there are 2 elements to this that we talked about before. There is a lot of education going on to get the intervenors and the commission itself to understand what it is that needs to be done, and then secondarily, in what time frame. And as we've looked at our proposal more deeply and done more analysis over the last 1.5 years, as Pedro said, we've identified a few areas where we thought we could actually push some of the modifications out. One that comes to mind is our sub-transmission relay replacements. So we know that, that will need to be done eventually and we know what it is that will drive it. And it's largely penetration of distributed energy resources and other things, but we have identified a different time frame that we could do it in. So I think it's really about educating people about exactly what it is that needs to be done because some of the design features that we're proposing are new. But as Pedro said, in the next case, they will be our new design and we'll be continuing to implement that across the system.

Could the modernization spend -- that's helpful -- could the modernization spend kind of be carved out and something to be accounted for in a separate proceeding in between the rate case?

The guidance we have from the commission is that, that is not the way they've designed it. Even in the distribution resources proceeding where the concepts about what would need to happen to modernize the grid were introduced, it was explicit that the money would not be authorized in that proceeding, but that proposals would be made in a General Rate Case.

Our next question comes from Jonathan Arnold of Deutsche Bank.

I just have a couple of questions on the EEG. When I look at -- in the Q, it looks like it lost $17 million in the second quarter which is the same as second quarter last year, and compared to $5 million or $6 million in the first quarter of both years, is that a seasonality or is there a sort of a or is it a different field given how you were evolving the business so far in Q2 this year?

So some of the things that are going on in Q2 this year actually relate to the SoCore impairment. So you'll see that we took a $10 million after-tax charge, about $17 million pretax. And so that's embedded in the Q2 results for EEG, which is probably throwing you off in terms of making the year -- the quarter-over-quarter comparison. So far year-to-date, I think we see EEG as performing -- absent the $0.03 consistently with the guidance that we provided.

So does that mean that absent the impairment, you might have broken even this quarter?

No, I don't think we would've done that. We would -- because the guidance for the year is an $0.08 loss.

Right, okay. And then just separately on -- the Q also says that you're not accounting for SoCore as an asset held for sale because you're not sure you'll necessarily sell it within the next 12 months. Can you -- I want to just be clear, are you -- what is the scenario where you don't sell it, how will that business look as part of this portfolio? And what are you -- what is the message?

So I think when it comes down to that comment about whether or not the asset is held for sale, that it's relatively straightforward assessment of whether or not you think it's probable within the next year that you'll sell the asset. If it is, you give it that categorization. In this instance, since we're just starting the process with SoCore, we've just retained someone to help us on that process, we don't have enough market information to know if that's going to be the decision. But clearly, we are evaluating that option in a very serious way. So I think it's really sort of how the accounting works and our actions are really going forward, I think, indicative of the fact that we're taking seriously the process.

Okay. And then just on a similar note, Pedro, your remark was that you've streamlined to focus on near-term needs rather than long-term potential scale. Does that change the -- that suggests a focus on getting to breakeven rather than growing. And I think is it changing the time frame, without telling me what the time frame is, but is it a sign the time frame is shifting?

No, it's not meant to be a signal that the time frame is shifting. I think as we -- the team took some initial steps. You always have the tradeoffs you go through in terms of what capabilities do you get in place now, today versus which ones do you get in place next week versus next year or the year after. And in some cases, we may have gotten some capabilities a little ahead of their time and, of course, should play in -- in a starter business, you're paying the freight for that and so we wanted to make the adjustment and turn down the volume knob on some areas that will be valuable. We will probably need to build these capabilities in the future, but we can still manage the business to do what we need to do and not have that cash flowing for this activities just yet. So frankly, just read financial discipline into the alignment that we made. Does that make sense, Jonathan?

Yes, it does. So could you just remind me, have you made an actual commitment to sort of to by when you intend to be earnings neutral?

We have not, but we will be sharing that with you in September.

Our next question comes from Gregg Orrill of Barclays.

Are you able to provide any guidance on what you think the holding company expenses will be going forward? I know they came down from $0.17 to $0.08 in the guidance. I guess that was due to tax -- tax timing?

So it was -- the change was related to the benefits that we received from the share-based compensation. I would say we're still in the same place we've been historically, that $0.01, $0.015 per month for the holding company is the right zone to be in.

Our next question comes from Travis Miller of Morningstar.

Just want a real quick follow-up on the SoCore stuff. What would other options be besides a sale?

Continuing to operate the business, I think that as (inaudible) view. We're looking at a sale option, but we're also looking at the areas of emphasis that we have today and that we want to turn the knob up on some of those or turn the knob down on some of those. Today, as you may recall, the business was really largely started by developing projects for commercial and industrial customers. The business has also added on community solar projects, looking at potential for other places that we can play in solar. So lots of strategic review that's looking at where it can play and whether that should change. And then having that view of how we would optimize the business and how we would maximize the values, with EIX as the owner, versus how somebody else who might be able to optimize that, that's signaled through the response in a exploration of a sale.

Okay. So there is some probability that you would keep the business and invest in it? Or is that a 0 probability?

I think we've just started the process of exploring a sale, so I think it's probably premature to assign probabilities to non-zero probabilities to outcomes.

And this is why it's not full asset held for sale.

Sure. Okay. And then real quick on the grid modernization, how much of those numbers in 2018 to 2020 would you have to invest in any way and put it into distribution, just like what you did in 2016, 2017 with some grid mod spending? How much could you just say, "Okay, we didn't get approval for grid mod, we're not going to do anything," versus while there's still some $100 million or so that we would have to do in there. Can you give me a sense for that? Because you guys did the grid moderate for 2016, 2017.

Let me kick off the answer this way. What we've done -- you obviously saw what we asked for in 2016 and 2017. In terms of memo account, we have not had actions from the PUC on that. As we look more deeply at a lot of that spend, as Ron Nichols mentioned earlier, while some of that spend was designed or conceived thinking about elements of grid modernization and the support for distributed resources, et cetera, the odd thing is there's a very great line between the modern and the grid part and -- to some extent. And so some of the work that supports grid modernization also supports safety and reliability in the system. And so we prioritized some of that work and proceeded with it in 2017. When we get a rate case decision, we will see what the PUC decides, what guidance they have for us, how specific that guidance is and then we'll manage the business prudently inside that and as we -- rate cases are every 3 years. Clearly, the day after you get the rate case decision, the guidance is pretty fresh. Two years into the 3-year cycle, things change and I think part of the job of a prudent utility manager is to reallocate capital within reason to serve customers. So it may be that there's some reallocation that might make sense in the future. Kevin, different view on that or anything you'd like to add?

No, I agree. Maybe I could just add a little that the technologies that we're using in grid modernization are not unfamiliar ones. We have a certain level of activity there today, substation automation, distribution automation, things like that. Some of the larger grid management computer type systems are new, but will ultimately have to be built out anyway. So part of grid modernization is implementing familiar technology to emerging technologies and doing it at a pace that we think will support the state of California's goals. If the commission doesn't see the full extent of our proposal or doesn't favor the full extent of our proposal in grid modernization, we will still consider and use aspects of those technologies to accomplish our safety and reliability goals such as focusing automation on our worst performing circuits to improve reliability, those kinds of things. So we'll work within the authorization that we have and we'll continue to advance the technologies that we implement on the grid.

Our last question is from Anthony Crowdell of Jefferies.

You may have just addressed it. I was just curious -- 2 quick questions. One is, is there an ability if you maybe delayed some of the other CapEx in your proposal and work with grid mod to just show how effective, how important would be California meeting their goals, and once maybe the commission sees how effective it is, some of the projects that you delayed, you could add into the next case and also grid mod? Is that possible or just too late in the process?

Well, I think some of the -- we're doing some of that already in the pilots that have been requested by the commission. And with that exact desire in mind, to be able to show how this works and do that at an initially relatively modest level as to how quickly those are reviewed and move forward, it depends on the end results of that. Also depends on the continuing guidance that we get during the dependency of the GRC. The guidance that may come out of the separate distribution resource plan proceeding. So there could be some additional guidance that comes out of that in that time frame that could influence ultimate decisions on that. But even absent that, we would expect it will have some results during this next GRC on the pilot programs that could enable some additional activities to go forward. It's hard to put a number on that at this point.

Okay. And just lastly, on Edison Energy. I don't know if the company has already done it, but maybe in September. Is there the ability to show what, like, maybe different business segments are causing more of the loss and maybe evaluate those, doing a evaluation of whether you sell that and keep some of the others or the company is not going to give that kind of detail?

Anthony, it's Maria. I think you're kind of talking about, like, underneath Edison Energy, the various service lines that we have, if one or the other is driving some of this. I think, we think of those service lines, really, as a whole. They are sort of the first step in providing the types of advice and advisory services to the commercial industrial customers that we have. And then layered over that is another service line, portfolio advisory services. So I think we think of them that way. We've already gone through an assessment of other aspects of the Edison Energy Group businesses, so we talked earlier this year about water, about transmission. We talked a lot today about SoCore. So yes, those pieces have been evaluated. Edison Energy and its service lines, we really view as more holistically.

And just lastly, I hate to go a whole call without talking about SONGS. Is there any ability to maybe settle or is there other settlement discussions scheduled?

As I mentioned in my remarks, the whole process for the mediation is confidential, so I just can't comment, unfortunately, on the prospect for the meetings or the like. Let me just reiterate what I said before that we've approached this proceeding fully and taking it very seriously. And at the end of the day, if we and the other parties involved end up agreeing on a revision to the settlement that we think is in the interest of our customers and our shareholders then we're certainly intellectually open to that, then we'd be looking at that in the context of the various other alternatives outside of a mediation process, including the potential scenario returning to litigation. So taking it pretty seriously. And unfortunately, it's about all we can say at this point.

There's one question queued up, and this is our last and final question and it's from Ashar Khan of V.

My questions have been answered.

All right. Well, before I turn it back over to Sam to do the closing, let me just say thank you all for joining us on the call today. We continue to be very focused on our businesses and think of the utility, strong alignment with what's going on in California with Edison Energy, that potential to capitalize on the technology changes in the industry, and we look forward to our next engagement with you. And please feel free to reach back out with questions after the call if you have any. Sam?

This concludes the call today. And please call us if you have any follow-up questions. Thank you.

That concludes today's conference. Thank you all for your participation. You may now disconnect.