爱迪生国际

The California legislative session is set to end with no incremental wildfire-related financial protections for the state's investor-owned utilities, including Edison International.

Why it matters: Wildfire-related legislation set to pass, reintroduced Senate Bill 492, is a win for insurers and fire victims. Utilities had sought limits on wildfire payments to insurers. Utilities' push for new financial protections follows a California Earthquake Authority report published in April that suggested utilities still face financial risk from future wildfire liabilities even considering the $21 billion state Wildfire Fund and $18 billion continuation fund. Legislators reportedly shut down California Gov. Gavin Newsom's efforts to include financial protections for utilities. Newsom, who championed landmark wildfire legislation AB 1054 and SB 254 earlier in his tenure as governor, is term-limited. It's uncertain whether his successor will be as supportive of utilities.

The bottom line: We are reaffirming our $81 fair value estimate and narrow moat rating for Edison International. Edison's stock was down 5% on Aug. 28 and fell 24% early Aug. 31, making it one of the cheapest US utilities stocks we cover. We think the market is overestimating its wildfire risk given existing legislation and constructive Eaton Fire developments.

Big picture: There is no immediate financial impact on Edison and no change to legislation that effectively eliminates Edison's wildfire exposure if deemed a prudent operator. We continue to assume Edison is fully reimbursed through the AB 1054 state wildfire fund for its Eaton Fire victim payments, resulting in no material shareholder impact. Our worst-case estimate remains $4.4 billion, or $8 per share. We still expect Edison to invest at least $40 billion in 2026-30, in line with its 2025-28 general rate case and supporting our 6% annual earnings growth forecast.

Coming up: The California general election is Nov. 3.

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Our fair value estimate is $81 per share after incorporating recent financial results.

We forecast 7% average annual earnings growth in 2026-29, excluding potential one-time 2025 fire-related costs. This is based on nearly $8 billion of capital investment annually on average. This is slightly higher than what regulators approved in Edison's 2025-28 general rate case to reflect incremental investment opportunities that regulators could approve outside of the GRC.

Higher financing and operating costs to support that investment and maintain a strong balance sheet will result in earnings and dividend growth that is slightly slower than regulatory rate base growth.

We assume a 10.5% long-term allowed return on equity, higher than Edison's 10.03% allowed ROE for 2026.

We include $1 per share for costs and liabilities related to the Eaton fire. We expect most of the shareholder impact will be one-time restoration and financing costs. We assume California's AB 1054 wildfire fund will cover nearly all liabilities from the fire. In a worst-case scenario, we estimate shareholders could face $8 per share of lost value.

We have incorporated the securitization of $3.6 billion of proceeds from the settlements involving costs from the 2017-18 TKM events and Woolsey fire.

We include no material value from nonutility investment during the next three years, but this could be an opportunity for long-term earnings and value upside.

We use a 7.5% cost of equity and a 6.1% weighted average cost of capital in our discounted cash flow valuation.

Edison International's primary subsidiary, Southern California Edison, has a service territory monopoly and efficient scale advantages that are the primary sources of Edison International's narrow economic moat. Edison is one of the few US utilities that has no direct exposure to fossil fuels or wholesale energy markets.

State and federal regulators grant SCE exclusive rights to charge customers rates that allow it to earn a fair return on and return of the capital it invests to build, operate, and maintain its infrastructure. In exchange for its service territory monopoly, state and federal regulators set returns at levels that aim to minimize customer costs while offering fair returns for capital providers.

At its core, we think California is a constructive regulatory environment. Regulators recognize the important role utilities play in achieving the state's environmental and energy policies. Edison's infrastructure investments to support these policies result in limited pushback from regulators, helping to boost core earned returns on capital.

Multiyear general rate cases are the primary way regulators approve Edison's investments and customer rates. California regulators have approved about 90% of Edison's proposed investments in its last five rate cases dating to 2012, including its 2025-28 rate case.

This is a high success rate for utilities, suggesting Edison's investment strategy is well aligned with expectations from regulators and customers. Edison also has received regulatory support for grid modernization, system hardening, and reliability investments that are incremental to its base plan.

The implicit contract between regulators and capital providers should, on balance, allow regulated utilities like SCE to achieve returns exceeding their costs of capital, though observable returns might vary in the short run, based on demand trends, investment cycles, operating costs, and access to financing. Intuitively, utilities should have economic moats based on efficient scale, but regulation offsets this advantage in some cases, preventing excess returns on capital.

The risk of adverse regulatory decisions keeps regulated utilities from having a wide economic moat. However, the threat of material value destruction is low, and normalized returns exceed costs of capital in most cases, leaving us comfortable assigning a Narrow Morningstar Economic Moat Rating to many regulated utilities.

With Edison's $40 billion of planned capital investment during the next five years, we project 7% average annual earnings growth.

Edison raised its dividend for the 22nd consecutive year to $3.51 for 2026, a 6% increase from 2025. We expect similar dividend growth for the foreseeable future.

California's focus on renewable energy, energy storage, and distributed generation should bolster Edison's investments in transmission and distribution infrastructure for many years.

Wildfires in California are a significant political and financial risk even with state legislation that offers financial protections for utilities.

Edison's long-term growth depends on California continuing to support constructive utility regulation and clean energy policies such as renewable energy, electric vehicles, and grid innovation.

Like all utilities, inflation and higher interest rates could slow Edison's earnings growth and make other income-producing investments more attractive.