In February 2018, I recommended Edison International (EIX) as a new Aggressive Holding; the shares had taken just a big hit on concern the company would be held liable for billions in 2017 wildfire damages under the state’s “inverse condemnation” law, explains Roger Conrad, editor of Conrad's Utility Investor.
My view was investors were underestimating management’s ability to navigate California regulation. And I saw them undervaluing the company’s robust rate base growth, from upgrading its power grid to meet the state’s aggressive de-carbonization goals.
That summer, California reduced financial pressure on utilities by allowing them to fund wildfire liabilities by issuing low cost debt. But then came the far more devastating 2018 wildfire season and subsequent bankruptcy of PG&E Corp (PCG).
Edison shares plunged again, hitting a low of $45 and change in mid-November. We hung in for three reasons. First, the utility’s potential liability was far less than PG&E’s.
Second, its plans for rate base growth were on track. And third, the state still needed to ensure utilities remained financially viable, so they could execute needed spending.
The rest is history. Last summer, the state enacted legislation establishing a first-ever wildfire insurance system, and PG&E is on track to exit bankruptcy by June 2020 deadline to participate.
California regulators last month granted Edison a solid 10.3 percent return on equity in its multi-year rate case. That assures a solid return on the $25 million management expects to invest for 7.7 percent annual rate base growth through the end of 2023.
The company has also amicably settled its liability from 2017 and 2018 wildfires. A successful debt refinancing has returned its cost of debt capital to one of the lowest in the power sector.
And the company has more than tripled its dividend growth rate for 2020 to 4.1 percent. Even after a solid performance in 2019, Edison trades at a discounted valuation of 16.6 times expected 2020 earnings. We expect the gap with the Dow Jones Utility Average’s 20.7 to close by mid-year, providing a lift to the shares.
Meanwhile, reduced legal risk and stronger finances earn the company a Quality Grade boost to A and a move to the Conservative Holdings. Buy up to $75.
