Morningstar | California Policy Developments Lift Edison; Now Trading in Line With Fair Value Estimate
We are reaffirming our $68 fair value estimate, narrow moat, and stable moat trend for Edison International after considering recent legislative and regulatory policy developments that are in line with our expectations.Edison's 31% stock rally since early 2019 leaves it now slightly overvalued based on our fair value estimate as of mid-July. Edison was 19% undervalued at its low in January. New wildfire insurance legislation, supportive credit reports, and regulatory rate clarity have removed major overhangs.
We now expect Edison to trade mostly in line with its utilities peers. Edison's 15 P/E remains a discount to peers' median 20 P/E, but we think this discount is fair based on Edison's ongoing fire liabilities and annual financing needs, which likely will depress near-term earnings. We continue to deduct $2 per share from our core fair value estimate to reflect unrecovered fire-related costs and potential payments to wildfire victims.
We continue to believe core earnings can top $5.00 per share by 2021 when the company's next round of base rates are set to take effect and wildfire issues are substantially resolved. We still forecast 6% annual normalized earnings and dividend growth through 2022. The rally will make it more cost-effective for Edison to issue equity to cover its $14 billion capital investment plan in 2019-21.
The $21 billion wildfire insurance fund legislation the Gov. Gavin Newsom signed on July 12 would require Edison to contribute about $2.4 billion initially and $100 million annually for the next 10 years based on its customer base and service territory. We expect Edison will retain its investment-grade rating now that the new legislation removes much of the company's long-term wildfire financial risk.
For more detail on our analysis of California utilities soon after PG&E filed for bankruptcy, see our report, "California Utilities: Gold Rush or Fool's Gold?"
Edison International is a holding company. Through its subsidiary, Southern California Edison Company (SCE), which is an investor-owned public utility, the company is primarily engaged in the business of supplying and delivering electricity to southern California. The company is also the parent company of Edison Energy Group, Inc., a holding company for Edison Energy, LLC, which is engaged in the business of providing energy services to commercial and industrial customers. SCE supplies electricity to its customers through transmission and distribution networks. Its transmission facilities include sub-transmission facilities and are located primarily in California but also in Nevada and Arizona.
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