Morningstar | Edison Takes Charge for 2017-18 Disasters, but Growth Outlook in Line With Our Expectations
We are reaffirming our $66 fair value estimate and narrow moat and stable moat trend ratings for Edison International after the company took a $1.8 billion aftertax charge in the fourth quarter related to the 2017-18 fires and mudslides and reaffirmed its core growth outlook. We continue to believe Edison is one of the most undervalued utilities in Morningstar's coverage.The charge totaling $5.60 per share is higher than the $2 per share deduction for 2017-18 disaster liabilities that we include in our fair value estimate. However, the charge based on recent court decisions assumes no disaster liability recoveries. We think Edison ultimately will recover about half of its total liabilities based on our outlook for state political, regulatory, and legal changes. This is in line with our assumption for peer PG&E. After making this adjustment and incorporating a time value discount, we are reaffirming our $2 per share disaster-related fair value deduction.
Core earnings in 2018 were $4.15 per share, down from $4.50 in 2017 and slightly below our expectations. Our forecast assumed regulators would approve Edison's 2018-20 rate plan before year-end, allowing Edison to book a full year of higher rates in 2018. We now plan to reflect those higher earnings and cash flows in our 2019 forecast with no impact on our fair value estimate.
We continue to believe Edison has upside to our earnings and fair value estimates if regulators grant it recovery for higher disaster-related insurance and system maintenance costs. These higher costs contributed to a $0.13 per share earnings drag in 2018,and we forecast a similar drag in 2019 and beyond.
Management reaffirmed its plan to invest an average $4.5 billion in 2018-20, in line with our forecast. This supports our 6% annual earnings and dividend growth forecast through 2022. We think it is a positive sign that the board declared a $0.6125 per share first-quarter dividend even after considering the accounting charge.
For more detail on our analysis of California utilities, 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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