Morningstar | Insurance Costs, GRC Delay Weigh on Edison's Earnings, but Growth Story Intact
We are reaffirming our $67 per share fair value estimate, narrow moat and stable moat trend ratings for Edison International after the company reported core earnings of $0.85 per share in the second quarter of 2018, the same as in the second quarter of 2017.Although first-half earnings are down from 2017, this is primarily due to state regulators' delayed decision in Southern California Edison's 2018-20 general rate case, or GRC. Rate increases will be retroactive to January as soon as regulators issue a decision. We expect the true-up in the second half of the year will result in full-year earnings growth in line with our estimate. We continue to forecast 6% annual earnings growth and similar dividend growth through 2022.
Management reaffirmed its $13.7 billion capital investment plan in 2018-20, in line with our forecast. We don't expect substantial changes to that plan when regulators issue their final GRC decision.
Wildfire policies and litigation likely will remain a drag on earnings and dividend growth. Edison's insurance costs have skyrocketed, and it likely won't be able to recover those higher costs from customers until its next GRC in 2021. Management estimated a $0.38 per share annual drag relative to its allowed insurance cost recovery. Incorporating this will lead to a slight reduction in our earnings forecasts. In the long run, we expect ratepayers, not shareholders, will have to bear most of the higher insurance costs, so it doesn't have a material impact on our fair value estimate.
Edison is less exposed to wildfire liabilities than the other California utilities, but the 2017 Thomas Fire does pose a liability. We do not include a material deduction to our fair value estimate directly related to the fire, but this could change if state fire investigators determine Edison's equipment played a role. Edison has joined the state's other utilities to petition for changes to inverse condemnation, which poses a long-term risk.
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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