EIX Edison International
A solid regulated rate-base compounder priced for wildfire catastrophe; the value depends on California's liability regime.
The story
Edison International owns Southern California Edison, a large regulated wires utility earning a CPUC-allowed return of about 10% on a rate base growing 7-8% a year from grid hardening and electrification capex. The 23% trailing ROE is not a recurring figure: it is swollen by wildfire-related recoveries and one-time items. Core earnings on common equity run closer to 11-12%, with holding-company debt and preferreds adding some leverage. The stock trades at a discount because of the January 2025 Eaton Fire: potential liability, the risk of draining California's wildfire fund, and uncertainty about inverse condemnation all cast doubt on the equity.
ROE is set slightly above SCE's allowed ~10% to reflect modest parent leverage and regulatory incentives, but well below the inflated trailing 23%. Book growth tracks rate-base capex, less dilution from equity issuance, and fades to 4%, below the risk-free rate. Beta sits above the 0.55 industry anchor, and a 7% failure probability captures the tail risk that Eaton Fire liabilities exceed insurance and wildfire-fund coverage.
Value drivers
| Return on equity (normalized) | 11.0% |
| Book-value growth (Y1) | 6.0% |
| Terminal book growth | 4.0% |
| Beta | 0.65 |
| Failure probability | 7.0% |
| Cost of equity | 8.2% |
Valuation bridge
| PV of excess returns | 3.94B |
| PV of terminal excess | 8.42B |
| Equity value | 27.38B |
| ÷ shares → per share | $71.16 |
Projected excess returns on equity
| Yr | Book equity | ROE | Excess return | PV |
|---|---|---|---|---|
| 1 | 17.08B | 11.0% | 477.95M | 441.72M |
| 2 | 18.11B | 11.0% | 506.63M | 432.73M |
| 3 | 19.15B | 11.0% | 535.90M | 423.04M |
| 4 | 20.22B | 11.0% | 565.68M | 412.69M |
| 5 | 21.30B | 11.0% | 595.85M | 401.75M |
| 6 | 22.38B | 11.0% | 626.30M | 390.27M |
| 7 | 23.48B | 11.0% | 656.92M | 378.32M |
| 8 | 24.57B | 11.0% | 687.58M | 365.96M |
| 9 | 25.67B | 11.0% | 718.13M | 353.25M |
| 10 | 26.75B | 11.0% | 748.46M | 340.26M |
Key risks
- Eaton Fire liability exceeds insurance and AB 1054 wildfire fund capacity, forcing large equity dilution or worse
- California keeps inverse condemnation in place, and further wildfire seasons drive repeated multi-billion-dollar claims
- CPUC disallowances or a lower allowed ROE in future cost-of-capital cycles squeeze earned returns
Catalysts
- Legislative reform of the California wildfire fund or of liability standards that caps utility exposure
- Clarity on Eaton Fire cause and settlements, with recovery under the prudency standard, removing the overhang