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Market Pricing (2/23/2016): $64.98/share; ST-Target: $90/share; NIV: $159/share
EIX: Valuations anchored by growth capex
Continued high levels of capital spending relative to maintenance capex should accelerate valuation. Dividend payout ratio has already largely caught up to the earnings power of SCE approaching close to 50% payout ratio. We look for continued capex spending on transmission, distributed generation, electric vehicle (EV) infrastructure, select renewable generation, energy storage, grid modernization, and energy efficiency. However, the 2015 GRC was somewhat disappointing, although successor net energy metering (NEM) tariff is constructive. We believe that GHG regulations will have little to no impact on EIX. We are also heartened by the fact that EIX is investing in renewable power and competitive transmission projects, but dismayed at its entry into water desalination and waste-water treatment. Acquisitions of utilities may be dilutive to valuations due to higher expected growth at SCE versus many utilities outside of California. Decommissioning of SONGS appears to be on schedule and the nuclear decommissioning trust fund (NDTF) appears to be adequate for now. Therefore, we look for valuations to move to the upside over the ST.