EIX Initiation Report

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Market Pricing (1/29/2016): $61.80/share; ST-Target: $88/share; NIV: $151/share

EIX: Growth capital should drive valuations higher

Continued high levels of capital spending relative to maintenance capex should accelerate valuation and drive dividend payout back to normalized range of 45%-55% from current levels of about 33%. We look for continued capex spending on transmission, distributed generation, electric vehicle (EV) infrastructure, select renewable generation, energy storage, grid modernization, energy efficiency, recovery of remaining investment balance of San Onofre Nuclear Generating Station (SONGS), and recovery of underbalance in power purchase costs. In addition, we look for a positive impact from the 2015 General Rate Case. 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 another power subsidiary, but based on renewables not fossil-fueled plants. 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.

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