EIX 1Q2018 Earnings (05/01/2018): Focus on 2018 GRC; we don’t expect ungainly impact from wildfires

EIX remains depressed from investor fears natural disasters may lead to outsized liabilities from CA’s inverse condemnation (IC)
But, given EIX’s dividend maintenance, we feel EIX is confident potential liabilities from natural disasters would not be debilitating to investors
Also, political climate appears to be shifting towards just treatment of California’s utilities. Therefore, we believe EIX is currently highly undervalued.
But, until there’s more clarity surrounding the liabilities, we believe EIX would continue to languish
EIX maintains silence re: its 2018E AEPS guidance until FD on 2018 GRC: FD likely in 2Q2018
Strong execution, strategic evolution, focus on core strengths and regulated investments make for attractive investment. Strategically, we like focus on utility projects with minimal distractions. Capex and rate base forecasts remain stable.

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EIX 4Q2017 Earnings (02/22/2018): Focus on 2018 GRC; EIX doesn’t seem to be suffering from PCG ills

EIX is under pressure from investor fears natural disasters would lead to outsized liabilities from CA’s inverse condemnation
However, given EIX has not only declared a dividend but also raised it, it suggests to us that EIX is confident that potential liabilities from natural disasters would not be debilitating to shareholders
Therefore, we believe EIX is severely undervalued at present
EIX is withholding its 2018E AEPS guidance until it gets decision on its 2018 GRC: FD likely in 2Q2018
Strong execution, strategic evolution, focus on core strengths and high regulated investments make for attractive investment. Strategically, we like focus on utility projects with minimal distractions, but capital expenditures reduced by $1B.
LT investments should drive LT AEPS CAGR above 7%-9% forecast range, in our opinion
We lowered our ST-Target to $86/share from $100/share, while our NIV/share increased to $180 from $168.

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Auvila Flash (EIX: 01/31/2018): Son Onfre Nuclear Generating Station (SONGS) Revised Settlement Agreement (RSA)

Southern California Edison (SCE), electric utility subsidiary of Edison International (EIX), reached a settlement agreement with all of the involved parties with regards to the closure of the SONGS
The long and the short of it is that the write-of amount from the RSA is hardly any different than the one reached in the prior settlement agreement in November 2014, which the CPUC had already approved

The after-tax write-off amount in the RSA is estimated by SCE at $448MM vs. $437MM from the prior settlement agreement an increase of only $11MM or about 2.5%

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2018 Industry Update: Economic growth should favor commodities-driven businesses in 2018

Warmer than normal winter:
Weak gas prices:
However, 4Q2017 and 1Q2018 power gross profit could be better than expectations:
Similarly, we’d expect natural gas infrastructure businesses to perform well for 4Q2017 and 1Q2018:
We expect economic growth to surpass 4% for 2018:
Strong economic performance should lead to strong power sector performance:
Commensurately, we expect natural gas infrastructure businesses to perform well:
Adjusted for seasonality, we expect natural gas prices to creep up throughout 2018 and, given normal weather, we’d expect natural gas prices to average at or just below $3.50 for 2018 with an exit price of some $3.65-$3.75:
Conclusion: Going into 2018, we believe that natural gas prices will stage a moderate recovery, but power margins should do better benefiting from accelerating economic activity. Individually, we continue to like… . However, the real star may be … . Among the utility names, we like … due to their growth prospects. We also look for … to outperform as … .

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GOP Tax Bill is win for utilities, power, infrastructure, and customers

GOP Tax Bill (GOPTB) looks to be positive for industries and companies in our coverage universe
Key aspects of GOPTB that affect our coverage industries and companies include, but not limited to:
21% corporate tax rate would be expected to reduce deferred income tax liability by some 40%
Interest expense deductibility capped at 30% of EBITDA for 2018-2021 and to 30% of EBIT after
100% investment deduction, except for utilities that would continue to deduct 100% interest
Preservation of existing investment tax credits (ITC) and production tax credits (PTC)
Repatriation of profits tax at 15.5% for cash and equivalent and 8% for non-liquid assets
Base-erosion & Anti-abuse Tax (BEAT) not impactful: If payments to foreign affiliates are 3% or more of a large company’s tax deductions then BEAT is imposed. We do not view this as relevant to companies that we cover, given 100% of PTC would be allowed to offset up to 80% of BEAT
AES Corp. faces large disqualification of interest expense deductibility but given its $3.7B in NOLs, we do not believe this to be an immediate issue; AES has time to remedy the situation:
NRG Energy shouldn’t have any issues with interest expense deductibility:
Exelon Corp. isn’t expected to have any problems with interest expense deductibility:
Cheniere Energy, oddly enough, shouldn’t have any problems with interest expense deductibility:
BKH, CNP, DUK, EIX, PCG, PNM, SRE should not have any issues with interest expense deductibility but may be able to use 100% investment deductibility to create win-win:
We note that the inability to deduct interest expense is limited to $0.21/$1 of lost deductibility
Loss of interest expense deduction could lead to some unexpected corporate behavior

Conclusion: Net effect of GOPTB looks to be positive, more so if utility holding companies are permitted to use non-utility subs to take advantage of the 100% capital investment deduction

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EIX 3Q2017: Strong 3Q17 performance lifts guidance; Focus on 2018 GRC

Management is showing confidence by again raising 2017FY AEPS guidance this time by about $0.05
Waiting on PD for 2018 GRC; FD unlikely in 2017
Strong execution, strategic evolution and focus on core strengths makes for attractive investment
Strategically, we like focus on utility projects with minimal distractions
Renewable integration’s challenging but no big surprises, yet.
Dividend payout ratio has caught up to earnings power of SCE logging-in at some 51%
LT investments should drive LT AEPS CAGR above 7%-9% forecast range, in our opinion

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EIX: Edison Energy Services (EES): Molehill trying to become an anthill with potential to become a hillock; we like approach but endgame’s murky

At present, EES is inconsequential to EIX and its shareholders and looks to remain that way:
By 2019 yearend, EIX expects EES to be breakeven:
The strategy behind EES for EIX is simple to explain:
Proof of concept by yearend 2019:
Absolutely, no additional capital investments in the next 18-months:
Conclusions: We believe that EIX will be successful …
Risk, like most things, is in the execution:

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EIX 2Q2017 Earnings Note: EIX Quarter was disappointing but raising guidance in show of confidence

Quarter was disappointing but raising guidance in show of confidence || Strong 1Q17 results were partially offset by weaker than expected 2Q17, but management is showing confidence by raising 2017FY AEPS guidance by about $0.09. Entered into settlement discussions for 2018 GRC, but dual-tracking litigation process. Strong execution, strategic evolution and focus on core strengths makes for attractive investment. Strategically, we like focus on utility projects with minimal distractions. Final decision on cost of capital proceedings were reasonable with ROE of 10.30% down 0.15%. Renewable integration’s challenging but no big surprises, yet. DC tax plan should be favorable: Likely both direct and indirect benefits. High growth likely to continue beyond 2020. Dividend payout ratio has caught up to earnings power of SCE logging-in at some 51%. We look for continued high capex spending on transmission, distributed generation, electric vehicle (EV) infrastructure, select renewable generation, energy storage, energy efficiency and grid modernization. LT investments should drive LT AEPS CAGR above 7%-9% forecast range, in our opinion. We’d support decision to sell SoCore Energy, and like expansion of energy advisory and service business at Edison Energy.

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EIX, SRE, PCG: Preliminary Decision from ALJ on CA IOU’s Cost of Capital Proceeding is Largely in Tact with Two Relatively Benign Changes to the Settlement

On May 10, 2017, two assigned Administrative Law Judges (ALJ) issued a proposed decision (PD) in the cost of capital (COC) proceeding pending final decision (FD) by the California Public Utility Commission (CPUC)
The PD upholds the settlement agreement but for the following two modifications that was submitted by Southern California Edison (SCE), PG&E (PGE), San Diego Gas & Electric (SDG&E), and Southern California Gas (SCG) – all four combines (CA-IOUs) – CPUC Office of Ratepayer Advocates, and The Utility Reform Network on February 7, 2017
Instead of requiring the next COC application in two years to April 22, 2019 for 2020, the PD would require the next COC application to be filed on March 22, 2018 for 2019
The PD left open the possibility of reducing PG&E’s return on equity until recommendations made by the NorthStar Consulting Group which are adopted by the CPUC are implemented in the second phase of the CPUC’s safety culture investigation
The earliest the CPUC would promulgate a FD is June 15, 2017

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EIX 1Q2017 Earnings Note

Despite strong beat EIX maintains guidance, which may be prudent ||

Even though 1Q17 results were better by $0.21 vs. ours and consensus estimate, we feel 2017E AEPS guidance of $4.04-$4.24 should be kept for now, given that the majority of the beat was due a tax benefit. Strong execution, strategic evolution and focus on core strengths makes for attractive investment. Strategically, we like focus on utility projects with minimal distractions. Preliminary decision of cost of capital proceedings were pulled and awaiting final decision. Overall objectives and thesis intact. Renewable integration’s challenging but no big surprises, yet. DC tax plan should be favorable: Likely both direct and indirect benefits. High growth likely to continue beyond 2020. Dividend payout ratio has already largely caught up to earnings power of SCE nearing close to 50%. We look for continued high capex spending on transmission, distributed generation, electric vehicle (EV) infrastructure, select renewable generation, energy storage, energy efficiency and grid modernization. LT investments should drive LT AEPS CAGR above 7%-9% forecast range, in our opinion. So, we look for ST upside valuations move.

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