Wildfire Risk Derisking Meets Rate Base Growth Clarity at Edison International (NYSE:EIX) - EIX Stock Research Report

## Executive Summary / Key Takeaways * The wildfire liability framework has been fundamentally transformed: AB 1054's prudency certification, combined with $3.6 billion in approved settlements (TKM and Woolsey) and a $1 billion self-insurance program, has converted wildfire risk from an existential threat into a manageable, rate-recoverable cost of doing business. * Unprecedented capital deployment visibility: The 2025 General Rate Case final decision authorizes $28-29 billion in capital expenditures through 2028, supporting 7-8% rate base CAGR and 5-7% core EPS growth, with no equity issuance required—a stark contrast to the funding uncertainty that plagued the company during the 2017-2018 wildfire crisis. * Financial performance validates the regulatory construct: Nine-month 2025 core earnings of $2.1 billion increased $349 million year-over-year, driven by the $661 million GRC revenue true-up, while the TKM settlement provided a $1.3 billion after-tax benefit, demonstrating the earnings power of a fully functioning cost recovery mechanism. * Valuation disconnect in a derisked utility: Trading at $58.01 with a P/E of 7.6x and price-to-book of 1.44x—well below the historical median P/E of 26.7x—the market appears to price EIX as if wildfire risk remains unquantified, despite a regulatory framework that now provides more certainty than most California utilities have enjoyed in decades. * The Eaton Fire remains the critical variable: While the company has accessed the Wildfire Insurance Fund and established a $300 million subrogation settlement, the inability to estimate total losses from approximately 500 lawsuits creates the primary asymmetry—downside if prudency is challenged, upside if the fund structure performs as designed. ## Setting the Scene: The Business Model and Strategic Position Edison International, founded in 1886 and headquartered in Rosemead, California, operates as a pure-play regulated electric utility through its subsidiary Southern California Edison (SCE). The company serves approximately 15 million customers across 50,000 square miles of Southern, Central, and Coastal California, making it one of the largest investor-owned utilities in the United States. Unlike diversified peers such as Sempra Energy (SRE) with its natural gas and international assets, or NextEra Energy (NEE) with its unregulated renewables development arm, Edison International has deliberately maintained a focused strategy: maximize value within the regulated utility framework. SCE generates revenue through a cost-of-service regulatory model, where the California Public Utilities Commission (CPUC) authorizes rate base investments and allows the company to earn a reasonable return on equity. This creates a straightforward investment thesis: grow rate base through necessary infrastructure investments, earn the authorized ROE, and manage costs to maintain regulatory support. The challenge—and opportunity—lies in California's unique dynamics: aggressive decarbonization mandates, surging electrification demand from electric vehicles and data centers, and the ever-present wildfire risk that has bankrupted utilities and reshaped the state's regulatory landscape. The company occupies a critical position in California's energy value chain. As the primary electricity delivery infrastructure for the nation's most populous state, SCE stands at the intersection of climate policy, economic growth, and public safety. This positioning creates both obligation and opportunity: obligation to maintain reliability while hardening the grid against wildfires, and opportunity to invest heavily in infrastructure that earns regulated returns while supporting the state's clean energy transition. The competitive moat is simple but powerful: a government-granted monopoly in a region with 3% annual load growth driven by electrification, where building parallel infrastructure would be economically and politically impossible.

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## History with Purpose: From Crisis to Constructive Framework Edison International's history explains why today's regulatory framework represents such a profound inflection point. The company survived the early 2000s energy crisis, the 2008 financial meltdown, and natural gas price spikes in the mid-2010s, but the 2017-2018 wildfire season fundamentally altered its risk profile. The Thomas, Koenigstein, and Woolsey fires created billions in potential liabilities, exposing a critical flaw in California's utility regulatory model: utilities could be held strictly liable for wildfire damages regardless of prudency, creating a risk of financial ruin. This crisis catalyzed Assembly Bill 1054 in July 2019, legislation that established the Wildfire Insurance Fund and, crucially, created a prudency presumption for utilities holding valid safety certifications. For Edison International, obtaining and maintaining that certification since July 15, 2019, transformed the legal framework from strict liability to a capped exposure model. The liability cap for 2025 fires is approximately $4.2 billion, with the Wildfire Fund covering damages beyond that threshold for prudently operated utilities. The evolution continued with SCE's shift from commercial insurance to a customer-funded self-insurance program in July 2023, authorized through at least 2028 with a $1 billion per policy year capacity. This move eliminated the volatile commercial insurance market from the equation and created a stable, rate-recoverable funding mechanism. The January 2025 approval of the TKM Settlement Agreement, authorizing recovery of $1.6 billion in pre-AB 1054 wildfire costs, and the September 2025 Woolsey Settlement Agreement seeking $2 billion in recovery, demonstrate that the regulatory apparatus has begun functioning as intended. These settlements validate the principle that historical wildfire costs can be recovered through rates, removing a multi-billion dollar overhang from the balance sheet. ## Technology and Strategic Differentiation: Grid Hardening as Competitive Advantage Edison International's technology strategy centers on wildfire mitigation and grid reliability, which directly supports its regulatory standing and rate base growth. By the end of 2025, SCE will have hardened nearly 90% of its distribution lines in high fire risk areas—over 14,000 miles—through covered conductor installation, targeted undergrounding, and enhanced vegetation management. This provides tangible evidence of prudency, supporting the safety certification that underpins the entire AB 1054 framework. The deployment of more than 6,800 miles of covered conductor represents a material technological advantage over traditional bare-wire systems. Covered conductor reduces ignition risk by containing electrical arcs and preventing contact with vegetation, directly addressing the primary cause of utility-sparked wildfires. The 2025 GRC authorizes an additional 1,650 miles of covered conductor and 212 miles of targeted undergrounding, ensuring this program continues through 2028. This creates a durable capital investment pipeline that earns regulated returns while reducing operational risk. SCE's Advanced Waveform Anomaly Recognition Engine (AWARE) uses real-time grid sensor data, AI, and machine learning to proactively predict system issues and pinpoint failure locations. This technology enables predictive maintenance, reducing both wildfire risk and operational costs. The system benefits customers through higher safety and reliability, faster restoration times, and improved affordability via optimized crew deployment. For investors, it demonstrates operational excellence that justifies rate recovery and supports the prudency standard. The company's competitive positioning benefits from this technology investment. SCE maintains the lowest system average rate among California's major investor-owned utilities, despite serving approximately 3,100 customers per square mile compared to Los Angeles Department of Water and Power's 105 customers per square mile. This cost efficiency creates regulatory goodwill and customer affordability, making future rate increases more palatable and politically feasible. ## Financial Performance: Evidence of a Derisked Earnings Stream Edison International's nine-month 2025 financial results provide compelling evidence that the regulatory framework is functioning as designed. Consolidated core earnings of $2.1 billion increased $349 million from the prior year, driven primarily by SCE's performance. The utility's operating revenue rose $498 million to $14.1 billion, while operating income surged $2.2 billion to $4.4 billion. These numbers demonstrate the earnings power of a fully authorized rate base growth program. The $661 million revenue increase from the 2025 GRC final decision, recorded in Q3 2025, represents a retroactive true-up effective January 1, 2025. This one-time adjustment will be collected over 24 months starting October 2025, providing near-term cash flow certainty. More importantly, the GRC authorized a $9.7 billion base rate revenue requirement for 2025, an $880 million increase over 2024, with additional adjustments of $544 million, $522 million, and $447 million for 2026-2028. This multi-year revenue visibility is unprecedented for a California utility and directly supports the 5-7% core EPS growth target. The TKM Settlement Agreement provided a $1.3 billion after-tax benefit in 2025, consisting of $1.4 billion in net earnings partially offset by other charges. This recovery validates the principle that wildfire costs can be securitized and recovered, strengthening the balance sheet without equity dilution. The pending Woolsey settlement, which would authorize recovery of approximately $2 billion, represents an additional $0.18 per share in annualized interest expense benefit and up to 90 basis points of FFO-to-debt improvement. At the parent level, the $285 million core loss increased $41 million due to higher interest expense and wildfire claims insured by Edison Insurance Services. This highlights the importance of the TKM and Woolsey recoveries in offsetting parent-level costs. Management explicitly stated that the financing plan does not require equity issuance through 2028, supported by these recoveries—a critical commitment for investors concerned about dilution.

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## Segment Dynamics: SCE as the Sole Value Driver Southern California Edison represents Edison International's only material business segment, making the investment thesis entirely dependent on the utility's performance. SCE's nine-month 2025 net income of $2.9 billion increased $1.7 billion year-over-year, with core earnings up $349 million. The segment's operating margin of 32.6% and return on equity of 15.8% demonstrate efficient capital deployment within the regulatory framework. The 2025 GRC final decision authorized 91% of SCE's capital expenditure request, a high approval rate that signals regulatory support for the investment plan. The authorized $6.1 billion in CPUC-jurisdictional capital expenditures for 2025 includes $1 billion for 212 miles of targeted undergrounding and 1,653 circuit miles of covered conductors in high fire risk areas. This ensures the wildfire mitigation program remains fully funded, protecting the prudency certification that underpins the entire risk framework. SCE's projected rate base growth of 7-8% CAGR through 2028, reaching $57.5 billion by 2028, provides the foundation for earnings growth. The rate base forecast incorporates the impact of wildfire mitigation capital that will not earn an equity return under SB 254, yet still supports the 5-7% EPS growth target. This demonstrates the company's ability to grow earnings even while investing in non-return earning safety infrastructure, a balancing act that requires careful cost management and regulatory navigation. The parent company's $285 million core loss, while a drag on consolidated results, is manageable within the overall capital structure. Management is evaluating cost-efficient options for early refinancing of preferred equity issuances with upcoming rate resets in March 2026 and 2027, which would bring forward both costs and benefits. The potential $0.10 per share cost associated with this optimization is already incorporated in the narrowed 2025 guidance, demonstrating proactive balance sheet management. ## Outlook and Guidance: A Four-Year Roadmap with Minimal Execution Risk Edison International's management has provided unusually specific and credible guidance through 2028, underpinned by the 2025 GRC final decision. The reaffirmed 5-7% core EPS growth target, using a $5.84 baseline that includes the $0.14 annual benefit from TKM settlement, translates to a 2028 EPS range of $6.74 to $7.14. This represents one of the clearest earnings trajectories in the utility sector, with multiple regulatory approvals already secured. The $28-29 billion capital expenditure forecast for 2025-2028 incorporates substantial investments in infrastructure replacement, electrification, and system resiliency. This plan is fully supported by the GRC and does not require equity issuance, a commitment made possible by $3.6 billion in settlement recoveries and access to the Wildfire Insurance Fund. The absence of equity dilution through 2028 is a critical differentiator from the 2017-2018 period, when wildfire liabilities threatened the company's capital structure. Load growth projections support the capital plan, with near-term CAGR of up to 3% driven by electrification (particularly EVs, representing one-third of growth), new housing developments, and commercial/industrial expansion. Management emphasized the durability of this diverse profile compared to relying solely on data centers, which reduces concentration risk and provides more stable, predictable demand growth across the service territory. The dividend policy, with a 45-55% payout ratio of SCE's core earnings and a 6.1% increase in December 2024 marking the 21st consecutive annual increase, signals confidence in the financial outlook. The current 5.69% dividend yield, supported by a 43.38% payout ratio, provides attractive income while retaining capital for growth investments. This demonstrates that management can balance shareholder returns with the massive capital requirements of grid modernization.

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## Risks and Asymmetries: Where the Thesis Can Break The Eaton Fire represents the most material risk to the investment thesis. With approximately 500 lawsuits representing 6,500 plaintiffs and a bellwether trial set for January 2027, the company has recorded $300 million in losses for the subrogation settlement but cannot estimate total potential damages. If SCE's conduct is found imprudent by the CPUC, the utility would be required to reimburse the Wildfire Fund up to the $4.2 billion liability cap, and potentially all withdrawn amounts if actions constitute conscious or willful disregard of safety. The company's statement that it "believes that it would be able to make a good faith showing that its conduct was consistent with the actions of a reasonable utility" provides some comfort, but the investigation remains ongoing. The Wildfire Fund administrator has confirmed the Eaton Fire as covered with $21 billion in initial claims-paying capacity, and SB 254's Continuation Account adds up to $18 billion in additional funding for fires after September 19, 2025. Liquidity exists to pay claims, but the ultimate cost to shareholders depends on the prudency determination, which remains uncertain. Credit rating risk emerged when S&P downgraded both EIX and SCE by one notch following SB 254's passage, despite Moody's and Fitch maintaining stable outlooks. The downgrade reflects concerns that persistent wildfire risk could lead to material fund depletion. Higher borrowing costs flow directly to customer rates, and sustained downgrades could increase financing costs for the $28-29 billion capital program, pressuring the 5-7% EPS growth target. Affordability concerns pose a structural risk. The CPUC must balance utility financial health with customer rates, and management noted that "the weakening of financial health ultimately impacts customer costs, as the cost of debt is borne by customers." If regulators view the system average rate growth (projected at inflation-like levels through 2028) as excessive, they could limit future capital recovery or reduce authorized ROE, directly impairing earnings power. ## Competitive Context: Operational Excellence in a Regional Monopoly Edison International competes indirectly with other California IOUs and national utilities, but its direct competitive landscape is limited by geographic franchise rights. Against PG&E Corporation (PCG), which serves Northern California, EIX demonstrates superior financial metrics: 15.8% ROE versus PCG's 8.8%, 32.6% operating margin versus 21.3%, and a more attractive valuation at 7.6x P/E versus PCG's 13.1x. EIX has managed wildfire risk and operational costs more effectively than its northern counterpart. Compared to Sempra Energy (SRE), which operates San Diego Gas & Electric, EIX carries higher debt-to-equity (2.04x versus 0.81x) but achieves better operational efficiency, serving 3,100 customers per square mile versus SRE's lower density. SRE's diversification into LNG and international assets provides different risk exposures, but EIX's pure-play electric focus allows for more concentrated operational excellence and clearer regulatory relationships. SRE's higher valuation multiples (27.9x P/E, 4.3x P/S) suggest the market rewards diversification, potentially undervaluing EIX's focused strategy. NextEra Energy (NEE) represents a different model entirely, with substantial unregulated renewables development driving 18.4% annual earnings growth. EIX's 5-7% growth target appears modest by comparison, but NEE's 70.3% payout ratio and exposure to merchant power markets create different risk profiles. EIX's regulated monopoly provides more predictable cash flows and lower earnings volatility, which should command a premium in uncertain markets, yet its valuation multiples trail NEE significantly. EIX's primary competitive advantage remains its operational efficiency, evidenced by the lowest system average rate among California's major IOUs for over 15 years. This cost discipline creates regulatory goodwill and customer acceptance that competitors struggle to match, particularly important as all utilities face massive capital investment requirements for decarbonization and grid hardening. ## Valuation Context: Discounted Despite Derisking At $58.01 per share, Edison International trades at 7.6x trailing earnings, 1.44x book value, and 8.4x EV/EBITDA. These multiples are substantially below the company's historical median P/E of 26.7x and peer averages. The 5.69% dividend yield, supported by a sustainable 43.38% payout ratio, provides immediate income while investors wait for valuation normalization. The valuation disconnect appears rooted in historical wildfire trauma rather than current fundamentals. The market seems to price EIX as if the pre-AB 1054 liability framework still exists, ignoring that the company now has: (1) prudency certification since 2019, (2) $1 billion in annual self-insurance, (3) access to a $21+ billion Wildfire Fund, and (4) regulatory approval for $3.6 billion in historical cost recoveries. This suggests significant upside if the company demonstrates the new framework works as intended through the Eaton Fire resolution. Cash flow metrics support the investment case, with $5.0 billion in annual operating cash flow and a price-to-operating cash flow ratio of 4.1x, indicating the market assigns minimal value to the underlying business beyond its asset base. The negative free cash flow (-$693 million TTM) reflects the heavy capital investment cycle, but this is rate-recoverable spending that grows the earnings base, not value-destructive cash burn.

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Institutional ownership at 89.03% suggests sophisticated investors recognize the value, while low insider ownership (0.21%) is typical for a 139-year-old utility. The consensus price target of $64.10 implies 10.3% upside, but this may prove conservative if the company successfully navigates the Eaton Fire and delivers on its 5-7% EPS growth target through 2028. ## Conclusion: A Transformed Risk-Reward Profile Edison International has engineered a remarkable transformation from a company facing existential wildfire risk to a regulated utility with unprecedented earnings visibility. The AB 1054 framework, validated by $3.6 billion in approved settlements and a functioning self-insurance program, has converted the primary risk from unpredictable liability to manageable, rate-recoverable cost. This allows investors to evaluate EIX as a traditional growth utility rather than a litigation wildcard. The 2025 General Rate Case provides the foundation for a compelling four-year investment thesis: 7-8% rate base growth, 5-7% EPS growth, no equity dilution, and a 5.7% dividend yield, all at a valuation multiple that suggests the market hasn't recognized the derisking. The company's operational excellence—lowest rates in California, 90% grid hardening completion, and AI-enabled predictive maintenance—creates regulatory goodwill that supports this capital recovery framework. The critical variable remains the Eaton Fire resolution. A prudency determination would validate the entire framework and likely trigger valuation re-rating, while an adverse finding could test the $4.2 billion liability cap and strain the Wildfire Fund. However, the company's proactive settlement approach and the legislative commitment evidenced by SB 254's $18 billion Continuation Account suggest policymakers understand that utility financial health directly serves customer interests. For investors, Edison International offers a rare combination: a derisked regulatory environment, visible earnings growth, attractive dividend yield, and valuation discount—all within a business that serves as essential infrastructure for America's largest state economy. The story that began with 19th-century electrification has evolved into a 21st-century playbook for managing climate risk while delivering predictable shareholder returns.