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Edison International shares resilient despite fire liability report, downgrades

Several Wall Street analysts remain optimistic that Edison International will persevere through potential wildfire liabilities, despite recent downgrades and a fire agency's report confirming Southern California Edison Co.'s role in the December 2017 Thomas Fire.

Guggenheim Securities increased its price target for Edison to $71 per share from $69, maintaining a "Buy" rating for the company to reflect the view that Edison shares are overdiscounted compared to current wildfire liabilities. Guggenheim now estimates $1.7 billion for the Thomas Fire liabilities and $2 billion for 2018 wildfires.

The fire department for Ventura County, Calif., released a report March 13 concluding that high winds caused SoCalEd's power lines to come into contact with each other and create an electric arc that dropped hot material on dry grass and brush to spark the Thomas Fire. While Edison CEO Pedro Pizarro previously said its equipment played a role in the disaster, SoCalEd questioned some of the report's findings, including disparities in the start time of the fire and certain evidence not considered in the investigation.

The news had little impact on Edison shares, which closed March 14 at $64.05, compared with an opening price March 13 of $63.85.

"Even if the disputes to the report are unsuccessful, the report does not identify any negligence or imprudence," Guggenheim analyst Shahriar Pourreza wrote in a March 14 note. "While the ultimate assignment of liability is through legal process, which at this point is likely years away, the known factors have pressured [Edison] beyond our reasonable worst case scenario — i.e. no recovery of current insured loss claims."

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Analysts' upbeat assessments came after a turbulent week for Edison and SoCalEd. Fitch Ratings downgraded the two entities by two notches to BBB- and placed them on Rating Watch Negative on March 11. Subsequently, Fitch placed three of the world's biggest clean energy projects that sell power exclusively to the utility on negative rating watch, including Berkshire Hathaway Energy's Solar Star complex.

In a March 14 note, Mizuho Securities maintained its "Buy" rating for Edison stock and raised its target price to $65.50 from $64.10, noting that the California Department of Forestry and Fire Protection has not issued its official conclusion on the Thomas Fire. Mizuho analysts estimated that in a best-case scenario, Edison's after-tax and after-insurance liabilities will be $1.8 billion for the wildfire and mudslide damages, on par with the after-tax charge recorded at SoCalEd in fourth-quarter 2018 results. Under Mizuho's worst-case scenario, after-tax and insurance liabilities could reach $6.5 billion.

Moody's, which downgraded Edison and SoCalEd on March 5 for wildfire-related risk exposure, maintained its assumption that SoCalEd will have $5 billion of net liability from past and future fires. The utility and its parent could see future downgrades from Moody's if California does not pass legislation to mitigate the financial impact of wildfires to utilities by the end of its 2019 legislative session or if SoCalEd faces future large fires.

"The negative outlook reflects the uncertain political and regulatory environment in California and execution risk associated with pending legislative and regulatory efforts to mitigate the risk of wildfires and inverse condemnation, and the potential that they may not be successful, as well as the risk of future wildfire exposures," Toby Shea, vice president and senior credit officer at Moody's, wrote in a March 13 note.