Wildfires and Mudslides and Lawsuits, Oh My! Adding EIX To Our List of Preferred Utilities

admin
Print Friendly
Share on LinkedIn0Tweet about this on Twitter0Share on Facebook0

______________________________________________________________________________

Eric Selmon Hugh Wynne

Office: +1-646-843-7200 Office: +1-917-999-8556

Email: eselmon@ssrllc.com Email: hwynne@ssrllc.com

SEE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES

______________________________________________________________________________

January 24, 2018

Wildfires and Mudslides and Lawsuits, Oh My!

Adding EIX To Our List of Preferred Utilities

Edison International (EIX) stock has fallen dramatically over the two months since the Thomas fire began in southern California, dropping 23% and erasing over $6 billion in market value. Our view is that this drop in value materially exceeds that required to offset the after-tax, after-insurance losses that EIX would face as a result of the fire; even in a worst-case scenario, we see 11% upside in the stock. In a range of scenarios with more positive outcomes, we see much greater upside potential. Given our estimate of EIX’s potential wildfire liabilities, the company’s current market value appears to offer a significantly larger margin of safety than that available on PCG.

Portfolio Manager’s Summary

  • The Scale of Potential Losses. EIX’s maximum potential losses for property and other third-party liability claims arising from the Thomas fire and Montecito mudslides, as well as CPUC penalties and litigation costs, could range, by our estimate, from ~$2.9 billion in an adverse case to ~$4.3 billion in a worst case. Adjusted for insurance recoveries and EIX’s ability to tax deduct the cost of third party liability claims, we estimate the net cost to EIX at $1.5 to $2.5 billion in these scenarios, or the equivalent of ~$4.45 to ~$7.80 per share (see Exhibit 1).
  • The Discount on EIX Stock. The loss in EIX’s value over the last two months materially exceeds our estimate the company’s net losses even in a worst case scenario.
    • Worst case. Based on (i) the consensus estimate of 2020 EPS for EIX ($4.83), (ii) the regulated utility sector’s average 2020 P/E multiple of 16.7[1], (iii) an assumed 5% discount for California risk, and (iv) our worst case estimate of $7.80 per share in net costs to EIX from the Thomas fire and Montecito mudslides, our analysis suggests fair value for EIX at ~$69 — 11% upside from Tuesday’s close of $62 per share.
    • Adverse case. In a range of more favorable scenarios, we estimate that upsides of 17% to 23% are possible (see Exhibit 1). If we assume only $4.45 per share of net costs to EIX from the Thomas fire and Montecito mudslides (our adverse case), but again apply the utility sector’s average 2020 P/E multiple to EIX’s consensus 2020 EPS estimate and subtract 5% for California risk, we would estimate fair value in our adverse case to be ~$72 per – some 16% above Tuesday’s close.
    • Adverse case, no liability for the Montecito mudslides. If EIX is not found to have caused the Montecito mudslides, our estimate of the net cost to EIX in our adverse case falls to only $3.03 per share. Applying the above valuation methodology, we would estimate fair value in this scenario at ~$74 per share, 19% above Tuesday’s close.
    • No negligence. If EIX is not found to have been negligent, and therefore is allowed to recover from ratepayers any damages paid in respect of the Thomas fire and Montecito mudslides, we estimate the net cost to EIX at only $0.48 per share, reflecting only litigation costs and potential CPUC penalties. Applying the above valuation methodology, we would estimate fair value in this scenario at ~$76 per share, 23% above Tuesday’s close.
  • EIX raised its dividend by 11.5% two weeks after the Thomas fire began, and EIX is in a position to maintain its dividend.Even in a worst case scenario, where EIX incurs $2.5 billion in after-tax, after-insurance losses over the next couple of years, EIX could offset the impact of these net losses on the equity of its utility subsidiary through two annual equity raises of $1.25 billion each, equivalent to 6% of its current $20 billion market capitalization each year.
  • Given the substantial potential upsides in EIX stock, even in a worst case scenario, we are upgrading EIX and now include it among our most favored regulated utilities.

Exhibit 1: Scenario Analysis of EIX’s Potential Losses from the Thomas Fire & Montecito Mudslides

_________________________________________

Source: Company and press reports, SSR estimates and analysis

  • Note that our valuation analysis and recommendation assume that EIX should trade at discount to the industry median PE multiple of only 5% under normal circumstances.
    • Contrary to this view, it is possible that EIX’s share price capitalizes not only its losses from the Thomas fired and Montecito mudslides, but also potential future losses of a similar nature, and that therefore a materially wider discount to mean industry valuations could persist.
    • Such a discount could reflect the ongoing risk to the utility of operating an extensive transmission and distribution grid in a state naturally prone to wildfires and mudslides, and where expensive homes are often built in close proximity to high risk areas. Adding to investor concerns is the tendency of California regulators to challenge the prudence of utility operating practices after the fact, preventing the recovery from ratepayers of damages paid under the principle of inverse condemnation.
  • We believe California must, and likely will pursue policies to close the valuation discount at which its utilities currently trade, much as the state did after the 2000-2001 energy crisis. However, it is unlikely that any such reforms will take effect before the state’s utilities have been forced to pay out several billion dollars in respect of this year’s wildfire claims. Indeed, large scale payouts may be required to give the state’s policy makers the impetus to act and the political cover to do so.
  • Options for addressing the issue include:
  • CPUC regulations detailing the practices to be pursued by utilities to minimize the risk of wildfires and which, if implemented by utilities, would be deemed to constitute prudent management of their assets. The CPUC would be required to make periodic inspections of utility assets and operations, and to certify their compliance with its regulations; a utility found to be compliant would be deemed not to have acted negligently and thus would have the right to recover from ratepayers any damages awarded under inverse condemnation.
  • The establishment of a wildfire cost recovery fund, to be funded through a surcharge on utility rates, that would be available to recover the costs associated with future wildfires caused by utilities, including the cost of third party liability claims. Utilities certified by the CPUC to be in compliance with the regulations described above would be allowed access to the fund to defray their fire-related costs.
  • A state sponsored insurance scheme designed to socialize the losses from wildfires across the citizens of the state. Such a scheme would allow property owners to purchase wildfire insurance on attractive terms from a state agency on the condition that policy holders waive their right to seek recovery from the state’s utilities in court when they collect from the fund. A portion of the funding for the scheme could come from property taxes or from electricity bills. To protect the state insurance agency from utility malfeasance, the CPUC would monitor utility operation and maintenance practices to ensure compliance with stipulated procedures, as outlined above.

Exhibit 2: Heat Map: Preferences Among Utilities, IPP and Clean Technology

Source: SSR analysis

Details

  • The losses that EIX may incur as a result of the Thomas fire can be categorized as follows:
    • penalties, including fines and unrecoverable capital expenditures, imposed by the California Public Utility Commission (CPUC);
    • third party liability claims for deaths, injuries, property damage and consequential damage (e.g., loss of wages or profit);[2]
    • punitive damages, either awarded by the courts or implicit in settlements negotiated by EIX with victims of the fires;[3] and
    • legal costs for the litigation and CPUC proceedings.

Below we estimate the range of EIX’s potential losses in each of these categories using multiple methods.

  • CPUC PenaltiesHistorically, the CPUC has levied relatively modest penalties on EIX and other California utilities for regulatory violations contributing to brush fires.
    • In September, 2015, the Butte Fire in Amador County burned 71,000 acres, destroyed 549 homes and killed two people. The CPUC found that PCG’s negligence in pruning trees nears its lines had contributed to the fire and fined the utility $8.3 million.
    • In 2013, Southern California Edison (SCE) agreed with the CPUC to a $37 million settlement in connection with the 2007 Malibu Canyon fire, paying a $20 million fine to the State of California and absorbing $17 million in costs to assess the safety of utility poles. SCE admitted having overloaded its power poles in violation of CPUC rules and having withheld pertinent information from the CPUC.
    • In 2010, San Diego Gas & Electric (SDG&E) agreed to pay $21 million to settle allegations that its mismanagement led to the 2007 Guejito, Rice and Witch Creek fires and that SDG&E hampered investigators. SDG&E paid $14.35 million in fines to the State of California and absorbed $6.75 million in costs incurred as a result of the 2007 fires.
    • In 1994, PCG was found guilty of 739 counts of negligence in connection with a fire in the Sierra foothills that destroyed twelve homes.  PCG was fined $30 million by state regulators, or the equivalent of ~$50 million in 2018 dollars.
  • Third Party Liability. EIX faces the risk of liability for property damages under the principle of inverse condemnation, and the risk of liability for property damages plus personal injury, pain and suffering and incidental damages under the principle of tort liability.
    • Inverse condemnation. Inverse condemnation is based upon the fifth amendment of the U.S. constitution, which stipulates that private property may not be taken for public use without just compensation. Under California state law, inverse condemnation, a principle that requires compensation for damage to property caused by government property, has been extended to cover investor owned utilities operating under state regulation. The principle stipulates that a utility must compensate property owners for damage to their property caused by a utility’s assets, whether or not the utility was negligent in the operation or maintenance of those assets. If the utility was not negligent in causing the damage, the CPUC should allow recovery of the damages from ratepayers. The principle of inverse condemnation does not extend to third party liability claims for death, injury, and consequential damages (e.g., loss of wages or profits); these must be pursued under the principle of tort liability.[4]
    • Tort liability. Third party liability claims for property damage could also be brought against EIX under the principle of tort liability in suits filed in state courts. Under the principle of tort liability. Plaintiffs may also seek compensation for death, injury, and consequential damages (e.g., loss of wages or profits). Under the principle of tort liability, however, the utility would be liable for property and other damages if the plaintiff could prove that the damages suffered were caused by the utility’s negligence. Plaintiffs can, and have, filed claims for both inverse condemnation and negligence at the same time, collecting the greater of the two liabilities they can prove in court.
      • Negligence. Whether a utility has been negligent in the operation or maintenance of its assets is of far greater consequence than whether a claim is pursued under the principle of inverse condemnation or tort liability. A finding of negligence is what determines if the utility suffers an economic loss or not. If a utility is not found to have been negligent, then, under the principle of inverse condemnation, it is to be allowed to recover from ratepayers any damages paid, implying minimal economic loss; under the principle of tort liability, it would not be liable for damages in the first place and thus, similarly, would suffer no loss. Conversely, if a utility is found to have been negligent, under CPUC rules, no recovery is allowed from ratepayers (regardless of whether the damage was awarded under the principle of inverse condemnation or of tort liability), implying that shareholders must absorb the cost of any damages paid.
    • Consequences for EIX. If EIX is found to be the cause of the Thomas fire and that its negligence in maintaining or operating its equipment caused the fire, EIX will be liable for all damage resulting from the fire, including property, death, injury, pain and suffering and consequential damages such as the loss of wages or profits.
  • Punitive Damages. We view the odds of an award of punitive damages to be very low and have excluded it from our analysis of potential impacts. In punitive damages cases, the burden of proof is on the plaintiff, who must demonstrate that the defendant engaged in “willful misconduct,” a higher legal standard of negligence which has generally been defined as a conscious disregard of probable harm. Given the absence to date of any physical evidence suggesting such egregious misconduct by EIX, and the significantly increased focus on vegetation management and fire prevention as California’s drought worsened over the last several years, proving conscious disregard of probable harm will be a challenge for plaintiffs.
  • Estimating the Scale of EIX’s Potential Losses. It is too early to know the full scale of damage caused by the Thomas fire and the Montecito mudslides. It is possible to estimate the scale of damage, however, by reference the damage caused by past fires, such as the 2007 Witch/Rice fires, the 2015 Butte fire and the fires in Northern California in October.
    • Property & Other Damages. Based on the insurance claims brought in connection with past fires, and the number of structures destroyed by these fires, it is possible to arrive at an estimated ratio of insured damage per structure, which we use as a proxy for property damage.[5] Adjusting for inflation, we found that the highest value of insurance claims per structure destroyed was registered in connection with the recent northern California fires, at ~$1.2 million per structure destroyed.
      • Using that figure and applying it to the ~1,060 structures destroyed by the Thomas fire, we estimate the property damage caused by the fire at $1.25 billion (see Exhibit 1).
      • We also applied the $1.2 million per structure ratio to the ~130 structures destroyed by the Montecito mudslides. Unlike wildfires, however, mudslides tend to damage many more structures than they destroy; in the case of the Montecito mudslides, some 300 structures were damaged. To estimate the claims likely to arise from these damaged structures, we assumed a 50% lower ratio, or $0.6 million of costs per structure. This methodology results in an estimate of total property damage caused by the Montecito mudslides of ~$340 million (see Exhibit 1).
      • Summing these estimates of the property damage caused by the Thomas fire and Montecito mudslides, we estimate EIX’s total potential liability for property damage at ~$1.6 billion (our adverse scenario).
      • However, the areas affected by the Thomas fire and Montecito mudslides include many wealthy neighborhoods with large homes. We have therefore calculated a worst case scenario based on a 50% increase in the estimated damages, or ~$1.9 billion of property damage for the Thomas fire and ~$500 million for the mudslides, for a total of ~$2.4 billion (our worst case; see Exhibit 1).
      • We note that the above estimates are broadly in line with published estimates for total damages from the Thomas fire of $1.0-2.5 billion.
    • Other Third Party Liabilities. EIX will likely also face other third party liabilities, including claims for damages arising from death and personal injury, consequential damages, such a loss of wages or profit, damage to governmental property, and firefighting costs. In the Witch/Rice fire, San Diego Gas & Electric (SDG&E) recorded total costs of $1.3 billion for all third party claims excluding insured claims. Calculated per structure destroyed, and adjusted for inflation since 2007, the losses from the Witch/Rice fire work out to ~$850,000 per structure. This implies the potential for ~$900 million of additional third party claims for the Thomas fire and ~$250 million for the mudslides, or a total of ~$1.15 billion in our adverse scenario. In our worst case scenario, we increase this by 50% to ~$1.35 billion for the Thomas fire and ~$375 million for the mudslides, or a total of ~$1.73 billion.
    • CPUC Penalties. Reflecting the penalty imposed on PCG by the CPUC for the Sierra foothills fire of 1994 — the largest penalty imposed by the Commission over the last 25 years in respect of a brush fire – we assume that EIX will face $50 million in CPUC fines and penalties for the Thomas fire.
    • Legal Fees. We estimate that in all scenarios EIX will face significant legal costs defending itself over the next few years, but less than the $300 million we estimate for PCG in the northern California fires, which total 31 fires and destroyed 8 times as many structures. We estimate EIX’s legal costs in respect of the Thomas fire and Montecito mudslides at $150 million.
  • The Offsets: Insurance and Taxes. EIX has disclosed that it has $1.1 billion of third party liability insurance available to it to cover losses from the Thomas fire. This would reduce our estimate of EIX’s out-of-pocket losses to ~$1.8 billion in our adverse case and to ~$3.2 billion in our worst case. We note, moreover, that payments in respect of third party liability and legal costs are tax deductible, reducing the after-tax cost of these loses to ~$1.45 billion in our adverse scenario and $2.5 billion in the worst case. (See Exhibit 1).
  • Could EIX Avoid Liability for the Montecito mudslides? In the appendix to this note, we provide a detailed legal analysis of the issues that will need to be addressed in court to determine EIX’s liability, if any, for the damage caused by the Montecito mudslides. In summary:
    • For EIX to be held liable under inverse condemnation for the damage caused by Montecito mudslides (i) EIX’s equipment must be found to have caused the Thomas fire, (ii) the trial court must determine that the principle of inverse condemnation should be extended to the mudslides, which are indirect and further removed from utility’s activities than the wildfires, and (iii) the jury must conclude that, but for the Thomas fire, the Montecito mudslides would not have occurred.
    • For EIX to be held liable under principles of tort liability (i) EIX’s equipment must be found to have caused the Thomas fire, (iii) the jury must conclude that, but for the Thomas fire, the Montecito mudslides would not have occurred, and (iii) the jury must conclude that EIX was negligent in its operation or maintenance of the assets that caused the Thomas fire.
    • If EIX were not found to have been negligent, and therefore was not liable under the principles of tort liability, it could still be found liable under inverse condemnation, but in that case it should be allowed to recover from ratepayers the damages paid.
  • The issue of whether the Montecito mudslides would not have occurred but for the Thomas fire will be highly contentious, with persuasive arguments on both sides:
    • The argument in favor of the position that, but for the Thomas fire, the Montecito mudslides would not have occurred is that fires destroy vegetation and harden the soil, reducing the ability of the land to absorb the rain and hold rocks and debris in place. Evidence in favor of the argument includes the absence of other major mudslides in other parts of Southern California at the same time, suggesting the differentiating factor causing the Montecito mudslide was the fire.
    • The contra argument is that, while fires increase the likelihood of mudslides, the canyons in the Ventura county are naturally prone to mudslides and the area received five inches of rain in less than 48 hours. Furthermore, there were other canyons in the area of the Thomas fire where mudslides did not occur.
    • This will be a debate of experts and the decision will be in the hands of the jury. We believe there is fair probability that the jury would decide that the plaintiffs were unable to prove that, but for the Thomas fire, the Montecito mudslides would not have occurred, allowing EIX to escape liability.
  • What Is in the Stock? The above estimates of the net cost to EIX of the Thomas fire and Montecito mudslides are equivalent to ~$4.45 to ~$7.80 per EIX share. The apparent discount at which EIX is trading appears to be much larger than this.
    • Worst case. Based on (i) the consensus estimate of 2020 EPS for EIX ($4.83), (ii) the regulated utility sector’s average 2020 P/E multiple of 16.7[6], (iii) an assumed 5% discount for California risk, and (iv) our worst case estimate of $7.80 per share in net costs to EIX from the Thomas fire and Montecito mudslides, our analysis suggests fair value for EIX at ~$69 — 11% upside from Tuesday’s close of $62 per share.
    • Adverse case. In a range of more favorable scenarios, we estimate that upsides of 17% to 23% are possible (see Exhibit 1). If we assume only $4.45 per share of net costs to EIX from the Thomas fire and Montecito mudslides (our adverse case), but again apply the utility sector’s average 2020 P/E multiple to EIX’s consensus 2020 EPS estimate and subtract 5% for California risk, we would estimate fair value in our adverse case to be ~$72 per – some 16% above Tuesday’s close.
    • Adverse case, no liability for the Montecito mudslides. If EIX is not found to have caused the Montecito mudslides, our estimate of the net cost to EIX in our adverse case falls to only $3.03 per share. Applying the above valuation methodology, we would estimate fair value in this scenario at ~$74 per share, 19% above Tuesday’s close.
    • No negligence. If EIX is not found to have been negligent, and therefore is allowed to recover from ratepayers any damages paid in respect of the Thomas fire and Montecito mudslides, we estimate the net cost to EIX at only $0.48 per share, reflecting only litigation costs and potential CPUC penalties. Applying the above valuation methodology, we would estimate fair value in this scenario at ~$76 per share, 23% above Tuesday’s close.
  • EIX raised its dividend by 11.5% two weeks after the Thomas fire began, and EIX is in a position to maintain its dividend.Even in a worst case scenario, where EIX incurs $2.5 billion in after-tax, after-insurance losses over the next couple of years, EIX could offset the impact of these net losses on the equity of its utility subsidiary through two annual equity raises of $1.25 billion each, equivalent to 6% of its current $20 billion market capitalization each year.
  • Given the substantial potential upsides in EIX stock, even in a worst case scenario, we are adding EIX to our list of most favored regulated utilities.
  • Note that our valuation analysis and recommendation assume that EIX should trade at discount to the industry median PE multiple of only 5% under normal circumstances.
    • Contrary to this view, it is possible that EIX’s share price capitalizes not only its losses from the Thomas fired and Montecito mudslides, but also potential future losses of a similar nature, and that therefore a materially wider discount to mean industry valuations could persist.
    • Such a discount could reflect the financial risk to shareholders of operating an extensive transmission and distribution grid in a state naturally prone to wildfires and mudslides, and where expensive homes are often built in close proximity to high risk areas. Adding to investor concerns is the tendency of regulators to challenge the prudence of utility operating practices after the fact, precluding the recovery from ratepayers of any damages paid by the utilities under the principle of inverse condemnation.
  • We believe California must, and likely will pursue policies to close the valuation discount at which its utilities currently trade, much as the state did after the 2000-2001 energy crisis. However, it is unlikely that any such reforms will take effect before the state’s utilities have been forced to pay out several billion dollars in respect of this year’s wildfire claims. Indeed, large scale payouts may be required to give the state’s policy makers the impetus to act and the political cover to do so.
  • Options to address the issue include:
  • CPUC regulations detailing the practices to be pursued by utilities to minimize the risk of wildfires and which, if implemented by utilities, would be deemed to constitute prudent management of their assets. The CPUC would be required to make periodic inspections of utility assets and operations, and to certify their compliance with its regulations; a utility found to be compliant would be deemed not to have acted negligently and thus would have the right to recover from ratepayers any damages awarded under inverse condemnation.
  • The establishment of a wildfire cost recovery fund, to be funded through a surcharge on utility rates, that would be available to recover the costs associated with future wildfires caused by utilities, including the cost of third party liability claims. Utilities certified by the CPUC to be in compliance with the regulations described above would be allowed access to the fund to defray their fire-related costs.
  • A state sponsored insurance scheme designed to socialize the losses from wildfires across the citizens of the state. Such a scheme would allow property owners to purchase wildfire insurance on attractive terms from a state agency on the condition that policy holders waive their right to seek recovery from the state’s utilities in court when they collect from the fund. A portion of the funding for the scheme could come from property taxes or from electricity bills. To protect the state insurance agency from utility malfeasance, the CPUC would monitor utility operation and maintenance practices to ensure compliance with stipulated procedures, as outlined above.

Appendix: The Legal Issues to be Addressed in Determining EIX’s Liability for the Montecito Mudslides

EIX is being sued under both inverse condemnation and negligence theories for causing the mudslides in Ventura county two weeks ago.

    • The mudslides were in areas that were burned by the Thomas fire and the basis of EIX’s liability is the claim that the fire caused the mudslide. They destroyed 132 homes and damaged 312, in addition to killing 23 people (including those still missing) and injuring 28.
    • The first question that must be addressed in evaluating this claim is whether EIX caused the Thomas fire and if it was negligent in doing so. If EIX did not cause the fire then they are in no way responsible for the mudslides. If EIX caused them, but was not negligent, they can only be responsible under the theory of inverse condemnation.
    • If we assume EIX caused the Thomas fire, the first legal question that would need to be addressed is whether inverse condemnation applies to damages that result from more distant, although still related, circumstances. Even if causation of the mudslides by the Thomas fire could be proved, a court could decide that extending inverse condemnation to events beyond the immediate damages from the utility equipment is not appropriate and was not intended, especially in light of the CPUC’s recent decision to deny recovery of San Diego Gas and Electric’s expenses from wildfire claims that were settled under an inverse condemnation theory. This is a question the courts have not had to address and, therefore, the trial court will have the first shot at defining the law in this situation, although its decision will certainly be appealed by whichever party loses.
    • If the court applies inverse condemnation to the mudslides, the next question is causation, which will be a question of fact to be determined by a jury.
      • It is widely known that fires increase the risk of mudslides, something discussed in many newspaper articles during the Thomas fire and before the mudslides. However, the plaintiffs will have to prove that the mudslides would not have occurred if the Thomas fire had not occurred. In other words, the fire (and EIX as the cause of the fire) must be the “but for” cause of the mudslides: the mudslides would not have occurred “but for” the Thomas fire.
      • Pro argument: Fires destroy vegetation and harden the soil, reducing the ability of the land to absorb the rain and hold rocks and debris in place. Moreover, there do not appear to have been other major mudslides in Southern California at the same time, suggesting the differentiating factor that caused the mudslide was the fire.
      • Contra argument: While fires increased the likelihood of mudslides, 5 inches of rain fell in Ventura county in the day leading up to the mudslide and the canyons in that region are naturally prone to mudslides. Furthermore, there were other canyons in the area of the Thomas fire where mudslides did not occur.
      • This will be a debate of experts and the decision will be in the hands of the jury.
    • The final question would be damages, assuming the case is fully litigated and not settled. If plaintiffs contributed to the damages, EIX will not be responsible for all of the damages.
      • Contributory negligence by the plaintiff would include improperly built structures or structures that were in a particularly precarious location where they should not have been built. For structures, this will most likely require material violations of zoning regulations and building codes.
      • For death and personal injury, contributory negligence could include decisions to ignore mandatory evacuation orders.
    • We believe that, even if EIX caused the Thomas fire and liability is extended to the Montecito mudslides, they will not be liable for future mudslides that occur. The Montecito mudslides resulted from an extreme rain event, with 5 inches in less than 48 hours. Should other mudslides occur as a result of future rainfalls, the fact that they did not occur after the first major rainfall makes it much harder to prove that the Thomas fire was the “but for” cause.

©2018, SSR LLC, 225 High Ridge Road, Stamford, CT 06905. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein.  The views and other information provided are subject to change without notice.  This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results.

  1. Excludes EIX, the heavily discounted stocks PCG and SCG, as well as PPL, due to its predominantly international utility portfolio. 
  2. Third party liability claims for property damage could be brought against EIX under (i) California’s principle of inverse condemnation, which stipulates that a utility must compensate property owners for damage to their property caused by a utility’s assets, whether or not the utility was negligent in the operation or maintenance of those assets, or (ii) under the principle of tort liability in suits filed in state courts, in which case the utility would be liable for damages only if the plaintiff could prove that the damages suffered were caused by the utility’s negligence. The principle of inverse condemnation does not extend to third party liability claims for death, injury, and consequential damages (e.g., loss of wages or profits); these must be pursued under the principle of tort liability, requiring the plaintiff to prove negligence. 
  3. The principle of inverse condemnation does not extend to punitive damages; these must be pursued under the principle of tort liability. In punitive damages cases, the burden of proof is on the plaintiff, who must demonstrate that the defendant engaged in “willful misconduct,” a higher legal standard of negligence which has generally been defined as a conscious disregard of probable harm. 
  4. For a much more thorough discussion of inverse condemnation and the risk it poses for utilities, please see our note from December 5, CPUC Ruling Denying SRE Recovery of Forest Fire Costs Does Not Increase the Risks for California Utilities
  5. We used the insurance claims as an estimate of total property damage. While there are uninsured property damages, the vast majority of structures destroyed in the past fires were insured. Furthermore, the insurance claims include non-property damages, such as business interruption and the cost of replacement housing. We assuming the non-property portion of the insured damages is similar in size to the value of the uninsured property. 
  6. Excludes EIX, the heavily discounted stocks PCG and SCG, as well as PPL, due to its predominantly international utility portfolio. 
Print Friendly