EIX Cost of Capital case in line with expectations, Buying Opportunity

Last week, ALJ Galvin of the CPUC, issued a proposed decision (PD) in the ongoing Cost of Capital case. The PD recommendation of 10.4% is in-line with expectations in my opinion. It is a 90 bp step down from the current ROE but it was expected due to the changes in the interest rate environment since 2007, the timing of the last Cost of Capital case. The final decision is expected in mid-late December. This decision along with the resolution of the Edison Mission Energy overhang (1) should decrease the valuation discount for EIX, in my opinion. I continue to rate the stock a buy and re-iterate my $51 price target.

What does this mean for the other California utilities: This decision should help to lift the valuation overhang for PCG and SRE as well.

(1) EIX subsidiary EME elected not to make interest payments dated November 15 for numerous unsecured bonds, which sets up for a bankruptcy filing for EME.  I believe this is a net positive for the equity story since EME will not be EBITDA positive till 2014 and results in a valuation discount for EIX.

Disclaimer: I am long EIX stock but do not intend to trade it over the next 24 hours.

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