Edison Preferreds Still Have A Ways To Go

Southern California Edison's probable involvement in the Eaton Fire has driven Edison International's stock down 35%, raising concerns about the California Wildfire Fund's adequacy and potential shareholder contributions, which EIX opposes. Despite this common stock pressure, the outlook for SCE's preferred shares (SCE.PR.J and SCE.PR.K) remains bullish. Analysis of SCE's capital structure plans and SOFR rates suggests these preferreds are likely to be called by March 2026, replaced by junior subordinated notes, offering potential annualized returns around 17% for investors. The primary risk remains another major fire exhausting the wildfire fund before these calls occur.

Analysis

Edison International's (EIX) common stock has experienced a significant 35% decline following its subsidiary's probable involvement in the Eaton Fire. The primary risk factor for equity holders is the potential depletion of the $21 billion California Wildfire Fund and the subsequent legislative response. A key uncertainty revolves around whether shareholders will be required to contribute to replenishing the fund, a measure the company's CEO, Pedro Pizarro, has publicly opposed. The legislative outcome by the September 13 recess serves as a major near-term catalyst for the common stock. In contrast, this situation has created a distinct opportunity in two of Southern California Edison's preferred securities, SCE.PR.J and SCE.PR.K. Analysis suggests these fixed-to-floating rate issues are likely to be called in 2025 and 2026, respectively. This expectation is supported by SCE's targeted 6.95% cost of capital for preferred equity, which is below the securities' projected floating yields of approximately 7.19% and 7.85%. The company's stated plan to issue hybrid securities like Junior Subordinated Notes further reinforces the likelihood of a call, which could generate annualized returns of around 17% for current buyers. The principal risk to this preferred thesis is another major fire exhausting the state fund, though the cumulative dividend feature provides a structural protection, as seen in the PG&E bankruptcy precedent.

Key Decisions for Investors

• Investors should recognize the clear divergence between EIX common stock, which is exposed to significant legislative and liability risk, and the SCE.PR.J and SCE.PR.K preferred issues, which offer a specific, event-driven return opportunity.
• Monitor California legislative developments until the September 13 recess, as any bill mandating shareholder contributions to the wildfire fund would be a material negative for EIX common stock.
• Income-oriented investors could consider the SCE preferreds (SCE.PR.J, SCE.PR.K) based on the thesis that they will be called, potentially delivering high single-digit cash returns and annualized returns above 17%.
• The primary risk to the preferred-share thesis is another major wildfire; therefore, positions should be managed with close attention to California fire season developments and the status of the state's wildfire fund.