SimonSkafar
I’ve previously written about Edison International (NYSE:EIX), a leading utility and electricity provider in the United States, stating that they’re set to benefit from various changes and spending increases we’re seeing across the country.
Although I continue to believe the company will outperform in the longer run as more and more funding becomes available to support electrification and utility upgrades, there are some new factors, both good and bad, I am considering on whether to maintain my hold in the company, increase my position, or trim it.
Positives Are Few But Substantial
There are a few positive factors both old and new to consider with Edison International.
The main positive factor remains the increased shift to electric vehicles and other means of public transport, which will require upgrades and a lot of work across the company’s and the nations existing lines of power transport. This will come in the form of grants and contracts which the company is well positioned to take advantage of. I continue to expect there to be billions of new spending dollars each and every year over the coming decade spent on these upgrades, which will greatly benefit the company’s top line growth.
The second positive factor is the recently announced climate change combating bill by Senate Democrats. While this may take a while to become a reality, the funding in the bill provides nearly $120 billion to transition the United States away from fossil fuels and onto renewable energies. The added benefit for companies like Edison International is that the cost of generating the same amount of electricity is going to go down substantially as the cost of renewable energies is currently cheaper than fossil fuel – and that trend is only going down as more time passes and additional technological innovations emerge.
These factors will mean that the company will see an increase in both revenues, coming in from the new spending related to upgrading and updating the electrical grid and allowing larger amounts of utilities and power to be transmitted across the country, as well as potentially higher profit margins as the company is able to deliver cheaper electricity across the country while we know that not all of those potential savings are transmitted to consumers.
The Negative Is Equally Substantial
My number one concern remains the company’s debt load. With their increasing debt position in a rising rate environment, the company is paying more and more interest expense each and every year which hinders their profitability and ability to produce enough cash to be able to meet their expanding demand for grid improvements, upgrades and maintenance.
The company has taken on a considerable amount of debt in recent years, which at the low interest rate environment of the past may have been ok, but in a rising rate environment – can spell disaster for their ability to meet demand if they get stuck with higher and higher rates.
Back in 2017, the company’s debt load was hovering around $11 billion and was rather consistent with years prior. But since then, their debt has ballooned to over $25 billion as of their latest financial reporting. As a result of this debt onboarding, they are currently paying just shy of $1.2 billion in interest expense every year, significantly hindering their ability to generate cash and fund operations.
If the company is to, I believe, succeed in taking advantage to the fullest extent, of the upgrades in the electrical grid and the increased demand and lower cost of electricity across the country, they need to tackle their long term debt issue and begin lowering interest expense to maintain the long term viability of both their business expansion efforts as well as their shareholder value programs of high dividend rates and other shareholder value measures.
Dissecting The Details – The Positive
On the positive side, beyond my thoughts on the increased investment and revenue potential for the company as demand for electricity and grid improvements aid their top lines, the company has already been seeing lower cost of power as they and other companies which they buy power from have been transitioning towards renewable energies, even as the price of oil and gas has been increasing over the past few months.
Here’s a rundown of the company’s revenues relative to the costs of purchasing that power, which includes fuel to run their own operations:
| 2017 | 2018 | 2019 | 2020 | 2021 | |
| Revenues | $12.3B | $12.7B | $12.3B | $13.6B | $14.9B |
| Power Cost | $4.9B | $5.4B | $2.6B | $2.9B | $2.6B |
| Percentage | 39.8% | 42.5% | 21.1% | 21.3% | 17.4% |
(Source: Company income statement – Seeking Alpha)
Although there are other factors, like the percentage of electricity the company generates themselves, has changed and the numbers are not only reflective of the costs associated with the shift to alternative energy, there is a significant amount which is and this is only set to continue as renewable energy like solar and wind become more available at larger scales and cost of which continues to decline with technological advancements.
Dissecting The Details – The Negative
In quite the ironic transition, the increased gross profit margins the company is set to see due to the lower cost of power with the transition to renewable energies, the company will only see its interest and debt bills rise, taking away a sizable chunk of those savings, unless the company puts forward an actionable plans to reduce their debt load – and follows through on it.
The company maintains in its filings that it feels appropriate to maintain a 43% debt to equity ratio under the terms of its capital structure and it very well may work for them in a neutral environment. But with the potential for increased contracts and upgrades, the need for additional capital won’t be able to be met without:
1. issuance of more debt to fund projects which can carry interest rate higher than some low-margin long term projects, negating the profitability of such projects.
2. Issuing shares or equity which in turn will dilute existing shareholder value, negating to some extent the value they’ve been putting in through dividend payments and other shareholder value measures.
Conclusion – Still Solid, But Needs Work
With only about $120 million in cash and equivalents, the company can, but will have a hard time to use the increased demand from the electrification of our transportation systems and transitioning to renewable energies to save cost and increase capacity given the limitation of fossil fuels and subjection to the price of oil and gas, which is determined more and more by incontrollable geopolitical factors.
The company’s high dividend yield of almost 4.1% is highly enticing while we wait for these long-term contracts for grid improvements and upgrades, as well as the further transition to renewables to lower the cost of electricity generation. Even so, before I would add any shares, I would like to see them revisiting the role of debt in the capital structure given the rising rate environment and potential further dilution of existing shareholders by equity issuance.
I remain cautiously bullish on the company’s long-term prospects.
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