Edison International

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

Edison International is a holding company that operates through its wholly-owned subsidiary Southern California Edison (SCE), one of the largest electric utility companies in the United States.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Edison International (EIX), primarily through its subsidiary Southern California Edison (SCE), distributes electricity to a vast customer base in Southern California. It’s a relatively low-growth, highly regulated business with a large capital expenditure requirement.

Business Overview:

Edison International (EIX) is a holding company, with its primary subsidiary, Southern California Edison (SCE), engaged in the regulated business of generating and distributing electricity to approximately 15 million people in Southern California.

Revenues: The majority of EIX’s revenue comes from the sale of electricity to a diverse customer base that consists of residential, commercial, industrial, agricultural, and public-entity clients. The company’s revenue is also affected by the rates authorized by the California Public Utilities Commission (CPUC) and other regulatory bodies. The following table summarizes Edison International’s operating revenue split by customer class:

Industry Trends: The utility industry faces increasing pressure to shift toward renewable energy sources, enhanced grid reliability, and grid modernization. The industry is regulated in a way that prices are fixed and changes can be slow, with long regulatory lag times.
Margins: Utilities typically have modest margins, because they’re regulated and are not expected to earn excessive profits. The focus is on managing costs efficiently.
Competitive Landscape: In its service area, SCE enjoys a near-monopoly, since it is very difficult and expensive for another utility company to establish a competing distribution network. The main source of competition is for generation of electricity, where there is competition from new renewable energy plants and smaller independent power producers. The sector is often dominated by a few large utilities.
What Makes EIX Different: EIX operates in a concentrated, densely populated area that allows for better delivery efficiency. The brand itself does have some strength in the area. It has one of the largest customer bases among US utilities, which gives the company some economies of scale. It also has a history of navigating complex regulations in California.

Financials:

A detailed analysis of the company’s financials shows that the company is in a phase of high capital expenditure investments, which will give the company growth in the future. They have a good history of paying dividends for a long period of time.

Revenue: EIX’s revenue has fluctuated due to changing energy consumption and weather patterns, but it’s been consistently large. For the trailing 12 months, the company reported revenues of $16.4 billion.
Profitability: The company reported net income of $2.4 billion in 2022, and $1.2 billion in 2021, mostly driven by changes in operating costs and deferred tax issues. Operating margins have generally remained stable around 25-30%.
Free Cash Flow: The free cash flow of the company has been very volatile due to large capex and regulatory issues, however it has been negative a lot of the times over the last few years.
Balance Sheet:
- Debt: While EIX carries a significant amount of debt, as is typical for utilities companies, much of the debt has been issued at fixed rate which gives some degree of stability to cash flows. The total long term debt outstanding is around $25 Billion. It also has some short-term debt of around 6 billion.
- Liquidity: The company has around $500 million in cash and short term investments, which is low for a company that has a high capex schedule.
Dividends: EIX’s dividend payments are very stable, with the company consistently paying dividends over the long term. The dividend yield is currently around 4.2%. Payout ratio has typically remained stable as well and is around 60% of earnings. The fact that its dividend payout ratio is high means that the company will not have much cash to use for future investments or buyback, hence most new growth will have to come from new capital infusions.

Moat Analysis:

EIX possesses a narrow moat (3/5), primarily based on its regulated operations and geographic location, as well as some economies of scale, which is a big factor when providing energy.

Intangible Assets: The company’s geographic location is a type of intangible asset in the sense that it is very difficult and costly for new entrants to start operations there. There’s a lot of red tape in getting licenses as well as regulatory approvals, and a new company will have to build an infrastructure from the ground up, which is very expensive. Brand awareness contributes to the customer’s reliability, which gives it some kind of pricing power. But this effect is only marginal, since the company’s pricing is regulated by the CPUC.
Switching Costs: There are very low switching costs in EIX’s territory. Customers can easily switch to another provider if it became available. However, if the prices and benefits are almost identical, customers will generally stick with the same provider due to inertia.
Network Effects: As a provider of electricity, EIX does not benefit from any direct network effect. It could be argued that their distribution network does benefit from a mild network effect in the sense that if new customers join their network it is easier to make connections.
Cost Advantages: The company’s business model is not designed to have low cost per energy delivered. The company uses economies of scale to keep costs low. For the future it seems that it would mostly benefit from operational improvements, and reducing costs of electricity delivery.

EIX’s moat is not as strong as other utility providers, but rather more tied to its regulations and geographical advantages. They do have a clear pricing power, but that pricing power is also mostly controlled by government regulatory agencies.

Risks to the Moat and Business Resilience

EIX is not immune to risks, and these risks include things such as regulatory headwinds, volatility of energy prices, high capital costs, natural disasters, lawsuits and financial constraints. They also face risks from changes in technology, market structure, and macroeconomic factors.

Regulatory Changes: Changes in regulations can impact EIX’s ability to set prices and earn profits, especially from the California Public Utilities Commission (CPUC). This risk is very apparent as the CPUC is generally quite stringent about utility profits, and makes sure that there is a lot of scrutiny over rate changes. A key uncertainty surrounds the pace at which regulators will allow the company to recover its investments into infrastructure.
- Rising Costs of Capital: Rising interest rates can increase the cost of financing for its massive capital expenditure projects. If debt financing costs increase it might force the company to give some profits to debtors, impacting shareholders returns and the stock price. It may also become difficult for the company to take on new investments.
- Wildfires: California faces a high risk of wildfires, with the company being held liable for costs of damage done by its infrastructure. EIX has a large amount of assets in Southern California and most of this infrastructure can get impacted by wildfires, so the management has to take care of this risk appropriately. The company has created the Wildfire Fund to pay for potential liabilities, however, it can cause significant financial burdens to the company.
Energy Price Volatility: Significant spikes in energy costs can affect the company’s revenues, and may impact operating profitability. Changes in natural gas prices, which is one of EIX’s sources of energy can result in high costs for the company.
- Economic Recession: During an economic recession, the demand for energy goes down, which reduces company revenues. This can also lead to customers being unable to pay their bills.
Technological Innovation: New technologies, such as solar panels or distributed energy storage, can reduce demand for centralized electricity generation. A failure to adapt to these could hurt the company’s revenues.

EIX does have some elements of resilience in their business. They will always be needed and as such their revenues can be considered stable, though with some variability due to the macroeconomic conditions, climate and population. Also the high barrier to entry gives the business some strong defensive capabilities.

Understandability Rating: 2 / 5

Given the complex interplay of regulatory and market factors with the massive scale of its operations, EIX presents a lot of difficulty to fully understand its business model to a person without some domain knowledge. Especially new technology risks make it complicated. This is also a highly regulated business which has a lot of nuances of rules and procedures.

Balance Sheet Health Rating: 3 / 5

EIX’s balance sheet can be deemed reasonably healthy, but with some areas for concern. The company has a lot of debt, however, its assets are also significant. So, they have a large amount of total capital. Due to its predictable and stable cash flows, the company is able to service its debt, which gives it some stability. Given the amount of capex the company will need to do in the coming years, its cash balance and liquidity are low.