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Edison International: What’s the Key to California Utilities?

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Edison International: Net income growth

According to Wall Street analysts, Edison International (EIX) is expected to earn $0.88 per share in 1Q16. In 1Q15, it earned $0.90 per share. Let’s take a look now at Edison International’s earnings drivers.

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Regulatory environment

Of all the US states, California has one of the healthiest regulatory environments for integrated utilities (FUTY). Edison International has one of the highest returns on equity among its peers in the state, about ~10.5%. The company managed to earn the highest return on equity due to its consistent asset expansion and favorable rate increases. California regulators have approved rate hikes that would result in revenues of $209 million in 2016 and $272 million in 2017, which ultimately can perk up earnings.

San Onofre case

Southern California Edison, a principal subsidiary of Edison International, permanently retired its San Onofre Nuclear Generating Station in 2013. Experts claim this could be a huge cost for Edison International based on the $7.6 billion damage claim settlement against steam generator Mitsubishi. The plant had severe wear and tear in its reactors during the installation of steam generators in 2011.

Net metering

Net metering is also a concern for California utilities. The state added the most capacity of all US states in net metering in 2015. In January 2016, regulators upheld their decision to pay net metered customers with a full retail rate for the electricity they generate and pass to the grid without using. Utilities (XLU) argued that paying a full retail rate results in a revenue loss for them and it’s an unnecessary burden with non-net-metered customers. Vastly growing net metering could be a negative aspect for utilities’ growth unless favorable policies are implemented.

Edison International accounts for 3.2% in the iShares US Utilities ETF (IDU). Its peers Sempra Energy (SRE) and Pacific Gas & Electric (PCG) form 3.2% and 3.9%, respectively, of IDU.

In the next part, we’ll see how Edison International outperformed its California peers in the past year.

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