Faced with the prospect of stagnating electric power use for years to come, Edison International has recently launched two ventures in an attempt to capture revenue in new markets.
The Rosemead parent of Southern California Edison late last year formed a water resources unit that will develop, construct, and operate water treatment facilities at major customers’ locations to make more water available. It also launched a consulting unit last month that aims to put together energy management strategies for major energy users around the nation.
Both of those units are the latest entrants into a rapidly expanding subsidiary at Edison International known as Edison Energy Group, whose stated goal is to find, develop, and exploit new revenue and growth opportunities outside the traditional utility business. The subsidiary also has a business that bids for transmission construction contracts around the nation and a solar panel installation business that it acquired.
“It’s all about growth,” Theodore Craver, Edison’s chief executive, said last week. “We’re not expecting significant growth on the energy usage front. The real growth is going to come from increasing the control and customization of energy use. That’s what these businesses are all about.”
Craver said that while the number of electric vehicles increases and other technologies emerge that will boost demand for electricity, the rise of solar power and greater ability of customers to generate their own electricity on site will offset that increased demand.
“Over time, these will likely cancel each other out, which is why we’re not forecasting much growth in electricity use from our customers,” he said. “So we have to go where the growth is.”
That, he said, is the driving force behind the creation and expansion of Edison Energy, which is run out of Irvine by former Southern California Edison President Ronald Litzinger.
New revenue streams
Of all the new unit launches to date, the SoCore solar rooftop installation unit has shown the most results. In Edison’s fourth-quarter earnings conference call in February, Craver said SoCore is operating about 250 individual projects in 16 states, with many of those coming on line last year. Craver did not disclose how much revenue is flowing from those installations.
To bolster the range of services it can offer, Edison Energy acquired a small independent energy consulting-engineering company as well as other firms specializing in energy procurement and offsite renewable energy sourcing.
While Edison Energy officially launched last month with former IBM executive Allan Schurr at the helm, Craver said the unit actually began advising customers last year and now counts about a dozen Fortune 50 companies as clients.
Nonetheless, this unit is still in its infancy. Given Edison International’s total revenue of $11.5 billion last year, it will take at least a couple of years before Edison Energy contributes significant revenue.
Edison International investors have been living the good life in recent weeks as the Rosemead energy company’s stock has been hovering around its 52-week high of $72 a share.
A late-February fourth-quarter earnings report of 88 cents a share, well above the consensus estimate of 58 cents, provided a boost, as did subsequent reports from a number of analysts raising their 2016 target price.
But there’s another reason: dividends.
Utilities have for decades been known as “widows-and-orphans stocks” for their high dividend payouts and regulated monopoly control that generally means stability. Now, though, two factors have converged to make Edison’s dividends especially attractive to investors.
According to a report by Ali Agha, analyst with Sun Trust Robinson Humphrey in New York, Edison’s current dividend of 48 cents a share “translates into a 47 percent payout ratio, which is at the low end of management’s target payout of 45 percent to 55 percent.”
That means dividend payouts are likely to rise in coming quarters, which should delight dividend-conscious investors. As Agha put it, “We project that dividend growth should continue to exceed earnings growth over the next few years.”
The other factor is completely outside Edison’s purview. With the collapse in oil prices, oil companies have cut their dividend payouts. In February, ConocoPhillips of Houston cut its dividend to 25 cents a share from 74 cents. The cuts have been even more dramatic at smaller oil companies, especially at master limited partnerships that had put dividend payouts at the center of their business model. One such partnership is L.A.’s own Breitburn Energy Partners, which completely eliminated its dividend in December; news of that cut sparked a major selloff in Breitburn shares, turning it into a penny stock.
So where can all those dividend-conscious investors turn and still remain in the energy sector? Utilities.
That is likely one reason why shares of utility companies have risen about 15 percent in the last 90 days, according to Bloomberg. Edison stock has done even better, jumping 23 percent.
– Howard Fine
“To really get to a point where this impacts the corporate bottom line, they are going to have to take the solutions that they draw up for their clients and then either partner with or acquire companies that can provide the energy to carry out those solutions,” said Burrell Kilmer, managing director in the energy practice division of Chicago-based Navigant Consulting.
Other utilities across the nation have been providing similar energy consulting services for years and have learned that lesson, added Kilmer. So far, only one company has managed to put the pieces together and cobble together big revenue gains: Chicago-based Exelon.
In a recent annual survey by Utility Dive, a publication that provides news and analysis for electric utility executives, the “vast majority” of 300-plus executives who responded said their utility companies “are pursuing at least one new revenue stream beyond traditional generation and grid infrastructure.”
The greatest revenue growth alternative: “energy management and efficiency services to customers,” with two-thirds of respondents saying their utilities are pursuing this strategy.
This is not the first time Edison and other utilities have ventured beyond their traditional regulated utility businesses. Twenty years ago, as the deregulation craze swept through the industry, Edison formed several nonregulated businesses, most notably power-generating subsidiary Edison Mission Energy (also run out of Irvine) and a security alarm business.
Edison Mission Energy rapidly acquired a portfolio of power-generating plants across the nation, but later ran into trouble in the Midwest as collapsing electricity prices hampered its ability to repay debt incurred while trying to renovate an aging crop of power plants. Edison Mission Energy filed for Chapter 11 bankruptcy protection in December 2012; its power plants were ultimately sold for $2.6 billion to NRG Energy Inc. of Houston.
Rapid changes
But unlike 20 years ago, when regulators forced utilities such as Edison International to spin off generating plants, the driving force this time around is rapidly changing technology.
“More and more large energy users increasingly are being bombarded by new startup companies that come in and say, We have a terrific product here that can solve your energy problems,” Craver said. “It’s becoming harder for large customers to sift through all these. And there isn’t anyone to advise on how to put all the pieces together for a customized solution at the best price. That’s what Edison Energy has set out to do.”
Meanwhile, the water resources unit is still getting off the ground.
“Our principal goal is to see if we can provide additional sources of water that can be used for things like cooling towers and irrigation,” Craver said. “This is for our major commercial and industrial customers, to allow them to more efficiently use energy on site, so we don’t have to provide them with as much power,” he added.
