Wall Street didn’t take well to Rosemead-based Edison International’s surprise announcement last week that it’s planning to issue up to $1.5 billion in additional shares this year.
Edison said its first major share offering in 25 years is intended to provide operational funding and more cash to deal with increased costs related to wildfires.
The parent company of electric utility Southern California Edison also announced that on April 26 it had closed a $1 billion bridge loan, roughly three-fourths of which came in the form of a major stock purchase.
Additional stock offerings generally have a dilutive effect on existing share prices, and investors reacted within minutes to Edison’s plan. The company’s stock dropped about 5% in after-hours trading on April 30 and remained near that level during regular trading on May 1, finishing at $60.29.
In remarks to analysts following the release of first quarter earnings, Edison Chief Executive Pedro Pizarro said the company was seeking to increase the proportion of common stock versus preferred stock to about 52% from the current 48%. The 52% ratio is more in line with the state’s other investor-owned utilities — San Francisco-based PG&E Corp., which filed for Chapter 11 bankruptcy protection in January, and San Diego-based Sempra Energy.
Pizarro also said the offering would provide more cash as SCE grapples with increased costs due to wildfires and fire-prevention measures like tree trimming. Edison Chief Financial Officer Maria Rigatti said on the conference call with analysts that wildfire mitigation costs negatively impacted first quarter earnings by 18 cents a share, accounting for the 17 cent drop in core earnings to 63 cents per share, and then some.
Edison has indicated that sparks from its wires may have ignited a portion of the Thomas Fire in December 2017 that ultimately burned 440 square miles in Santa Barbara and Ventura counties, and destroyed more than 1,000 structures. The company disputes assertions that its wires ignited the main portion of the blaze. Investigations are continuing into the role SCE’s equipment might have played in the ignition of November’s Woolsey Fire.
Edison’s $1 billion bridge loan — with proceeds split between a $750 million equity purchase and $250 million in cash — will be repaid in part with financing from the stock offering, Rigatti told analysts.
Besides the surprise nature of the announcements, investors were apparently concerned about share dilution. At the May 1 closing price, Edison would have to issue roughly 25 million shares to reach their target of $1.5 billion, adding about 7% to the company’s 326 million shares outstanding.
Ali Agha, managing director of equity research at Atlanta-based investment bank SunTrust Robinson Humphrey Inc., said in a May 1 research update on Edison that existing shares would lose about 40 cents in value due to the dilutive effect. But, Agha added, that would be offset over time because of the higher common stock ratio.
Before Edison can issue additional shares, though, it needs approval from the California Public Utilities Commission, which regulates Edison’s rate of return. Agha said he expects the PUC to approve the higher common stock ratio.
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