03 November 2007

EIX: Financial Analysis through September 2007

We have analyzed Edison International's (EIX) preliminary financial results for the quarter that ended on 30 September 2007. The financial statements provided are surprisingly complete for a press release. We will determine if our evaluation needs to be updated after the company files a formal 10-Q report with the SEC.

Edison is the parent of Southern California Edison and other companies that generate or distribute electricity or that provide financing for these activities. Edison, which traces its roots back to 1886, is one of the largest investor-owned utilities in the U.S.

When we analyzed Edison after the June quarter, the Overall score was 25 points. Of the four individual gauges that fed into this composite result, Profitability was the strongest at 12 points. Value was weakest at 2 points.

Now, with the available data from the September 2007 quarter, our gauges display the following scores:
The incongruity between this low score and the stock market's positive reaction to the latest earnings report is striking.

Before we examine the factors that affected each gauge, let's review the latest quarterly Income Statement. We did not issue a pre-release prediction of Edison's earnings for September quarter.


Sept 2007
Sept 2006
Revenue (1)
Op expenses

CGS (2) (2799)

Depreciation (3)

Other (4) 66
Operating Income
899 963
Other income

Investments (5)

Asset sales

Interest, etc. (6)
(136) (168)
Pretax income

728 770
Income tax

Net Income
465 460
Discontinued ops



1. Total operating revenue.
2. Fuel + Purchased Power + Other Operation and Maintenance + Property and Other Taxes.
3. Depreciation, Decommissioning, and Amortization.
4. Provision for Regulatory Adjustment Clauses + Miscellaneous.
5. Equity in Income from Partnerships, etc., + Minority Interests
6. Interest and Dividend Income + Other Nonoperating Income - Interest Expense - Other Nonoperating Deductions - Dividends on Preferred Securities

Edison's revenue in the September quarter is the usually the highest of the year, as the relentless summer sun in Southern California keeps air conditioners humming. Revenue in the recent quarter was 3.7 percent greater than in the year-earlier period. Cost of Goods Sold (CGS) was 71 percent of Revenue, much higher than 63.9 percent in September 2006 and a five-year median value of 68 percent. Depreciation expenses were 7.9 percent of Revenue, up just a little from the year-earlier value of 7.7 percent.

The Other Operating Expenses line, which is our simpler term for "Net Provisions for Regulatory Adjustment Clauses" was an advantage for the company in the recent quarter relative to the year-earlier quarter. This figure is essentially a random variable, with a mean expense of about $50 million and a standard deviation of a whopping $774 million over the last 40 quarters. Net Provisions provided a gain of $66 million in the September 2007 quarter and a loss of $115 million in the September 2006 quarter, for a pre-tax swing of $181 million in the favor of the quarter just concluded. Given the long term appearance of randomness, we would not conclude that the recent positive figure indicates anything about the company's operating performance.

The added push from Net Provisions was not enough to overcome the higher CGS. Operating Income fell 6.6 percent below the amount attained one year ago.

The recent quarter also featured non-operating expenses $32 million less than in the year-earlier quarter.

The Income Tax Rate was 36 percent in the September 2007 quarter, about 4 percent lower than last year. Lower non-operating expenses and a lower tax rate were enough to enable Edison to compensate for the declining Operating Income and attain a tiny increase in Net Income. It's hard to believe that this performance would lead to a rally in Edison shares.

Cash Management. This gauge decreased from 7 points in June to 2 points now.

None of these measures helped the gauge significantly:

Growth. This gauge decreased from 6 points in June to 1 point now.

There was not much good news here, either:
Net income growth benefited from a change in the effective income tax rate from 38.8 to 28.4 percent.

Profitability. This gauge decreased from 12 points in June to 7 points now.

The measures that helped the gauge were:
The measures that hurt the gauge were:
  • FCF/Equity = 5.3 percent, down from 13.5 percent in a year
  • Accrual Ratio = 1.8 percent, up from -0.1 percent in a year.
The increasing Accrual Ratio tells us that less of the company's Net Income is due to CFO, and, therefore, more is due to changes in non-operational Balance Sheet accruals.

Value. Edison's stock price slipped over the course of the quarter from $56.12 to $55.45. The Value gauge, based on the latter price, dropped from 2 points three months ago to 1 point.
The average P/E for the Electric Utilities industry is currently a more expensive 18.8. The average Price/Revenue for the industry is currently 1.9.

Now at a weak 12 out of 100 possible points, the Overall gauge is down about 50 percent from recent quarters. The stock price has increased faster than the company earnings.

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