02 March 2008

EIX: Financial Analysis through December 2007

We have analyzed Edison International's (EIX) financial statements for the quarter and year that ended on 31 December 2007. Edison filed its 10-K annual report with the SEC on the same day the preliminary results were issued in a press release.

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 September quarter, the Overall gauge score was only 12 points. Of the four individual gauges that fed into this composite result, Profitability was the strongest at 7 points. Value was weakest at 1 point.

Now, with data available from the December 2007 quarter, our gauges display the following scores:

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 this quarter. Please note that the presentation format below, which we use for all analyses, may differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.


Dec 2007
Dec 2006
Revenue (1)

Op expenses

CGS (2)

Depreciation (3)

Other (4) (82)
Operating Income
483 473
Other income

Investments (5)

Asset sales

Interest, etc. (6)
(151) (153)
Pretax income

314 332
Income tax

Net Income
214 266
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 Non-operating Income - Interest Expense - Other Non-operating Deductions - Dividends on Preferred Securities

Edison's Revenue in the recent quarter was up 4.7 percent over the year-earlier period. Cost of Goods Sold (CGS) was 72.2 percent of Revenue, much higher than 67.0 percent in the December 2006 quarter and the five-year median value of 68 percent. Depreciation was 10.2 percent of Revenue, up from the year-earlier value of 8.4 percent.

Other Operating Expenses, which in this case is "Net Provisions for Regulatory Adjustment Clauses," were almost $200 million less in the December 2007 quarter than in the year-earlier period. This figure fluctuates substantially from quarter to quarter. It is income in some quarters and an expense in others, as was the case in both of the two quarters being compared. We don't gain any insight into the company's operating performance from the swings in Net Provisions, but it can have a significant impact on quarterly results.

Despite a lower Net Provisions expense, higher CGS and Depreciation had a significant negative effect on profitability. Although Revenue increased nicely, Operating Income was only $10 million more in the quarter than the amount attained one year ago.

Non-operating expenses, predominantly interest, were $28 million more in the current quarter than in the year-earlier quarter.

The Income Tax Rate was 31.8 percent in the December 2007 quarter, which is fairly typical. Since the rate was an unusually low 19.9 percent in December 2006 quarter, it provided a boost to Net Income in the earlier quarter. Lacking that advantage in the more recent quarter, Net Income declined by 19.5 percent.

Cash Management. This gauge increased from 2 points in September to 7 points now.

The following measures contributed the most to the score:
The following measures contributed the least to the score:

Growth. This gauge remained at a very weak 1 point.

Clearly, none of these measures contributed much to the score:
  • Revenue growth = 3.9 percent year-over-year, down from 6.5 percent
  • Revenue/Assets = 34.9 percent, essentially unchanged from last year's 34.8 percent
  • CFO growth = -10.5 percent year-over-year, down from 58.8 percent
  • Net Income growth = 1.6 percent year-over-year, up from -2.3 percent
Net income growth benefited significantly from a decrease in the effective income tax rate from 35.0 to 30.9 percent.

Profitability. This gauge decreased from 7 points in September to 5 points now.

The measures that helped the gauge were:
The measures that hurt the gauge were:
  • FCF/Equity = 9.7 percent, down from 12.0 percent last year
  • Accrual Ratio = 1.5 percent, up from 1.3 percent in 2006
As the result of a reader comment, we're experimenting with a different way to calculate the Accrual Ratio. We'll explain the details in a subsequent post, but the new approach provides a different view of the relationship between Net Income and Cash Flow. Low Accrual Ratios, preferably below 0, indicate that more of the company's Net Income is due to Cash Flow and, therefore, less is due to changes in non-operational Balance Sheet accruals.

Value. Edison's stock price slipped over the course of the quarter from $55.45 to $53.37. (It has dropped more significantly during the first two months of 2008.) The Value gauge, based on the year-end closing price, sunk to 0 points from 3 points last year.
  • Enterprise Value/Cash Flow = 8.0, matching its five-year median value. The ratio was only 6.2 last year.
  • P/E = 16.0, up from a median value of 13.1
  • P/E to S&P 500 average P/E = 6 percent discount, compared to a more typical discount of about 20 percent
  • Price/Revenue ratio = 1.3, higher than the median value of 1.1.
The average P/E for the Electric Utilities industry is currently a more expensive 16.3. The average Price/Revenue for the industry is currently 1.7.

At 13 out of 100 possible points, the Overall gauge for Edison remains very weak. We're not seeing much Growth, the Profitability picture is mixed, and most Value metrics suggest that the shares are expensive compared to norms.

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