30 June 2008

EIX: Look Ahead to June 2008 Results

When we analyzed Edison International's first-quarter financial statements, the GCFR Overall gauge score was a dreadful 5 of the 100 possible points. Net Income and Cash Flow from Operations in the most recent four quarters were down by double digit percentages from the previous four quarters. A 55 percent increase in purchased power cut deeply into the Gross Margin, which fell from 42.2 percent of Revenue in the March 2007 quarter to 35.1 percent in the first quarter of 2008.

It should be noted that company-defined "core earnings" were greater in the March 2008 quarter than the March 2007 quarter. Core earnings, which exclude certain items and discontinued operations, are a useful measure. However, GCFR sticks to the SEC -mandated GAAP results.

Edison International (EIX) 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 electric utilities in the U.S.

Edison is scheduled to report its second quarter results on 7 August 2008. In anticipation of this report, we've modeled the company's Income Statement for the quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data. GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

The company's announcement of its first-quarter results included the following guidance for the remainder of 2008:
The current outlook for Edison International 2008 core earnings is around the high end of its guidance range of $3.61 - $4.01 per share.
We were relieved to see in the conference call presentation material that Edison is not expecting any deviations between core and GAAP results for 2008. Core earnings for 2007 are $0.36 per share (about 10 percent) less than GAAP earnings for this period, thus making it that much easier for the current year to surpass last year's core results.

Year-over-year Revenue growth was 4 percent through March 2008, but the first quarter's Revenue was closer to 6 percent more than in the year-earlier quarter. One might expect that high energy prices will boost both Revenue and Operating Expenses. Therefore, for the second quarter, we believe $3.26 billion is a reasonable target. This figure would lift year-over-year Revenue growth to 5 percent, and it is almost 7 percent greater than Revenue in the June 2007 quarter.

Of Edison's various Operating Costs, we group Fuel, Purchased Power, Other Operation and Maintenance, and Property and Other Taxes as Cost of Goods Sold (CGS). Gross Margin in the difference between Revenue and CGS, and we usually express it as a percentage of Revenue. History shows that Edison's Gross Margin can be anywhere between 15 and 50 percent of Revenue in a quarter. However, if we just look at the last 12 quarters, and exclude the highest and lowest values, the average Gross Margin is 30 percent. If this margin is achieved in the second quarter, and our Revenue estimate proves accurate, the CGS will equal (1 - 0.30) * $3.26 billion = $2.28 billion.

Expenses for Depreciation, Decommissioning, and Amortization usually total around 10 percent of Revenue, give or take a percentage point. Given our Revenue estimate, we would expect these expenses to equal 0.1 * $3.26 billion = 326 million in the second quarter.

Other Operating Expense includes "Net Provisions for Regulatory Adjustment Clauses." This item, which fluctuates substantially, is income in some quarters and an expense in others. The particular value can have a significant impact on quarterly results, but there is no obvious connection between the value and the company's operating performance. The average "Net Provisions" over the last three years, ignoring the highest and lowest value, is a $54 million charge. This is what we will assume for the second quarter.

These figures would result in Operating Income of $597 million, compared to $501 million in the year-earlier quarter, a 19 percent gain.

We group the various Non-operating income and expense items into three categories. The first category is Investment gains and losses. For Edison, we group Equity in Income from Partnerships, etc., and Minority Interests in the Investment category. Historical data suggest that a $20 million charge is a reasonable assumption. The second Non-operating category is gains on asset sales, which is not typically a material item for Edison. The final category is for interest expenses and a plethora of other items. In recent quarters, these items have resulted in a net expense of about $175 million.

The June 2007 quarter included a $241 million charge for the early extinguishment of debt.

These figures would result in pre-tax income of $402 million. if we assume an effective tax rate of 33 percent, Net Income in the quarter would be $269 million (about $0.82 per share), more than three times the result of the year-earlier 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.


June 2008
June 2007
Revenue (1)

Op expenses

CGS (2)

Depreciation (3)

Other (4) (54)
Operating Income
597 501
Other income

Investments (5)

Asset sales

Interest, etc. (6)
(175) (384)
Pretax income

402 91
Income tax

Net Income
269 91
Discontinued ops


Shares outstanding

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

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