03 January 2009

EIX: Look Ahead to December 2008 Quarterly Results

Edison International (NYSE: EIX) will announce its fourth quarter and fiscal year results near the end of February 2009.

This post explains how we modeled Edison International's Income Statement for the fourth quarter, which ended on 31 December 2008. When the results are announced, we will compare them to the model and calculate how much the actual figures varied from our expectations. GCFR estimates are derived from trends in the historical financial record and guidance provided by company management.

Edison International 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 recently hiked its annual common stock dividend from $1.22 per share to $1.24 per share, an increase of 1.64 percent.

In 2008's third quarter, which ended last September, the GCFR Overall Gauge of Edison International increased from 8 to 21 of the 100 possible points. Our analysis report explained the results in some detail. [Because of a year-end change to our equations, the scores are slightly different from those originally reported.]

The increase in the Overall gauge score was driven almost entirely by the double-weighted and highly contrarian Value gauge responding to the 22 percent fall in Edison's share price during the third quarter. All other gauges remain weak in the third quarter.

Penalties related to SCE's customer satisfaction and employee safety and higher tax rate outweighed growth in Operating Income and caused Net Income to decline by 6.9 percent.

Cash Flow from Operations in the 12 months that ended on 30 September 2008 was almost 40 percent less than in the comparable year earlier.

In the company's announcement of its third-quarter results, Edison International reaffirmed previous guidance to expect "core EPS" between $3.61 and $4.01. However, management remarked that the middle of the range is now more likely than the high end. "Core" earnings is a non-GAAP measure that excludes discontinued operations and, naturally enough, "non-core" items. For the 2008, the principal exclusion from Core earnings are the CPUC-imposed penalties identified above, which totaled $0.15 per share. Therefore, the guidance for GAAP earnings is $3.46 to $3.86 per share.

Fourth-quarter Revenue has been between 23 and 25 percent of the year's total in each of the last five years. We, therefore, assume Revenue in the fourth quarter of 2008 will be 24 percent of the year's Revenue. The assumption will be satisfied if the Revenue in the quarter is $3.34 billion. This value is 4 percent more than the December 2007 quarter, and it would result in year-over-year Revenue growth of 6 percent.

Of Edison's various Operating Costs, we group Fuel, Purchased Power, Other Operation and Maintenance, Property and Other Taxes, and "Net Provisions for Regulatory Adjustment Clauses" as Cost of Goods Sold. Gross Margin in the difference between Revenue and CGS, and we express it as a percentage of Revenue. The Gross Margin is volatile from quarter to quarter, but it has recently been averaging about 27 percent.

If the average value is achieved in the fourth quarter, and our Revenue estimate proves accurate, the CGS will equal (1 - 0.27) * $3.34 billion = $2.44 billion.

Expenses for Depreciation, Decommissioning, and Amortization usually total around 9 percent of Revenue. Given our Revenue estimate, we would expect these expenses to equal 0.09 * $3.34 billion = $300 million in the fourth quarter.

These figures would result in Operating Income of $600 million, compared to $483 million in the year-earlier quarter, a 24 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, the Investment category consists of Equity in Income from Partnerships. Historical data suggest that a $19 million gain is a reasonable assumption. The second Non-operating category is gains on asset sales, which is typically not a material item for Edison. We will assume a $4 million gain. The final category is for interest expenses and a plethora of other items. In recent quarters, these items have averaged a net expense of about $172 million.

These figures would result in pretax income of $452 million. If we assume an effective tax rate of 31 percent, the tax provision would be about $140. We also need to subtract values for Minority Interests and Dividends on Preferred Shares. With these adjustments made, we end up with our $265 million (about $0.81 per share) estimate for Net Income. This value is 26 percent more than in the December 2007 quarter.

These estimates for the quarter would result in Net Income for 2008 of $1.26 billion ($3.85 per share), compared to $1.1 billion ($3.33 per share) in 2007.

Our estimate for the year is at the upper end of the range identified in the company's guidance.

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.


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