20 April 2009

EIX: Look Ahead to March 2009 Quarterly Results

The GCFR Overall Gauge of Edison International (NYSE: EIX) increased from 21 to 31 of the 100 possible points in the fourth quarter of 2008.  Our analysis report explained this result in some detail.

We have now modeled Edison International's Income Statement for the March 2009 quarter.   The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data that the company will announce on 8 May 2009.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

First, we present some background information.

Edison International is the parent of Southern California Edison and Edison Mission Group.  SCE, which traces its roots back to 1886, is one of the largest investor-owned, regulated electric utilities in the U.S.  Edison Mission Group owns, or has interests in, power generation facilities across the U.S., plus the Doga Energy power plant in the Esenyurt, Turkey.  EMG oversees "one of the largest portfolios of wind energy projects in the U.S."

The California Renewable Portfolio Standard [pdf] obligates utilities regulated by the California Public Utilities Commission to procure additional energy from renewable sources each year until 20 percent of retail sales are from these sources in 2010.  In November 2008, the Standard was increased to 33 percent by 2020.  It's uncertain whether enough solar and wind projects will get built to satisfy either objective, but the CPUC claimed:  "2008 was a turning point for the RPS program and contracted projects are beginning to deliver in large numbers."

The CPUC in a 4-1 vote on 12 March 2009 approved a 2 percent rate increase in 2009.  SCE then issued $750 million in bonds, which were assigned an A+ rating by Fitch, "for general corporate purposes and to finance fuel inventories."

Revenue in the fourth quarter of 2008 was 2.7 percent more than in the same quarter of 2007.  The quarter's Net Income of $217 million ($0.66 per share) managed to squeeze ahead of the $211 million ($0.64 per share) in the year-earlier period.  In all of 2008, Revenue 2008 exceeded that in 2007 by 5.8 percent.  Net Income in 2008 grew by 3.2 percent relative to 2007.

More worrisome was that Cash Flow from Operations in 2008 was 31 percent less than in 2007. 

At the end of 2008, the Cash Management, Growth, and Profitability gauges were all stable at weak levels.  The increase in the Overall gauge score was mostly due to a big decline in Edison's share price, which got the attention of the double-weighted and contrarian Value gauge.

In a Business Update issued in mid-March 2009, Edison International indicated that it expects Core and GAAP earnings per share for 2009 between $2.90 and $3.20.  "Core" earnings excludes discontinued operations and, naturally enough, "non-core" items.  In 2009, Core and GAAP EPS were $3.84 and $3.69, respectively.  Therefore, Edison's management has told investors to expect GAAP earnings in 2009 to fall between 13 and 21 percent.

Edison's Revenue varies with demand, rating decisions, and energy prices.  The effect of energy commodity (e.g., natural gas) price changes is especially significant for EMG's power-generation business.  In addition, since the demand for energy varies with the weather, Edison's Revenue has a seasonal component.  In the last five years, the first quarter has contributed an average of 21.6 percent of the year's total Revenue. 

Our target for the first quarter 2009 Revenue is $2.85 billion.  In producing this estimate, we assumed that electric utility Revenue (about 80 percent of the total) in 2009 Revenue would be the same as in 2008 (i.e., small rate increase offsets small demand decrease) and that non-utility power generation Revenue will be down 10 percent.

Of Edison's numerous 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 SoldGross Margin in the difference between Revenue and CGS, and we express it as a percentage of Revenue.  The Gross Margin was 27.2 percent in 2008, but it varied by a couple of points from quarter to quarter.

We will assume a slightly lower than average Gross Margin of 26.5 percent in first quarter.  If this assumption and our Revenue estimate prove accurate, the CGS will equal (1 - 0.265) * $2.85 billion = $2.095 billion.

Expenses for Depreciation, Decommissioning, and Amortization usually sum to around 9 percent of Revenue.  However, in the low-Revenue first quarter, 10 percent is more typical.  Given our Revenue estimate, we would expect these expenses to equal 0.1 * $2.85 billion = $285 million in the first quarter.

These figures would result in Operating Income of $470 million.  This amount is 23 percent less than the comparable $611 million figure in the year-earlier quarter.

We group the various Non-operating income and expense items into three categories.  The first category is Investment gains and losses.  The second Non-operating category is gains on asset sales.  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 $157 million.

These figures would result in pretax income of $313 million.  If we assume an effective tax rate of 30 percent, the tax provision would be about $94.  We also need to subtract values for Minority Interests and Dividends on Preferred Shares.  With these adjustments made, we end up with our $186 million (about $0.57 per share) estimate for Net Income.  This value is 38 percent less than in the March 2008 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.


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