17 May 2009

EIX: Financial Analysis through March 2009

Edison International (NYSE: EIX) earned $0.76 per share, much better than we expected, in the three months that ended 31 March 2009.  The latest results were announced in this press release and this 10-Q report

This post provides the GCFR analysis of this period, which was the first quarter of 2009.

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 Public Utilities Commission, in a 4-1 vote on 12 March 2009, approved for a 2 percent rate increase for SCE 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."

California law requires increasingly greater use of renewable energy sources.  The Renewable Portfolio Standard, established by law in 2002, set 2017 as the year by which regulated utilities in the state had to obtain 20 percent of their energy from renewable sources.  In 2006, the deadline was legally advanced to 2010.  In 2008, Governor Schwarzenegger signed Executive Order S-14-08 requiring that 33 percent of energy sold in 2020 be created from renewable sources.

Looking back to the fourth quarter of 2008, we are reminded that Edison's Revenue increased by 2.7 percent from the same quarter of 2007.   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.  However, Cash Flow from Operations in 2008 was 31 percent less than in 2007.  The GCFR Overall Gauge increased from 21 to 31 of the 100 possible points.  The rise was mostly due to a big decline in Edison's share price, which boosted the contrarian Value gauge.

Now, with data available from the March 2009 quarter, our gauges display the following scores:
  • Overall: 34 of 100 (up/down from 31)

Before we examine each gauge, we will compare the latest quarterly Income Statement to our previously communicated expectations.  Edison reports both GAAP earnings and non-GAAP, "core" earnings.  Unless stated otherwise, our evaluation is limited to the GAAP results.

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.


Revenue was 9.7 percent less than in the same quarter of last year.  (For all year-to-year comparisons, we're using the company's restated figures for the March 2008 quarter.)  Our estimate was only off (on the optimistic side) by 1.4 percent.

The Cost of Goods Sold (CGS) -- fuel, purchased power, other operation and maintenance costs -- fell 13.5 percent.  CGS declined from 70.4 to 67.4 percent of Revenue.  These figures result in a Gross Margin increase from 29.6 percent to 32.6 percent.  This is the highest the margin has been since the September 2006 quarter, and it far surpassed our 26.5-percent target. 

The Gross Margin soared because lower energy prices, especially for natural gas, reduced Edison's costs for fuel and purchased power even more than these lower prices cut Revenue.  One SCE plant spent $60 million less for natural gas cost than in 2008.

Expenses for Depreciation, Decommissioning, and Amortization were 12.2 percent of Revenue.  We had estimated that these expenses would be 10 percent of Revenue.  The 10-Q indicates that SCE's expenses in this category were higher because the utility had additional transmission and distribution assets to depreciate, plus they had a "$10 million increase in capitalized software amortization costs."

A $21 million "Contract buyout/termination" expense was a drag on the quarter's results. The 10-Q attributes this expense "to the termination of two [Edison Capital] cross-border leveraged leases."  The lease termination is related to a Global Settlement of federal tax disputes between Edison International and the IRS.

Operating Income was 12 percent less than in the March 2008 quarter.  Lower Revenue, greater Depreciation, and the special charge hurt Operating Income; lower fuel and power costs softened the fall.

With the exception of an $8 million loss from equity in partnerships and unconsolidated subsidiaries, Edison's various non-operating income and expense items added up to a figure that matched our target.

The Income Tax Rate in the quarter was 31.4 percent, which is less than last year's 33.1 percent and a shade higher than our 30-percent estimate.

The amount of Net income attributable to non-controlling interests was about $15 million less than our estimate, which meant that more income was available to Edison's shareholders.  All in all, Net Income of $250 million ($0.76 per share) was 16 percent less than last year's $299 million ($0.91 per share).  Net income blew away our prediction by 35 percent.

Now for the gauges:

Cash ManagementMarch 20093 months prior12 months prior
Current Ratio1.21.11.0
LTD/Equity 105%105%99%
Debt/CFO 5.7 years6.1 years3.3 years
Inventory/CGS N/AN/AN/A
Finished Goods/Inventory N/AN/AN/A
Days of Sales Outstanding (DSO)26.4 days26.9 days27.3 days
Working Capital/Invested Capital 4.6%3.3%0.1%
Cash Conversion Cycle Time15.9 days8.8 days15.1 days
Gauge Score (0 to 25)

Liquidity and leverage are stable, but the decline in Cash Flow from Operations makes the Debt level a little harder to bear.  The improvements, albeit small, in the Current Ratio, DSO and Working Capital added enough lift to get the Cash Management gauge off last year's zero-point score, but the score remains low.

GrowthMarch 20093 months prior12 months prior
Revenue growth2.2%6.0%3.6%
Revenue/Assets 32.9%33.7%35.5%
CFO growth -23.7%-30.4%-17.5%
Net Income growth 1.6%3.2%-10.0%
Gauge Score (0 to 25)12
Growth rates are trailing four quarters compared to four previous quarters.

With a recession underway, and energy prices moving this way and that, the Growth gauge hasn't found much to like for some time.  One probably shouldn't expect much growth from a regulated utility, but the rates for Revenue and Net Income growth have to be viewed as tepid, at best.  A good omen might be that Cash Flow from Operations increased 17 percent in the first quarter; this served to slow the rate at which CFO on a trailing four-quarter basis was falling.

ProfitabilityMarch 20093 months prior12 months prior
Operating Expenses/Revenue 81.6%81.8%81.2%
ROIC 8.6%8.8%9.9%
Free Cash Flow/Invested Capital -2.9%-3.0%1.2%
Accrual Ratio 4.0%4.3%1.9%
Gauge Score (0 to 25)223

Higher operating costs when energy prices were rising last year hurt Profitability.  With natural gas prices now low, we should see some improvement.

Negative Free Cash Flow is a very significant concern, which is also manifested in the lower quality of earnings suggested by the rising Accrual Ratio.

ValueMarch 20093 months prior12 months prior
P/E 8.18.715.2
P/E vs. S&P 500 P/E 51%46%86%
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)17

Edison's stock price fell during the first quarter from $32.12 to $28.81, which was enough to inflate the Value gauge.  The share price one year earlier was $49.02.

Edison's valuation ratios can be compared with other Electric Utilities.

OverallMarch 20093 months prior12 months prior
Gauge Score (0 to 100)34

Revenue fell 9.7 percent in the first quarter.  The 10-Q indicates that the company's electric utility experienced a decline in demand for electricity.  However, lower energy prices, especially for natural gas, brought down the cost of producing electricity by an even greater amount.  These lower costs helped check the fall in Operating Income and Net Income.

The first quarter included a $21 million "Contract buyout/termination" expense related to "cross-border leveraged leases."  The leases were terminated in accordance with a settlement of tax disputes with the IRS.  To get a better understanding of how the settlement affects the credit-worthiness of Edison and its subsidiaries, one could read this newly published S&P report.  (Let us know what you find:  the $100 fee is outside our price range.)

The Cash Management, Growth, and Profitability gauges remained very weak.  The contrarian Value gauge benefited from the big decline in Edison's share price.  Although the Value increase added a few points to the Overall gauge score, the latter is still weak by our standards.

Full disclosure: Long EIX at time of writing.

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