11 August 2009

EIX: Income Statement Analysis for the June 2009 Quarter

Edison International (NYSE: EIX) lost $0.05 per share in the three months that ended on 30 June 2009, down from income of $0.79 per share in the second quarter of last year. 

On a non-GAAP ("pro forma," "ex-items," or, Edison's preferred term, "Core") basis, earnings slipped from $0.79 to $0.78 per share.  The difference between GAAP and Core Net Income in the latest quarter was a $262 million "charge from finalizing a global settlement with the Internal Revenue Service in May 2009 and the related termination of cross-border, leveraged leases."

(By some oddity, the settlement charge increased earnings at the SCE subsidiary by $300 million, decreased earnings at the Edison Mission Group segment by $612, with the remaining $50 million allocated to the parent or other.)

This post examines the Income Statement for the quarter and compares it to our "look-ahead" estimates, which were published on 29 June.  Our target for Edison's Net Income in the latest quarter was $0.15 per share.

In a second article, we will report Edison's scores as measured by the GCFR Financial Gauges.  The follow-up post will also provide the latest figures for the financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Our principal sources were the earnings announcement, the 10-Q for the quarter, the transcript (at Seeking Alpha) from the post-announcement conference call, and management's conference call presentation.  Some background information about Edison International and the business environment in which it is currently operating can be found in the look-ahead.

Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Revenue in the June 2009 period was 18.5 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 June 2008 quarter.) 

Electric utility revenue fell 20.2 percent.

Our estimate for total Revenue was too high by 6.7 percent.  Seasonal patterns over a number of years had suggested to us that second-quarter Revenue would be roughly 7.5 percent more than in the preceding March quarter.  In reality, second-quarter 2009 Revenue inched ahead of the first quarter value by a mere 0.8 percent.

We group Edison's reported fuel, purchased power, other operation and maintenance costs and give the combination the Cost of Goods Sold designation.  CGS in the second quarter fell from 77.5 percent of Revenue to 70.0 percent, a very substantial change.  In other words, the Gross Margin increased from 22.5 percent to 30.0 percent of Revenue.

Our target for the Gross Margin was 28 percent.  Lower energy prices, especially for natural gas, reduced Edison's costs for fuel and purchased power more than we expected.

The Gross Margin in the prior period was adversely affected by higher purchased power costs.

We had assumed that expenses for Depreciation, Decommissioning, and Amortization would be similar to the $340 million average in the two sequentially previous quarters.  The actual value in the June quarter was $347 million.

Edison's Income Statement shows an $866 million operating charge for "Lease terminations and other."  This puzzled us because other information indicated that settlement-related charges were $262 million.  Our assumption is that the $866 million charge was offset by a $604 million income tax credit (see below), resulting in the net effect of $262 million.  The truth is probably more complicated.

We didn't expect this offsetting approach, and it explains the inadequacy of the $300 million provision we made for special operating charges.

With the $866 million charge included, Operating Income was minus $364 million, compared to a gain of $450 million in last year's second quarter.  With the charge excluded, Operating Income would become $502 million.

Edison's various non-operating income and expense items added up to a figure that was about $24 million less negative than we expected.

We haven't seen many companies report a pre-tax loss of $510 million and a net tax benefit of $524 million. 

If we exclude the $866 million operating charge and an assumed (might not be true) $604 million tax credit, income from continuing operations before taxes would be $356 million, income taxes would be $78 million, and the tax rate would be 21.9 percent

The amount of Net income attributable to non-controlling interests was about $3 million more than our estimate. 

Full disclosure: Long EIX at time of writing.

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