04 October 2009

EIX: Look Ahead to September 2009 Quarterly Results

The GCFR Overall Gauge of Edison International (NYSE: EIX) fell from 34 to 28 points in the June quarter.  Our income statement and financial gauge analyses explained how the score was attained in some detail. 

In the second quarter, Edison lost $0.05 per share, compared to income of $0.79 per share in the same period last year.  However, on a non-GAAP, "Core" basis, earnings slipped merely to $0.78 per share.  Core results excluded 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."

Lower energy prices, especially for natural gas, cut electric utility revenue and costs.

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

First, we set the stage with some background information about Edison International and the business environment in which it is currently operating.  Readers that keep close tabs on the company are invited to skip ahead.

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, various power-generation facilities.

California's Renewables Portfolio Standard originally set 2017 as the deadline 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 an Executive Order requiring that 33 percent of energy sold in 2020 be created from renewable energy sources.

In a move towards compliance with these objectives, SCE made arrangements in June for 960 megawatts of wind and solar power, beginning in 2013 and 2014.  Additionally, SCE also reached an agreement in August with First Solar (NASDAQ: FSLR) to build two solar power plants, with a combined 550 megawatt capacity.  Edison International claims to deliver energy from these sources to consumers than any other U.S. utility and to have "delivered 65 percent of the nation’s solar energy to its customers in 2008." 

In an effort spur conservation, California is allowing its utilities to spend $3.1 billion on efforts that improve energy efficiency.

We're now ready to look ahead.

Edison International's September 2009 Business Update, which was made available to institutional investors and analysts, provided a good starting point.  This presentation includes earnings guidance as of 7 August 2009.

2009 "Core" earnings are expected to range between $2.90 and $3.20 per share.  The range for GAAP earnings is from $2.18 to $2.48 per share.

The $0.72 difference between Core and GAAP earnings consists of previously recorded charges totaling $0.86 per share and a $0.14 credit in the third quarter "to reflect the transfer of SCE’s Mountainview Power Plant to cost of service remaking, effective July 1, 2009."  (Huh?)

Edison's Revenue varies with customer demand for power, the rates it is authorized to charge, and energy prices.  Demand is dependent on factors such as the economy, population growth, and weather.

From 2000 to 2008, an average of 31.3 percent of the year's total Revenue was realized in the third quarter.  In addition, third quarter Revenue was about 33 percent greater than the average Revenue in the first two quarters of the particular year.

Since Edison had Revenue of about $2.8 billion in each of first two quarters of 2009, we might expect Revenue in the third quarter of about $3.7 billion.  We've chosen to trim this figure to $3.6 billion because the economy has stayed cool (even if weather didn't).

For convenience, we group the Fuel, Purchased Power, and Other Operation and Maintenance operating expenses reported by Edison and call the subtotal Cost of Goods Sold.  In recent years, CGS in September quarters has been about 69 percent of Revenue.  This is equivalent to a Gross Margin of approximately 31 percent.

Assuming a more conservative 30 percent in 2009, our target for the CGS is 0.70 * $3.6 billion = $2.5 billion.

Expenses for Depreciation, Decommissioning, and Amortization were about $345 million per quarter so far this year, and we will assume a similar amount for the September quarter.

We are adding $46 million to account for the Mountainview gain mentioned above.

These figures would result in Operating Income of $781 million in the third quarter, down 10 percent from $964 million in 2008.

Edison also reports a plethora of non-operating income and expense items, which we partition into three categories.  The first category is Investment gains and losses.  The second category is gains on asset sales.  The final category is for interest expenses and a plethora of miscellaneous items.  We are assuming these figures will be similar to those reported in the first two quarters of the year.

These figures would result in pretax income of $625 million.  If we assume an effective tax rate of 34 percent, the tax provision would be $213 million.  We also need to subtract values for Minority Interests and Dividends on Preferred Shares.  With these adjustments, the estimate for Net Income becomes $390 million (about $1.19 per share).  In the year-earlier quarter, Edison earned $439 million ($1.34 per share). 

Please click here to see a full-sized, normalized depiction of the projected results next to Edison's 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.

Full disclosure: Long EIX at time of writing.

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