15 November 2009

EIX: Income Statement Analysis for the September 2009 Quarter

Edison International (NYSE: EIX) earned $1.22 per share in the third quarter of 2009, down from $1.34 in the same quarter of last year.

On a non-GAAP ("pro forma," "ex-items," or, Edison's preferred term, "Core") basis, earnings fell from $1.46 to $1.09 per share.  The $45 million difference between GAAP and Core Net Income in the latest quarter was mostly due to "the non-cash accounting benefit from the final regulatory approval to transfer [SCE's] Mountainview power plant to utility rate base."

This post examines the Income Statement for the quarter in the earnings announcement and the more detailed 10-Q and compares the entries on each line to our "look-ahead" estimates.  Our target for Edison's Net Income in the latest quarter was $1.19 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 various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Edison International, the parent of Southern California Edison and Edison Mission Group, is one of the largest investor-owned, regulated electric utilities in the U.S.  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 was 14.7 percent less than the restated value for last year's third quarter.  Our Revenue estimate was too low, but only by 1.7 percent.

Electric utility revenue fell 11.6 percent because the weaker economy and milder weather reduced customer demand for power.  Compliance with regulatory mechanisms also resulted in higher Revenue deferrals.

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 third quarter was 69.1 percent of Revenue, which translates into a Gross Margin of 30.9 percent.  The margin was 30.1 percent in last year's third quarter.

Our target for the Gross Margin in the recent quarter was 30 percent, so Edison exceeded our expectations by 0.9 percent.  Lower energy prices, especially for natural gas, reduced Edison's costs for fuel and purchased power.

We had assumed that expenses for Depreciation, Decommissioning, and Amortization would be similar to the $345 million average in the first two quarters of 2009.  The actual value was $20 million more.  Edison attributed the rise to increased capital expenditures and software amortization.

We had also thought the Mountainview accounting gain would be recorded as an operating item, but Edison surprised us by treating the gain as non-operating income.  The third quarter of 2009 was free of the "special" non-recurring operating income and expenses that can complicate its Income Statement.

Operating Income, which we define as the difference between Revenue and the operating expenses identified above, was 20 percent less than last year.  We had projected a decline of 19 percent.

Edison's various non-operating income and expense items did not cut into Operating Income as much as we had expected, partially because this category included the Mountainview gain.  As a result, pretax income exceeded our expectations by 8.2 percent.

The income tax rate of 34.3 percent was slightly more than our 34 percent estimate.  The amount of Net income attributable to non-controlling interests was almost $20 million more than our estimate. 

Rolling it all up, Net Income was 8 percent less than last year, and 3 percent ($0.03) more than we had forecast.

Full disclosure: Long EIX at time of writing.

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