07 January 2010

EIX: Look Ahead to December 2009 Quarterly Results

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.  
In November, we examined Edison's Income Statement for the September quarter and compared the entries on each line to our "look-ahead" estimates.  We later performed a financial gauge analysis of Edison, which determined that the GCFR Overall gauge fell negligibly from 23 to 22 of the 100 possible points.

We have now modeled Edison International's Income Statement for the fourth quarter of 2009, which ended on 31 December.  The intent of this exercise was to produce a baseline for identifying deviations, positive or negative, in the actual data that the company will announce in February.  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. 

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.

SCE owns nuclear, hydroelectric, natural gas, and coal electricity generating facilities.  It also has transmission systems and a distribution network for brings electricity to commercial and residential consumers.

The company'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.

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

Edison recently increased the annual dividend on its common stock from $1.24 to $1.26 per share.

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." 

We're now ready to look specifically at the current quarter.

Edison International's November 2009 Business Update, which was made available to institutional investors and analysts, provides a good starting point. 

The Update indicates that Edison expects "Core" earnings between $2.95 and $3.15 per share in 2009.  Since Edison had core earnings of $2.66 per share during the first three quarters of the year, the guidance for core earnings in the fourth quarter is $0.29 to $0.49 per share.

We get this same range for GAAP earnings when we repeat the exercise with the projection for the year of $2.23 to $2.43 per share and the $1.94 of actual earnings during the first three quarters.

With about 330 million diluted shares outstanding, the guidance translates into fourth-quarter Net Income between $96 million and $162 million, a rather wide range.

From 2000 to 2008, an average of 22.9 percent of the year's total Revenue was realized in the fourth quarter.  In addition, fourth quarter Revenue has, on average, been 26.9 percent less than Revenue during the hot third quarter.

Since Edison had Revenue of $9.31 billion in first three quarters of 2009, we can expect Revenue in the fourth quarter between $2.7 and $2.8 billion.

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 December quarters has been about 73 percent of Revenue.  This is equivalent to a Gross Margin of 27 percent.

If this margin was achieved in the fourth quarter of 2009, CGS would be 0.73 * $2.75 billion = $2.0 billion.

Expenses for Depreciation, Decommissioning, and Amortization have recently been about $350 million per quarter, and we will assume a similar amount for the December quarter.

Since GAAP and Core earnings are expected to be identical, we won't include any provisions for non-recurring operating expenses.

These figures would result in Operating Income of $393 million in the fourth quarter, down 16 percent from $466 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 three quarters of the year.

These figures would result in pretax income of $263 million.  If we assume an effective tax rate of 34 percent, the tax provision would be $89 million.  We also need to subtract values for Minority Interests and Dividends on Preferred Shares.  With these adjustments, the estimate for Net Income becomes $148 million (about $0.45 per share), near the upper end of the guidance range.  In the year-earlier quarter, Edison earned $217 million ($0.66 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.

No comments:

Post a Comment