01 March 2010

EIX: Income Statement Analysis for the December 2009 Quarter

Edison International (NYSE: EIX) earned $0.65 per share in the fourth quarter of 2009, which ended 31 December.  Edison made $0.66 per share in the same period of 2008.

On a non-GAAP ("pro forma," "ex-items," or, Edison's preferred term, "Core") basis, earnings fell from $0.66 to $0.59 per share.  Core earnings in the latest quarter exclude gains attributed to "revised interest costs related to the global tax settlement."  This agreement  with the IRS resolved issues involving cross-border leases and various other items.

This post examines Edison's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates.  Our EPS target was $0.45, which is $0.20 less than the reported GAAP amount and $0.14 less than Core earnings.

The principal sources for the income statement analysis were the earnings announcement, the 10-K, the conference call presentation, and the call transcript.  The latter is made available by SeekingAlpha.

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.  Additional 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 of $3.05 billion was 5.5 percent less than the $3.2 billion in last year's fourth quarter.  Our estimate of $2.75 billion, which was based on seasonal patterns, was 10 percent less than the actual amount.

Electric utility revenue fell 4.6 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 fourth quarter was 73.6 percent of Revenue, which translates into a Gross Margin of 26.4 percent.  This Gross Margin was 60 basis points more profitable than in the fourth quarter of 2008, mostly because Edison spent 25 percent less on purchased power in the latest period.

Our target for the Gross Margin was 27 percent, so Edison fell a little short of our expectations by this measure. 

The $365 million of Depreciation, Decommissioning, and Amortization expenses were 8 percent more than last year.  The increase is most likely due to record-high capital expenditures, which included investments to improve energy distribution systems.  We had estimated a Depreciation expense of $350 million.

The only "special" non-recurring operating item in the fourth quarter was a $2 million charge for lease terminations and other.  In 2008, the charge for special operating expenses was $30 million.

The various operating items discussed above combined to produce Operating Income of $439 million, down 5.8 percent from $466 million in the year-earlier quarter.  The decrease was mostly due to lower Revenue and greater Depreciation, partially offset by lower power costs and lower special charges.

Our Operating Income target of $393 million was 10.5 percent too low, primarily because Revenue was greater than we expected.

Edison's various non-operating income and expense items were within $10 million of our expectations. It's worth mentioning that Equity in income from partnerships and unconsolidated subsidiaries swung from a $9 million loss in the fourth quarter of 2008 to a $9 million gain in the recent period.  The $18 million difference quietly boosted the 2009 results. 

The income tax rate of 23.8 percent was close to the 24.2 percent of 2008's fourth quarter, but much less burdensome that our estimate of 34 percent.  The rate might have been lower than normal because of the previously mentioned "revised interest costs related to the global tax settlement."

After adjusting for non-controlling interests and discontinued operations, the bottom-line Net Income attributable to Edison's common shareholders was $212 million ($0.65 per diluted share), compared to $217 million ($0.66 per diluted share) in the year-earlier period.  Although Operating Income was down nearly 6 percent, partnership income and lower taxes nearly closed the gap.

Net income was significantly better than we expected.  In addition to better-than-anticipated Revenue, the outperformance can also be attributed to lower taxes and a smaller deduction for non-controlling interests.

Full disclosure: Long EIX at time of writing.

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