08 May 2010

EIX: Income Statement Analysis for the March 2010 Quarter

Edison International (NYSE: EIX) earned $0.72 per diluted share on a GAAP basis in the first quarter of 2010, which ended on 31 March 2010.  Edison made $0.04 less per share than the $0.76 it earned in 2009's first quarter. 

The latest quarter included a non-cash $39 million charge ($0.12 per share) to address a change in the federal taxation of retiree benefits, which was a provision of the recently enacted health-care legislation.  Excluding this and other special items, Edison's "Core" earnings, a non-GAAP measure, rose from $0.79 to $0.82 per share.  Core earnings exclude results from discontinued operations and other items that do not affect the company's long-term profitability. 

This post examines Edison's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates.  Reported earnings equaled the $0.72 per share we had forecast.

The principal sources for this income statement analysis were the earnings announcement, the 10-Q, 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 is the parent of Southern California Edison and Edison Mission Group.  SCE is a regulated utility that generates and acquires electricity and delivers it to customers in parts of Southern California.  Edison Mission Energy owns, or has interests in, various independent power-generation facilities.  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 $2.81 billion was almost exactly the same as in last year's first quarter.  Our $2.9 billion estimate, which was based on typical seasonal patterns, was 3.2 percent too high.

The electric utility business (i.e., SCE) was responsible for 77 percent of total Revenue in the latest quarter.  Electric utility Revenue decreased 1.4 percent when compared to 2009's first quarter.  Revenue from the competitive power generation business (i.e, EMG) and other activities increased 4.5 percent.

We group Edison's reported Fuel, Purchased power, and Operations and maintenance costs and treat the combination as the Cost of Goods Sold.  CGS in the latest quarter was $1.94 billion, or 69.0 percent of Revenue.  This rate translates into a Gross Margin of 31.0 percent, 160 basis points less profitable than last year's 32.6 percent. (SCE's spending in the first quarter of 2009 was constrained, temporarily pushing up the margin, pending regulatory action on rates.)

The Gross Margin was 100 basis points better than the 30.0 percent we had estimated.

Fuel costs were $92 million lower in the latest quarter, but Purchased power and O&M costs were each $68 million higher.

Depreciation, Decommissioning, and Amortization expenses increased 8 percent to $369 million, as a result of increased capital spending.  The reported amount was 2.5 percent more than our $360 million estimate.

The only "special" non-recurring operating item in the latest quarter was a $3 million charge for "Lease terminations and other."   The first quarter of 2009 included special charges of $21 million.

Subtracting the various operating expenses from Revenue yields Operating Income of $498 million, down 10 percent from $553 million in the year-earlier quarter.  The decrease was mostly due to the lower Gross Margin and to greater Depreciation charges, partially offset by lower special charges.

Our Operating Income target of $510 million was 2.4 percent too high.  Revenue was a little less than we expected, but the Gross Margin was better.

Edison's various non-operating items totaled a net expense of $105 million, much less than $157 million in the March 2009 period.  The company spent $19 million less on Interest expenses, and equity income swung from a $8 million loss to an $18 million gain.

In the aggregate, the non-operating expense was $35 million less than we had expected.

The income tax rate of 38.2 percent was much higher than normal because the latest quarter included a $39 million charge to reverse previously recognized tax benefits eliminated by the recently enacted health care legislation.  The tax rate was 31.4 percent in 2009's first quarter, and we were anticipating 31.0 percent in the latest period. 

After adjusting for non-controlling interests and discontinued operations, the bottom-line Net Income attributable to Edison's common shareholders was $236 million ($0.72 per diluted share), compared to $250 million ($0.76 per diluted share) in the year-earlier period. 

Net income nearly matched our $235 million ($0.72 per diluted share) target.  The positive surprises (gross margin, investment gains, interest expenses, earnings from discontinued operations) balanced the negative ones (revenue, health-care tax charge).

Full disclosure: Long EIX at time of writing.

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