27 June 2010

EIX: Look Ahead to June 2010 Quarterly Results

This post describes our model of Edison International's (NYSE: EIX) Income Statement for the second quarter of 2010, which will end on 30 June.

The purpose of the model is to establish a baseline for identifying surprises, positive or negative, in the quarterly results the company will report.  Estimates for each line of the Income Statement are derived from management's guidance, the company's historical financial results, and other publicly available data.

We begin by reviewing background information about Edison and the business environment in which it is currently operating.

Edison International is the parent of Southern California Edison and Edison Mission Group

The company earned $849 million for its shareholders in 2009 on Revenue of $12.4 billion, compared to earnings of $1.2 billion and Revenue of $14.1 billion in 2008. 

//UPDATE - 2 July 2010// Fitch Ratings upgraded Edison's long-term issuer default credit ratings from "BBB-" to "BBB," with a stable outlook.//

It has a market capitalization of around $11 billion.

SCE, which traces its roots back to 1886, operates a regulated electric utility serving commercial and residential consumers in central, coastal and southern California.  SCE owns facilities that generate, transmit, and distribute electricity.  It contributed more than 80 percent of Edison's revenue in 2009.

The two other large electric utilities in California are PG&E Corp.'s (NYSE:PCG) Pacific Gas and Electric Company and the San Diego Gas and Electric subsidiary of Sempra Energy (NYSE: SRE).

In 2009, renewable energy sources provided about 17 percent (13.6 billion kilowatt hours) of SCE's total power portfolio.  Given this figure and its purchase of 65 percent of all the solar power produced in the nation," SCE claims to be "the nation’s leading utility for renewable energy." 

SCE is increasing its use of power from renewable sources to comply with California's Renewables Portfolio Standard.  In 2008, Governor Schwarzenegger signed an Executive Order requiring that 33 percent of energy sold in 2020 be created from renewable energy sources.

Edison Mission Group has two subsidiaries: Edison Mission Energy and Edison Capital.  EME owns, or has interests in, various independent power-generation facilities.  Edison Capital provided financing for energy and infrastructure projects, but it is not making new investments.

In the first quarter of 2010, Edison International earned $0.72 per diluted share, $0.04 less than in 2009's first quarter.  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. 

Edison increased the dividend on its common stock for 2010 from $1.24 to $1.26 per share.

We're now ready to look specifically at the June 2010 quarter.

Edison updated its guidance for 2010 when it released its first quarter results on 7 May 2010.  The guidance was further clarified in the presentation the company gave during the ensuing conference call.

It now expects basic earnings (akin to GAAP) between $3.05 and $3.35 per share, and Core earnings between $3.15 and $3.45 per share.

Since GAAP and Core earnings per share in the first quarter were $0.72 and $0.82, respectively, the GAAP and Core guidance for the final three quarters is $2.33 to $2.63.

If normal seasonal patterns apply, second quarter earnings between $0.70 and $0.79 would be consistent with the company's guidance for the year.

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.  As shown in the figure, Edison's Revenue peaks in the third quarter when warm temperatures increase the demand for air conditioning.

We expect that Revenue in the second quarter will be 5 to 10 percent greater than the first quarter's $2.8 billion.  Our specific target is $3.02 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.  Although there have been some wide variations from year to year, we believe a reasonable expectation for the second quarter is CGS at 71 percent of Revenue.

 This is equivalent to a Gross Margin of 29 percent.

Given our Revenue estimate, these figures would suggest CGS in the second quarter of 2010 of 0.71 * $3.02 billion = $2.1 billion.

Expenses for Depreciation, Decommissioning, and Amortization have recently been about $370 million per quarter, and we will assume a similar amount for the June quarter.

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

These figures would result in Operating Income of $506 million.

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 per quarter in 2009.

These figures would result in pretax income of $376 million.  If we assume an effective tax rate of 31 percent, the tax provision would be $116 million.  We also need to subtract something for Noncontroling Interests.  With these adjustments, the estimate for Net Income becomes $244 million (about $0.74 per share).  In the year-earlier quarter, Edison lost $17 million ($0.05 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.


  1. Hi, do you have a way to suggest a company to analyze? If not, any plans to analyze Ford (F)?

  2. I appreciate the suggestion. I'd like to add an Industrial company to the analysis rotation, and Ford would be an interesting choice.

    I don't ask for requests because the time required to setup and perform the initial GCFR analysis of a company would make it impossible for me to satisfy more than one or two requests per year.

    I'll look at Ford's historical financial statements and then decide whether the GCFR approach is suitable. This will take several weeks, perhaps a bit longer, given the current work load.

    Thank you for reading Gauging Corporate Financial Results. I hope you have found it helpful in some small way.