06 October 2010

EIX: Look Ahead to September 2010 Quarterly Results

This post describes our model of Edison International's (NYSE: EIX) Income Statement for the third quarter of 2010, which ended on 30 September.

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.  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 contributed more than 80 percent of Edison's revenue in 2009.  

Edison Mission Energy owns, or has interests in, various independent power-generation facilities

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).

Edison International 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. 

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

Edison's current market value is approximately $11 billion.  On 2 July 2010, Fitch Ratings upgraded Edison's long-term issuer default credit ratings from "BBB-" to "BBB," with a stable outlook.

In 2009, Edison reached an agreement with the IRS settling all of the company's federal tax disputes, most notably those involving "cross-border, leveraged leases," for the tax years between 1986 and 2002.  The settlement resulted in numerous special charges, including some for lease terminations.  In the second quarter of 2010, the state tax impacts of the federal settlement became clearer when the California Franchise Tax Board accepted the company's tax positions.

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.  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." 

Edison International earned $1.05 per diluted share on a GAAP basis in 2010's second quarter, which ended 30 June.  This amount included $0.43 of non-recurring, tax-related gains.

Stripping out the special items, "Core" earnings, a non-GAAP measure, fell from $0.78 in the second quarter of 2009 to $0.62 per share in the same quarter of 2010.  Core earnings increased at the company's electric utility but declined by a greater amount at Edison's power-generation subsidiary.  The cost of performing an unusually high number of preventive maintenance activities at certain electricity-generating plants depressed the latter's results.

Readers wanting to take another look at Edison International's June 2010 quarter might wish to review our Income Statement analysis.

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

Edison updated its guidance for 2010 when it released its second-quarter results on 5 August 2010.  The guidance was further clarified in the presentation the company gave during the ensuing conference call.

The company continues to expect Core earnings per share between $3.15 and $3.45, but it now expects basic earnings (akin to GAAP) between $3.48 and $3.78 per share.

Since Core and GAAP earnings per share in the first half of 2010 were $1.44 and $1.77, respectively, the guidance for Core and GAAP earnings in the second half is $1.71 to $2.01 per share.  If normal seasonal patterns apply, in which earnings spike during the summer, third-quarter earnings between $1.14 and $1.34 would be consistent with the company's guidance for the year.

Edison'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 temperatures where company provides electric service. 

Based on Edison's historical financial data, our specific target for Revenue in the third quarter is $3.6 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 third quarter is CGS at 68.5 percent of Revenue.

This is equivalent to a Gross Margin of 31.5 percent.

Given our Revenue estimate, these figures would suggest CGS in the third quarter of 2010 of 0.685 * $3.6 billion = $2.47 billion.

Expenses for Depreciation, Decommissioning, and Amortization have recently inched up to about $380 million per quarter, and we will assume a similar amount for the September 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 $754 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 $624 million.  If we assume an effective tax rate of 31 percent, the tax provision would be $193 million.  We also need to subtract something for Noncontroling Interests.  With these adjustments, the estimate for Net Income becomes $400 million (about $1.22 per share).  In the year-earlier quarter, Edison made $403 million ($1.22 per share). 

Please click here to see a 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.

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