01 November 2010

EIX: Income Statement Analysis for the September 2010 Quarter

Edison International (NYSE: EIX) earned $1.56 per diluted share on a GAAP basis in the September-ending third quarter of 2010, up 27 percent from $1.22 in the same three months of last year. 

When compared to the other quarters of the year, Edison's earnings are nearly always highest in September.

An $0.11 per share benefit related to a tax settlement gave an added boost to reported earnings in the most recent quarter.  "Core" earnings, a non-GAAP measure that excludes special items, were strong without the extra lift, rising from $1.09 to $1.46 per share.

This post examines Edison's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates.  Reported and core earnings both surpassed our $1.22 EPS estimate.

The principal sources for this income statement analysis were the earnings announcement, the formal 10-Q, the conference call presentation, and the call transcript.  The latter is made available by Seeking Alpha.

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.

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

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

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's current market value is approximately $12 billion.
On 2 July 2010, Fitch Ratings upgraded Edison's long-term issuer default credit ratings from "BBB-" to "BBB," with a stable outlook.  The company increased the dividend on its common stock for 2010 from $1.24 to $1.26 per share.

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 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 in the September quarter increased 3.4 percent, from $3.66 billion last year to $3.79 billion in the most recent three months.  Our $3.6 billion estimate, which was based on typical seasonal patterns, was 5 percent too low.

The SCE electric utility supplied 81.8 percent of total Revenue in the third quarter.  However, the competitive power generation business (i.e, EMG) was responsible for 77 percent of Edison's Revenue growth.  Higher energy prices led to greater revenues from EMG's Illinois-based Midwest Generation and Homer City, PA, plants.

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 $2.55 billion, or 67.3 percent of Revenue.  This rate translates into a Gross Margin of 32.7 percent, 180 basis points more profitable than last year's 30.9 percent.

The Gross Margin was a 120 basis points stronger than the 31.5 percent we had estimated.

Depreciation, Decommissioning, and Amortization expenses increased 3.6 percent to $378 million, as a result of increased capital spending. The reported amount was just slightly below our $380 million estimate.

The September quarter did not include additional operating charges.

Subtracting the various operating expenses mentioned above from Revenue yields Operating Income of $862 million.  Operating Income increased 12.2 percent from $768 million in last year's third quarter.  Income growth was due to strength in both Revenue and Gross Margin, partially offset by higher depreciation.

Our Operating Income target of $754 million proved to be 12.5 percent too low.  We failed to anticipate the improvements to both Revenue and Gross Margin.

Equity in income from partnerships and unconsolidated subsidiaries rose from $35 million to $62 million, which was significantly better than we expected.  This item is more influenced by seasonal factors than we realized. 

The other various non-operating items totaled a net expense of $150 million, almost exactly as expected.

The effective Income Tax Rate was 31.9 percent in the September 2010 quarter.  We had estimated the tax rate would be 31 percent.

After adjusting for non-controlling interests and discontinued operations, the bottom-line Net Income attributable to Edison's common shareholders was $510 million ($1.56 per diluted share).  This result was much better than earnings of $403 million ($1.22 per share) in the year-earlier period. 

Earnings, even without non-core items, significantly exceeded our expectation of flat growth.

In summary, Edison's revenue increased in the third quarter.  The rise was modest, but it broke a string of quarters with negative revenue growth.  Edison's competitive power generation business provided most of the revenue growth, and this was probably due to higher energy prices.  The Gross Margin improved significantly, which allowed more of the revenue to reach the bottom line as earnings.  A rise in equity income from partnerships and unconsolidated subsidiaries also helped earnings more than we expected.

Reported earnings in the September 2010 quarter also benefited from "final resolution of interest charges related to a California Franchise Tax Board settlement" and from "a gain from the sale of bankruptcy claims."

Full disclosure: Long EIX at time of writing.

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