04 January 2011

EIX: Look Ahead to December 2010 Quarterly Results

This post describes our model of Edison International's (NYSE: EIX) Income Statement for 2010's fourth quarter, which ended on 31 December.

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 a population of about 13 million people 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. 

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 2011 from $1.26 to $1.28 per share.

Edison's current market value is approximately $12.7 billion, on a fully diluted basis. 

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 $1.56 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. 

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.

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

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

When Edison International released its third-quarter results on 29 October 2010, it increased its core earnings guidance range to $3.45 to $3.60 per share for the full year of 2010, from $3.15 to $3.45 per share.  In addition, Edison now expects Basic earnings (more akin to GAAP) between $3.88 and $4.03 per share.

The guidance was further clarified in the presentation [pdf] the company gave during the conference call that followed the earnings announcement.

Since Core and Basic earnings per share in the first three quarters of 2010 were $2.90 and $3.33, respectively, the fourth-quarter guidance for both earnings variants is $0.55 to $0.70.  Fully diluted GAAP earnings could be $0.01 to $0.02 per share less.

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 the company provides electric service. 

Based on Edison's historical financial data, our specific target for Revenue in the fourth quarter is $3.0 billion.  This is 1.7 percent less than Revenue of $3.05 billion in the December 2009 period.

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 fourth quarter is CGS at 72.5 percent of Revenue.

This is equivalent to a Gross Margin of 27.5 percent.

Given our Revenue estimate, these figures would suggest CGS in the fourth quarter of 0.725 * $3.0 billion = $2.2 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 December 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 $445 million, up 1.4 percent from last year's fourth quarter.

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 the figures for these items will be similar to those reported in the first three quarters of the year.

The non-operating data would bring overall pretax income down to $315 million.  If we assume an effective tax rate of 30 percent, the tax provision would be $95 million.  We also need to subtract $13 million for Noncontroling Interests.  With these adjustments, the estimate for Net Income becomes $208 million (about $0.63 per share).  In the year-earlier quarter, Edison made $212 million ($0.65 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.

1 comment:

  1. I have a web site where I cover stocks under five dollars.I don"t think electric utilities are the safe investment they were years ago. a lot companies in this business are in to hedging trading of electricity.this makes them much more speculative.