28 February 2011

EIX: Income Statement Analysis for the December 2010 Quarter

Edison International (NYSE: EIX) earned $0.51 per diluted share on a GAAP basis in the December-ending fourth quarter of 2010, down 22 percent from $0.65 in the same three months of the previous year. 

"Core" earnings, a non-GAAP measure that excludes special items, fell from $0.59 to $0.58 per share.  The latest quarter included a $0.07 per share non-core write-off charge, whereas the year-earlier quarter had a $0.06 per share non-core benefit.

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 missed our EPS estimate of $0.63.

The principal sources for this income statement analysis were the earnings announcement, the formal 10-K, 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 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 $1.25 billion for its shareholders in 2010, up sharply from $849 million in 2009.  Revenue was approximately $12.4 billion in both years. 

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 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." 

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.

Edison did not provide a complete Income Statement for the fourth quarter.  We derived the results from the annual data and the reports from the first three quarters of the year. 

Revenue in the December quarter increased 0.7 percent, from $3.05 billion last year to $3.07 billion in the most recent three months. Our $3.0 billion estimate, which was based on typical seasonal patterns, was 2.3 percent too low.

The SCE electric utility supplied 80.4 percent of total Revenue in 2010, about the same as in 2009.

We group, for convenience, 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 $2.2 billion, or 72.2 percent of Revenue.  This rate translates into a Gross Margin of 27.8 percent, 140 basis points more profitable than last year's 26.4 percent.

The Gross Margin was 30 basis points stronger than the 27.5 percent we had estimated.

Depreciation, Decommissioning, and Amortization expenses increased 8.2 percent to $395 million, as a result of increased capital spending.  The reported amount was exceeded our $380 million estimate.

The December quarter included $44 million in additional operating charges.

Subtracting the various operating expenses mentioned above from Revenue yields Operating Income of $415 million.  Operating Income decreased 5.5 percent from $439 million in last year's fourth quarter.  Higher depreciation expenses and special charges outweighted the improved Gross Margin.

Our Operating Income target of $445 million proved to be 7.2 percent too high.  The special charges recorded in the latest quarter were the principal difference between our Operating Income target and the actual result.

Equity in income from partnerships and unconsolidated subsidiaries fell from $9 million to $6 million. We had expected $20 million. 

The other various non-operating items totaled a net expense of $151 million, $1 million more than expected.

The effective Income Tax Rate was 34.4 percent in the December 2010 quarter. We had estimated the tax rate would be 30 percent.  A change in the apportionment of state taxes was a negative factor.

After adjusting for non-controlling interests and discontinued operations, the bottom-line Net Income attributable to Edison's common shareholders was $161 million ($0.51 per diluted share).  This result was much weaker than earnings of $212 million ($0.65 per share) in the year-earlier period. 

We had expected nearly flat earnings growth ($0.63 vs $0.65 per share).  The GAAP results were, therefore, disappointing.  However, Core earnings were more consistent with expectations, falling from $0.59 to $0.58 per share.

For the year, core earnings per share increased to $3.48 per share, from $3.25 in 2009. 

Full disclosure: Long EIX at time of writing.

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