Edison International (NYSE: EIX) is the parent of Southern California Edison and other companies that generate or distribute electricity or that provide financing for these activities. Edison, which traces its roots back to 1886, is one of the largest investor-owned electric utilities in the U.S.
When we analyzed Edison's first quarter of 2008, the Overall gauge score was an anemic 5 of 100 points. Of the four individual gauges that fed into this composite result, all showed scores between 0 and 3 points, on a scale of 0 to 25 points.
Now, with data available from the June 2008 quarter, our gauges display the following scores:
- Cash Management: 4 of 25 (up from 0 in March)
- Growth: 6 of 25 (up from 1)
- Profitability: 1 of 25 (down from 3)
- Value: 2 of 25 (up from 0)
- Overall: 11 of 100 (up from 5)
Before we examine each gauge, we will compare the latest quarterly Income Statement to our previously communicated expectations. Edison reports both GAAP earnings and non-GAAP, "core" earnings. Unless stated otherwise, our evaluation is limited to the GAAP results.
Please note that the presentation format below, which we use for all analyses, may differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.
| ($M) | | June 2008 (actual) | June 2008 (predicted) | June 2007 (actual) |
| Revenue (1) | | 3382 | 3257 | 3047 |
| Op expenses | | | | |
| | CGS (2) | (2320) | (2280) | (2266) |
| | Depreciation (3) | (333) | (326) | (313) |
| | Other (4) | (279) | (54) | (33) |
| Operating Income | | 450 | 597 | 501 |
| Other income | | | | |
| | Investments (5) | (14) | (20) | (26) |
| | Asset sales | 56 | 0 | 0 |
| | Interest, etc. (6) | (147) | (175) | (384) |
| Pretax income | | 345 | 402 | 91 |
| Income tax | | (83) | (133) | (0) |
| Net Income | | 262 | 269 | 91 |
| Discontinued ops | | 0 | 0 | 2 |
| | | $0.80/sh | $0.82/sh | $0.28/sh |
| Shares outstanding | | 329 | 330 | 330 |
2. Fuel + Purchased Power + Other Operation and Maintenance + Property and Other Taxes.
3. Depreciation, Decommissioning, and Amortization.
4. Provision for Regulatory Adjustment Clauses + Miscellaneous.
5. Equity in Income from Partnerships, etc., + Minority Interests
6. Interest and Dividend Income + Other Non-operating Income - Interest Expense - Other Non-operating Deductions - Dividends on Preferred Securities
Edison's Revenue in the quarter was 11.0 percent more than in the year-earlier period, beating our forecast of 6.9 percent growth. Revenue in the most recent four quarters was 6.2 percent more than in the four previous quarters.
The Gross Margin in the quarter was 31.4 percent, which exceeded our 30.0 percent prediction. The margin translates into a Cost of Goods Sold (CGS) -- fuel, purchased power, etc. -- of 68.6 percent of Revenue. It's interesting that Edison spent $272 million more on purchased power in the quarter than in the year-earlier quarter, but through "economic hedging activities" the net cost of purchased power actually dropped by $173 million.
Expenses for Depreciation, Decommissioning, and Amortization were 9.8 percent of Revenue, nearly matching our 10 percent estimate.
Other Operating Expenses, which in this case are "Net Provisions for Regulatory Adjustment Clauses," were a substantial $225 million more than we anticipated. These provisions fluctuate wildly (and, to this outsider, randomly) from quarter to quarter. It appears if the company saves money by hedging the cost of power it gives back these savings as one component of the "Net Provisions" line item.
Despite higher Revenue and a better Gross Margin than we anticipated, the huge Net Provisions expense caused Operating Income, as we define it, to fall 24.6 percent below our forecast. Operating Income was 10.2 percent below that in the June 2007 quarter.
The quarter included a $56 million gain on the "Gain on buyout of contract and sale of assets." We treat this as non-operating income, but Edison classifies it as an operating gain. It appears that the bulk of this gain was due to First Energy (NYSE: FE) paying a sum to terminate a lease at the Beaver Valley nuclear power plant.
The net expense for Interest and other non-operating charges was $28 million less than we anticipated. It was an even more impressive $237 million less than in the second quarter of 2007. The prior period featured a loss on early "extinguishment" of debt in the amount of $241 million.
The Income Tax Rate was a mere 24.1 percent in the June 2008 quarter, much less than our expectation of 33 percent.
The lease termination gain, the lower Interest and other expenses, and the lower-than-anticipated tax rate almost completely balanced out the Operating Income shortfall caused by the Net Provisions expenses. Net Income ended up only 2.6 percent below our forecast value.
Cash Management. This gauge increased to 4 points from zero points in March.
| June 2008 | 3 months ago | 12 months ago | |
| Current Ratio | 0.9 | 1.0 | 1.2 |
| LTD/Equity | 99.1% | 99.3% | 101.6% |
| Debt/CFO | 4.0 yrs | 3.3 yrs | 2.6 yrs |
| Inventory/CGS | N/A | N/A | N/A |
| Finished Goods/Inventory | N/A | N/A | N/A |
| Days of Sales Outstanding (DSO) | 29.8 days | 27.2 days | 30.6 days |
| Working Capital/Market Capitalization | -2.2% | 0.1% | 2.5% |
| Cash Conversion Cycle Time (CCCT) | 10.5 days | 14.8 days | 12.6 days |
There might by a small sign of an efficiency improvements in the DSO and CCCT figures. The increase in total Debt from 4.0 years of Cash Flow is the most negative change.
Growth. This gauge increased to 6 points from 1 point in March.
| June 2008 | 3 months ago | 12 months ago | |
| Revenue growth | 6.2% | 3.9% | 2.6% |
| Revenue/Assets | 34.9% | 35.0% | 34.7% |
| CFO growth | -32.3% | -17.9% | 54.7% |
| Net Income growth | 8.5% | -12.6% | 5.2% |
There were minor improvements in Revenue growth and Net Income growth, but the large drop in Cash Flow from Operations is more significant. Edison has been burning its cash to pay natural gas and other energy costs in excess of what it receives in return from ratepayers.
Profitability. This gauge decreased from 3 points in March to 1 point now.
| June 2008 | 3 months ago | 12 months ago | |
| Operating Expenses/Revenue | 78.6% | 80.1% | 74.9% |
| ROIC | 10.4% | 9.9% | 12.8% |
| FCF/Equity | 1.9% | 7.8% | 12.9% |
| Accrual Ratio | 3.9% | 2.0% | 0.9% |
Energy price increases have significantly raised Edison's operating costs. The only good news here is that 10 percent ROIC is reasonable.
Value. Edison's stock price edged up over the course of the quarter from $49.02 to $51.38, however, the price is below $47 now. The Value gauge, based on the quarter-end closing price, inched up from zero to 2 points.
| June 2008 | 3 months ago | 12 months ago | 5 year median | |
| P/E | 13.6 | 15.0 | 16.1 | 13.5 |
| P/E to S&P 500 average P/E | 76.5% | 87.2% | 98.2% | 81.8% |
| Price/Revenue | 1.2 | 1.2 | 1.4 | 1.2 |
| Enterprise Value/Cash Flow (EV/CFO) | 10.1 | 8.1 | 6.9 | 8.1 |
The greater discount from the market multiple is a minor positive from the value perspective.
At 11 out of 100 possible points, the Overall gauge for Edison International remains weak. All gauges are registering poor scores, but there were some minor increases that bear watching to see if they continue in future quarters.
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