Edison International recently announced its results, and filed a 10-Q, for the third quarter of 2008. This post provides the GCFR analysis of the financial statements for this period, which ended on 30 September.
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.
Three months ago, the GCFR Overall gauge inched up from a poor 5 of the 100 possible points to a still-weak 11 points. See our analysis of Edison's second quarter of 2008 for the details.
The amount of Cash Flow from Operations during the year that ended on 30 June 2008 was a stunning 32 percent less than in the previous year. The chart, created with Google Finance, on the right compares Edison's share price with the Dow Jones Utilities Average (INDEXDJX:.DJU ). In another era, Electric Utilities were considered a relatively safe, even boring, investment.
Now, with data available from the September 2008 quarter, our gauges display the following scores:
- Cash Management: 6 of 25 (up from 4 in June)
- Growth: 3 of 25 (down from 6)
- Profitability: 1 of 25 (unchanged)
- Value: 10 of 25 (up from 2)
- Overall: 22 of 100 (up from 11)
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) | | September 2008 (actual) | September 2008 (predicted) | September 2007 (actual) |
| Revenue (1) | | 4,111 | 4,294 | 3,942 |
| Op expenses | | | | |
| | CGS (2) | (3,622) | (2,898) | (2,799) |
| | Depreciation (3) | (262) | (343) | (310) |
| | Other (4) | 737 | (103) | 66 |
| Operating Income | | 964 | 949 | 899 |
| Other income | | | | |
| | Investments (5) | (16) | (15) | (34) |
| | Asset sales | 1 | 6 | (1) |
| | Interest, etc. (6) | (239) | (157) | (136) |
| Pretax income | | 710 | 783 | 728 |
| Income tax | | (277) | (258) | (263) |
| Net Income | | 433 | 525 | 464 |
| Discontinued ops | | 6 | 0 | (4) |
| | | $1.32/sh | $1.59/sh | $1.41/sh |
| Shares outstanding | | 328 | 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 4.3 percent more than in the year-earlier period, but it fell short of our forecast of 9 percent growth. Revenue in the most recent four quarters was 6.3 percent more than in the four previous quarters.
The Cost of Goods Sold (CGS) -- fuel, purchased power, etc. -- was 88.1 percent of Revenue. This translates into a Gross Margin in the quarter of 11.9 percent. This margin is very low for Edison. Our target was 32.5 percent of Revenue. Fuel costs were up 26.5 percent, and purchased power cost 52.8 percent more than in the year-earlier quarter.
Expenses for Depreciation, Decommissioning, and Amortization were 6.4 percent of Revenue. Our estimate was 8 percent.
We assign "Provisions for Regulatory Adjustment Clauses, Net" to the Other Operating Expense category. This peculiar item fluctuates wildly and without apparent pattern from quarter to quarter. In the September 2008 period, Provisions resulted in a colossal gain of $737 million. In the prior 10 quarters, but ignoring the highest and lowest values, the average Provision was an expense of about $100 million.
The extraordinary Provisions gain is probably related to the unusually low Gross Margin. Activities for hedging the cost of power have the effect of shifting expenses between Cost of Goods Sold and Provisions, in some sort of balancing arrangement. We will consider adding Provisions to the CGS line of the Income Statement to dampen the variations.
Operating Income, as we define it, was $65 million (7.2 percent) above that in the September 2007 quarter. The effect of the huge Provisions gain on this result should be obvious. Operating Income was also a minor 1.6 percent above our forecast.
Non-operating gains and losses fit the historic pattern with one noticeable exception. "Other nonoperating deductions" -- included in the Interest, etc., line above -- were up by $75 million. A good chunk of this deduction (i.e., expense) is related to penalties related to SCE's customer satisfaction and employee safety.
The Income Tax Rate was 39.0 percent in the September 2008 quarter, much more than the 36.1 percent rate in the year-earlier quarter. The tax rate also greatly surpassed our 33 percent estimate.
The penalty and the higher tax rate reversed the growth in Operating Income, resulting in Net Income declining by 6.9 percent. Net Income fell short of our prediction by 17.5 percent.
| Cash Management | September 2008 | 3 months ago | 12 months ago |
| Current Ratio | 1.2 | 0.9 | 1.1 |
| LTD/Equity | 103% | 99% | 97% |
| Debt/CFO | 6.2 yrs | 4.0 yrs | 2.8 yrs |
| Inventory/CGS | N/A | N/A | N/A |
| Finished Goods/Inventory | N/A | N/A | N/A |
| Days of Sales Outstanding (DSO) | 34.7 days | 29.8 days | 37.6 days |
| Working Capital/Market Capitalization | 3.7% | -2.2% | 2.0% |
| Cash Conversion Cycle Time (CCCT) | 19.9 days | 10.5 days | 20.2 days |
| Gauge Score (0 to 25) | 6 | 4 | 3 |
Liquidity and leverage are stable, but the decline in Cash Flow from Operations makes the Debt level harder to bear.
| Growth | September 2008 | 3 months ago | 12 months ago |
| Revenue growth | 6.3% | 6.2% | 3.5% |
| Revenue/Assets | 34.7% | 35.8% | 35.0% |
| CFO growth | -38.7% | -32.3% | -3.0% |
| Net Income growth | 5.3% | 8.5% | 3.3% |
| Gauge Score (0 to 25) | 3 | 6 | 2 |
Revenue and Net Income growing tepidly, but these gains are overshadowed by the large and continuing drop in Cash Flow from Operations (see CFO chart above).
| Profitability | September 2008 | 3 months ago | 12 months ago |
| Operating Expenses/Revenue | 83.3% | 78.6% | 77.1% |
| ROIC | 7.9% | 10.5% | 12.7% |
| FCF/Equity | -2.1% | 1.9% | 6.8% |
| Accrual Ratio | 4.5% | 3.9% | 2.3% |
| Gauge Score (0 to 25) | 1 | 1 | 8 |
Perhaps the recent drop in the price of crude oil will help, but high energy prices through September significantly raised Edison's operating costs. ROIC is falling and Free Cash Flow is negative. The increasing Accrual Ratio suggest lower quality earnings.
| Value | September 2008 | 3 months ago | 12 months ago | 5 year median |
| P/E | 10.8 | 13.6 | 15.9 | 13.5 |
| P/E to S&P 500 average P/E | 64% | 74% | 93% | 81.8% |
| Price/Revenue | 0.9 | 1.2 | 1.4 | 1.2 |
| Enterprise Value/Cash Flow (EV/CFO) | 10.8 | 10.1 | 7.7 | 8.3 |
| Gauge Score (0 to 25) | 10 | 2 | 1 | N/A |
Edison's stock price fell during the third quarter from $51.38 to $39.90. The price fell further in October, getting as low as $30 before rebounding to about $35. The Value gauge score listed above was computed using the quarter-end closing price, per GCFR standard practice.
Edison's valuation ratios can be compared with other Electric Utilities.
| Overall | September 2008 | 3 months ago | 12 months ago |
| Gauge Score (0 to 100) | 22 | 11 | 13 |
The increase in the Overall gauge score was driven almost entirely by the double-weighted and highly contrarian Value gauge perking up in response to the big decline in Edison's share price. The Growth and Profitability results are very, very weak.
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