Edison Int'l: ROE & FCFE Analyses

From 2004 through 2006, Edison International's (EIX - Analyst Report) return on equity (ROE) remained within an attractive mid-teen percentage range, as indicated in the table above. Operating profit margins, asset turnover and cost-of-debt all indicate general annual improvements over this four-year historical period, partially offset by increasing leverage and declining tax retention rates.

In 2007-08, however, ROE declined moderately to approximately 12% due to slightly lower operating profit margins and volatility in the other ROE components.

Looking ahead through 2009, we expect ROE to decline from its 2008 level due primarily to lower margins and lower revenue per dollar of assets in light of the weak economy, and a declining tax retention rate.
 

EIX's free-cash-flow-to-equity (FCFE) remained weak and negative in 2004 mainly due to modest cash flow from operations (CFO). The situation worsened in 2005 due to a focus on debt reduction, but improved dramatically in 2006 with greater CFO and net debt issuance, partially offset by greater capital expenditures.

However, after recording significantly positive FCFE in fiscal 2006, the utility's free-cash-flow-to-equity in 2007 declined significantly -- yet remained positive -- due to lower CFO, greater capex and modest net debt reduction. The situation reversed in 2008, primarily due to a higher level of external borrowings.

Looking ahead throughout 2009, we expect another reduction in FCFE due to lower issuance of new debt and lower CFO.
 
California-based Edison International, through its subsidiaries, is a generator and distributor of electric power and an investor in infrastructure and energy assets, including renewable energy. Edison International is the parent company of Southern California Edison, a regulated electric utility, and Edison Mission Group, a competitive power generation business.