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Mixed 3Q for Edison, Profits Dip

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Edison International (EIX - Free Report) reported adjusted earnings of 81 cents per share for the third quarter of 2012, missing both the Zacks Consensus Estimate of $1.10 and the year-ago quarterly earnings of $1.26 per share. The steep decline in earnings was primarily due to losses at the Midwest Generation unit and a delay in the 2012 rate case decision regarding regulatory support for investment made by the utility’s subsidiary Southern California Edison.

On a reported basis, including one-time items, earnings came in at 58 cents per share for the reported quarter versus $1.30 per share in the year-ago quarter. The variance of 23 cents in the reported quarter between adjusted and reported earnings was mainly due to the exclusion of the results of Homer City, after the orderly transfer of the Homer City plant to its owner-lessors, General Electric Company (GE - Free Report) . For Edison International, this resulted in a loss of material control and all beneficial economic interest in the Homer City plant.

Revenue Update

Edison International's revenue rose $248 million year over year to $4.07 billion in the reported quarter, beating the Zacks Consensus Estimate of $3.70 billion.

Segment Results

Southern California Edison (SCE) segment’s third quarter 2012 earnings were $1.11 per share compared with $1.25 in the year-ago quarter. In the reported quarter, earnings decreased primarily due to a delay in the 2012 California Public Utilities Commission (CPUC) general rate case decision as higher depreciation and net interest expenses are not accounted in currently authorized revenue. The revenue requirement ultimately adopted by the CPUC will be retroactive to January 1, 2012. SCE also incurred incremental steam generator inspection & repair costs related to outages and severance costs at the San Onofre Nuclear Generating Station that were offset by other operation and maintenance cost reductions.

Edison Mission Group (EMG) segment’s quarterly GAAP loss was 42 cents per share compared with earnings of 10 cents per share in the year-ago quarter. Adjusted losses were 28 cents per share compared with earnings of 5 cents per share in the same quarter, last year. Losses resulted from lower average realized energy, capacity prices, reduced generation, and higher fuel prices. This loss was partially offset by lower planned maintenance costs cum depreciation at Midwest Generation; decreased earnings from natural gas-fired projects, and lower income tax benefits. One-time items for both quarters included the results for its Homer City plant, which were classified as discontinued operations effective from the third quarter of 2012. Homer City losses from discontinued operations during the third quarter of 2012 were 24 cents per share, including an impairment charge of 21 cents per share, compared with earnings of 5 cents per share in the prior-year period. One-time items also included a gain of 9 cents per share on the sale of an Edison Capital lease interest in a power plant.

Edison International's parent company and other segment digested a quarterly loss of 11 cents per share in the reported quarter versus a loss of 4 cents in the year-ago quarter. Losses increased primarily due to higher consolidated state income taxes of 9 cents per share.

Financial Condition

Edison International, in the first nine months of 2012, generated $2.16 billion from operating activities compared with $2.82 billion generated in the year-ago period. Cash and cash equivalents at the end of the reported period were $1.08 billion versus $1.39 billion at the end of the year-ago period. Long-term debt remained flat at $13.71 billion compared with $13.69 million at year-end 2011.


Edison International would not provide 2012 earnings guidance owing to SCE not receiving a final decision on its 2012 CPUC General Rate Case. Going forward the company plans to provide its 2013 earnings guidance simultaneously when it reports its fourth quarter and full year 2012 results on February 26, 2013.


With its strong portfolio of regulated utility assets and well-managed merchant energy operations, Edison International presents a lower risk profile compared to its utility-only peers. In addition, an incremental dividend adds to the company’s appeal with the Federal Reserve planning to keep benchmark interest rates low through mid-2013. In December 2011, the company raised its annual dividend from $1.28 per share to $1.30 per share. Going forward, with the management targeting to dish out 45% – 55% of Southern California Edison’s earnings as dividend we see ample scope for dividend appreciation going forward.

Southern California Edison operates in a supportive regulatory environment of California. The California regulator has decoupled earnings from demand volatility and also partial recovery of fuel and power purchase cost. The company is also implementing infrastructure improvement programs, focusing mainly on system reliability, smart grid technology and compliance with California’s renewable energy mandate through programs like SmartConnect and Solar Photovoltaic Program (SPVP). Going forward, Californian fundamentals would allow the utility to grow to stronger levels with the improvement in the economic environment.

With a forward-looking regulatory backup allowing the utility to file its General Rate Cases for three years, Southern California Edison has witnessed a sharp rise in its regulated rate base in recent times. Over the past five years, the regulators allowed rate base of the utility to grow by a CAGR of approximately 11%. Going by the trend we expect positive development regarding recovery of investment by the regulated utility in its 2012 General Rate Case (GRC) and the cost of capital proceeding. Overall, the company plans capital expenditure in the range of $11.8 billion to $13.2 billion for 2012 through 2014 to boost annualized growth in its rate base by 7% – 9%.

Currently, it holds a short-term Zacks #3 Rank (Hold), primarily due to the high-level of current valuation of Edison International. Over the longer run, we maintain our Neutral recommendation on the stock. Year-to-date, the stock rose almost 12.8% and is now trading near its 52-week high.

Based in Rosemead, California, Edison International engages in the supply of electric energy in central, coastal and southern California.

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