Edison International (EIX) reported adjusted earnings of 32 cents per share for the second quarter of 2012, missing both the Zacks Consensus Estimate of 33 cents and the year-ago quarterly earnings of 56 cents 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 22 cents per share for the reported quarter versus 54 cents per share in the year-ago quarter. The variance of 10 cents in the reported quarter between adjusted and reported earnings was due to the exclusion of the results of Homer City, in anticipation of the orderly transfer of the Homer City plant to its owner-lessors, General Electric Company (GE). For Edison International, this will result in a loss of material control and all beneficial economic interest in the Homer City plant.
Revenue Update
Edison International’s revenue rose $74 million year over year to $3.06 million in the reported quarter, in line with the Zacks Consensus Estimate.
Segment Results
Southern California Edison (SCE) segment’s second quarter 2012 earnings were 59 cents per share compared with 65 cents 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 and repair costs related to outages 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 34 cents per share compared with a loss of 9 cents per share in the year-ago quarter. Adjusted losses were 25 cents per share compared with a loss of 7 cents per share in the same quarter, last year. Losses resulted from lower average realized energy, capacity prices and higher fuel prices. This loss was partially offset by lower planned maintenance costs at Midwest Generation; lower distributions from the Doga project; decreased energy trading revenues; lower renewable energy income; and higher interest expense from new project financings. One-time items for both quarters included the results for its Homer City plant, in anticipation of the transfer of Homer City to the owner-lessors.
Edison International’s parent company and other segment digested a quarterly loss of 2 cents per share in both the reported and the year-ago quarter.
Financial Condition
Edison International, in the first half of 2012, generated $1.16 billion from operating activities compared with $1.22 billion generated in the year-ago period. Cash and cash equivalents at the end of the reported period were $1.18 billion versus $1.47 billion at the end of the year-ago period. Long-term debt remained flat at $13.66 billion compared with $13.67 million at year-end 2011.
Guidance
Edison International would provide 2012 earnings guidance after SCE has received a final decision on its 2012 CPUC General Rate Case.
Outlook
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 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 approved an ROE of 11.5% since 2008, 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 2014 to boost annualized growth in its rate base by 7% – 9%. Thus, over the longer run, we maintain our long-term Outperform rating on the stock.
Currently, it holds a short-term Zacks #3 Rank (Hold), primarily due to the high-level of current valuation of Edison International. Year-to-date, the stock rose almost 12% and is now hovering near its 52-week high.
Based in Rosemead, California, Edison International engages in the supply of electric energy in central, coastal and southern California.
