Electric Utilities Down But Still Profitable

By Greg Sushinsky | August 14, 2009 AAA

Edison International (NYSE: EIX), California's second-largest utility, delivered a mixed earnings report last week for this year's second quarter. Profits were down due to charges while adjusted income was up slightly from last year's quarter despite a dip in revenue. This profitable picture despite a revenue decrease emphasizes the mixed picture for Edison and the climate for electric utilities right now.

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Edison's Quarter
The utility reported a $16 million loss, or five cents a share, due to an 81 cents-per-share tax settlement. Without the tax settlement, the adjusted earnings were 78 cents a share versus 79 cents a share, or $261 million, for the same quarter last year. Revenues, however, slipped to $2.83 billion from $3.48 billion. While the company pegged its earnings outlook for the year at $2.18 to $2.48 a share, grinding out adjusted profits on lesser revenue is the real take home message from their report.

Other Utilities Share the Experience
A slew of electric utilities were in the same boat. Southern Company (NYSE: SO), the Georgia-based utility, posted a 15% profit while revenue fell from $4.22 billion to $3.89 billion. Cost-cutting and tight management overcame the 17% drop in power use by industrial customers. So with Edison in California and Southern in the southeastern U.S., the recession affecting business and manufacturing proved similar. Consolidated Edison (NYSE: ED), the New York utility giant, had similar adjusted profits along with its 10% revenue drop.

First Energy

(NYSE: FE), a Midwest stalwart centered in Ohio with operations that sprawl over several states, actually edged up very slightly in revenue while adjusted earnings increased to 87 cents per share compared to 85 cents a share in last year's second quarter. The company undertook vigorous cost-cutting and was, on a relative basis, a stellar performer given the mild summer midwest weather and the recession in many of its auto industry related communities. PG & E (NYSE: PCG), the largest California utility and a combination or multi-line company (including both natural gas and electric), fared similarly to most others with a revenue drop but a profit boost, in its case aided by price hikes as well as one-time gains.

Future Profitability
The recurring theme of one-time gains plus cost-cutting and management squeezing profits out of declining revenues is not going to be a theme that plays well long-term. Duke Energy (NYSE: DUK), another major multi-line company, has asked the federal government to fund "smart grid" projects. This, too, is similar to requests (or demands) from the other major utility companies. Along with this, the utilities must always contend with their regulatory climates, so there is some uncertainty going forward, even as we pull out of recession with an expected increase in user demand .

The sentiment that the electric grid needs a complete overhaul is not really news, as the last decades have featured power outages and antiquated equipment and there's the new demand from more industrial and residential customers as the U.S. population continues to increase. There will also be the challenge of expected green-source power causing concern for the future of utilities.

The Bottom Line
Utilities are not always a great dividend play, as they are dependent on the particular utility and area in which they operate. Edison International should be able to bounce back in its revenue sometime in the next several quarters, but it might not pay to be too optimistic about California's economy going forward. Some of the other utilities mentioned here might be better plays, particularly Southern, Duke and First Energy. (For a related reading, check out Trust In Utilities.)

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