Business context and reporting period
Consolidated Edison, Inc. (Con Edison) filed this combined, unaudited Form 10-Q with subsidiary Consolidated Edison Company of New York, Inc. (CECONY) for the three months ended March 31, 2013. Con Edison includes CECONY, Orange and Rockland Utilities (O&R), and competitive energy businesses. CECONY supplies electric, gas and steam service in New York City and Westchester County; its results are reported separately below where relevant.
Key financial results
| Metric | Con Edison | CECONY |
|---|---|---|
| Operating revenues | $3.184 billion, up 3.4% from $3.078 billion | $2.806 billion, up 9.6% from $2.561 billion |
| Operating income | $526 million, down from $561 million | $560 million, up from $544 million |
| Net income for common stock | $192 million ($0.66 basic; $0.65 diluted), versus $277 million ($0.95 basic; $0.94 diluted) | $277 million, versus $273 million |
| Operating margin | Approximately 16.5%, versus 18.2% | Approximately 20.0%, versus 21.2% |
| Operating cash flow | $(84) million, versus $402 million | $350 million, versus $368 million |
| Investing cash flow | $(663) million, versus $(490) million | $(562) million, versus $(487) million |
| Cash at March 31 | $132 million, down from $394 million at year-end | $39 million, down from $353 million |
Con Edison’s net margin was approximately 6.0%, versus 9.0% in the prior-year quarter, principally reflecting the LILO-related charge described below. CECONY’s net margin was approximately 9.9%, versus 10.8%. Con Edison declared common dividends of $0.615 per share, compared with $0.605 a year earlier.
Con Edison’s total assets were $41.736 billion. Long-term debt, including the current portion, was $10.959 billion; commercial paper outstanding was $1.021 billion, and the company reported no loans under its credit agreement. Its common equity ratio was 53.0%, down from 54.1% at December 31, 2012. The current ratio was approximately 0.93. CECONY reported $10.040 billion of long-term debt including the current portion, $313 million of commercial paper, and a 52.5% common equity ratio.
Material changes versus the prior-year quarter
- Con Edison’s net income for common stock fell $85 million. Competitive energy businesses’ results declined by $99 million, while CECONY’s common-stock income increased $4 million and O&R’s increased $10 million.
- The competitive energy businesses recorded a $150 million after-tax charge tied to the IRS’s disallowance of tax losses from lease-in/lease-out (LILO) transactions. The quarter included a $121 million reduction in non-utility revenue, $131 million of additional interest expense and a $102 million reduction in income tax expense related to the accounting effect.
- Utility net revenues increased: CECONY by $148 million and O&R by $5 million. Rate-plan revenues and higher steam revenues from colder, more normal winter weather contributed; higher operating and maintenance costs, depreciation and taxes partly offset the gains.
- Con Edison’s operating cash flow deteriorated by $486 million year over year, largely because it deposited $447 million with federal and state tax agencies in January in connection primarily with potential LILO-related tax and interest liabilities. Utility construction spending also increased.
Outlook, management commentary, risks and contingencies
- Outlook and capital spending: The filing provides no quantified consolidated earnings guidance. Con Edison raised its 2013 competitive-energy capital-expenditure estimate from $253 million to $375 million, reflecting potential renewable-generation investments. Management described its strategy as emphasizing reliable service, safety, energy efficiency and cost-effective operations.
- LILO and taxes: A federal appeals court reversed a prior favorable trial-court decision on the 1997 LILO transaction in January 2013; rehearing was denied in March. The company could petition the U.S. Supreme Court by June 25, 2013. Con Edison increased estimated prior-year uncertain-tax liabilities by $238 million due to the decision and reported $251 million of uncertain income tax liabilities at quarter-end. It requested return of $95 million of its tax-agency deposit in April. The IRS accepted manufacturing deductions, favorably affecting the quarter’s effective tax rate by $15 million; acceptance of repair-cost deductions reduced estimated uncertain-tax liabilities by $72 million for Con Edison and $66 million for CECONY, with no first-quarter income-tax-expense impact.
- Regulatory refund exposure: In a New York prudence proceeding concerning alleged improper payments and construction expenditures, CECONY had collected an estimated $1.174 billion from customers subject to potential refund. A NYSPSC consultant estimated $208 million of overcharges, which the company disputes. The company had a $15 million regulatory liability and could not estimate any additional refund that might be required. Settlement discussions were anticipated.
- Superstorm Sandy and storm reviews: By March 31, CECONY and O&R had incurred $431 million and $90 million, respectively, in response and restoration costs, including capital expenditures. Most non-capital costs were deferred as regulatory assets for recovery under rate plans. New York authorities were investigating storm preparation and performance; New Jersey regulators opened a prudence review of storm costs, including RECO costs.
- Other contingencies: Con Edison reported $536 million of accrued Superfund and other environmental liabilities, largely associated with manufactured-gas-plant sites, and $721 million of related regulatory assets. The filing cautions that further remediation liabilities may be material but are not presently determinable. Approximately 93 suits remained pending from CECONY’s 2007 Manhattan steam-main rupture; no liability had been accrued, and costs could be substantial, though the company expected insurance to cover most costs.
- Regulatory and market risks: New York amended its public-service law to authorize expanded utility penalties and more stringent reliability reviews, among other measures. The filing also identifies risks from regulation and rate plans, environmental obligations, pension and postretirement liabilities, capital-market access, cyber attacks, energy-market disruption and tax disputes. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether Con Edison appeals the LILO ruling and the ultimate amount and timing of tax, interest and cash consequences.
- The potential customer-refund exposure in the NYSPSC expenditure-prudence proceeding, including how the disputed $208 million estimate is resolved.
- Recovery through rates of Sandy and other storm costs, and the outcomes of storm-performance and prudence investigations.
- Whether competitive-energy results and planned renewable investments develop as expected, given the segment’s reported operating loss and increased capital-spending estimate.
- Funding and liquidity needs: operating cash flow was negative at Con Edison, cash balances fell, and commercial-paper borrowing increased; also monitor pension contributions and utility construction spending.