Consolidated Edison, Inc. — 2013 Form 10-K
Business context and reporting period. This combined annual report covers Con Edison and its wholly owned regulated utility subsidiary, Consolidated Edison Company of New York (CECONY), for the fiscal year ended December 31, 2013. Con Edison also owns Orange and Rockland Utilities (O&R) and competitive energy businesses. Regulated utilities generated 91% of consolidated revenue and substantially all common-stock earnings; CECONY alone contributed 96% of consolidated net income for common stock.
Key financial metrics
| Con Edison, $ millions except per-share amounts | 2013 | 2012 |
|---|---|---|
| Operating revenues | $12,354 | $12,188 |
| Operating income | $2,244 | $2,339 |
| Net income for common stock | $1,062 | $1,138 |
| Diluted earnings per share | $3.61 | $3.86 |
| Cash dividends declared per share | $2.46 | $2.42 |
| Operating cash flow | $2,552 | $2,599 |
| Cash and temporary cash investments at year-end | $674 | $394 |
| Total assets at year-end | $40,647 | $41,209 |
| Long-term debt at year-end | $10,489 | $10,062 |
| Shareholders’ equity at year-end | $12,245 | $11,869 |
Con Edison’s operating margin was approximately 18.2% in 2013, versus 19.2% in 2012; net income for common stock was approximately 8.6% of revenue, versus 9.3%. Utilities’ purchased energy costs are generally passed through to customers, so management emphasizes “net revenues” (revenues less purchased power, fuel and gas costs) when assessing operating performance.
Fourth quarter: Con Edison reported revenue of $2,868 million, operating income of $477 million, net income for common stock of $234 million and diluted EPS of $0.79. In Q4 2012, the corresponding figures were $2,901 million, $453 million, $207 million and $0.70. CECONY’s Q4 2013 revenue was $2,410 million, operating income $402 million and net income for common stock $189 million, compared with $2,449 million, $415 million and $189 million in Q4 2012.
Operating cash flow remained substantial but was slightly lower year over year. Investing activities used $2,659 million, including $2,339 million of utility construction expenditures; financing activities provided $387 million. Year-end current assets were $3,891 million and current liabilities $4,730 million. The company reported $1,451 million of commercial paper outstanding, including $1,210 million for CECONY; a $2.25 billion revolving credit facility supported the commercial paper programs, with no borrowings under that facility at year-end. Con Edison’s common equity ratio was 53.9%.
Material changes versus the prior comparable period
- Revenue rose 1.4%, while operating income fell 4.1% and net income for common stock declined 6.7%.
- CECONY’s common-stock income increased slightly to $1,020 million from $1,014 million. Lower electric operating income was largely offset by higher gas and steam results; steam benefited from colder weather and higher deliveries.
- Competitive energy businesses reported a $23 million net loss, versus $76 million of net income in 2012. Results included a $63 million after-tax LILO charge, partly offset by a $15 million tax benefit and $45 million in after-tax mark-to-market gains.
- Operating cash flow decreased $47 million. Con Edison cited a special deposit with federal and state tax agencies primarily related to LILO; CECONY’s cash flow improved, partly due to a New York City property-tax refund.
- Year-end regulatory assets fell materially, primarily reflecting the actuarial remeasurement of pension and postretirement obligations. Total assets declined by $562 million despite higher net plant.
Outlook, commentary, risks and unusual items
- Rates and investment: A New York PSC-approved joint proposal established CECONY delivery rate plans for 2014–2015 electric service and 2014–2016 gas and steam service. The plans provide authorized returns on equity of 9.2% for electric and 9.3% for gas and steam, with specified revenue changes and cost-reconciliation mechanisms. The Utilities estimated 2014–2016 regulated construction expenditures of approximately $7.5 billion in total; 2014 regulated utility construction was estimated at $2.365 billion. Management expected to fund 2014 requirements with internal cash and $1.5–$2.0 billion of long-term debt, and said it did not expect to issue common equity in 2014.
- Operations and demand: CECONY’s 2013 electric deliveries declined 0.5%, while gas deliveries rose 19.4% and steam deliveries rose 11.1%, with weather and billing conditions affecting comparisons. The company forecast continued peak-demand growth and expected available supply to meet 2014 requirements.
- Superstorm Sandy and regulation: CECONY and O&R incurred $483 million and $91 million, respectively, of Sandy response and restoration costs through 2013. Most eligible costs were deferred for recovery, but CECONY’s recovery is subject to regulatory review and potential refund. New York adopted additional utility storm-response requirements, customer credits for extended outages and performance scorecards; failures may lead to penalties or limits on cost recovery.
- Tax and lease matter: A federal appeals court disallowed tax losses claimed for Con Edison Development’s LILO transactions. Termination of the transactions resulted in a $95 million 2013 charge to earnings before tax effects (a $63 million after-tax charge); the company also received $200 million of net cash proceeds. Verify the full tax, interest and cash-deposit implications.
- Contingencies: CECONY estimated accrued Superfund and other environmental liabilities of $644 million at year-end, with $830 million of related regulatory assets. Its estimated potential liability for known Astoria-site investigation and cleanup was $152–$451 million; exposure at the Gowanus Canal site could not be predicted. A separate New York PSC prudence proceeding concerns alleged vendor-payment misconduct by former employees; the company had collected $1.389 billion from customers subject to potential refund and disputed a consultant’s $208 million overcharge estimate. These matters may change as investigations and proceedings progress.
- Other risks: The filing highlights infrastructure reliability and construction execution, severe weather and climate impacts, extensive regulatory oversight, environmental compliance, pension funding and market returns, wholesale supplier and commodity exposure, cyber attacks, and continued access to capital markets. Con Edison reported that cyber incidents to date had not materially affected operations.
- Management estimated 2014 pension and postretirement benefit costs would decrease by $300 million for Con Edison and $280 million for CECONY versus 2013. Actual costs remain sensitive to actuarial assumptions and plan investment performance.
Most important facts for an investor to verify
- Whether the 2014–2016 rate plans and cost-recovery provisions deliver expected returns, and whether the planned utility investment is completed on schedule and within budget.
- The timing and outcome of regulatory review of Sandy restoration costs, the vendor-payment prudence proceeding and any potential customer refunds or penalties.
- The ultimate cost and recoverability of environmental remediation, particularly at manufactured-gas sites, Astoria and Gowanus Canal.
- How recurring earnings compare after removing the LILO charge, tax benefits and competitive-business mark-to-market effects.
- Whether operating cash flow, planned debt issuance and revolving-credit access remain adequate to fund construction, debt maturities, pension contributions and dividends.
- Whether pension-cost reductions materialize and how changes in discount rates, asset returns and benefit assumptions affect future obligations and cash contributions.