Business context and reporting period
Consolidated Edison, Inc. (Con Edison) filed this combined unaudited Form 10-Q with its subsidiary Consolidated Edison Company of New York, Inc. (CECONY) for the quarter ended March 31, 2011. Con Edison includes CECONY, Orange and Rockland (O&R), and competitive energy businesses. CECONY provides regulated electric, gas and steam service, primarily in New York City and Westchester County.
Financial performance and position
Unless otherwise noted, amounts are in millions of dollars. Year-over-year comparisons are for the three months ended March 31.
- Con Edison: Operating revenue was $3,349, down 3.3%; operating income was $626, up 27.2%; net income for common stock was $311, up 37.6%. Basic EPS was $1.07 versus $0.80; diluted EPS was $1.06 versus $0.80. The declared dividend was $0.600 per share, compared with $0.595.
- CECONY: Revenue was $2,709, down $9; net income for common stock was $268, up $25 (10.3%). Operating income rose to $546 from $512. Electric, gas and steam operating income was $217, $204 and $125, respectively.
- Segment earnings: O&R net income increased to $19 from $13. Competitive energy businesses reported $27 versus a $28 loss, including $22 of after-tax mark-to-market gains versus $38 of losses in 2010.
- Cash flow: Con Edison generated $362 of operating cash flow, invested $496, and received $312 from financing; cash and temporary investments ended at $516, up from $338 at year-end. CECONY generated $72 from operations, used $413 in investing, and received $291 from financing; ending cash was $28, versus $78 at year-end.
- Investment and debt: Con Edison utility construction expenditures were $398; CECONY’s were $379. At March 31, Con Edison had $10,670 of long-term debt and $464 of short-term notes payable; CECONY had $9,743 and $464, respectively. Con Edison’s common equity ratio was 50.8%, up from 50.4% at year-end; CECONY’s was 50.2%, up from 49.9%.
- Margins and liquidity: Con Edison’s operating margin (operating income/revenue) was approximately 18.7%, versus 14.2% in 2010. Current assets were $3,590 and current liabilities $2,676 at March 31. CECONY’s corresponding balances were $2,570 and $2,272.
Material changes versus the prior period
- Con Edison’s $85 increase in common-stock earnings principally reflected a $60 after-tax improvement in competitive-business mark-to-market effects and a $25 increase at CECONY; O&R contributed $6 of growth.
- Con Edison operating income increased $134 despite lower revenue, mainly because purchased-power expense fell $278. Utility rate plans and higher net revenues contributed to results; lower operations and maintenance costs also helped, partly offset by higher depreciation and property taxes.
- Competitive energy revenue fell $92, but purchased-power expense fell $192. Competitive results are therefore materially affected by derivative mark-to-market movements.
- Operating cash flow improved substantially at Con Edison, primarily due to federal tax refunds and lower cash collateral paid on energy derivatives. Utility construction spending was lower than in the 2010 quarter.
Outlook, management commentary, risks and contingencies
- The filing provides no specific earnings guidance. Management describes its strategy as reliable and safe energy service, energy efficiency, cost-effective operations and evaluation of additional electric- and gas-related investment opportunities. Forward-looking statements are subject to risks and actual results may differ.
- Management attributed lower operations and maintenance costs to health-insurance savings, demand-management costs and cost controls, partly offset by winter-storm emergency response and higher regulatory assessments. Depreciation and property taxes rose mainly with higher utility plant balances.
- CECONY had collected an estimated $605 subject to potential refund in an NYSPSC prudence proceeding. The company disputed a regulator consultant’s provisional $21 assessment, could not estimate any refund, and had not recorded a refund liability.
- Investigations into kickbacks and vendor payments remain ongoing, including additional arrests in 2010 and 2011. The company said it could not predict the effect on its controls, business or financial results. The filing reports effective disclosure controls; the new financial and supply-chain system project is reasonably likely to materially affect internal control over financial reporting.
- Approximately 100 suits relating to the 2007 Manhattan steam-main rupture remained pending. CECONY had not accrued a liability; insurance was expected to cover most costs, which could be substantial but could not be estimated.
- Environmental exposure includes $511 of accrued Superfund liabilities at Con Edison and $392 at CECONY. Additional remediation liabilities could be material and are not presently determinable; regulators have opened a proceeding on recovery mechanisms.
- Con Edison’s IRS disputes over Lease In/Lease Out tax deductions remain unresolved. The company reported $225 of estimated tax savings through March 31 and potential repayment interest of up to $79, net of tax, if deductions were disallowed; it had recorded no reserve.
- Maximum guarantees totaled $897. A 10% decline in market prices was estimated to reduce the fair value of utility hedges by $107, with expected offsets in energy purchase costs. Derivative collateral requirements could rise significantly following a downgrade.
Most important facts for investors to verify
- How much of the earnings increase is repeatable, given the competitive businesses’ $22 after-tax mark-to-market gain and its prior-year loss.
- The outcome and potential customer-refund exposure from the NYSPSC prudence proceeding and vendor-payment investigations.
- Final costs, insurance recovery and liability developments from the steam-main rupture and environmental remediation matters.
- The IRS appeals and potential cash, interest and earnings effects of the LILO tax disputes.
- Funding needs for utility construction and pension plans, including CECONY’s $491 discretionary pension contribution in the first quarter and Con Edison’s expected $533 pension contribution for 2011.
- Short-term borrowing, derivative collateral exposure, and the implementation and control implications of the new financial and supply-chain system.