Consolidated Edison, Inc. — 2011 Second-Quarter 10-Q
Business context and period: Combined unaudited filing for Consolidated Edison, Inc. (Con Edison) and subsidiary Consolidated Edison Company of New York, Inc. (CECONY), for the quarter and six months ended June 30, 2011. Con Edison includes regulated utilities CECONY and O&R, plus competitive energy businesses. Unless noted, amounts below are in millions of dollars.
Key financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenues | $2,993 | $3,017 | $6,342 | $6,478 |
| Operating income | $398 | $429 | $1,024 | $921 |
| Net income for common stock | $165 | $183 | $477 | $409 |
| Diluted EPS | $0.56 | $0.64 | $1.62 | $1.44 |
| Operating cash flow | Not separately presented for quarter | $1,589 | $795 |
- Q2 revenue declined 0.8%, operating income declined 7.2%, and common-stock net income declined 9.8%. Operating margin was approximately 13.3%, versus 14.2% a year earlier.
- First-half revenue fell 2.1%, while operating income rose 11.2% and common-stock net income rose 16.6%. First-half operating margin was approximately 16.1%, versus 14.2%.
- Quarterly common dividends declared were $0.60 per share, compared with $0.595; first-half dividends were $1.20 per share, compared with $1.19.
- At June 30, Con Edison reported cash and temporary investments of $492, current assets of $3,209, and current liabilities of $2,473. Long-term debt was $10,669, with $5 due within one year. No commercial paper or credit-agreement borrowings were outstanding; letters of credit under the facility totaled $188.
- First-half investing cash outflow was $1,129, including $958 of utility construction expenditures and $50 of non-utility construction expenditures. Financing cash outflow was $306; cash increased by $154 from year-end.
Changes and performance drivers
- Q2 results reflected a $39 million reduction in competitive energy businesses’ net income, primarily from adverse year-over-year mark-to-market effects of $67 million. This more than offset improved utility earnings.
- CECONY first-half operating income increased $71 million. Higher net revenues, including rate-plan effects, were partly offset by increased operating and maintenance costs, depreciation, and property taxes. Gas operating income declined $22 million, while electric and steam operating income increased $52 million and $41 million, respectively.
- First-half cash from operations increased $794 million year over year, reflecting World Trade Center-related recoveries, lower estimated income-tax payments and refunds, and lower cash collateral paid, partly offset by higher pension contributions. The cash-flow improvement therefore includes substantial timing and working-capital effects.
- Con Edison’s competitive energy businesses’ first-half operating income rose to $58 million from $33 million, mainly because of improved mark-to-market effects; results remain exposed to commodity markets.
- Long-term debt was broadly unchanged from December 31, 2010. Common equity represented 50.8% of Con Edison capitalization and 50.1% of CECONY capitalization at June 30.
Outlook, regulation, risks and unusual items
- No company-wide earnings guidance is stated in the provided filing text. O&R received a New York electric rate order effective July 1, 2011, authorizing a $26.6 million increase. O&R subsequently requested a $17.7 million increase effective July 1, 2012, and proposed an alternative three-year plan with annual increases of $17.6 million.
- Management expected $533 million of discretionary 2011 pension contributions, including $491 million already contributed by CECONY in the first half; expected 2011 contributions to other postretirement plans were $84 million.
- CECONY had collected an estimated $681 million subject to potential customer refund in a NYSPSC prudence proceeding. The company disputed a consultant’s provisional $21 million assessment and had recorded a $10.5 million regulatory liability; any additional refund exposure was not estimable.
- Con Edison accrued $502 million for Superfund and other environmental costs, against $683 million of related regulatory assets. Estimated potential undiscounted MGP remediation exposure was stated as up to $1.9 billion for CECONY and $200 million for O&R; actual costs may differ materially, and some remediation requirements remain undetermined.
- About 100 suits remained pending over CECONY’s 2007 Manhattan steam-main rupture. No liability was accrued; insurance was expected to cover most costs, but total exposure could be substantial and was not estimable.
- IRS audits disallowed tax deductions related to Con Edison’s LILO transactions, including $416 million for tax years 1998–2007 and further deductions for 2008 and 2009. Con Edison recorded no reserve, reported $229 million of estimated tax savings through June 30, and stated potential repayment could carry up to $82 million of after-tax interest.
- Management said disclosure controls were effective. The ongoing enterprise resource planning implementation was considered reasonably likely to materially affect internal control over financial reporting, though no material quarterly change was reported.
Most important facts for investors to verify
- Whether regulated rate-plan revenues and cost-reconciliation mechanisms sustain utility earnings as pension, healthcare, depreciation, and property-tax costs rise.
- How much of the first-half operating cash-flow increase reflects recurring operations versus tax refunds, regulatory recoveries, collateral movements, and other timing effects.
- The eventual customer-refund outcome and any additional liabilities in the CECONY expenditure-prudence proceeding.
- Environmental remediation estimates, regulatory recovery arrangements, and the status and potential cost of steam-main litigation.
- The outcome of IRS challenges to LILO tax treatment and any resulting cash repayment, interest, or earnings charge.
- Competitive energy mark-to-market volatility, commodity and counterparty exposures, and the potential collateral impact of credit-rating downgrades.