Business context and reporting period
Consolidated Edison, Inc. (Con Edison) filed a combined Form 10-K with its subsidiary Consolidated Edison Company of New York, Inc. (CECONY) for the fiscal year ended December 31, 2010. Con Edison is primarily a regulated utility holding company: CECONY and Orange and Rockland Utilities (O&R) deliver electricity and natural gas, and CECONY also delivers steam. Management expects the regulated utilities to provide substantially all earnings in the coming years.
Financial performance and position
| Metric | Con Edison 2010 | 2009 | Change |
|---|---|---|---|
| Operating revenue | $13.325 billion | $13.032 billion | +2.2% |
| Operating income | $2.120 billion | $1.899 billion | +11.6% |
| Income from continuing operations | $1.003 billion | $879 million | +14.1% |
| Net income for common stock | $992 million | $868 million | +14.3% |
| Diluted EPS from continuing operations | $3.47 | $3.14 | +10.5% |
| Cash from operating activities | $2.381 billion | $2.466 billion | Down $85 million |
- Revenue and earnings drivers: Utility rate-plan changes and a higher allowed CECONY electric return supported results. Net revenues rose 11.8%; higher operating and maintenance expense, depreciation and taxes partly offset that gain. Competitive energy business operating income was $98 million, up $4 million, with higher retail margins offsetting lower wholesale revenues and mark-to-market effects.
- Margins: Operating income was $2.120 billion on $13.325 billion of revenue. The filing does not present a single consolidated margin measure.
- Cash flow and investment: Investing cash outflow was $2.175 billion, including $2.001 billion of utility construction expenditures. Cash and temporary investments ended the year at $338 million, versus $260 million in 2009.
- Debt, equity and liquidity: Long-term debt was $10.671 billion, up from $9.854 billion; shareholders’ equity was $11.274 billion, up from $10.462 billion. The common equity ratio was 50.4%. No commercial paper was outstanding at year-end; a $2.25 billion revolving credit facility supported the commercial paper programs, and the companies reported no borrowing under that facility. Management believes funding needs can be met, while noting reliance on capital-market access.
- Dividend: Common dividends declared were $2.38 per share, compared with $2.36 in 2009. A quarterly dividend of $0.60 per share was declared in January 2011.
CECONY reported 2010 revenue of $10.573 billion and net income for common stock of $893 million, compared with $10.036 billion and $781 million in 2009. Its operating income rose to $1.922 billion from $1.716 billion. Fourth-quarter Con Edison net income for common stock was $233 million and diluted EPS was $0.80, versus $202 million and $0.73 in the fourth quarter of 2009.
Material changes versus the prior comparable period
- Con Edison’s 2010 net income for common stock increased $124 million. CECONY contributed $112 million of the increase, mainly from rate-plan revenue and a higher allowed electric return; O&R and competitive energy businesses each contributed $6 million.
- Higher CECONY operations and maintenance costs, including demand-side management, employee health insurance, pension benefits and state assessments, alongside higher depreciation and property taxes, constrained earnings growth.
- Con Edison’s operating cash flow was modestly lower year over year, partly reflecting the timing of New York City property-tax payments. Investing cash outflow decreased as construction spending fell from 2009, while financing activities shifted to a $128 million outflow from an $80 million inflow.
- The 2010 results did not include the 2008 generating-plant sale gain and discontinued-operations income, which had materially elevated 2008 reported earnings.
Outlook, risks and unusual items
- Rates and investment: CECONY’s electric, gas and steam rate plans provide increases over 2010–2013, subject to cost-reconciliation, earnings-sharing and performance provisions. The utilities estimated 2011 construction expenditures of about $1.992 billion; competitive-energy capital spending was estimated at $131 million. Management expects utilities to use internally generated funds, parent equity and borrowing, including up to $600 million of long-term utility debt issuance in 2011. No explicit 2011 EPS guidance is provided in the filing.
- Operations and demand: CECONY delivered 58,693 million kWh of electricity in 2010, up 3.6%; gas deliveries were down 0.7%, and steam deliveries were essentially flat. The company forecast average annual peak-demand growth over five years of about 0.7% for electricity and 1.1% for gas. Reliability, safe operation, severe weather and completion of major infrastructure projects remain key risks.
- Pensions and benefits: The pension plan was underfunded by $2.586 billion at year-end. CECONY expected to make a discretionary pension contribution of $502 million in 2011; Con Edison estimated 2011 pension and other postretirement benefit costs would increase by $110 million. Market returns and actuarial assumptions can affect costs and funding needs.
- Environmental matters: Accrued Superfund and other environmental liabilities were $512 million for Con Edison, up from $212 million, with a corresponding $692 million regulatory asset. CECONY estimated potential aggregate MGP investigation and remediation costs of up to $1.9 billion, and O&R up to $200 million; these are estimates, not accrued amounts. CECONY could not estimate its exposure at the Gowanus Canal or potential Flushing River contamination. Recovery mechanisms and their regulatory treatment are subject to review.
- Other contingencies: CECONY had collected an estimated $535 million from customers subject to possible refund in a regulatory prudence proceeding; it disputed a consultant’s provisional $21 million assessment. About 110 lawsuits related to the 2007 Manhattan steam-main rupture remained pending, and the company had not accrued a liability. In December 2010, CECONY paid $5 million under an environmental consent order and agreed to further audits and corrective work.
- Tax uncertainty: The IRS disallowed tax deductions associated with the company’s lease-in/lease-out transactions. Con Edison reported $222 million in cumulative tax savings from those transactions and up to $77 million of potential interest, with no reserve recorded; the filing describes ongoing disputes and appeal rights. Separately, a $297 million federal tax refund was received in November 2010, and management expected no current federal income-tax liability for 2011.
- Other risks: Extensive utility regulation, potential changes to rate plans, wholesale energy supply and counterparty risk, capital-market conditions, unfunded benefits, environmental rules, and investigations into vendor payments could affect results or liquidity. Management and the auditor concluded internal control over financial reporting was effective at year-end 2010.
Important facts for investors to verify
- Whether the rate plans and cost-recovery mechanisms continue to support utility returns as operating, tax and infrastructure costs rise.
- The scale, timing and customer recovery of environmental remediation costs, particularly MGP sites, Gowanus Canal and other unresolved sites.
- Potential refunds, cost disallowances or other consequences from the vendor-payment investigation and regulatory prudence proceeding.
- The outcome and possible cash impact of the IRS challenges to LILO and repair-related tax positions, including any interest or repayment exposure.
- Whether pension funding, capital spending and planned debt issuance remain manageable while preserving credit quality and dividend capacity.