Consolidated Edison, Inc. — 2012 Form 10-K
Business context and reporting period. This combined annual report covers Con Edison and its wholly owned utility subsidiary, Consolidated Edison Company of New York (CECONY), for the fiscal year ended December 31, 2012. Con Edison is a regulated utility holding company; its regulated utilities accounted for 95% of 2012 net income for common stock. The filing also includes unaudited fourth-quarter data.
Key financial metrics
| Con Edison, $ millions except per-share data | 2012 | 2011 | Change |
|---|---|---|---|
| Operating revenues | $12,188 | $12,886 | Down 5.4% |
| Operating income | $2,339 | $2,239 | Up $100 million |
| Net income for common stock | $1,138 | $1,051 | Up 8.3% |
| Diluted earnings per share | $3.86 | $3.57 | Up $0.29 |
| Cash dividends per common share | $2.42 | $2.40 | Up $0.02 |
| Operating cash flow | $2,599 | $3,137 | Down $538 million |
| Cash and temporary cash investments, year-end | $394 | $648 | Down $254 million |
| Long-term debt, year-end | $10,062 | $10,143 | Down $81 million |
| Total assets, year-end | $41,209 | $39,214 | Up $1,995 million |
| Shareholders’ equity, year-end | $11,869 | $11,649 | Up $220 million |
Investing activities used $2,523 million and financing activities used $330 million. The company reported $2,538 million of construction expenditures, including $2,046 million for regulated utilities. Current assets were $3,451 million versus current liabilities of $3,945 million.
CECONY reported 2012 revenue of $10,187 million, operating income of $2,093 million, net income for common stock of $1,014 million, operating cash flow of $2,346 million and long-term debt of $9,145 million.
In the fourth quarter, Con Edison reported revenue of $2,901 million, operating income of $453 million, net income for common stock of $207 million and diluted EPS of $0.70, versus $2,915 million, $459 million, $190 million and $0.65, respectively, in fourth-quarter 2011.
Material changes versus prior periods
- Annual revenue declined mainly with lower energy costs and lower competitive-business sales; energy supply costs are generally recovered from customers and do not ordinarily drive utility earnings.
- Net income for common stock increased $87 million. Utility rate-plan revenues and improved competitive-energy results supported earnings, while higher operations and maintenance costs, depreciation and property taxes offset part of the gains.
- Competitive energy businesses’ net income increased to $76 million from $32 million, including $40 million of after-tax mark-to-market gains in 2012 versus $13 million of losses in 2011.
- Operating cash flow fell, principally reflecting higher income tax payments and pension contributions. Pension contributions were $797 million in 2012 versus $553 million in 2011.
- Electric, gas and steam deliveries at CECONY declined 1.1%, 9.8% and 11.6%, respectively. Management cited milder weather as a factor in lower steam revenues; New York utility revenue decoupling mechanisms generally limit the earnings impact of delivery-volume changes.
Outlook, risks, contingencies and unusual items
- Rates and investment: CECONY filed for new electric, gas and steam rate plans in January 2013, requesting annual changes effective January 2014 of a $375 million electric increase, a $25 million gas increase and a $5 million steam decrease. The utilities estimated regulated construction expenditures of $2,172 million in 2013, $2,217 million in 2014 and $2,416 million in 2015.
- Funding: Management expected to meet 2013 external financing needs, including maturities, with $1.0–$1.5 billion of long-term debt issuance and said it did not expect to issue additional common equity in 2013. The filing states that the companies rely on capital-market access to fund investment needs.
- Superstorm Sandy: The storm interrupted service to about 1.4 million utility customers. CECONY and O&R incurred $363 million and $98 million, respectively, in response and restoration costs in 2012, including capital spending. Most non-capital costs were deferred as regulatory assets for recovery under rate plans. State authorities were investigating utility preparation and performance; steam-system capacity was temporarily impaired but restored in January 2013.
- Tax litigation: A January 2013 appeals-court ruling disallowed deductions related to Con Edison Development’s 1997 lease-in/lease-out transaction. Con Edison expected a first-quarter 2013 after-tax charge of $150–$170 million and had deposited $447 million with federal and state tax agencies. The company planned to seek rehearing.
- Regulatory prudence proceeding: At year-end, CECONY had collected an estimated $1,103 million subject to potential refund. A regulator’s consultant estimated $208 million in overcharges for a reviewed portion of construction expenditures; CECONY disputed the estimate and methodology. The company could not estimate any refund beyond its recorded $14 million regulatory liability.
- Environmental and legal exposure: Con Edison accrued $545 million for Superfund liabilities, with $730 million in related regulatory assets. Some site costs remain uncertain. CECONY said its potential Flushing River cleanup liability could be substantial and that its exposure at the Gowanus Canal site could not be predicted. The filing also describes asbestos claims and lawsuits over a 2007 steam-main rupture; the company had not accrued a liability for the rupture suits and said costs could be substantial, with insurance expected to cover most costs.
- Pensions and benefits: Management identified substantial unfunded pension and postretirement obligations. It expected 2013 pension contributions of $893 million in total, including $834 million from CECONY and $59 million from O&R; pension and postretirement benefit costs were estimated to rise by $43 million in 2013 compared with 2012.
- Other risks: The filing highlights severe weather and climate-related events, utility reliability and safety, regulatory penalties and rate recovery, wholesale energy supply disruptions, cybersecurity, environmental regulation, and the effects of market conditions on financing. Management reported effective internal control over financial reporting; the independent auditor issued an unqualified opinion.
Most important facts for investors to verify
- Whether regulators approve CECONY’s requested rate plans and storm-resiliency cost recovery, and what final customer rates and allowed returns result.
- The amount and timing of Sandy cost recovery, remaining restoration or resilience spending, and findings from storm investigations.
- The ultimate tax cost and accounting treatment of the LILO transactions, including the outcome of any rehearing or further proceedings.
- The potential refund exposure in the construction-expenditure prudence proceeding and any resolution of the disputed $208 million estimate.
- Whether environmental remediation estimates, pension funding needs, or other contingencies materially exceed recorded amounts.
- Future operating cash flow, capital spending, debt issuance, liquidity and dividend coverage in light of large investment requirements and lower 2012 cash balances.