Consolidated Edison, Inc. (Con Edison) — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. The combined filing reports Con Edison, a holding company with regulated utility subsidiaries CECONY and O&R and competitive energy businesses, and separately reports CECONY. Unless noted, consolidated figures below refer to Con Edison. Amounts are in millions of dollars except per-share data.
Key financial results
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Operating revenues | $3,462 | $3,423 | +1.1% |
| Operating income | $492 | $419 | +17.4% |
| Net income | $229 | $183 | +$46 |
| Net income for common stock | $226 | $180 | +25.6% |
| Diluted EPS | $0.80 | $0.66 | +$0.14 |
| Common dividend declared per share | $0.595 | $0.59 | +$0.005 |
Operating margin was approximately 14.2%, compared with 12.2% a year earlier. Revenue growth included higher electric and non-utility revenue, partly offset by lower gas and steam revenue. Management attributed the earnings improvement principally to CECONY rate-plan revenues. CECONY contributed $243 million of Con Edison common earnings versus $197 million; O&R contributed $13 million versus $12 million, while competitive energy businesses and other items remained a net loss.
Cash flow, debt and liquidity
- Operating cash flow: $1 million, down from $645 million. Management cited the timing of CECONY’s January New York City property-tax payment, without a comparable payment in January 2009, as well as timing of energy-cost recovery and payments.
- Investing cash flow: $460 million used, primarily reflecting $430 million of utility construction expenditures. Financing provided $286 million, including $475 million of net short-term borrowing and $155 million of common dividends paid.
- Cash: $87 million at March 31, down from $260 million at year-end 2009. Current assets were $3,386 million and current liabilities $3,518 million.
- Debt: $9,855 million of long-term debt, $686 million due within one year, and $475 million of commercial paper outstanding at a weighted-average rate of 0.3%. No loans were outstanding under the credit agreement. The filing reports a 50.7% common-equity ratio and a 3.1 times earnings-to-fixed-charges ratio.
Material changes and management commentary
- CECONY’s operating income rose $79 million. Its electric operating income increased $57 million, principally from rate-plan revenues, including a higher allowed return on common equity; gas and steam operating income each increased $11 million.
- Across Con Edison, net revenues (operating revenue less purchased power, fuel and gas resale costs) increased $275 million. Higher operations and maintenance expense ($121 million), taxes other than income taxes ($69 million), and depreciation and amortization ($12 million) partly offset the increase. Management cited pension and retiree-benefit costs, demand-management programs, regulatory assessments, higher property taxes and a larger utility plant.
- Competitive energy businesses recorded a $28 million net loss for common stock, versus a $25 million loss. Q1 results included $38 million of after-tax mark-to-market losses, compared with $34 million a year earlier.
- Two severe winter storms increased expenses, which were deferred as regulatory assets and did not affect Q1 operating income. Utilities’ electric and gas delivery revenues are generally subject to decoupling mechanisms; specified energy costs are generally recoverable under rate provisions.
Outlook, regulatory matters and risks
- Rates: In March 2010, New York regulators approved CECONY’s electric rate agreement for April 2010 through March 2013. The filing describes base-rate increases of $420 million effective in April 2010 and April 2011, and $287 million effective April 2012, plus $133 million to be collected through a surcharge in the rate year ending March 2013. A separate order provides a $36 million customer-bill credit in 2010. CECONY and regulators reached agreements in principle on gas and steam rate requests in April; terms were not yet public. These rate matters are not earnings guidance.
- Potential customer refunds: A regulatory proceeding examining certain CECONY expenditures remained ongoing. Approximately $322 million had been collected subject to potential refund; the company could not estimate any refund and had not recorded a regulatory liability.
- Environmental and legal contingencies: Con Edison reported $246 million of accrued Superfund liabilities and $421 million of related regulatory assets; additional remediation liabilities could be material and were not determinable. CECONY faced a proposed $10.8 million penalty and potentially substantial compliance costs concerning generating-facility permit issues. A separate Astoria matter resulted in a $1.1 million penalty and estimated $10 million of capital expenditures. Approximately 100 suits related to the 2007 Manhattan steam-main rupture remained pending; no liability was accrued, costs could be substantial, and insurance was expected to cover most costs.
- Other exposures: The IRS disputed deductions for Con Edison’s LILO transactions, including $416 million of net deductions for 1998–2007 and $42 million for 2008. The company reported $209 million in estimated tax savings and potential interest of up to $65 million if amounts were repaid; it recorded no reserve and was pursuing appeals. Contractor-payment investigations and related regulatory review were ongoing.
- Pensions: The company expected discretionary 2010 pension contributions of $434 million, including $397 million for CECONY; CECONY contributed $112 million in Q1. The filing says no legally required 2010 pension contribution was then expected.
- The filing provides no explicit consolidated earnings guidance. Management said it was evaluating further investment opportunities in electric- and gas-related businesses. Reported risk factors were unchanged from the 2009 Form 10-K. Forward-looking statements are subject to risks that could cause actual results to differ materially.
Important facts for investors to verify
- Whether the approved electric rate increases, pending gas and steam rate matters, and customer credits or potential refunds affect future earnings and cash flow as expected.
- How operating cash flow and liquidity develop after the unusually large Q1 property-tax payment and the increase in short-term borrowing.
- Actual pension funding and benefit costs, and whether the expected discretionary contributions change.
- Resolution and financial impact of environmental matters, steam-main litigation, the contractor investigation, and the disputed LILO tax deductions.
- Whether competitive-energy mark-to-market volatility and derivative collateral requirements materially affect results or liquidity.