Consolidated Edison, Inc. — 2015 Second-Quarter 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2015, and presents unaudited results for Consolidated Edison, Inc. (Con Edison) and its wholly owned utility subsidiary, Consolidated Edison Company of New York, Inc. (CECONY). Con Edison’s businesses include regulated electric, gas and steam utilities, Orange and Rockland (O&R), and competitive energy businesses, including renewable generation.
Key financial results
| Con Edison, $ millions except per-share data | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenues | 2,788 | 2,911 | 6,404 | 6,700 |
| Operating income | 472 | 455 | 1,198 | 1,140 |
| Net income for common stock | 219 | 212 | 589 | 574 |
| Diluted EPS | $0.74 | $0.72 | $2.01 | $1.95 |
| Dividends declared per share | $0.65 | $0.63 | $1.30 | $1.26 |
- Q2 revenue declined 4.2%, while operating income rose 3.7% and net income rose 3.3% year over year. For the first half, revenue fell 4.4%, operating income increased 5.1%, and net income increased 2.6%.
- Calculated operating margin was about 16.9% in Q2 2015 versus 15.6% in Q2 2014; first-half operating margin was about 18.7% versus 17.0%. Net margin was about 7.9% versus 7.3% in Q2 and 9.2% versus 8.6% for the first half.
- CECONY reported Q2 net income of $211 million, up from $172 million, and first-half net income of $559 million, up from $506 million. O&R recorded a Q2 net loss of $7 million versus income of $8 million a year earlier; its first-half income was $16 million versus $29 million.
Cash flow, debt and liquidity
- First-half operating cash flow was $1.486 billion, versus $1.257 billion in 2014. Investing outflow was $1.725 billion, versus $1.233 billion, reflecting higher utility construction spending and renewable-project investment. Financing provided $249 million; cash increased $10 million to $709 million.
- At June 30, cash and temporary cash investments were $709 million; current assets were $3.679 billion and current liabilities $3.935 billion. Commercial paper outstanding was $1.245 billion, including $995 million at CECONY; the weighted-average rate was 0.4%. No credit-agreement loans were outstanding; $56 million of letters of credit were issued.
- Con Edison reported $11.925 billion of long-term debt and $460 million due within one year, in addition to short-term notes payable. Its common-equity ratio was 51.8%, compared with 52.0% at year-end 2014. The six-month ratio of earnings to fixed charges was 3.5.
- First-half utility construction expenditures were $1.174 billion at Con Edison and $1.108 billion at CECONY. Con Edison increased its 2015 and 2016 competitive-energy capital expenditure estimates to $835 million and $985 million, respectively, from $375 million and $366 million, citing additional renewable-project development.
Material changes and management commentary
- Results benefited from utility rate-plan changes and lower operating and maintenance costs, partly offset by higher interest expense from debt financing. Lower purchased-power, fuel and gas costs reduced reported utility revenues and corresponding expenses; these pass-through costs generally do not drive utility earnings under the rate plans.
- CECONY’s first-half gas firm sales and transportation volumes rose 10.5%, with weather-adjusted volumes up 8.4%, reflecting oil-to-gas conversions. The company reduced its forecast of average annual peak gas-demand growth to 2.3% for 2016–2020 from 2.8% for 2015–2019.
- Competitive energy businesses had first-half operating income of $10 million versus $50 million. The prior-year period included a $45 million pre-tax gain on the sale of solar project interests; 2015 results also reflected less favorable mark-to-market effects.
- Con Edison began marketing its retail electric supply business for sale and classified $167 million of assets and $91 million of liabilities as held for sale. It expected the sale to close within 12 months and reported no impairment.
- CECONY’s electric rate plan was extended through 2016 with no base-rate change; it includes $123 million of additional annual income from amortization of net regulatory liabilities. O&R entered rate-plan joint proposals for electric and gas service, subject to NYSPSC approval, with new plans proposed to begin in November 2015.
- Management described investment in reliable, resilient, safe and clean energy infrastructure and growth in regulated utilities and contracted assets as central to its strategy. The filing gives no specific earnings or EPS guidance.
Risks, contingencies and unusual items
- CECONY had collected an estimated $1.818 billion subject to potential customer refund in an NYSPSC prudence proceeding concerning alleged contractor and employee misconduct. A consultant estimated $208 million of possible overcharges, an estimate the company disputes; a $103 million regulatory liability was recorded. Settlement discussions were ongoing, with no assurance of settlement.
- For the 2014 Manhattan gas explosion that killed eight people, the NTSB identified a defective service-tee fusion joint and a breached city sewer line as probable causes. About 70 suits were pending; CECONY had not accrued a liability and said the possible loss could not be estimated. It believes insurance will cover amounts above a required retention.
- Environmental exposure remains significant and uncertain. Con Edison reported $751 million of accrued Superfund and other environmental costs and $897 million of related regulatory assets. Potential investigation and remediation liability for manufactured-gas-plant sites was estimated in 2014 at up to $2.7 billion for Con Edison; actual costs may differ materially.
- Other risks include possible additional liabilities from asbestos litigation, gas-safety regulatory investigations, rate-plan penalties and refunds, environmental rules, pension obligations, capital-market access, interest rates, commodity prices, counterparty credit and cyber or facility disruptions. The filing reported no material change in risk factors from the 2014 Form 10-K.
- The filing discussed the NYSPSC’s Reforming the Energy Vision proceeding and the EPA’s Clean Power Plan; management said Clean Power Plan compliance costs could be substantial. Regulatory decisions and proposed clean-energy programs may affect future investment, rates and returns.
Important facts for investors to verify
- Progress and terms of the proposed retail electric supply business sale, including closing timing and final proceeds.
- Outcomes of the NYSPSC prudence proceeding, potential customer refunds, and approval of O&R’s proposed rate plans.
- Liability, insurance coverage and regulatory findings related to the 2014 Manhattan explosion and gas-safety matters.
- Renewable-project spending, funding needs, commercial operation dates and contracted returns, given the higher capital expenditure estimates.
- Trends in utility earnings, interest expense, pension costs and cash generation, alongside the growing use of commercial paper and construction investment.