Business context and reporting period
Consolidated Edison, Inc. (Con Edison) filed this combined, unaudited Form 10-Q with its subsidiary Consolidated Edison Company of New York, Inc. (CECONY) for the quarter and six months ended June 30, 2014. Con Edison operates regulated electric, gas and steam utilities through CECONY and Orange and Rockland (O&R), alongside competitive energy businesses. Unless noted, financial amounts are in millions of dollars.
Financial performance
| Con Edison | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $2,911 | $2,818 | $6,700 | $6,003 |
| Operating income | $455 | $386 | $1,140 | $912 |
| Net income attributable to common stock | $212 | $172 | $574 | $364 |
| Diluted EPS | $0.72 | $0.59 | $1.95 | $1.24 |
| Operating margin | 15.6% | 13.7% | 17.0% | 15.2% |
| Net margin | 7.3% | 6.1% | 8.6% | 6.1% |
Margins are calculated from reported revenue and operating or net income. Con Edison declared dividends of $0.63 per share in Q2 2014, compared with $0.615 in Q2 2013.
- CECONY: Q2 revenue was $2,436 versus $2,321 and net income was $172 versus $153. For the first half, revenue was $5,641 versus $5,127 and net income was $506 versus $430.
- Cash flow: Con Edison generated $1,257 of operating cash in the first half, versus $865 in 2013; net investing cash outflow was $1,233 and financing cash inflow was $76. Cash and temporary investments ended at $774, up from $674 at year-end 2013. CECONY operating cash flow was $882, versus $1,043; ending cash was $696, up from $633.
- Debt and liquidity: At June 30, Con Edison reported $11,084 of long-term debt, $45 due within one year and $1,531 of commercial paper; CECONY reported $10,216 of long-term debt and $1,482 of commercial paper. Commercial paper carried a 0.2% weighted-average rate. Con Edison’s common-equity ratio was 52.9% (53.9% at year-end); CECONY’s was 51.8% (53.7%).
- Investment: First-half utility construction expenditures were $1,073 for Con Edison and $1,007 for CECONY. Con Edison increased its 2014 competitive-business capital-expenditure estimate from $243 to $470, primarily for renewable-energy development.
Material changes versus prior comparable periods
First-half Con Edison revenue rose 11.6% and net income increased $210 (57.7%). Utility rate plans were a key contributor: management attributed $93 of the net-income improvement to CECONY rate plans. Results also included a $45 pre-tax ($26 after-tax) gain from selling a 50% interest in California solar projects. The prior-year comparison included significant LILO-related effects, including a $121 net-income charge in the first half of 2013; these items make year-over-year earnings growth less representative of underlying performance.
CECONY’s first-half operating income increased $124, primarily from higher net revenues, while O&R net income declined $7. Competitive energy businesses reported first-half net income of $42, compared with a $95 loss in 2013, with the comparison affected by LILO items, the solar gain and mark-to-market results. Higher operating and maintenance costs at CECONY included emergency-response spending and support for underground facilities affected by municipal projects; first-half pension costs partly offset these pressures.
Outlook, risks and contingencies
- The filing provides no specific consolidated earnings guidance. CECONY lowered its five-year forecast for average annual peak gas-demand growth from about 3.8% to 2.8%, citing the changed forecast period and oil-to-gas conversion trends.
- Regulatory outcomes are material uncertainties. CECONY had collected an estimated $1,531 subject to potential refund in a NYSPSC prudence proceeding. The company disputes a consultant’s $208 overcharge estimate; it currently estimates any additional refund could range from $25 to an amount based on that estimate. A settlement is being explored but is not assured and would require commission approval.
- CECONY and O&R reported deficiencies in gas plastic-fusion worker qualification and requalification practices; the utilities have requalified affected workers, and the NYSPSC opened an investigation.
- For the March 2014 Manhattan gas explosion and fire, which caused fatalities and injuries, investigations and lawsuits were pending. CECONY said it could not estimate potential loss and had recorded no liability. The company believes insurance would cover liability above a non-material retention. For the 2007 steam-main rupture, CECONY accrued $50 and recorded an equal insurance receivable.
- At June 30, Con Edison reported $738 of accrued Superfund and other environmental costs and $911 of related regulatory assets; additional remediation obligations could be material but were not presently determinable. Utilities’ Superstorm Sandy response and restoration costs incurred through that date were $495 at CECONY and $92 at O&R; recovery of deferred costs remains subject to regulatory review.
- Con Edison’s maximum guarantees totaled $1,428, including $837 for energy transactions and $560 for solar projects. Management identified operational reliability, construction execution, regulation and rate plans, environmental exposure, pension liabilities, capital-market access, wholesale-market disruption and cyberattack as risks. The filing reported no material change in previously disclosed risk factors.
- New York’s Reforming the Energy Vision proceeding could alter utility regulation and business models; the companies said the outcome and impact could not be predicted. The EPA’s proposed Clean Power Plan could also entail substantial costs.
Important facts for investors to verify
- Underlying earnings excluding the solar-sale gain, LILO-related effects and competitive-business mark-to-market items.
- Progress and potential customer-refund exposure in the NYSPSC prudence proceeding, and developments from the gas-fusion safety investigation.
- Insurance coverage, claims and eventual loss estimates related to the Manhattan explosion and fire.
- Regulatory recovery and timing for Sandy restoration and environmental-remediation costs.
- Funding needs and returns associated with the higher competitive-business capital-spending plan, alongside commercial-paper borrowing and debt maturities.