Consolidated Edison, Inc. (Con Edison) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. The combined filing reports Con Edison and its subsidiary, Consolidated Edison Company of New York (CECONY). Amounts are in millions of dollars unless stated otherwise.
Business context and results
Con Edison is a holding company with regulated electric, gas and steam utilities, principally CECONY and Orange and Rockland (O&R), plus competitive energy businesses. Utilities contributed 92% of consolidated revenue and 99% of net income in the quarter.
| Con Edison metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenues | $3,789 | $3,184 | +$605 (19.0%) |
| Operating income | $685 | $526 | +$159 (30.2%) |
| Net income for common stock | $361 | $192 | +$169 (88.0%) |
| Diluted EPS | $1.23 | $0.65 | +$0.58 |
| Dividend declared per share | $0.630 | $0.615 | +$0.015 |
Operating margin was approximately 18.1%, versus 16.5% a year earlier; net margin was approximately 9.5%, versus 6.0%. Revenue growth included higher electric and gas costs passed through to customers, as well as higher non-utility revenue. Management’s net revenues measure—revenue less purchased power, fuel and gas resale costs—increased $190 million, or 9.1%.
Cash flow, capital spending and liquidity
- Operating cash flow was $224, compared with cash used of $84 in Q1 2013. The year-over-year improvement mainly reflected 2013 tax deposits related primarily to LILO transactions, partly offset by higher 2014 income tax payments.
- Investing cash outflow was $634, including $498 of utility construction expenditures and $80 of solar project investments. Financing cash outflow was $162; the company paid $184 in common dividends.
- Cash and temporary investments were $102 at March 31, down from $674 at year-end 2013. Current assets were $3,484 and current liabilities $3,576.
- Long-term debt, including current maturities, was $11,623 at quarter-end, versus $10,974 at December 31. Commercial paper outstanding was $830, down from $1,451. CECONY issued $850 of 4.45% 30-year debentures and redeemed $200 of 4.70% debentures at maturity.
- Con Edison’s common equity ratio was 52.3%, down from 53.9% at year-end; its ratio of earnings to fixed charges was 4.8 for the quarter.
Material changes and unusual items
- Con Edison’s earnings increase was substantially affected by LILO accounting: Q1 2014 included a $7 after-tax benefit, while Q1 2013 included a $150 after-tax charge. The prior-year comparison also included a $15 tax benefit from IRS acceptance of manufacturing tax deductions.
- Competitive energy businesses reported net income of $9, versus a loss of $112 in Q1 2013. Their results included $11 of after-tax mark-to-market gains in 2014, compared with $26 in 2013. Management attributed much of the segment improvement to the LILO comparison.
- CECONY net income increased to $334 from $277, primarily reflecting rate-plan effects, higher steam revenue from weather, and lower operations and maintenance costs, partly offset by higher depreciation and property taxes. O&R net income declined to $21 from $30.
- New York legislation enacted March 31 reduced the corporate franchise tax rate from 7.1% to 6.5% beginning in 2016. Con Edison recorded a $77 reduction in deferred tax liabilities, alongside regulatory asset and liability adjustments; the quarterly effective-tax-rate impact was immaterial.
Outlook, risks and contingencies
- The filing provides no specific earnings guidance. Management said it could not predict the outcome or utility impact of New York’s Reforming the Energy Vision proceeding, initiated in April 2014, which considers changes to utility roles, distributed energy resources and regulation.
- CECONY’s March 2014 Manhattan gas explosion destroyed two buildings, killing eight and injuring more than 48. Investigations and lawsuits were pending; the company had not accrued a liability and could not estimate a possible loss. It believed insurance would cover liability above a non-material retention.
- In a separate NYSPSC prudence proceeding, a consultant estimated $208 of potential construction overcharges, an estimate CECONY disputes. CECONY had collected an estimated $1,462 from customers subject to potential refund and recorded a $38 regulatory liability. The company estimated any additional required refund could range from $25 up to an amount based on the consultant’s estimate; settlement was uncertain and subject to commission approval.
- Utilities had incurred $583 of Superstorm Sandy response and restoration costs through March 31, including capital expenditures; most non-capital costs were deferred as regulatory assets for potential rate recovery, subject to review.
- Con Edison reported $741 of accrued Superfund and environmental costs and $921 of related regulatory assets. The company cautioned that additional remediation liabilities could be material but were not presently determinable.
- Other stated risks include extensive utility regulation and potential penalties, rate-plan adequacy, safety and reliability, project execution, energy-market disruption, unfunded pension and postretirement obligations, capital-market access, cyber risk, and commodity, credit and interest-rate risks.
Most important facts for investors to verify
- Whether the earnings improvement persists after separating recurring utility performance from the LILO comparison and competitive-business mark-to-market results.
- Outcomes of the Manhattan explosion investigations, litigation and insurance coverage, given that no loss was accrued and exposure could not be estimated.
- Resolution of the NYSPSC prudence proceeding and the potential customer refund, including the disputed $208 estimate and settlement status.
- Regulatory recovery and timing for Sandy costs and environmental remediation costs, including the assumptions supporting related regulatory assets.
- Debt and liquidity trends, pension funding requirements, and the effect of New York’s energy-regulation proceeding on future utility returns and investment plans.