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 ended September 30, 2014. Con Edison combines CECONY, Orange and Rockland Utilities (O&R), and competitive energy businesses. The business is predominantly regulated electric, gas, and steam delivery; CECONY accounted for 90% of consolidated assets at quarter-end.
Key financial metrics
All dollar amounts are in millions unless stated otherwise. Comparisons are with the corresponding 2013 period.
| Con Edison consolidated | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenues | $3,390 | $3,484 | $10,091 | $9,487 |
| Operating income | $819 | $855 | $1,959 | $1,767 |
| Net income for common stock | $436 | $464 | $1,010 | $828 |
| Diluted EPS | $1.48 | $1.58 | $3.44 | $2.81 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1,751 | $1,238 |
- Quarterly performance: Revenue fell 2.7%, operating income fell 4.2%, and net income fell 6.0%. The approximate operating margin was 24.2%, versus 24.5% a year earlier; net margin was 12.9%, versus 13.3%.
- Nine-month performance: Revenue rose 6.4%, operating income 10.9%, and net income 22.0%. Approximate operating and net margins were 19.4% and 10.0%, respectively, versus 18.6% and 8.7%.
- CECONY: Q3 revenue was $2,838 and net income $399, versus $2,893 and $401. Nine-month revenue was $8,479 and net income $905, versus $8,021 and $831.
- Cash flow and investment: Con Edison generated $1,751 of operating cash in the first nine months and used $1,996 in investing activities, including $1,663 of utility construction expenditures. CECONY generated $1,306 operating cash and used $1,717 in investing activities.
- Debt and liquidity: At September 30, Con Edison had $10,985 of noncurrent long-term debt, $210 due within one year, and $1,425 of commercial paper; total debt on these lines was $12,620. Cash and temporary investments were $205, down from $674 at year-end 2013. Current assets of $3,519 were below current liabilities of $3,873 (current ratio approximately 0.91). No loans were outstanding under the credit agreement.
- Capital and dividends: Con Edison issued $850 of 30-year debt at 4.45% through CECONY and retired $475 of long-term debt during the first nine months. Con Edison declared dividends of $0.630 per share for Q3 and $1.890 year to date.
Material changes versus the prior period
- Q3 consolidated earnings declined, principally reflecting weaker competitive energy results and higher operating and maintenance costs. Competitive energy net income was $20 versus $40; its operating income was $20 versus $63, with the prior-year quarter benefiting from LILO-related revenue.
- For the first nine months, Con Edison earnings increased, with regulated utility rate-plan effects and improved competitive energy results contributing. Competitive energy results included a $45 pretax ($26 after-tax) gain on a solar-project sale and a $7 after-tax LILO-related benefit; the comparable 2013 period included a $95 after-tax LILO charge.
- CECONY’s nine-month electric operating income increased $109, while gas operating income was essentially flat and steam operating income increased $17. Utility operating and maintenance costs rose, including costs for emergency response, underground-facility protection, healthcare, and other items.
- Con Edison operating cash flow increased $513 year over year, while CECONY’s decreased $63. The comparison was affected by prior-year tax deposits related primarily to LILO transactions, higher 2014 income-tax payments, and lower pension contributions.
- Con Edison’s common equity ratio was 53.7% at quarter-end versus 53.9% at year-end 2013; CECONY’s was 52.3% versus 53.7%. Nine-month earnings-to-fixed-charges ratios were 4.3 for both companies.
Outlook, commentary, risks, and unusual items
- Demand outlook: CECONY lowered its five-year forecast of average annual electric peak-demand growth to approximately 0.9%, from 1.4%, citing demand-side management and slower growth from large commercial customers. Its gas peak-demand growth forecast was reduced to 2.8% from approximately 3.8%.
- Capital outlook: Con Edison increased its 2014 competitive-energy capital expenditure estimate from $243 to $470 to fund renewable-energy development. The filing does not provide consolidated earnings guidance.
- Regulatory matters: A New York prudence proceeding concerns construction-related alleged overcharges. Customers had paid an estimated $1,603 subject to potential refund; the company estimated an additional possible refund from $25 up to the consultant’s disputed $208 estimate. The recorded regulatory liability was $36, and settlement discussions were ongoing.
- Safety and litigation: Following the March 2014 Manhattan gas explosion and fire, which killed eight people and injured more than 48, approximately 20 suits were pending. CECONY said it could not estimate a possible loss and had recorded no liability. Investigations were ongoing. CECONY and O&R also disclosed deficiencies in gas-plastic-fusion worker qualification and requalification processes and submitted testing and surveying plans for review.
- Storm recovery and environmental exposure: Superstorm Sandy response and restoration costs through September 30 were $500 for CECONY and $91 for O&R; recovery of deferred costs remains subject to regulatory review. Con Edison recorded $734 of Superfund and other environmental liabilities, with $899 of related regulatory assets; additional remediation costs may be material and are not presently determinable.
- Pension and policy risks: Revised mortality tables issued in October 2014 could increase future pension and postretirement obligations, accounting costs, and contributions; the companies were evaluating the impact. The NYSPSC’s Reforming the Energy Vision proceeding could change utility roles and ratemaking, with outcomes and financial effects not yet predictable. Proposed federal power-plant emissions rules could also entail substantial costs.
- Management reported disclosure controls and procedures were effective and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the Q3 earnings decline reflects temporary competitive-energy and timing effects or a sustained change in earnings trends.
- How much of the $1,603 collected subject to refund in the prudence proceeding may ultimately be returned, and whether a settlement is reached.
- Potential financial and regulatory consequences of the Manhattan explosion, gas-fusion review, and Superstorm Sandy cost recovery.
- Whether the increased renewable-project spending and solar investments generate returns consistent with the company’s plans, and how the 2014 solar-sale gain affects comparable earnings.
- The impact of revised pension mortality assumptions on obligations, expense, and required contributions, alongside cash needs for capital investment and debt maturities.