CONSOLIDATED EDISON INC quarterly report, Q2 FY2013

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Consolidated Edison, Inc. — Q2 2013 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2013. The combined filing reports Con Edison and its subsidiary CECONY; Con Edison also consolidates O&R and competitive energy businesses. Amounts below are in millions of dollars except per-share data.

Financial performance

MetricQ2 2013Q2 2012Six months 2013Six months 2012
Operating revenue$2,818$2,771$6,003$5,849
Operating income$386$475$912$1,036
Net income for common stock$172$214$364$491
Diluted EPS$0.59$0.73$1.24$1.67
Operating margin13.7%17.1%15.2%17.7%

Revenue increased 1.7% in Q2 and 2.6% year to date, while operating income and earnings declined. Six-month diluted EPS and common-stock net income include the effects of the LILO transactions described below. CECONY, the largest earnings contributor, recorded Q2 net income of $153 million versus $163 million and six-month net income of $430 million versus $436 million.

Cash flow, debt and liquidity

  • Six-month operating cash flow was $973 million, down from $1.247 billion; investing cash outflow was $1.212 billion, versus $1.105 billion, principally reflecting increased utility construction spending.
  • Financing provided $592 million, compared with $591 million. Cash and temporary investments ended June at $747 million, versus $394 million at year-end 2012.
  • At June 30, Con Edison had $10.494 billion of long-term debt, $483 million of long-term debt due within one year, and $1.400 billion of commercial paper outstanding. Commercial paper carried a 0.3% weighted-average rate. Current assets were $4.103 billion and current liabilities $4.504 billion.
  • Con Edison issued $919 million of long-term debt and retired $706 million during the first half. CECONY issued $700 million of 30-year debentures at 3.95% and redeemed $700 million of maturing debt. A Con Edison Development subsidiary issued $219 million of solar-project-backed notes.
  • Common equity was 53.1% of total capitalization, compared with 54.1% at year-end 2012. The six-month ratio of earnings to fixed charges was 2.1, down from 3.3, primarily reflecting the LILO transactions.

Material changes and operating drivers

  • Competitive energy businesses’ six-month operating income moved to a $56 million loss from $59 million income, driven mainly by LILO effects, lower margins and mark-to-market results. Their Q2 operating income was $27 million versus $78 million, including a $93 million adverse year-over-year swing in net mark-to-market values.
  • CECONY six-month operating income declined $19 million. Lower electric operating income, up $78 million in costs versus the prior-year comparison, was partly offset by improved gas and steam results. Higher depreciation, property taxes and operating costs pressured results.
  • Gas and steam revenues rose year to date, but much of the increase reflected higher purchased gas/fuel costs and weather effects. Utilities generally recover energy costs through rates, so revenue growth alone does not indicate improved margins.
  • Con Edison’s six-month net income includes a $121 million after-tax LILO charge, partly offset by a $15 million tax benefit related to IRS acceptance of manufacturing deductions. Q2 includes a $29 million after-tax gain from termination of the 1999 LILO transaction.

Outlook, regulatory matters and risks

  • No consolidated earnings or EPS guidance is stated in the provided filing text. Con Edison increased its 2013 competitive-energy-business capital expenditure estimate from $253 million to $375 million. In July, it announced investments in interests in two solar projects in Nevada and Arizona.
  • CECONY requested 2014 rate increases of $425 million for electric, $26 million for gas and $11 million for steam in updated testimony. NYSPSC staff, as revised in July, supported rate decreases of $187 million, $122 million and $28 million, respectively; the rate case remained unresolved.
  • Superstorm Sandy response and restoration costs incurred through June 30 were $457 million for CECONY and $93 million for O&R. Most non-capital costs were deferred as regulatory assets for recovery under rate plans. Regulators and the New York Attorney General were investigating storm preparation and response; a state commission identified performance deficiencies and recommended improvements.
  • A NYSPSC prudence proceeding concerning alleged contractor-related overcharges remains unresolved. The company had collected an estimated $1.246 billion subject to potential refund and disputed the consultant’s $208 million overcharge estimate. The filing says a possible refund could range from the recorded $16 million regulatory liability up to an amount based on that estimate; the company could not estimate any ultimate excess liability.
  • The IRS disallowed $574 million of tax losses associated with the 1997 and 1999 LILO transactions. Following an adverse appellate decision, Con Edison recorded a first-quarter after-tax charge of $150 million; the 1999 transaction was terminated in June for $108 million net cash proceeds and a $29 million after-tax gain. The 1997 transaction remained outstanding, with potential termination proceeds estimated at approximately $90 million pre-tax, subject to negotiation.
  • Environmental liabilities include $522 million of accrued Superfund costs for Con Edison, with $713 million of related regulatory assets. The filing cautions that additional remediation liabilities could be material but are not presently determinable. Other contingencies include approximately 93 pending suits arising from a 2007 Manhattan steam-main rupture; no liability was accrued and costs could be substantial, with insurance expected to cover most costs.
  • Risk factors include extensive regulation and rate-plan outcomes, storm response and reliability, environmental remediation, pension and postretirement obligations, capital-market access, energy-market and counterparty exposures, cybersecurity, and the IRS tax dispute. Management reported disclosure controls effective and no material change in internal control over financial reporting.

Important facts for investors to verify

  1. Final NYSPSC decisions on CECONY’s 2014 electric, gas and steam rates, including allowed returns and equity ratios.
  2. Resolution and potential customer refunds in the construction-expenditure prudence proceeding.
  3. Ultimate cash, tax and earnings consequences of the LILO transactions, particularly the remaining 1997 transaction.
  4. Regulatory recovery and timing of Sandy restoration costs, alongside any resulting penalties or required operating changes.
  5. Execution and funding of the higher competitive-business capital plan, and performance of the announced solar investments.
  6. Changes in pension funding, environmental remediation estimates, and the company’s commercial-paper and liquidity needs.