Consolidated Edison, Inc. (Con Edison) — Q3 2011 Form 10-Q
Business context and reporting period. This unaudited combined filing covers Con Edison and its subsidiary Consolidated Edison Company of New York, Inc. (CECONY), for the quarter and nine months ended September 30, 2011, compared with the same 2010 periods. Con Edison is a holding company with regulated electric, gas and steam utilities and competitive energy businesses; CECONY serves New York City and Westchester County. Unless noted, financial amounts below are in millions of dollars.
Financial performance and position
| Con Edison metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenues | $3,629 | $3,707 | $9,972 | $10,185 |
| Operating income | $756 | $705 | $1,781 | $1,627 |
| Net income for common stock | $383 | $350 | $860 | $759 |
| Diluted EPS | $1.30 | $1.23 | $2.92 | $2.68 |
| Dividends declared per share | $0.600 | $0.595 | $1.800 | $1.785 |
Con Edison’s operating margin was approximately 20.8% in Q3 2011 versus 19.0% a year earlier, and 17.9% for the first nine months versus 16.0%. Net margin was approximately 10.6% and 8.7%, respectively, compared with 9.4% and 7.5% in 2010.
- Cash flow: Nine-month operating cash flow was $2,161, up from $974; investing cash outflow was $1,611 versus $1,566; financing cash outflow was $490 versus cash inflow of $530. Cash and temporary investments ended September at $398, compared with $338 at year-end 2010.
- Debt and equity: At September 30, long-term debt was $10,369 and current maturities were $305; total debt was approximately $10,674, broadly unchanged from year-end. Common equity ratio was 52.0%, up from 50.4%; earnings-to-fixed-charges ratio for the nine-month period was 3.8.
- Liquidity: No commercial paper or credit-agreement loans were outstanding at September 30. A new revolving credit agreement entered in October provides up to $2.25 billion, including up to $1.2 billion for letters of credit; it expires in October 2016. The filing reports $223 million of letters of credit outstanding at quarter-end.
- CECONY: Nine-month operating revenues were $8,042 versus $8,015; common-stock income was $779 versus $709. Operating cash flow was $1,960 versus $938. At September 30, cash was $70, long-term debt was $9,444 and current maturities were $300.
Material changes versus the prior comparable period
- Con Edison common earnings increased $33 in Q3 and $101 in the first nine months. CECONY contributed most of the nine-month increase, supported by rate-plan revenues and lower purchased power and fuel costs.
- Across Con Edison, nine-month revenues declined 2.1%, while operating income rose 9.5%. Lower purchased power and fuel costs reduced reported revenue and expense; management’s “net revenues” measure, which removes these energy costs, increased 6.8%.
- Con Edison’s competitive energy businesses reported operating income of $16 in Q3 versus an $8 loss, and $75 for nine months versus $25. Improvement included favorable net mark-to-market effects of $26 in Q3 and $60 for nine months. Competitive-business revenues fell as electricity prices and sales volumes declined.
- Operations and maintenance costs increased $45 in Q3 and $96 for nine months, reflecting higher pension and health-insurance costs, partly offset by cost-control savings. Depreciation and property taxes also increased, primarily with higher utility plant balances.
- Operating cash flow improved substantially, primarily because of lower estimated income-tax payments and refunds, reduced cash collateral paid on energy hedges, and $150 of World Trade Center-related cost recoveries; higher pension contributions partly offset these benefits. The cash-flow increase therefore includes timing and other items, not just earnings growth.
Outlook, management commentary, risks and contingencies
- Outlook and capital: The filing provides no specific earnings or EPS guidance. Management said the Utilities did not anticipate needing long-term debt to fund capital requirements for the remainder of 2011, citing tax benefits and refunds. CECONY extended a power-purchase agreement: contracted output remains 350 MW for 2011–2012 and increases to 500 MW for 2013–2017.
- Rates and regulation: O&R received a $26.6 annual electric rate increase effective July 1, 2011, and filed for a further $17.7 increase effective July 1, 2012, with an alternative three-year proposal. CECONY revenue collections related to a prudence proceeding remain subject to potential customer refunds: approximately $753 had been collected by September 30. A consultant’s disputed provisional assessment was $21; the recorded regulatory liability was $10.5, and any additional refund exposure could not be estimated.
- Hurricane Irene: Most related operating expenses in the 2011 period were deferred as regulatory assets, subject to recovery through the applicable regulatory process.
- Environmental and legal exposure: Con Edison recorded $496 of Superfund and other environmental liabilities, with $681 of related regulatory assets. Further remediation obligations could be material and are not fully determinable. CECONY faces approximately 100 pending suits related to the 2007 Manhattan steam-main rupture; no liability was accrued, and costs could be substantial, although the company believes insurance will cover most costs.
- Tax dispute: The IRS disallowed deductions related to Con Edison’s lease-in/lease-out transactions, including $416 of deductions for 1998–2007 and further audit disallowances for 2008–2010. The company is contesting the positions and recorded no reserve. Estimated tax savings through September 2011 were $232; repayment, if required, could also involve up to $86 of after-tax interest. A material earnings charge could result if expected tax cash-flow timing changes.
- Other risks: Vendor-kickback investigations and related regulatory review remain ongoing; the company could not predict their impact. Con Edison’s maximum guarantees totaled $862. Derivative exposures include potential collateral requirements if credit ratings fall. The filing identifies cyberattack, regulation and rate recovery, safety and reliability, environmental obligations, pension and postretirement liabilities, capital-market access, and tax disputes as risks.
- Controls: Management concluded disclosure controls were effective at quarter-end. The ongoing enterprise-resource-planning project is reasonably likely to materially affect internal control over financial reporting, though no material quarterly change in those controls was reported.
Most important facts for investors to verify
- Whether rate-plan revenues and regulatory cost-recovery mechanisms continue to support utility earnings, and the outcomes of O&R’s pending rate filing and CECONY’s prudence proceeding.
- How much of the increase in operating cash flow is recurring, given the stated tax refunds, collateral movements, World Trade Center recoveries and pension contributions.
- The ultimate exposure and timing for the IRS LILO dispute, environmental remediation, steam-main litigation and vendor-payment investigations.
- Whether competitive energy earnings remain sensitive to mark-to-market movements, lower unit margins, prices and sales volumes.
- Debt maturities, access to the new revolving facility, derivative-related collateral needs, and the effect of pension obligations and capital spending on liquidity.