Consolidated Edison, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Unaudited combined filing for Con Edison and its subsidiary CECONY. Unless noted, amounts are in millions of dollars. Con Edison includes CECONY, O&R and competitive energy businesses.
Financial performance
| Con Edison | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $3,017 | $2,845 | $6,478 | $6,269 |
| Operating income | $429 | $372 | $921 | $791 |
| Net income for common stock | $183 | $150 | $409 | $330 |
| Diluted EPS | $0.64 | $0.55 | $1.44 | $1.20 |
| Cash from operating activities | — | — | $795 | $1,443 |
Calculated operating margin rose to about 14.2% in both Q2 and the first half, from 13.1% and 12.6%, respectively. Net income for common stock margin was about 6.1% in Q2 and 6.3% for the first half, versus 5.3% in each 2009 comparison.
- Q2 earnings growth was led by competitive energy businesses, whose earnings increased $33 million, including $39 million of after-tax mark-to-market gains (versus $19 million in Q2 2009). CECONY common-stock earnings were $135 million, down from $136 million.
- First-half earnings increased $79 million. CECONY contributed $378 million, up from $333 million; competitive energy businesses contributed $19 million, versus a $10 million loss in 2009.
- Management attributed utility performance chiefly to rate plans, including CECONY electric rate changes. Higher pension and retiree-benefit costs, demand-side management, regulatory assessments, depreciation and property taxes offset part of the revenue benefit. Lower gas and steam commodity costs affected reported revenues and expenses; utility energy costs are generally recovered from customers.
Cash flow, debt and liquidity
- First-half operating cash flow was $795 million, down $648 million year over year, primarily reflecting the timing of CECONY’s New York City property-tax payment and energy-cost payments and recoveries. Utility construction expenditures were $946 million; net investing cash outflow was $1,007 million.
- Cash and temporary investments were $178 million at June 30, 2010, down from $260 million at year-end 2009. Current liabilities were $2,675 million. Long-term debt was $10,552 million, with $305 million due within one year; commercial paper outstanding was $153 million.
- Con Edison issued $700 million of CECONY debentures: $350 million at 4.45% due 2020 and $350 million at 5.70% due 2040. It retired $426 million of long-term debt in the first half. No loans were outstanding under the credit agreement; $248 million of letters of credit were outstanding.
- Con Edison’s common-equity ratio was 49.1%, down from 50.5% at year-end 2009; its six-month earnings-to-fixed-charges ratio was 2.9 times, versus 2.5 times in the comparable 2009 period.
Material changes, outlook and risks
- CECONY’s gas and steam rate-plan joint proposals cover October 2010 through September 2013 and were subject to NYSPSC approval at filing. O&R filed for a New York electric rate increase of $61.7 million effective July 2011, with an alternative multi-year proposal. RECO’s $9.8 million electric-rate increase took effect in May 2010.
- CECONY is reviewing capital needs and expects to defer projects with estimated construction expenditures of $75 million in 2011 and $200 million in 2012. No company-wide earnings guidance is provided in the supplied filing text.
- Con Edison expected to make $434 million of discretionary pension contributions in 2010, including $397 million for CECONY; CECONY had contributed $279 million in the first half. The filing says these contributions were not required by funding regulations based on year-end estimates.
- CECONY had collected an estimated $394 million subject to potential customer refund in a regulatory proceeding concerning the prudence of certain expenditures. The company could not estimate any refund and had not recorded a refund liability.
- Environmental and legal exposures include $236 million of accrued Superfund liabilities at Con Edison, with further costs potentially material but not presently determinable; roughly 100 pending suits related to the 2007 Manhattan steam-main rupture, for which no liability was accrued; and a proposed $10.8 million penalty in a separate environmental enforcement matter, with additional compliance costs uncertain. For an Astoria pollution matter, CECONY paid a $1.1 million penalty and estimated $12 million of corrective-action capital spending.
- Con Edison continued to contest IRS disallowances of $458 million in net tax deductions related to LILO transactions and recorded no reserve. Estimated tax savings through June 30 were $213 million; potential interest if amounts had to be repaid was up to $71 million after tax. A court ruled favorably for the company on the 1997 transaction, but the IRS could appeal.
- Market risks include commodity-price, counterparty-credit and interest-rate exposure. A 10% decline in market prices was estimated to reduce fair value of utility energy hedges by $93 million, expected to be largely offset by opposite changes in purchased-energy costs. A ratings downgrade could increase collateral requirements.
Important facts for investors to verify
- Approval and final terms of CECONY’s proposed gas and steam rate plans and O&R’s requested electric rates.
- Drivers and sustainability of competitive-energy earnings, particularly mark-to-market gains and retail margins.
- Cash-flow timing, planned construction deferrals, and the company’s pension-contribution plans and funding assumptions.
- Potential customer refunds, environmental remediation and compliance costs, and outcomes of the steam-main and contractor-related proceedings.
- Progress and potential financial impact of the IRS LILO tax dispute, including any appeal and possible interest exposure.