Consolidated Edison, Inc. — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009. Financial statements are unaudited. This combined filing covers Con Edison, Inc. and subsidiary Consolidated Edison Company of New York, Inc. (Con Edison of New York); figures below refer to Con Edison unless otherwise noted. Dollar amounts are in millions except per-share data.
Financial performance and position
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Operating revenues | $2,845 | $3,149 | $6,269 | $6,725 |
| Operating income | $294 | $408 | $614 | $798 |
| Net income | $153 | $555 | $336 | $860 |
| Net income for common stock | $150 | $552 | $330 | $854 |
| EPS, basic | $0.55 | $2.02 | $1.20 | $3.14 |
| Common dividend declared per share | $0.590 | $0.585 | $1.180 | $1.170 |
- Continuing-operations EPS was $0.55 for Q2 and $1.20 for the first half of 2009, versus $1.03 and $2.13, respectively, in 2008. The 2008 comparisons include substantial generation-project sale gains and discontinued operations: $272 million of discontinued-operations income in Q2 and $274 million for the first half. A $260 million pretax sale gain was included in 2008 operating income.
- Reported operating margin was approximately 10.3% in Q2 2009 versus 13.0% in Q2 2008, and 9.8% versus 11.9% for the first half. These comparisons include the 2008 project-sale gain.
- Operating cash flow was $1,437 for the first half, up from $1,290. Investing used $1,119, compared with $294 provided in 2008, when project-sale proceeds included $1,477. Financing used $81; cash increased $237 to $311.
- At June 30, cash was $311; current assets were $2,997 and current liabilities $2,735. Long-term debt was $9,664, with $588 due within one year and $100 of notes payable. Total capitalization was $19,625; common equity was $9,748, or 49.7% of capitalization. Construction expenditures were $1,034 for the first half.
- Con Edison of New York reported Q2 revenue of $2,220 and common-stock income of $136, compared with $2,294 and $121 in 2008. For the first half, revenue was $4,990 and common-stock income $333, versus $5,034 and $340.
Material changes and management commentary
- Con Edison revenue fell 9.7% in Q2 and 6.8% for the first half. Lower energy commodity costs reduced both revenue and related purchased-power, fuel, and gas expenses; competitive-energy revenue also declined. Utility net revenues (revenue less energy-supply costs) increased $138 in Q2 and $103 in the first half.
- Con Edison of New York’s utility operating income improved in Q2, but first-half electric operating income declined $10. Higher operations and maintenance, depreciation, and property taxes partly offset rate-plan revenues. Management cited higher pension and retiree-benefit costs, uncollectible accounts, capital-related depreciation, and property taxes.
- Competitive-energy earnings were lower, reflecting the prior-year generation-project sale and weaker mark-to-market results. First-half competitive-energy results included a $15 million after-tax mark-to-market loss, compared with a $63 million gain in 2008.
- First-half operating cash flow benefited from the timing of New York City property-tax payments and working-capital changes; Con Edison’s cash flow was partly offset by increased cash collateral posted on commodity derivatives.
- Moody’s lowered ratings on the companies’ commercial paper and unsecured debt in June. Con Edison had $100 million of commercial paper outstanding at a weighted average rate of 0.4%; no credit-agreement loans were outstanding. Ratings and capital-market access remain relevant to funding needs.
Outlook, regulation, risks, and contingencies
- Con Edison of New York requested a three-year electric rate plan with annual rate increases of $695 million effective April 2010, 2011, and 2012; an alternative request was $854 million effective April 2010. These were proposals, not approved rates. The company also filed austerity measures intended to reduce the rate-year revenue requirement by $60 million, with identified actions representing $47 million.
- O&R reached a proposed three-year New York gas rate settlement for November 2009 through October 2012, subject to Public Service Commission approval. It includes return, expense-deferral, revenue-decoupling, and customer-service provisions.
- Management reduced its demand outlook amid the global financial turmoil. Design-weather 2009 peak electric demand was estimated at 13,750 MW for Con Edison of New York and 1,650 MW for O&R. Forecast five-year annual peak-demand growth was about 0.6% and 2.1%, respectively. 2009 construction spending was forecast at $2,181 for Con Edison of New York and $142 for O&R.
- Con Edison expected to issue $150–$400 million of common stock in 2009 beyond plan issuances. Con Edison of New York had issued $750 million of long-term debt and could issue up to $900 million more during the rest of the year; O&R could issue up to $150 million.
- Potentially material, unresolved matters include the investigation into alleged contractor kickbacks and possible regulatory cost disallowances or customer refunds; the company could not estimate any refund. Approximately 100 suits relate to the 2007 Manhattan steam-main rupture; no liability was accrued, and the company expects insurance to cover most costs, which could be substantial.
- A New York environmental enforcement proceeding seeks an unspecified penalty and possible audits, remediation, equipment removal, and facility upgrades; costs and operational effects could be substantial and were not estimable. Environmental liabilities also include $227 accrued for Con Edison Superfund sites; further investigation may require additional accruals, potentially material.
- The IRS has challenged deductions for Con Edison’s lease-in/lease-out transactions. The company recorded no reserve; reported tax savings through June 30 were $205, with interest of up to $85 potentially payable if amounts must be repaid. A change in projected tax cash-flow timing could also require an earnings charge.
- O&R was named in third-party litigation concerning the Newark Bay Complex; its exposure could not be predicted. The filing also identifies credit, commodity-price, interest-rate, pension, regulatory, and economic risks.
Investor verification priorities
- Separate recurring utility earnings from 2008 generation-sale gains, discontinued operations, and volatile competitive-energy mark-to-market results.
- Track decisions on Con Edison of New York’s electric rate filing, austerity requirements, and O&R’s proposed gas-rate settlement.
- Review the contractor-payment investigation, potential rate refunds or cost disallowances, steam-main claims, and environmental enforcement exposure as new estimates or resolutions are disclosed.
- Assess funding plans, debt maturities, Moody’s rating changes, pension contributions, and liquidity against the utilities’ substantial capital program.
- Monitor IRS proceedings concerning the LILO transactions and the associated unreserved tax and interest exposure.