Business context and reporting period
Consolidated Edison, Inc. (Con Edison) filed this unaudited combined Form 10-Q with its subsidiary, Consolidated Edison Company of New York, Inc. (Con Edison of New York). The reporting period ended September 30, 2009; results are compared with the three and nine months ended September 30, 2008. Con Edison’s principal businesses are regulated electric, gas and steam utilities, alongside competitive energy businesses. Amounts below are for Con Edison unless otherwise stated and are in millions of dollars, except per-share data.
Financial performance and position
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Operating revenues | $3,489 | $3,858 | $9,758 | $10,584 |
| Operating income | $484 | $311 | $1,098 | $1,109 |
| Net income for common stock | $336 | $182 | $666 | $1,036 |
| Diluted EPS | $1.22 | $0.66 | $2.42 | $3.79 |
| Dividends declared per share | $0.59 | $0.585 | $1.77 | $1.755 |
- Cash flow: Nine-month operating cash flow was $1,460, versus $50 in 2008. Investing cash use was $1,646, including $1,524 of utility construction expenditures; financing provided $187. Cash and temporary investments were $75 at September 30.
- Debt and capitalization: Long-term debt was $9,363, with $888 due within one year and $509 of notes payable. Common shareholders’ equity was $9,943; the common equity ratio was 50.9%, versus 50.7% at year-end 2008.
- Liquidity: Current assets were $3,227 and current liabilities $3,512 at September 30. No loans were outstanding under the credit agreements; $231 of letters of credit were outstanding. Commercial paper carried a 0.3% weighted-average rate.
- Margins: Operating income was about 13.9% of revenue in Q3 2009 versus 8.1% in Q3 2008; year-to-date it was about 11.2% versus 10.5%. Comparisons are affected by lower commodity costs and prior-year generation-sale items.
Material changes versus prior periods
- Q3 revenue fell 9.6%, while operating income rose $173 and common-stock income rose $154. Management attributed the earnings increase largely to utility rate-plan effects and a swing in competitive-energy mark-to-market results from losses to gains.
- Nine-month revenue declined 7.8%; operating income was nearly flat. Common-stock income fell $370, principally because 2008 included a $274 after-tax gain and income from discontinued generation-project operations, plus a $30 after-tax Northeast Utilities litigation settlement. Excluding these prior-year items, utility earnings improved.
- Utilities’ lower purchased-power, fuel and gas costs reduced reported revenues and expenses; these costs are generally recovered from customers and do not normally drive earnings. Utility costs for operations and maintenance, depreciation and property taxes increased.
- Operating cash flow improved substantially, partly because of the timing of New York City property-tax payments and 2008 income-tax payments on the generation sale. Investing cash use increased year over year because 2008 included $1,477 of generation-sale proceeds.
Outlook, risks and unusual items
- Rates and demand: Con Edison of New York’s electric rate filing sought a $477 annual increase effective April 2010. The company and PSC staff reported a high probability of a joint proposal, but negotiations were confidential and any agreement required PSC approval. Design-weather 2010 peak demand was forecast at 13,500 MW for Con Edison of New York and 1,595 MW for O&R; five-year annual peak-demand growth estimates were 0.3% and 0.9%, respectively. Management said it had reduced its demand outlook amid economic conditions.
- Capital investment: Con Edison of New York was selected for negotiations on $136 of federal smart-grid grants, covering 50% of eligible project costs. The companies said 2010–2011 construction expenditures, excluding those projects, might be lower than previously estimated. No formal earnings guidance is provided in the supplied filing text.
- Regulatory and conduct matters: Some electric revenues remain subject to potential refund pending review of historical capital expenditures and a contractor-payment investigation; the company could not estimate any refund. Gas and steam revenue amounts were also made subject to potential refund. The investigation concerns alleged kickbacks involving employees and contractors; the company said the inquiry was ongoing and its impact could not be predicted.
- Environmental and legal contingencies: The DEC sought a penalty and significant compliance measures for alleged permit and pollution violations at steam-generating facilities; costs could be substantial but were not estimable. Con Edison of New York received an EPA information request regarding the Gowanus Canal and said its potential liability was unknown. The company had not accrued a liability for approximately 100 suits arising from the 2007 Manhattan steam-main rupture; costs could be substantial, with insurance expected to cover most costs. Superfund and other environmental liabilities were $225, with additional costs possible.
- Tax matter: A court ruled for Con Edison on the 1997 LILO transaction, but IRS challenges to deductions from both transactions remained. The company reported $205 of estimated tax savings and potential repayment of amounts, with interest up to $55 net of tax, if its position were rejected; it had recorded no reserve.
- Controls and market exposure: Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting. A one-level downgrade could require additional derivative collateral; a downgrade below investment grade could require up to $196 for Con Edison and $23 for Con Edison of New York, under the stated assumptions.
Important facts for investors to verify
- Track the outcome and timing of Con Edison of New York’s electric rate proceeding and any potential refunds or disallowances related to past expenditures.
- Assess competitive-energy earnings volatility: Q3 included favorable mark-to-market effects, while 2008 year-to-date results included generation-sale gains and discontinued operations.
- Monitor liquidity, refinancing needs and debt costs, including short-term borrowings and variable-rate or auction-rate debt.
- Follow the contractor-payment investigation, DEC proceeding, Gowanus Canal exposure and steam-main litigation, none of which had a clear final cost in the filing.
- Review the IRS appeals and related potential LILO tax repayment exposure, as well as pension and retiree-benefit obligations.