Consolidated Edison, Inc. (Con Edison) — Q1 2015 Form 10-Q
Business context and reporting period. This unaudited combined filing covers Con Edison and its wholly owned utility subsidiary, Consolidated Edison Company of New York, Inc. (CECONY), for the three months ended March 31, 2015, compared with the same quarter of 2014. Con Edison’s businesses include regulated electric, gas and steam utilities, competitive energy businesses and renewable-energy projects. CECONY serves New York City and Westchester County.
Key financial results
| Con Edison, $ millions except per-share data | Q1 2015 | Q1 2014 |
|---|---|---|
| Operating revenues | 3,616 | 3,789 |
| Operating income | 726 | 685 |
| Net income for common stock | 370 | 361 |
| Diluted earnings per share | $1.26 | $1.23 |
| Operating margin | 20.1% | 18.1% |
| Net margin | 10.2% | 9.5% |
| Cash flow from operating activities | 559 | 224 |
| Utility construction expenditures | 550 | 498 |
| Cash and temporary cash investments, at quarter-end | 117 | 102 |
Con Edison’s declared dividend was $0.65 per share, versus $0.63 a year earlier. CECONY reported revenue of $3,010 million, operating income of $684 million and net income of $348 million, compared with $3,204 million, $643 million and $334 million, respectively, in Q1 2014.
Liquidity, debt and capital
- At March 31, Con Edison reported $11.694 billion of long-term debt, $496 million of long-term debt due within one year and $519 million of notes payable. Commercial paper carried a weighted-average rate of 0.5%.
- Current assets were $3.398 billion against current liabilities of $3.407 billion. Cash declined by $582 million during the quarter, to $117 million.
- Operating cash flow of $559 million was more than offset by $667 million of investing outflows and $474 million of financing outflows. Financing included $190 million of common dividends; no long-term debt was issued during the quarter.
- Con Edison’s common equity ratio was 52.2%, versus 52.0% at year-end 2014. Its Q1 ratio of earnings to fixed charges was 4.3, compared with 4.8 a year earlier.
Changes versus Q1 2014
- Revenue fell $173 million, or 4.6%, while operating income rose $41 million and net income increased $9 million. Lower purchased-power and gas costs reduced reported revenue and related expenses; the filing notes that regulated energy costs are generally recovered from customers.
- Lower operating and maintenance expense contributed to improved results. Net interest expense increased $25 million, principally reflecting higher long-term-debt interest charges at CECONY and tax-related interest adjustments in the competitive businesses.
- Operating cash flow improved by $335 million. Management attributed the increase primarily to lower income taxes paid, net of refunds, and timing of energy-cost cash flows. Q1 2014 included long-term debt issuance and repayment activity that did not recur in Q1 2015.
- Competitive energy businesses’ net income declined to $2 million from $9 million; Q1 2014 included a $7 million after-tax benefit related to previously terminated lease-in/lease-out transactions.
Outlook, management commentary and significant risks
- Rates and regulation: In April 2015, CECONY and parties to its electric rate proceeding submitted a proposal to extend the current plan through 2016, with no base-rate increase or decrease. The proposal includes $123 million of additional annual revenue from amortization of net regulatory liabilities and remains subject to New York State Public Service Commission approval. It also retains potential performance penalties of up to $400 million.
- Capital and strategy: In April, Con Edison increased its estimate of 2015 competitive-business capital expenditures from $375 million to $835 million to fund additional renewable-energy development. The company was considering strategic alternatives for its retail electric supply business; no decision is reported in the supplied filing text.
- Regulatory and customer-refund exposure: CECONY had collected an estimated $1.747 billion subject to possible refund in a proceeding concerning alleged contractor overcharges and employee misconduct. The company disputed a regulator consultant’s $208 million estimate and had accrued a $104 million regulatory liability; the proceeding could result in additional refunds, and settlement was not assured.
- Safety and legal contingencies: Following a 2014 Manhattan gas explosion that killed eight people, approximately 35 suits were pending. CECONY had not accrued a liability and stated that it could not estimate the possible loss; it believed insurance would cover liability beyond a non-material retention. Separately, regulators identified deficiencies in gas-pipe fusion worker qualification and requalification procedures; further inspection, remediation and reporting requirements were under consideration.
- Environmental and benefit obligations: Con Edison reported $758 million of accrued Superfund and other environmental costs, alongside $911 million of related regulatory assets. The company cautioned that additional site remediation liabilities could be material but were not presently estimable. Expected 2015 pension contributions were $750 million, including $697 million from CECONY.
- Other risks: The filing highlights extensive regulation, rate-plan outcomes, infrastructure reliability, cybersecurity, environmental exposure, wholesale energy-market disruptions, unfunded pension and postretirement obligations, and access to capital markets. Management reported no material change in risk factors from the 2014 Form 10-K.
Most important facts for investors to verify
- Whether the NYSPSC approved the proposed 2016 CECONY electric rate-plan extension and how potential refunds, penalties and regulatory-asset amortization were ultimately resolved.
- The outcome and financial exposure from the contractor-prudence proceeding, including the disputed consultant estimate and amounts collected subject to refund.
- Developments in the Manhattan explosion investigation and litigation, including insurance coverage and whether an estimable liability is recorded.
- Whether the higher 2015 competitive-business capital-expenditure plan was funded and executed, and the outcome of the retail electric supply strategic review.
- Subsequent cash generation, borrowing needs and pension contributions, given low quarter-end cash and continued substantial utility investment.