Consolidated Edison, Inc. (Con Edison) — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The combined filing covers Con Edison and its subsidiary, Consolidated Edison Company of New York (CECONY). Unless noted, financial amounts below are Con Edison consolidated and in millions of dollars.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $2,771 | $2,993 | $5,849 | $6,342 |
| Operating income | $475 | $398 | $1,036 | $1,024 |
| Net income for common stock | $214 | $165 | $491 | $477 |
| Diluted EPS | $0.73 | $0.56 | $1.67 | $1.62 |
| Operating margin | 17.1% | 13.3% | 17.7% | 16.1% |
Q2 revenue fell 7.4%, while operating income rose 19.3% and common-stock net income rose 29.7%. Six-month revenue declined 7.8%; operating income increased 1.2% and common-stock net income increased 2.9%. The Q2 earnings improvement included substantial mark-to-market gains at the competitive energy businesses; management reported $36 million of after-tax mark-to-market gains for that segment in Q2, versus a $1 million loss in Q2 2011. Six-month segment mark-to-market gains were $18 million versus $21 million in 2011.
- Cash flow, six months: Operating cash flow was $1,247, down $342 from 2011; investing outflow was $1,105; financing inflow was $591. Cash and temporary investments ended June at $1,381, up from $648 at year-end 2011. Utility construction expenditures were $1,030.
- Debt and liquidity: Long-term debt, including current maturities, totaled $11,071 at June 30, versus $10,673 at year-end. CECONY issued $400 of 4.20% 30-year debentures; $239 of net proceeds funded redemption of all outstanding preferred stock. Commercial paper outstanding was $800 at a 0.4% weighted-average rate. Con Edison’s current assets were $4,102 versus current liabilities of $4,380.
- Capitalization: Common equity was 54.1% of total capitalization, up from 52.5% at year-end. The six-month earnings-to-fixed-charges ratio was 3.3.
- Dividends: Con Edison declared $0.605 per common share in Q2, compared with $0.600 a year earlier.
Business drivers and changes
- Regulated utilities accounted for 89% of Con Edison’s Q2 revenue and 81% of common-stock net income. CECONY’s Q2 common-stock net income was $163, up from $157; O&R’s was $11, up from $4.
- Utility revenue declined mainly because lower energy commodity costs flow through revenue and expenses. Rate-plan-related revenue supported results, while higher operations and maintenance costs—particularly pension expense—and higher depreciation weighed on operating income.
- Milder winter weather reduced steam volumes and revenue: CECONY’s steam operating income fell $11 in Q2 and $37 for the first six months. Lower gas commodity costs and operating costs helped CECONY gas results.
- Competitive energy Q2 operating income rose to $78 from $14, largely reflecting mark-to-market effects. For the first six months, segment operating income was $59 versus $58 despite lower revenue.
- Operating cash flow decreased year over year, primarily due to higher estimated income-tax payments and cash collateral paid to brokers and counterparties, as well as timing of energy-cost recovery and payments.
Outlook, regulatory matters and risks
- No specific consolidated earnings guidance is stated in the supplied filing text. CECONY was preparing to file new electric, gas and steam rate plans in November 2012; new plans were expected to take effect in October 2013. O&R’s approved New York electric rate plan provides staged base-rate increases from July 2012 through 2015.
- In July 2012, Con Edison Development acquired a company developing 70 MW of California solar projects. Con Edison raised its 2012 competitive-business capital expenditure estimate from $119 to approximately $450, funded the acquisition with available cash and commercial paper, and was evaluating long-term project financing. The projects are expected to qualify for investment tax credits or grants and have long-term power purchase agreements.
- CECONY reached a four-year labor agreement in July covering approximately 8,000 employees, ending a 26-day work stoppage; employee ratification remained pending.
- CECONY had collected an estimated $959 subject to potential customer refund in a regulatory prudence proceeding. A disputed consultant assessment identified $21 of potential construction-work overcharges; the company recorded a $15 regulatory liability and could not estimate any additional refund exposure.
- Con Edison reported $539 of accrued Superfund and environmental liabilities and $730 of related regulatory assets. The Utilities warned that further remediation liabilities may be accrued and could be material. Approximately 93 suits related to the 2007 Manhattan steam-main rupture remained pending; no liability was accrued, and total costs were not estimable.
- The IRS disallowed tax deductions associated with Con Edison’s LILO transactions, including $416 for tax years 1998–2007 and additional disallowances for 2008–2010. The company reported $244 of cumulative tax savings and potential after-tax interest of up to $118 if amounts must be repaid; it recorded no reserve and is contesting the matters.
- Management identified regulated-rate adequacy, operational and construction execution, environmental liabilities, pension and postretirement obligations, capital-market access, tax disputes, energy-market and counterparty risks, and cyber risk as potential exposures. Risk factors were reported as unchanged from the 2011 Form 10-K. Disclosure controls were considered effective; the utilities’ new financial and supply-chain systems, introduced in July, could materially affect internal controls.
Key facts for investors to verify
- How much of Q2 earnings growth reflects recurring regulated performance versus competitive-business mark-to-market gains, and how those gains may reverse.
- Progress and outcomes of CECONY’s upcoming rate filings and the O&R rate plan, including any customer refunds from the prudence proceeding.
- Funding, completion costs, tax-credit or grant realization, and financing plans for the California solar projects.
- Cash-flow and liquidity effects of the $800 commercial-paper balance, debt maturities, pension contributions, and utility investment program.
- Updates to IRS LILO disputes, environmental remediation estimates, and the unaccrued steam-main litigation exposure.
- Ratification and implementation of the labor agreement and the operational and financial effects of the new enterprise systems.