Consolidated Edison, Inc. — First Quarter 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. This combined, unaudited filing covers Consolidated Edison, Inc. and its subsidiary Consolidated Edison Company of New York, Inc. (CECONY). Unless noted, financial amounts below are Con Edison consolidated and in millions of dollars.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Operating revenue | $3,078 | $3,349 | Down $271 (8.1%) |
| Operating income | $561 | $626 | Down $65 (10.4%) |
| Net income | $280 | $314 | Down $34 |
| Net income for common stock | $277 | $311 | Down $34 |
| Diluted EPS | $0.94 | $1.06 | Down $0.12 |
| Operating margin | 18.2% | 18.7% | Down 0.5 percentage points |
| Common dividend per share | $0.605 | $0.600 | Up $0.005 |
Revenue fell mainly with lower gas and steam revenue, reflecting lower energy costs and milder winter weather, and lower competitive-energy revenue. Operating expenses also declined, but not enough to offset lower operating income and higher operating and maintenance costs. Pension and other postretirement benefit costs were significant contributors to expense pressure.
- CECONY common-stock income was $273 million versus $268 million. O&R income was $20 million versus $19 million. Competitive energy businesses and other reported a combined $12 million loss versus $27 million of income, including an $18 million after-tax mark-to-market loss in 2012 compared with a $22 million gain in 2011.
- CECONY electric operating income increased $7 million, while gas operating income increased $17 million and steam operating income fell $26 million. Steam deliveries declined 23.4%, primarily due to milder weather.
Cash flow, debt and liquidity
- Con Edison operating cash flow was $402 million, compared with $362 million. Investing used $490 million, principally for utility construction; financing provided $209 million. Cash and temporary investments ended the quarter at $769 million, up from $648 million at year-end 2011.
- Utility construction expenditures were $471 million, up from $394 million. Operating cash flow benefited in part from lower pension contributions than in the prior-year quarter; cash collateral payments and timing of energy-cost recoveries affected cash flows.
- At March 31, Con Edison had $11.071 billion of long-term debt including current maturities ($10.041 billion long-term and $1.030 billion due within one year). Current assets were $3.904 billion and current liabilities $3.840 billion. Common equity was 53.5% of total capitalization, compared with 52.5% at year-end.
- CECONY issued $400 million of 4.20% 30-year debentures in March. On May 1, 2012, it used $239 million of net proceeds to redeem all outstanding preferred stock. Neither Con Edison nor CECONY had commercial paper outstanding at quarter-end, and the companies had not borrowed under their October 2011 credit agreement.
- Con Edison’s ratio of earnings to fixed charges was 3.5, versus 3.9 a year earlier. Expected 2012 pension contributions were $775 million for the companies, including $721 million for CECONY.
Material changes, outlook and commentary
- Management attributed the year-over-year results to rate-plan changes, milder winter weather affecting steam revenues, and increased operating costs. CECONY rate-plan revenues helped offset higher costs; competitive-energy results were materially weaker due primarily to mark-to-market effects.
- CECONY said it was evaluating when to seek a new electric rate plan after its current plan ends March 31, 2013. It expected the electric business’s earned return on common equity for the rate year ending March 31, 2014 to be below the return for the year ending March 31, 2013. The filing gives no clear consolidated earnings or EPS guidance.
- O&R’s proposed New York electric rate settlement, subject to NYSPSC approval, covers July 2012 through June 2015 and provides for specified annual base-rate increases. CECONY was directed to offset a $134 million surcharge otherwise planned for collection by using regulatory liabilities.
- For CECONY’s expenditure-prudence proceeding, $887 million had been collected from customers subject to potential refund. The company had an $8 million related regulatory liability but could not estimate any refund required above that amount.
Risks, contingencies and unusual items
- Tax dispute: The IRS disallowed $416 million of net deductions for the company’s lease-in/lease-out transactions for tax years 1998–2007 and also disallowed deductions for 2008–2010. Con Edison was pursuing appeals and recorded no reserve. It reported $240 million of estimated tax savings through quarter-end and potential interest of up to $114 million net of tax if amounts were repaid. The IRS also appealed a prior court decision favorable to the company.
- Environmental exposure: Accrued Superfund liabilities were $537 million for Con Edison, with $729 million of related regulatory assets. The company cautioned that additional remediation liabilities may be accrued and could be material. CECONY’s estimated potential MGP-site liability had previously been stated as up to $1.9 billion, based on assumptions that may differ from actual remediation needs.
- Steam-main litigation: Approximately 93 suits remained pending over the 2007 Manhattan steam-main rupture. No liability was accrued; the company said costs could be substantial but could not be estimated, and believed insurance would cover most costs.
- Other exposures: Vendor-payment investigations and the NYSPSC expenditure review remained ongoing. Con Edison reported $760 million of maximum guarantees, primarily related to energy transactions. Net derivative liabilities were $175 million after collateral netting; a downgrade below investment grade could require additional collateral.
- The filing identifies operational reliability, regulation and rate recovery, environmental matters, pension obligations, access to capital markets, tax disputes, wholesale energy markets and cybersecurity among risks. Management reported effective disclosure controls and no material change in internal control during the quarter; an enterprise systems project was expected to be reasonably likely to materially affect internal controls.
Most important facts for investors to verify
- Whether the decline in consolidated earnings persists, particularly the effect of competitive-energy mark-to-market volatility and higher pension, benefit and operating costs.
- CECONY’s next electric rate-plan filing and expected earned returns, and NYSPSC approval and implementation of O&R’s proposed rate settlement.
- Potential customer refunds from the CECONY expenditure-prudence proceeding and the eventual outcomes of vendor-payment investigations.
- Developments in the LILO tax appeals, including possible repayment, interest and earnings effects.
- Environmental remediation estimates, steam-rupture litigation exposure, pension funding requirements and any resulting liquidity or collateral needs.