Consolidated Edison, Inc. (Con Edison) — Q3 2010 Form 10-Q
Business context and period: Combined unaudited quarterly filing for Con Edison and its subsidiary CECONY, for the quarter and nine months ended September 30, 2010, compared with the corresponding 2009 periods. Con Edison operates regulated electric, gas and steam utilities, alongside competitive energy businesses. CECONY is its principal utility subsidiary.
Financial performance
All dollar amounts are in millions except per-share data.
| Con Edison | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenues | $3,707 | $3,489 | $10,185 | $9,758 |
| Operating income | $705 | $685 | $1,627 | $1,476 |
| Net income for common stock | $350 | $336 | $759 | $666 |
| Diluted earnings per share | $1.23 | $1.22 | $2.68 | $2.42 |
| Cash from operating activities | Not separately reported | Not separately reported | $971 | $1,469 |
| Utility construction expenditures | Not separately reported | Not separately reported | $1,455 | $1,524 |
- For Q3, revenue increased about 6% and operating income about 3% year over year; diluted EPS rose from $1.22 to $1.23. For the first nine months, common earnings increased about 14% and diluted EPS rose from $2.42 to $2.68.
- Quarterly common dividends declared were $0.595 per share, versus $0.590 a year earlier. Nine-month dividends were $1.785 per share versus $1.770.
- At September 30, cash was $198, down from $260 at year-end 2009. Current assets were $3,890 and current liabilities $3,147. Commercial paper outstanding was $846, including $832 at CECONY; the weighted-average rate was 0.4%.
- Long-term debt was $10,667, with $5 due within one year; Con Edison also had $846 of notes payable. Common equity was 49.4% of total capitalization, down from 50.5% at year-end. Nine-month earnings-to-fixed-charges coverage was 3.4x.
- Nine-month cash from operations fell $498 year over year, while cash used in investing improved by $83 and financing cash flow increased by $352. The filing attributes lower operating cash flow largely to the timing of New York City property tax payments, higher estimated income tax payments, and timing of energy-cost recovery and payments.
Material changes and management commentary
- Con Edison’s Q3 earnings improvement was led by CECONY and O&R utility results, partly offset by competitive energy businesses. CECONY’s Q3 common earnings rose $50 to $332; O&R earnings rose $6 to $25. Competitive energy businesses and other declined $42, to a $7 loss in the segment detail.
- For the nine-month period, CECONY common earnings rose $94 to $709 and O&R rose $8 to $42; competitive energy businesses and other declined $10 to $8.
- Management cited utility rate-plan changes, including CECONY’s higher allowed electric return on equity, as key earnings support. Higher operating and maintenance expense, depreciation and property taxes partly offset the benefit. Demand-side management costs and New York State assessments increased; cost-control savings provided a partial offset.
- Competitive energy results were affected by mark-to-market losses: after-tax losses of $22 in Q3 2010 versus gains of $17 in Q3 2009, and losses of $21 for the first nine months versus gains of $1 in 2009. Q3 results also reflected lower electric retail margins.
- CECONY’s gas and steam rate plans were approved in September 2010 for October 2010 through September 2013, with scheduled base-rate increases. The steam order also requires a future proposal to phase in a revised allocation of certain East River Repowering Project fuel costs.
Outlook, risks and unusual items
- Management expected 2010 construction expenditures to be about $160 lower than previously estimated, including $85 for CECONY. The Utilities did not anticipate needing additional long-term debt for remaining 2010 capital requirements.
- The Companies expected approximately $500 of tax benefits over the next few months, increasing operating cash flow, related to accelerated repair deductions and bonus depreciation. In October 2010, Con Edison issued 6.3 million shares for net proceeds of $305, invested in CECONY.
- CECONY was reviewing 2011–2012 capital needs and expected to defer projects with estimated expenditures of $75 in 2011 and $200 in 2012. These are management expectations, not guaranteed outcomes.
- CECONY had collected an estimated $464 from customers subject to potential refund in a NYSPSC prudence proceeding. A consultant reported a provisional $21 assessment for potential construction overcharges, disputed by the company; the ultimate refund, if any, could not be estimated.
- Environmental exposure includes Superfund and manufactured-gas-plant remediation. Con Edison accrued $239 for Superfund liabilities and recorded $421 in related regulatory assets. The filing warns that additional remediation liabilities could be material as investigations proceed.
- Other contingencies include approximately 100 pending suits related to the 2007 Manhattan steam-main rupture, without an accrued liability; a proposed NYSDEC penalty of $10.8 for permit and pollution matters; and an agreed Astoria corrective-action plan estimated to require $32 in capital expenditures.
- The IRS had challenged deductions associated with Con Edison’s leveraged lease-in/lease-out transactions. The company reported $217 of estimated tax savings and potential interest of up to $73, net of tax, if some or all were repaid; it recorded no reserve and believes its tax treatment is correct.
- Fitch lowered O&R’s senior unsecured debt rating from A to A- in October 2010. Management reported no material change in risk factors from the 2009 Form 10-K. The filing describes forward-looking statements as subject to risks and uncertainties.
Important facts for investors to verify
- Whether the anticipated tax benefits and refunds were realized, and how they affected cash flow and tax liabilities.
- The outcome of the NYSPSC vendor-payment investigation, including whether customer refunds or further assessments are required.
- Progress and cost estimates for environmental remediation and the steam-main rupture litigation.
- The status of IRS appeals and exposure relating to the LILO transactions and repair deductions.
- Whether forecast construction spending, project deferrals, rate-plan recoveries and financing needs developed as management expected.
- Changes in competitive energy mark-to-market results, utility pension costs, short-term borrowing and O&R’s credit rating.