Consolidated Edison, Inc. (Con Edison) — Third Quarter 2012 Form 10-Q
Business context and reporting period. This combined, unaudited filing covers the quarter and nine months ended September 30, 2012, and reports separately for Con Edison and its subsidiary Consolidated Edison Company of New York (CECONY). Con Edison operates regulated electric, gas and steam utilities through CECONY and Orange and Rockland, alongside competitive energy businesses. Unless noted, figures below are for Con Edison; dollars are in millions.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $3,438 | $3,629 | $9,287 | $9,972 |
| Operating income | $851 | $756 | $1,886 | $1,781 |
| Net income for common stock | $440 | $383 | $931 | $860 |
| Diluted EPS | $1.49 | $1.30 | $3.16 | $2.92 |
| Dividends declared per common share | $0.605 | $0.600 | $1.815 | $1.800 |
Operating margin, calculated as operating income divided by revenue, was approximately 24.8% for Q3 2012 versus 20.8% a year earlier; nine-month margin was approximately 20.3% versus 17.9%. Net margin was approximately 12.8% and 10.6% for the respective quarters, and 10.0% and 8.6% for the nine-month periods.
- Cash flow: Nine-month operating cash flow was $1,638, down $523 year over year; investing used $1,867, including $1,450 of utility construction expenditures and $286 for the Alpaugh solar acquisition. Financing used $350. Cash and temporary investments ended at $69, versus $648 at year-end 2011.
- Debt and liquidity: September 30 long-term debt, including amounts due within one year, was $10,769; commercial paper outstanding was $340 at a 0.3% weighted-average rate. Cash was $69 and current liabilities were $3,724. The reported common-equity ratio was 54.6%, compared with 52.5% at December 31, 2011. The companies had not borrowed under their credit agreement.
- CECONY: Nine-month common-stock income was $824 versus $779, and operating income was $1,678 versus $1,619. CECONY cash from operations was $1,463 versus $1,960; cash at September 30 was $26. Its long-term debt, including current portion, was $9,845.
Material changes and management commentary
- Despite lower consolidated revenue, Con Edison’s common income rose 14.9% in Q3 and 8.3% for the nine-month period. Lower purchased-power, fuel and gas costs reduced reported revenue and expenses; utility rate-plan revenues supported net revenues. Nine-month steam income was pressured by milder winter weather, with steam operating income down $41.
- Con Edison attributed lower operating cash flow chiefly to larger pension contributions, higher estimated income-tax payments and timing of energy-cost recovery. Pension contributions were $787 in the first nine months of 2012, compared with $544 in 2011.
- Competitive energy businesses’ operating income increased to $53 in Q3 from $16, and to $111 for nine months from $75. Management attributed most of the improvement to mark-to-market effects; competitive-business net income included after-tax mark-to-market gains of $17 for Q3 and $35 for nine months.
- CECONY issued $400 of 4.20% 30-year debentures in March and redeemed $239 of preferred stock in May; it retired $300 of 5.625% debentures at maturity in July. In November, after quarter-end, CECONY purchased $225 of tax-exempt debt subject to mandatory tender.
Outlook, risks and unusual items
- Con Edison raised estimated competitive-energy capital expenditures to approximately $500 for 2012 and $240 for 2013, primarily for solar projects. The Alpaugh acquisition involved 70 MW of projects, with estimated total acquisition and construction cost of $350; an October acquisition added 40 MW of projects with estimated total cost of $200. Long-term project financing was under evaluation; investment tax credits or grants were expected.
- CECONY planned to file new electric, gas and steam rate plans in November 2012, with new plans expected to take effect in October 2013. O&R’s approved New York electric rate agreement covers July 2012 through June 2015 and includes staged base-rate increases and earnings-sharing provisions.
- Hurricane Sandy struck in late October, after the reporting date, interrupting service to approximately 950,000 CECONY and 250,000 O&R customers and damaging electric and steam systems. Restoration costs and capital expenditures were substantial but not yet estimable. The utilities expected most storm operating costs to be deferred for recovery under rate plans; recovery of additional capital spending is subject to regulatory provisions.
- Contingencies include environmental remediation liabilities of $537 for Con Edison, with related regulatory assets of $722; the filing says additional remediation liabilities could be material but cannot presently be estimated. Approximately $1,031 of CECONY customer collections remained subject to potential refund in the vendor-payment prudence proceeding; the company could not estimate any refund exceeding its $15 regulatory liability.
- The IRS had disallowed tax deductions relating to lease-in/lease-out transactions, including $416 for 1998–2007 and additional amounts for 2008–2011. Con Edison disputed the disallowances and had recorded no reserve. It estimated tax savings of $248 through September 30 and potential interest of up to $122, net of tax, if amounts were required to be repaid.
- Approximately 93 suits remained pending over the 2007 Manhattan steam-main rupture. The company had not accrued a liability; it believed insurance would cover most costs, which could be substantial, but could not estimate them. Other cited risks include regulation and rate recovery, pension and postretirement obligations, access to capital, energy-market and counterparty risks, environmental exposure and cyberattacks.
- Management stated disclosure controls were effective. A new financial and supply-chain ERP system began operating in July and materially affected internal control over financial reporting; management reported no other material quarterly change in those controls.
Investor verification priorities
- Verify the drivers and sustainability of earnings growth, particularly utility rate-plan contributions and competitive-business mark-to-market gains.
- Track cash balances, pension funding, capital spending and the financing plan for the solar projects.
- Follow the CECONY rate filings and the NYSPSC vendor-payment proceeding, including potential customer refunds beyond the recorded liability.
- Assess the eventual cost, regulatory recovery and operational impact of Hurricane Sandy restoration work.
- Monitor IRS appeals and potential exposure from the LILO tax deductions, as well as environmental and steam-main litigation contingencies.