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ED > SEC Filings for ED > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for CONSOLIDATED EDISON INC

Form 10-Q for CONSOLIDATED EDISON INC


8-May-2014

Quarterly Report


Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

This combined management's discussion and analysis of financial condition and results of operations relates to the consolidated financial statements (the First Quarter Financial Statements) included in this report of two separate registrants: Con Edison and CECONY and should be read in conjunction with the financial statements and the notes thereto. As used in this report, the term the "Companies" refers to Con Edison and CECONY. CECONY is a subsidiary of Con Edison and, as such, information in this management's discussion and analysis about CECONY applies to Con Edison.

This MD&A should be read in conjunction with the First Quarter Financial Statements and the notes thereto and the MD&A in Item 7 of the Companies' combined Annual Report on Form 10-K for the year ended December 31, 2013 (File Nos. 1-14514 and 1-1217, the Form 10-K).

Information in any item of this report referred to in this discussion and analysis is incorporated by reference herein. The use of terms such as "see" or "refer to" shall be deemed to incorporate by reference into this discussion and analysis the information to which reference is made.

Con Edison, incorporated in New York State in 1997, is a holding company which owns all of the outstanding common stock of CECONY, Orange and Rockland Utilities, Inc. (O&R) and the competitive energy businesses. As used in this report, the term the "Utilities" refers to CECONY and O&R.

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CECONY's principal business operations are its regulated electric, gas and steam delivery businesses. O&R's principal business operations are its regulated electric and gas delivery businesses. The competitive energy businesses sell electricity to retail customers, provide energy-related products and services, and participate in energy infrastructure projects.

Con Edison's strategy is to provide reliable energy services, maintain public and employee safety, promote energy efficiency, and develop cost-effective ways of performing its business. Con Edison seeks to be a responsible steward of the environment and enhance its relationships with customers, regulators and members of the communities it serves.


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CECONY

Electric

CECONY provides electric service to approximately 3.4 million customers in all of New York City (except a part of Queens) and most of Westchester County, an approximately 660 square mile service area with a population of more than nine million.

Gas

CECONY delivers gas to approximately 1.1 million customers in Manhattan, the Bronx and parts of Queens and Westchester County.

Steam

CECONY operates the largest steam distribution system in the United States by producing and delivering approximately 22,000 MMlbs of steam annually to 1,703 customers in parts of Manhattan.

O&R

Electric

O&R and its utility subsidiaries, Rockland Electric Company (RECO) and Pike County Light & Power Company (Pike) (together referred to herein as O&R) provide electric service to approximately 0.3 million customers in southeastern New York and in adjacent areas of northern New Jersey and northeastern Pennsylvania, an approximately 1,350 square mile service area.

Gas

O&R delivers gas to over 0.1 million customers in southeastern New York and adjacent areas of northeastern Pennsylvania.

Competitive Energy Businesses

Con Edison pursues competitive energy opportunities through three wholly-owned subsidiaries: Con Edison Solutions, Con Edison Energy and Con Edison Development. These businesses sell to retail customers electricity purchased in wholesale markets and enter into related hedging transactions, provide energy-related products and services to wholesale and retail customers, and participate in energy infrastructure projects. At March 31, 2014, Con Edison's equity investment in its competitive energy businesses was $503 million and their assets amounted to $1,419 million.

In March 2014, Con Edison Development agreed to sell a 50 percent membership interest in its wholly-owned subsidiary, CED California Holdings Financing I, LLC (CCH). CCH owns project companies that operate 110 MW of solar energy projects in California. Electricity generated by the projects is sold to Pacific Gas and Electric Company pursuant to long-term power purchase agreements. At March 31, 2014, CCH had approximately $374 million in net property, plant and equipment and $217 million in long-term debt.

Certain financial data of Con Edison's businesses is presented below:

                                                 Three months ended March 31, 2014                 At March 31, 2014
(Millions of Dollars, except                     Operating               Net Income for
percentages)                                     Revenues                 Common Stock                   Assets
CECONY                                        $3,204           85 %        $334         93 %          $36,326        90 %
O&R                                              256            7 %          21          6 %            2,569         6 %
Total Utilities                                3,460           92 %         355         99 %           38,895        96 %
Con Edison Solutions (a)                         295            8 %          (4 )       (1 )%             287         1 %
Con Edison Energy                                 26            - %           5          1 %              119         - %
Con Edison Development (b)                        11            - %           8          2 %              936         2 %
Other (c)                                         (3 )          - %          (3 )       (1 )%             244         1 %
Total Con Edison                              $3,789          100 %        $361        100 %          $40,481       100 %

(a) Net income from the competitive energy businesses for the three months ended March 31, 2014 includes $11 million of net after-tax mark-to-market gains (Con Edison Solutions, $11 million).

(b) Includes an after-tax benefit of $7 million in the three months ended March 31, 2014 due primarily to lower than previously estimated interest on the tax liability from the lease in/lease out (LILO) transactions (see in Note I to the First Quarter Financial Statements).

(c) Other includes parent company expenses, primarily interest, and consolidation adjustments. See "Results of Operations," below.


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Con Edison's net income for common stock for the three months ended March 31, 2014 was $361 million or $1.23 a share ($1.23 on a diluted basis) compared with $192 million or $0.66 a share ($0.65 on a diluted basis) for the three months ended March 31, 2013. See "Results of Operations - Summary," below. For segment financial information, see Note K to the First Quarter Financial Statements and "Results of Operations," below.

Results of Operations - Summary

Net income for common stock for the three months ended March 31, 2014 and 2013
was as follows:



               (Millions of Dollars)                2014        2013
               CECONY                                $334        $277
               O&R                                     21          30
               Competitive energy businesses (a)        9        (112 )
               Other (b)                               (3 )        (3 )
               Con Edison                            $361        $192

(a) Includes an after-tax benefit of $7 million in the three months ended March 31, 2014, and an after-tax charge of $150 million in the three months ended March 31, 2013 relating to the LILO transactions (see Note I to the First Quarter Financial Statements) and a tax benefit of $15 million resulting from the acceptance by the Internal Revenue Service (IRS) of the company's claim for manufacturing tax deductions in the three months ended March 31, 2013 (see Note J to the First Quarter Financial Statements). Also includes $11 million and $26 million of net after-tax mark-to-market gains in the three months ended March 31, 2014 and 2013, respectively.

(b) Other includes parent company expenses, primarily interest, and consolidation adjustments.

The Companies' results of operations for the three months ended March 31, 2014, as compared with the 2013 period reflect changes in the rate plans of Con Edison's utility subsidiaries, the weather impact on its steam delivery service, decreases in certain operations and maintenance expenses and increases in depreciation and property taxes, reflecting primarily the impact of higher utility plant balances. The results of operations also include the impact of the LILO transactions and the net mark-to-market effects of the competitive energy businesses.

Operations and maintenance expenses for CECONY primarily reflect a decrease in pension costs and lower surcharges for assessments and fees that are collected in revenues, offset in part by higher operating costs attributable to emergency response to weather related events.

The following table presents the estimated effect on earnings per share and net income for common stock for the 2014 period as compared with the 2013 period, resulting from these and other major factors:

                                             Earnings         Net Income for Common
                                             per Share           Stock Variation
                                             Variation        (Millions of Dollars)
 CECONY (a)
 Rate plans                                       $0.15                          $43
 Weather impact on steam revenues                  0.04                           13
 Operations and maintenance expenses               0.03                           10
 Depreciation and property taxes                  (0.05 )                        (15 )
 Other                                             0.02                            6
 Total CECONY                                      0.19                           57
 O&R (a)                                          (0.03 )                         (9 )
 Competitive energy businesses (b)                 0.41                          121
 Other, including parent company expenses             -                            -
 Total variations                                 $0.57                         $169

(a) Under the revenue decoupling mechanisms in the Utilities' New York electric and gas rate plans and the weather-normalization clause applicable to their gas businesses, revenues are generally not affected by changes in delivery volumes from levels assumed when rates were approved. Under the rate plans, pension and other postretirement costs and certain other costs are reconciled to amounts reflected in rates for such costs.

(b) These variations include an after-tax benefit in the 2014 period of $7 million or $0.02 a share compared to an after-tax charge in the 2013 period of $150 million or $0.51 a share relating to the LILO transactions (see Note I to the First Quarter Financial Statements). In addition, the variations include a tax benefit in the 2013 period of $15 million or $0.05 a share resulting from the acceptance by the IRS of the company's claim for manufacturing tax deductions (see Note J to the First Quarter Financial Statements). The variations also include after-tax net mark-to-market gains of $11 million or $0.04 a share in the 2014 period and after-tax net mark-to-market gains of $26 million or $0.09 a share in the 2013 period.


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See "Results of Operations" below for further discussion and analysis of results of operations.

Liquidity and Capital Resources

The Companies' liquidity reflects cash flows from operating, investing and financing activities, as shown on their respective consolidated statement of cash flows and as discussed below.

Changes in the Companies' cash and temporary cash investments resulting from operating, investing and financing activities for the three months ended March 31, 2014 and 2013 are summarized as follows:

Con Edison



           (Millions of Dollars)             2014        2013        Variance
           Operating activities             $  224      $  (84 )    $      308
           Investing activities               (634 )      (663 )            29
           Financing activities               (162 )       485            (647 )
           Net change                         (572 )      (262 )          (310 )
           Balance at beginning of period      674         394             280
           Balance at end of period         $  102      $  132      $      (30 )

CECONY



           (Millions of Dollars)             2014        2013        Variance
           Operating activities                $11      $  350      $     (339 )
           Investing activities               (510 )      (562 )            52
           Financing activities                (75 )      (102 )            27
           Net change                         (574 )      (314 )          (260 )
           Balance at beginning of period      633         353             280
           Balance at end of period         $   59      $   39      $       20

Cash Flows from Operating Activities

The Utilities' cash flows from operating activities reflect principally their energy sales and deliveries and cost of operations. The volume of energy sales and deliveries is dependent primarily on factors external to the Utilities, such as growth of customer demand, weather, market prices for energy, economic conditions and measures that promote energy efficiency. Under the revenue decoupling mechanisms in CECONY's electric and gas rate plans and O&R's New York electric and gas rate plans, changes in delivery volumes from levels assumed when rates were approved may affect the timing of cash flows but not net income. The prices at which the Utilities provide energy to their customers are determined in accordance with their rate plans. In general, changes in the Utilities' cost of purchased power, fuel and gas may affect the timing of cash flows but not net income because the costs are recovered in accordance with rate plans.

Net income is the result of cash and non-cash (or accrual) transactions. Only cash transactions affect the Companies' cash flows from operating activities. Principal non-cash charges include depreciation and deferred income tax expense. Principal non-cash credits include amortizations of certain net regulatory liabilities. Non-cash charges or credits may also be accrued under the revenue decoupling and cost reconciliation mechanisms in the Utilities' electric and gas rate plans in New York.

Net cash flows from operating activities for the three months ended March 31, 2014 for Con Edison and CECONY were $308 million higher and $339 million lower, respectively, than in 2013. The increase in net cash flows for Con Edison reflects the deposits made in 2013 with federal and state tax agencies primarily related to the LILO transactions (see Note I to the First Quarter Financial Statements), offset in part by higher income tax payments ($392 million) in 2014. The decrease in net cash for CECONY reflects primarily higher income tax payments ($231 million) in 2014.


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The change in net cash flows also reflects the timing of payments for and recovery of energy costs. This timing is reflected within changes to accounts receivable - customers, recoverable energy costs and accounts payable balances.

The changes in regulatory assets principally reflect changes in deferred pension costs in accordance with the accounting rules for retirement benefits.

Cash Flows Used in Investing Activities

Net cash flows used in investing activities for Con Edison and CECONY were $29 million and $52 million lower, respectively, for the three months ended March 31, 2014 compared with the 2013 period. The changes for Con Edison and CECONY reflect decreased utility construction expenditures in 2014. In addition, for Con Edison, the change reflects increased investments in solar energy projects (see Note N to the First Quarter Financial Statements), offset in part by decreased non-utility construction expenditures and receipt of grants related to solar energy projects.

Cash Flows from Financing Activities

Net cash flows from financing activities for Con Edison and CECONY were $647 million lower and $27 million higher, respectively, in the three months ended March 31, 2014 compared with the 2013 period.

In March 2014, CECONY issued $850 million of 4.45 percent 30-year debentures, the net proceeds from the sale of which were used to repay short-term borrowings and for other general corporate purposes. In February 2014, CECONY redeemed at maturity $200 million of 4.70 percent 10-year debentures.

In February 2013, CECONY issued $700 million of 3.95 percent 30-year debentures, the net proceeds from the sale of which were used to repay short-term borrowings and for other general corporate purposes. In February 2013, CECONY redeemed at maturity $500 million of 4.875 percent 10-year debentures.

Cash flows from financing activities of the Companies also reflect commercial paper issuance. The commercial paper amounts outstanding at March 31, 2014 and 2013 and the average daily balances for the three months ended 2014 and 2013 for Con Edison and CECONY were as follows:

                                                            2014                                 2013
(Millions of Dollars, except Weighted           Outstanding at         Daily         Outstanding at         Daily
Average Yield)                                     March 31           average           March 31           average
Con Edison                                     $            830      $     961      $          1,021      $     889
CECONY                                         $            669      $     777      $            313      $     188
Weighted average yield                                      0.2 %          0.2 %                 0.3 %          0.3 %

Other Changes in Assets and Liabilities

The following table shows changes in certain assets and liabilities at March 31,
2014, compared with December 31, 2013.



                                                  Con Edison             CECONY
                                                 2014 vs. 2013        2014 vs. 2013
(Millions of Dollars)                              Variance             Variance
Assets
Prepayments                                     $           353      $           295
Special deposits                                           (324 )                (84 )
Regulatory asset - Unrecognized pension costs              (139 )               (132 )
Liabilities
Accrued taxes                                              (378 )                (11 )
Pension and retiree benefits                               (225 )               (216 )


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Prepayments

The increase in prepayments for Con Edison and CECONY reflects primarily CECONY's January 2014 payment of its New York City semi-annual property taxes, offset by three months of amortization, while the December 2013 balance reflects the full amortization of the previous semi-annual payment.

Special Deposits and Accrued Taxes

The decreases in Con Edison's special deposits and accrued taxes reflect the deposits made in 2013 with federal and state tax agencies primarily relating to the LILO transactions. See Note I to the First Quarter Financial Statements.

Regulatory Asset for Unrecognized Pension Costs and Liability for Pension and Retiree Benefits

The decrease in the regulatory asset for unrecognized pension costs and the liability for pension and retiree benefits reflects the final actuarial valuation of the pension and other retiree benefit plans as measured at December 31, 2013, in accordance with the accounting rules for retirement benefits. The change in the regulatory asset also reflects the year's amortization of accounting costs. The decrease in the liability for pension and retiree benefits reflects in part contributions to the plans made by the Utilities in 2014. See Notes B, E and F to the First Quarter Financial Statements.

Capital Requirements and Resources

For each of the Companies, the ratio of earnings to fixed charges (Securities
and Exchange Commission basis) for the three months ended March 31, 2014 and
2013 and the twelve months ended December 31, 2013 was:



                                                                Ratio of Earnings to Fixed Charges
                           For the Three Months Ended              For the Three Months Ended               For the Twelve Months Ended
                                 March 31, 2014                          March 31, 2013                          December 31, 2013
Con Edison (a)                                      4.8                                     1.9                                      3.0
CECONY                                              4.6                                     4.1                                      3.7

(a) Reflects after-tax benefit/(charge) to earnings relating to Con Edison Development's LILO transactions of $7 million, $(150) million and $(95) million for the three months ended March 31, 2014 and 2013 and twelve months ended December 31, 2013, respectively. See Note I to the First Quarter Financial Statements.

For each of the Companies, the common equity ratio at March 31, 2014 and December 31, 2013 was:

                                        Common Equity Ratio
                                 (Percent of total capitalization)
                            March 31, 2014           December 31, 2013
               Con Edison              52.3                        53.9
               CECONY                  51.9                        53.7

Off-Balance Sheet Arrangements

The Companies have no off-balance sheet arrangements other than two guarantees ($80 million maximum and $208 million maximum) issued by Con Edison Development on behalf of two entities in which it acquired a 50 percent interest in July 2013 and March 2014, respectively (see "Guarantees" in Note H and Note N to the First Quarter Financial Statements). The entities were formed to develop, construct and operate photovoltaic solar energy facilities with a cumulative capacity of 400 MW (AC). Con Edison Development is not the primary beneficiary of these entities since the power to direct the activities that most significantly impact the economics of the facilities is shared equally between Con Edison Development and a third party. No payments have been made nor are any expected to be made under the guarantees.

Regulatory Matters

In December 2013, the New York State Public Service Commission (NYSPSC) directed the NYSPSC staff "to recommend, for commencement in the first quarter of 2014, a process that will result in timely decisions regarding the broad restructuring of distribution utility regulation, such that the post-2015 course of energy efficiency and other clean energy programs can be


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determined in the context of these more sweeping changes." The NYSPSC articulated five core policy outcomes intended to better align the role and operations of utilities to enable market and customer-driven change: empowering customers; leveraging customer contributions; system-wide efficiency; fuel and resource diversity; and system reliability and resiliency. The NYSPSC requested that the scope of the proceeding be sufficiently broad to address the role of distribution utilities in enabling system-wide efficiency and market-based deployment of distributed energy resources and load management; changes that can and should be made in the current regulatory, tariff, and market design and incentive structure in New York to better align utility interest with achieving the NYSPSC's energy policy objectives; and further changes that need to be made to energy efficiency delivery including better alignment and definition of the roles and responsibilities of New York State Energy Research and Development Authority (NYSERDA) and utilities.

In April 2014, following the issuance of a NYSPSC staff report and proposal that, among other things, recommended that the NYSPSC consider fundamental changes in the manner in which utilities provide service, the NYSPSC initiated its Reforming the Energy Vision proceeding to (1) improve system efficiency, empower customer choice, and encourage greater penetration of clean generation and energy efficiency technologies and practices; (2) examine how existing practices should be modified to establish Distributed System Platform Providers (DSPP), actively managing and coordinating distributed energy resources and providing a market enabling customers to optimize their energy priorities, provide system benefits, and be compensated for providing such system benefits; and (3) examine how the NYSPSC's regulatory practices should be modified to incent utility practices that best promote the NYSPSC's policies and objectives, including the promotion of energy efficiency, renewable energy, least cost energy supply, fuel diversity, system adequacy and reliability, demand elasticity, and customer empowerment. The NYSPSC indicated that its goal is to reach generic policy determinations with respect to DSPP and related issues and regulatory design and ratemaking issues by the end of 2014 and in the first quarter of 2015, respectively. The Utilities are not able to predict the outcome of the Reforming the Energy Vision proceeding or its impact on the Utilities.

Financial and Commodity Market Risks

The Companies are subject to various risks and uncertainties associated with financial and commodity markets. The most significant market risks include interest rate risk, commodity price risk, credit risk and investment risk.

Interest Rate Risk

The interest rate risk relates primarily to variable rate debt and to new debt financing needed to fund capital requirements, including the construction expenditures of the Utilities and maturing debt securities. Con Edison and its businesses manage interest rate risk through the issuance of mostly fixed-rate debt with varying maturities and through opportunistic refinancing of debt. Con Edison and CECONY estimate that at March 31, 2014, a 10 percent variation in interest rates applicable to its variable rate debt would result in an increase in annual interest expense of $1 million. Under CECONY's current gas, steam and electric rate plans, variations in actual variable rate tax-exempt debt interest expense are reconciled to levels reflected in rates. Under O&R's current New York rate plans, variations in actual tax-exempt (and under the gas rate plan, taxable) long-term debt interest expense are reconciled to the level set in . . .

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