CONSOLIDATED EDISON INC quarterly report, Q2 FY2017

Business context and reporting period

Consolidated Edison, Inc. (Con Edison) filed this combined unaudited Form 10-Q for the quarter and six months ended June 30, 2017. Con Edison is a holding company whose businesses include regulated electric, gas and steam utilities, renewable energy and energy services, and transmission investments. CECONY is its wholly owned subsidiary and is reported separately in the filing.

Key financial metrics

Q2 operating and net margins were approximately 16.1% and 6.6%, respectively, compared with 18.4% and 8.3% a year earlier. For the six-month period, the respective margins were approximately 20.4% and 9.6%, versus 19.4% and 9.1% in 2016.

Six-month operating cash flow was $1.574 billion, investing cash outflow was $1.703 billion, and financing cash inflow was $169 million. Cash and temporary investments ended June at $816 million, up from $776 million at year-end 2016. Capital spending included $1.425 billion of utility construction expenditures and $225 million of non-utility construction expenditures.

At June 30, total assets were $49.099 billion and equity was $14.498 billion. Current assets of $3.280 billion compared with current liabilities of $4.329 billion. Long-term debt, including the current portion, was $15.340 billion; commercial paper outstanding was $1.036 billion. The common equity ratio was 49.6%.

Material changes versus prior comparable periods

• Q2 revenue fell 5.8% and net income fell 24.6% year over year; diluted EPS declined to $0.57 from $0.77. For the first half, revenue decreased 1.5%, while net income increased 3.9% and diluted EPS increased to $1.84 from $1.82.
• The Clean Energy Businesses’ Q2 revenue declined $192 million and net income declined $51 million. The main comparison factor was the September 2016 sale of the retail electric supply business; substantially all of the large 2016 mark-to-market gains also related to that business. Renewable revenue rose as additional projects entered service.
• CECONY’s Q2 net income was $143 million versus $161 million; first-half net income was $482 million versus $472 million. CECONY’s first-half gas operating income improved, while electric operating income declined.
• Con Edison’s first-half operating cash flow was $57 million lower than in 2016, primarily reflecting less favorable income-tax cash timing; 2016 included a substantial tax refund. Investing outflow was lower mainly because there were no comparable large renewable-project investments in 2017.

Outlook, management commentary, risks and contingencies

• No company-wide earnings guidance was provided in the supplied filing text. Management reported reducing its forecast of average annual peak gas-demand growth in CECONY’s service area from about 2.3% for 2017–2021 to 1.6% for 2018–2022, citing fewer remaining oil-to-gas conversion opportunities.
• Con Edison expects 2017 pension contributions of $450 million, including $412 million from CECONY. It anticipates a federal consolidated net operating loss for 2017, primarily due to bonus depreciation, and expects an $18 million tax carryback refund.
• CECONY issued $500 million of 3.875% debentures due 2047. Con Edison issued $400 million of 2.00% debentures due 2020 and prepaid a $400 million variable-rate term loan. The 2018 long-term debt retirement estimate was reduced by $400 million to $1.288 billion.
• Following a CECONY subway power outage, the New York State Public Service Commission indicated that inspections, monitoring, reporting and other actions would be required; a prudence review was considered likely. The company could not estimate the related costs. The matter followed the quarter-end.
• For the 2014 Manhattan gas explosion, approximately 80 suits remained pending; CECONY had not accrued damages liability and could not estimate possible losses. A 2017 regulatory settlement required CECONY to forgo recovery of $126 million of past emergency-response costs and provide $27 million in future customer benefits.
• Con Edison reported $745 million of accrued Superfund and other environmental costs, including $659 million for manufactured gas plant sites; further remediation liabilities may arise and could be material. CECONY also could not estimate its exposure at the Newtown Creek Superfund site. A transformer-oil release into the East River was being remediated; costs were not expected to materially affect the company, though monetary sanctions were possible.
• Thousands of asbestos suits remain, and the companies disclosed a reasonable possibility of loss above accrued amounts but could not estimate the excess. For the 2007 Manhattan steam-main rupture, $18 million of accrued liability was matched by an $18 million insurance receivable; agreements to resolve most suits were reached in July 2017.
• Other risks identified include extensive utility regulation, rate-plan outcomes, facility failure, cybersecurity, environmental exposure, pension and postretirement obligations, access to capital markets, and commodity and counterparty risks. Management reported effective disclosure controls and no material change in internal control over financial reporting.

Important facts for investors to verify

• How much of the year-over-year Clean Energy Businesses decline reflects the sold retail supply business and nonrecurring 2016 mark-to-market gains, versus underlying performance of continuing renewable and energy-services operations.
• Whether the subway-outage review, Manhattan explosion litigation, asbestos claims, and Newtown Creek remediation result in material costs, penalties, or limits on customer cost recovery.
• Whether utility rate plans and regulatory mechanisms adequately offset rising depreciation, property taxes, and other costs, and how the reduced gas-demand growth forecast affects investment plans.
• Funding needs, debt maturities, interest-rate exposure, pension contributions, and the ability to sustain dividend growth while funding substantial utility construction.