Business context and reporting period
Consolidated Edison, Inc. (Con Edison) filed this unaudited combined Form 10-Q with wholly owned utility subsidiary Consolidated Edison Company of New York, Inc. (CECONY). The report covers the quarter and nine months ended September 30, 2017, compared with the corresponding 2016 periods. Con Edison’s businesses include regulated electric, gas and steam utilities, clean energy businesses and transmission investments.
Financial performance
| Con Edison, millions except per-share data | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenues | $3,211 | $3,417 | $9,072 | $9,368 |
| Operating income | $873 | $940 | $2,066 | $2,097 |
| Net income | $457 | $497 | $1,020 | $1,039 |
| Diluted EPS | $1.48 | $1.62 | $3.31 | $3.46 |
| Dividends declared per share | $0.69 | $0.67 | $2.07 | $2.01 |
Revenue fell 6.0% in Q3 and 3.2% for the nine-month period; net income declined 8.0% and 1.8%, respectively. Approximate operating margins were 27.2% versus 27.5% in Q3 and 22.8% versus 22.4% year to date. The 2016 comparisons include a $104 million Q3 gain on sale of the retail electric supply business; the prior-year nine-month period also included that gain. Excluding that one-time Q3 gain, reported operating income comparisons are less favorable than the headline figures suggest.
CECONY net income increased to $401 million from $388 million in Q3 and to $883 million from $859 million for the first nine months. Con Edison’s Clean Energy Businesses reported net income of $26 million in Q3 versus $78 million and $54 million for nine months versus $120 million, with the prior-year periods benefiting from the retail supply business sale and other items.
Cash flow, debt and liquidity
- Con Edison generated $2.227 billion of operating cash in the first nine months, down from $2.336 billion. Investing used $2.572 billion, compared with $3.717 billion in 2016; financing used $362 million, versus $583 million provided in 2016.
- Cash and temporary investments were $69 million at September 30, 2017, down from $776 million at year-end 2016. Current assets were $3.096 billion against current liabilities of $3.915 billion.
- Long-term debt, including amounts due within one year, was $15.338 billion; commercial paper outstanding was $356 million. The company reported no borrowings under its credit agreement. Con Edison’s common equity ratio was 50.8%, compared with 49.3% at year-end 2016.
- Utility construction expenditures were $2.148 billion for the period. Con Edison issued $343 million net proceeds from common shares; CECONY issued $500 million of 3.875% debentures due 2047.
Material changes and management commentary
- The Clean Energy Businesses’ revenue and expenses were substantially lower following the September 2016 sale of its retail electric supply business. Growth in renewable project revenues partly offset the reduction; renewable generation rose 43.7% year over year for the nine-month period.
- CECONY’s gas operating income improved, supported by rate-plan revenues and customer growth. Lower pension and postretirement costs benefited utility operating expenses, while depreciation, property taxes and other taxes increased.
- Con Edison cited higher cash income-tax payments as a key reason for lower operating cash flow. Differences in energy-cost recovery and regulatory timing also affected cash flows.
- Management expects electric peak-demand growth in CECONY’s service area to average approximately 0.1% annually for 2018–2022; O&R forecasts flat growth. CECONY’s forecast for peak gas-demand growth was reduced to 1.6% annually for 2018–2022. The filing provides no explicit consolidated earnings guidance.
Risks, contingencies and unusual items
- The NYSPSC identified CECONY’s supply failure and improper rerouting/documentation as causes associated with the April 2017 subway power outage. A prudence review was expected; the company could not estimate possible costs.
- Following the 2014 Manhattan gas explosion, a 2017 settlement requires CECONY to forgo recovery of $126 million of specified emergency-response costs and provide $27 million of future customer benefits. Approximately 80 lawsuits remained pending; the company had not accrued damages and could not estimate a loss range.
- Environmental liabilities include $745 million of accrued Superfund and other environmental costs for Con Edison, including $659 million for manufactured-gas-plant sites. The company cited potential additional remediation liabilities that could be material. CECONY also could not estimate its exposure at the Newtown Creek Superfund site.
- A 2017 transformer-oil release into the East River was being remediated; management did not expect a material adverse financial effect, though monetary sanctions were possible. Costs associated with an underwater transmission-line leak and repair were approximately $27 million in total across parties; CECONY did not expect its ultimate share to be material.
- Con Edison’s guarantees totaled $2.162 billion. Other significant exposures include pension and postretirement obligations, environmental claims, regulatory proceedings, market and counterparty risks, and the need for continued access to capital markets.
Important facts for investors to verify
- How much of the earnings comparison reflects the prior-year $104 million business-sale gain and other nonrecurring or mark-to-market items.
- Progress and potential financial impact of the subway-outage prudence review, including any subsequent NYSPSC orders.
- Updated estimates, recovery treatment and timing for environmental remediation and pending litigation, particularly Newtown Creek and the Manhattan explosion claims.
- Funding needs, debt maturities, liquidity and construction spending, given low period-end cash and continued capital investment.
- Whether the demand forecasts, renewable-project growth and utility rate plans support the company’s stated dividend-growth strategy.