CONSOLIDATED EDISON INC quarterly report, Q3 FY2019

Consolidated Edison, Inc. (Con Edison) — Q3 2019 Form 10-Q

Business context and reporting period. This unaudited combined filing covers Con Edison and its wholly owned utility subsidiary, Consolidated Edison Company of New York, Inc. (CECONY), for the quarter and nine months ended September 30, 2019. Con Edison operates regulated electric, gas and steam utilities, clean-energy businesses and transmission investments. Unless noted, amounts below are in millions of dollars.

Financial performance

Con Edison consolidated	Q3 2019	Q3 2018	Nine months 2019	Nine months 2018
Operating revenue	$3,365	$3,328	$9,623	$9,388
Operating income	$867	$826	$2,111	$2,007
Net income	$503	$435	$1,127	$1,051
Net income attributable to common stock	$473	$435	$1,048	$1,051
Diluted earnings per share	$1.42	$1.39	$3.19	$3.37

Con Edison’s operating margin was approximately 25.8% for Q3 and 21.9% year to date, compared with approximately 24.8% and 21.4%, respectively, in 2018. For the nine-month period, revenue increased 2.5%, operating income increased 5.2%, but common-stock net income and diluted EPS declined modestly. The 2019 consolidated net income includes income attributable to noncontrolling interests of $30 million for the quarter and $79 million year to date.

CECONY: Q3 revenue was $2,877 million and net income was $414 million, versus $2,899 million and $431 million in 2018. Nine-month revenue was $8,248 million and net income was $978 million, versus $8,121 million and $969 million. Higher rate-plan revenues and gas earnings were offset by higher operating costs, depreciation and property taxes; steam earnings also declined.
Clean Energy Businesses: Q3 operating revenue rose to $247 million from $181 million, and operating income to $100 million from $25 million, largely reflecting the Sempra Solar acquisition and consolidation of projects. Nine-month net income for common stock was a loss of $19 million, compared with income of $58 million in 2018; acquisition-related debt costs, depreciation and tax-equity investor allocations weighed on results.

Cash flow, debt and liquidity

For the first nine months, Con Edison generated $1,960 million of operating cash flow, versus $1,600 million in 2018. Investing activities used $2,884 million, including $2,428 million of utility construction expenditures; financing provided $171 million. Cash, temporary investments and restricted cash ended at $253 million, including $175 million restricted.
At September 30, Con Edison had $19,451 million of long-term debt including current maturities and $1,300 million of commercial paper outstanding. CECONY had $14,374 million of long-term debt including current maturities and $930 million of commercial paper. Con Edison’s common equity ratio was 50.8%, compared with 49.0% at year-end 2018.
Con Edison’s current assets were $3,581 million and current liabilities $6,219 million; CECONY’s were $3,005 million and $3,813 million. Cash balances were affected by seasonal property-tax payments and financing needs.
Con Edison issued shares for $825 million during the nine months, issued $700 million of CECONY debentures, and issued or borrowed other debt. A $1,012 million portion of project debt tied to PG&E power contracts was classified as due within one year.

Material changes versus the prior period

Con Edison’s Q3 common-stock earnings rose to $473 million from $435 million, while nine-month common-stock earnings slipped to $1,048 million from $1,051 million. The nine-month EPS decline also reflects a larger average share count following equity issuance.
Utility earnings benefited from rate increases, but were pressured by higher pension and other benefit costs, depreciation and property taxes. CECONY nine-month electric operating income fell $47 million; gas operating income increased $45 million, while steam operating income declined $23 million.
Clean Energy Businesses’ nine-month revenue increased $123 million, chiefly from the Sempra Solar acquisition, but operating costs and interest expense also rose. Net income for common stock fell to a loss, including $41 million of after-tax mark-to-market losses and $60 million of after-tax income allocated to a tax-equity investor.
Adoption of lease accounting added operating lease right-of-use assets of $834 million and lease liabilities of $878 million to Con Edison’s balance sheet. The common equity ratio increased from year-end.

Outlook, risks and unusual items

CECONY rate plans: In October 2019, CECONY and other parties entered a proposed three-year electric and gas rate-plan joint proposal for 2020–2022, subject to NYSPSC approval. It includes staged base-rate changes, an 8.80% authorized return on common equity, and potential performance penalties and incentives. The filing does not provide a clear full-year 2019 earnings guidance figure.
Capital spending and demand: The proposed CECONY plans include electric capital expenditures of $2,135 million, $2,137 million and $1,917 million in 2020–2022, and gas spending of $1,073 million, $1,055 million and $989 million. CECONY forecast average annual electric peak-demand change of approximately negative 0.1% for 2020–2024, while design-condition gas peak demand was forecast to grow approximately 1.5% annually.
PG&E bankruptcy exposure: Con Edison has 680 MW of renewable projects selling under long-term PPAs with PG&E. Distributions from the related projects are suspended during the bankruptcy, and lenders may accelerate project debt or foreclose. Con Edison recorded no impairment based on its expectation that the PPAs are not likely to be rejected; a rejection or becoming likely could result in a material impairment. PG&E reorganization plans remained subject to court, regulatory and funding approvals.
Outages and regulatory proceedings: The July 2019 Manhattan outage affected approximately 72,000 CECONY customers. The company recognized a $5 million negative revenue adjustment; investigations continue and additional exposure could not be estimated. Other open matters include investigations of 2018 storm responses, gas operator qualification and inspection practices, and the 2018 steam-main rupture.
Environmental and legal exposures: Con Edison estimated manufactured-gas-plant remediation exposure could range up to $2.8 billion, largely offset by regulatory recovery mechanisms, but actual costs may differ materially. The companies also face asbestos claims and other contingencies for which possible excess losses could not be estimated. New York climate and emissions laws and federal environmental rules may affect future utility operations and investment.
Other unusual items: A $42 million TCJA-related deferred-tax remeasurement affected the 2018 comparison period. The July 2019 power-outage adjustment was recorded in Q3 2019. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

Whether the NYSPSC approves the proposed CECONY 2020–2022 rate plans, including final rates, capital recovery and performance provisions.
Developments in PG&E’s bankruptcy, PPA assumption and project-lender arrangements, including the status of the $1,012 million current project-debt balance and restricted project cash.
Progress and potential costs of outage, storm-response, gas-safety, steam-main, environmental and asbestos proceedings, including whether any unaccrued loss becomes estimable.
Whether Clean Energy Businesses’ acquisition-related revenue growth translates into common-stock earnings and cash distributions after debt service and tax-equity allocations.
How continued capital spending, debt maturities, commercial paper funding and share issuance affect cash flow, leverage and per-share earnings.