Consolidated Edison, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. This combined, unaudited filing covers the three months ended March 31, 2018, with comparative results for Q1 2017. Con Edison is a holding company whose principal businesses include regulated electric, gas and steam utilities, clean-energy businesses and transmission investments. CECONY is its wholly owned subsidiary; its figures below are presented separately where useful.
Financial performance
| Con Edison, millions except per-share data | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $3,364 | $3,228 | +$136; 4.2% |
| Operating income | $755 | $812 | −$57; 7.0% |
| Net income | $428 | $388 | +$40; 10.3% |
| Diluted EPS | $1.37 | $1.27 | +$0.10 |
| Dividends declared per common share | $0.72 | $0.69 | +$0.03 |
| Operating cash flow | $143 | $448 | −$305 |
| Capital expenditures and other investing cash flow | −$909 | −$856 | −$53 |
Operating margin was approximately 22.4% versus 25.2%; net margin was approximately 12.7% versus 12.0%, calculated from reported revenue and income. Con Edison’s total assets were $48.9 billion at quarter-end. Long-term debt, including current maturities, was approximately $16.0 billion; commercial paper outstanding was $1.389 billion, at a 2.3% weighted-average rate. Cash, temporary cash investments and restricted cash totaled $683 million. Common equity was 51.5% of total capitalization.
CECONY reported revenue of $2.884 billion, operating income of $705 million and net income of $389 million, compared with $2.856 billion, $741 million and $339 million, respectively, in Q1 2017. Its operating cash flow was $56 million, down from $380 million. CECONY had $12.066 billion of long-term debt and $913 million of commercial paper outstanding at March 31, 2018.
Changes versus Q1 2017
- Con Edison’s net income increased despite lower operating income, principally as income tax expense fell to $117 million from $227 million. The filing attributes the decrease primarily to the federal corporate tax rate reduction under the Tax Cuts and Jobs Act (TCJA), along with lower pretax income and related tax effects.
- Utility operating results reflected higher rate-plan revenues and, for CECONY steam, favorable weather effects; these were partly offset by the deferral of TCJA benefits for customers and higher operating costs. CECONY net income rose $50 million; O&R net income fell $3 million.
- Clean Energy Businesses revenue rose $97 million to $233 million, largely from engineering, procurement and construction services and renewable generation, but higher operating and construction-related costs left segment net income at $6 million versus $7 million.
- Operating cash flow declined substantially, while investing outflows increased. Financing cash flow was $605 million, compared with a $320 million outflow in Q1 2017, mainly reflecting greater short-term debt issuance. Cash and restricted cash ended the quarter at $683 million, versus $102 million a year earlier.
Outlook, risks and unusual items
- Outlook: The filing provides no specific full-year earnings or EPS guidance. Management describes its strategy as pursuing dividend growth supported by earnings growth in regulated utilities and contracted assets. Utilities’ rate plans generally decouple delivery revenues from volume changes and allow recovery of eligible energy costs.
- TCJA and regulation: Utilities recorded $112 million of estimated Q1 net TCJA benefits as regulatory liabilities for customers. New York staff recommended customer bill credits beginning October 1, 2018; regulatory treatment remained subject to proceedings. The companies had not finalized provisional tax accounting and expected to complete their assessment by Q4 2018.
- Storms: March storms Riley and Quinn interrupted service to approximately 209,000 CECONY, 93,000 O&R and 44,000 RECO customers. CECONY reported $106 million of storm-related costs through March 31; O&R and RECO reported $31 million and $11 million. Recovery is subject to regulatory review, and the companies could not estimate potential losses related to the storms.
- Subway power reliability: CECONY had incurred $149 million through March 31 in connection with required MTA-related actions; $122 million was deferred as a regulatory asset. It expected a further $115 million of costs during the rest of 2018, most expected to be deferred, and planned to complete required actions in 2018.
- Environmental and legal exposures: Con Edison reported $734 million of accrued Superfund and other environmental costs and $783 million of related regulatory assets. Estimated potential manufactured-gas-site remediation liability could range up to $2.7 billion for Con Edison; actual costs may differ materially. The company also disclosed unresolved suits arising from the 2014 Manhattan gas explosion and asbestos claims, including possible exposure above accrued amounts that it could not estimate.
- Other liquidity and market risks: Utility construction expenditures were $790 million for Con Edison. Pension contributions were $184 million in Q1, with $472 million expected for 2018. A 10% increase in rates applicable to variable-rate debt was estimated to raise annual interest expense by $6 million. A 10% decline in market prices was estimated to reduce fair value of utility electricity and gas hedges by $63 million, expected to be largely offset by changes in energy purchase costs.
- The companies adopted revenue-recognition guidance and restricted-cash cash-flow guidance in 2018; management stated revenue recognition was equivalent to the prior method for the quarter. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How the TCJA customer-benefit proceedings and final tax-accounting assessment affect utility revenues, cash flow and regulatory balances.
- Whether storm restoration, subway reliability and other deferred costs are recoverable in rates, and the timing of recovery.
- Progress and remaining costs for MTA-required work, alongside any further regulatory findings or penalties.
- Developments in the Manhattan explosion, asbestos, Superfund and Hudson River transmission-line matters, including any change in estimated exposure or insurance recovery.
- Funding needs, commercial-paper levels, capital spending and pension contributions relative to operating cash generation.
- Whether clean-energy revenue growth from construction services translates into sustained segment earnings after associated costs.