Consolidated Edison, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017. This combined filing covers Con Edison and its wholly owned utility subsidiary, Consolidated Edison Company of New York (CECONY). The filing also provides unaudited fourth-quarter data.
Business context
Con Edison is a holding company whose businesses include regulated electric, gas and steam utilities in New York and New Jersey, renewable-energy and energy-services businesses, and electric and gas transmission investments. Management expects the regulated utilities to provide substantially all earnings over the next few years. Utility rates are regulated and generally provide for recovery of approved delivery costs and purchased energy costs.
Key financial results
| Con Edison, $ millions except per-share data | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenue | $12,033 | $12,075 | (0.3%) |
| Operating income | $2,610 | $2,575 | 1.4% |
| Operating margin | 21.7% | 21.3% | Up 0.4 percentage points |
| GAAP net income | $1,525 | $1,245 | 22.5% |
| Diluted EPS | $4.94 | $4.12 | 19.9% |
| Adjusted earnings (non-GAAP) | $1,264 | $1,198 | 5.5% |
| Adjusted diluted EPS (non-GAAP) | $4.12 | $3.99 | 3.3% |
| Operating cash flow | $3,367 | $3,459 | (2.7%) |
| Capital expenditures | $3,606 | $5,235 | (31.1%) |
The $259 million, or $0.85 per share, benefit from remeasuring deferred taxes following the Tax Cuts and Jobs Act (TCJA) materially increased reported earnings; adjusted earnings exclude this benefit. Revenue was nearly flat as lower non-utility retail-electric-supply activity was largely offset by utility results. CECONY net income rose to $1,104 million from $1,056 million, while its operating income increased to $2,405 million from $2,262 million. Utility earnings benefited from rate-plan changes and lower CECONY pension and postretirement costs; higher depreciation, property taxes and other taxes partly offset these gains.
Con Edison’s 2017 fourth-quarter revenue was $2,961 million and net income was $505 million, compared with $2,707 million and $207 million, respectively, in fourth-quarter 2016. The filing does not provide a comparable adjusted-earnings figure specifically for the quarter.
Financial position, debt and liquidity
- At year-end, Con Edison reported total assets of $48.1 billion, equity of $15.4 billion and long-term debt of $14.7 billion. Long-term debt due within one year was $1.3 billion; total long-term debt including that current portion was $16.0 billion.
- Cash and temporary cash investments were $797 million. Current assets were $3.5 billion and current liabilities were $4.9 billion; the company states it generally maintains minimal cash and uses short-term borrowing for working capital.
- Operating cash flow was $3.37 billion, down $92 million year over year, primarily because of higher net income-tax payments. Cash used in investing was $3.70 billion, and financing provided $357 million.
- Year-end commercial paper outstanding was $577 million for Con Edison, including $150 million for CECONY. A $2.25 billion revolving credit facility was available, with no borrowings outstanding under it. The companies reported compliance with debt covenants.
- Con Edison’s common-equity ratio was 51.1%, versus 49.3% in 2016. Its 2017 dividend declared was $2.76 per share, up from $2.68.
Material changes and outlook
- Con Edison issued 4.1 million common shares in 2017 for net proceeds of $343 million and issued $400 million of 2.00% debentures due 2020. CECONY issued $1.2 billion of long-term debt. The Utilities invested $3.09 billion in energy delivery systems.
- For 2018, estimated capital expenditures are $3.97 billion, including $3.21 billion for the Utilities, $360 million for Con Edison Transmission and $400 million for the Clean Energy Businesses. Total stated 2018 capital requirements, including debt maturities, are $5.27 billion.
- Management planned to fund 2018 requirements with internally generated cash and securities issuance, including $1.3–$1.8 billion of utility long-term debt, additional project-secured renewable debt and up to $450 million of common equity, in addition to shares issued under company plans.
- CECONY forecast average annual peak-demand growth over five years of approximately 0.1% for electricity and 1.2% for gas, with steam peak demand expected to decline about 0.5% annually. O&R forecast flat electric peak demand and 0.3% annual gas peak-demand growth.
- O&R filed in January 2018 for New York rate increases of $20.3 million for electric and $4.5 million for gas, effective January 2019; these are requests, not approved increases.
Management commentary, risks and unusual items
- TCJA and regulation: The utilities’ lower tax liabilities may reduce operating cash flows as customer rates are adjusted. New York and New Jersey regulators opened proceedings to determine how tax benefits will be passed to customers. The company recorded a $3.7 billion regulatory liability for future income-tax changes; some tax accounting remained provisional and could be adjusted in 2018.
- Regulatory execution: Rate plans, cost-recovery mechanisms and allowed returns depend on regulatory decisions. REV proceedings may alter utility business models and distributed-energy compensation. CECONY’s 2017 electric and gas rate plans run through 2019.
- Service and safety matters: Following a 2017 subway power outage, CECONY incurred $65 million in related costs and expected $137 million in 2018 costs; regulators indicated the incident could lead to a prudence review. The company also faces approximately 80 suits arising from the 2014 Manhattan gas explosion. A regulatory settlement requires $27 million of future customer benefits and disallows recovery of $126 million of previously expensed costs; the company had not accrued damages because it could not estimate the loss range.
- Environmental exposure: Recorded Superfund liabilities were $737 million, with $793 million in related regulatory assets. The estimated undiscounted potential liability for manufactured-gas-plant sites, including Astoria, could reach $2.7 billion for Con Edison; remediation scope and costs remain uncertain. Separate exposures at Gowanus Canal and Newtown Creek could not be estimated.
- Other principal risks: Severe weather and physical damage, cyberattacks, energy-market or supplier disruption, pension and postretirement obligations, environmental regulation, rate-case outcomes, access to capital markets and changes in laws or customer technology. Management reported prior cyberattacks but no material impact.
- Renewables and transmission: Operating renewable capacity reached 1,358 MW. Mountain Valley Pipeline remained under development, with a stated total project cost of $3.0–$3.5 billion and targeted in-service timing in fourth-quarter 2018; litigation and permitting matters remained relevant.
Management and the independent auditor reported effective internal control over financial reporting. The auditor gave an unqualified opinion on the financial statements.
Important facts for investors to verify
- Separate recurring earnings from the $259 million TCJA benefit and reconcile the company’s non-GAAP adjusted earnings to GAAP results.
- Track regulatory decisions on TCJA customer benefits, CECONY rate plans, the subway-outage prudence review and O&R’s pending rate requests.
- Assess funding needs against planned capital spending, debt maturities, projected utility cash flows and potential common-equity issuance.
- Review the status and estimability of environmental remediation and Manhattan explosion claims, including recoveries from regulators or insurers.
- Confirm construction, cost and legal milestones for Mountain Valley Pipeline and renewable projects, and monitor actual returns and cash generation against management’s outlook.