Consolidated Edison, Inc. — Q3 2016 Form 10-Q
Business context and period: This combined, unaudited filing covers the quarter and nine months ended September 30, 2016, with 2015 comparatives. Con Edison is a holding company whose principal operations include regulated utilities CECONY and O&R, competitive energy businesses, and a newly reported Con Edison Transmission segment. CECONY is wholly owned by Con Edison; figures below are consolidated Con Edison unless identified otherwise. Dollar amounts are in millions except per-share data.
Financial highlights
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | $3,417 | $3,443 | $9,368 | $9,847 |
| Operating income | $940 | $830 | $2,097 | $2,028 |
| Net income | $497 | $428 | $1,039 | $1,017 |
| Diluted EPS | $1.62 | $1.45 | $3.46 | $3.46 |
| Operating cash flow | Not separately stated | Not separately stated | $2,336 | $2,199 |
- Q3 revenue fell 0.8%, while operating income rose 13.3% and net income rose 16.1%. Nine-month revenue declined 4.9%; operating income increased 3.4% and net income increased 2.2%. Nine-month diluted EPS was unchanged, reflecting the higher share count after the May stock offering.
- Q3 and nine-month operating income included a $104 pretax gain ($47 after tax) from selling the retail electric supply business. Calculated operating margins were approximately 27.5% for Q3 and 22.4% for the nine-month period; excluding the sale gain, approximately 24.5% and 21.3%, respectively.
- Con Edison declared dividends of $0.67 per share for Q3, versus $0.65 a year earlier; nine-month declared dividends were $2.01 versus $1.95.
- Nine-month investing cash outflow was $3,717, including $2,057 of utility construction expenditures and $1,281 of investments in or acquisitions of renewable generation and transmission projects. Financing cash flow was positive $583; cash and temporary investments ended the period at $150, down from $944 at year-end 2015.
- At September 30, Con Edison reported $14,093 of long-term debt including current maturities and $601 of commercial paper, compared with $12,745 and $1,529, respectively, at year-end 2015. Its common equity ratio was 50.9%, versus 52.1% at year-end. Current assets were $3,154 and current liabilities $3,591. The filing reports a 4.0 earnings-to-fixed-charges ratio for the nine months.
Material changes and management commentary
- Con Edison sold its competitive retail electric supply business to an Exelon subsidiary in September for $235 cash consideration, subject to working-capital adjustments. The sale generated the gain noted above; transition services continue through the end of 2017, and some guarantees may remain in effect during that period.
- Con Edison invested $945, subject to closing adjustments, for a 50% interest in the Stagecoach gas pipeline and storage joint venture; its reported investment was $968 at quarter-end. Other investments included solar projects, Mountain Valley Pipeline, and NY Transco. The company added Con Edison Transmission as a separate reportable segment in 2016.
- Management attributed the nine-month revenue decline largely to lower energy costs passed through to customers and lower steam revenue, including the effect of warmer-than-normal weather. CECONY’s nine-month net income fell 8.1%, principally reflecting lower steam results and higher depreciation, property taxes, and other tax items. Lower purchased-power and fuel costs generally flow through utility rates and do not, by themselves, determine utility earnings.
- Con Edison increased its estimated 2016 capital requirements from $4,892 to $6,117, mainly due to the gas pipeline and storage investment and additional renewable development. It also raised competitive-business capital expenditure estimates for 2017 and 2018 from $360 to $400 for each year. CECONY planned to issue up to $750 of long-term debt later in 2016.
Outlook, regulation and risks
- CECONY, NYSPSC staff and other parties reached proposed three-year electric and gas rate-plan agreements for 2017–2019, subject to NYSPSC approval. The electric proposal includes base-rate changes of $195, $155 and $155 by year; the gas proposal includes changes of $(5), $92 and $90. Both provide for a 9.0% authorized return on common equity, incentives and potential performance penalties, and continuation of specified cost-reconciliation mechanisms.
- New York’s Clean Energy Standard requires load-serving entities, including CECONY and O&R for full-service customers, to meet renewable-energy-credit and zero-emissions-credit requirements beginning in 2017. CECONY’s approved advanced-metering plan has a $1,285 capital-expenditure cap and a six-year deployment schedule.
- The filing gives no clear company-wide earnings guidance. Forward-looking results remain exposed to regulation and rate-plan outcomes, reliability and safety events, cyber risk, environmental liabilities, wholesale energy-market disruptions, pension and postretirement obligations, and access to capital markets.
- Material contingencies include approximately 70 pending suits related to the 2014 Manhattan gas explosion, for which CECONY had not accrued damages and could not estimate a loss range; a gas-safety regulatory matter with a $28 regulatory liability and no estimable additional loss range; and Superfund/environmental remediation liabilities of $752, largely associated with manufactured-gas-plant sites. A 2015 estimate put potential manufactured-gas-plant investigation and remediation costs as high as $2.8 billion for Con Edison; actual costs may differ materially. The filing also cites a reasonable possibility of asbestos-related exposure above the accrued liability but cannot estimate the amount.
- CECONY continues to challenge increased PJM transmission charges and appealed FERC’s decision; it elected not to extend the service beyond April 2017. The filing also discusses potential gas-safety penalties and customer credits, including a remaining $96 regulatory liability related to a prudence proceeding.
Important facts for investors to verify
- How much reported earnings growth depends on the one-time retail-business sale gain, and how the remaining competitive-energy results perform after the sale.
- Whether NYSPSC approves the proposed CECONY rate plans as filed, and the realized effects of incentives, penalties, and cost-reconciliation terms.
- Funding needs and debt levels alongside the expanded renewable and transmission investment program, planned debt issuance, and reduced cash balance.
- Developments in the Manhattan explosion litigation, gas-safety proceedings, environmental remediation, and asbestos claims, including insurance coverage and any changes to recorded liabilities.
- Execution, returns, and financing of the Stagecoach, solar, and transmission investments, and the effect of evolving clean-energy requirements.