CONSOLIDATED EDISON INC annual report, FY2018

Consolidated Edison, Inc. — FY 2018 Form 10-K

Reporting period: Year ended December 31, 2018. This combined filing covers Con Edison and its wholly owned subsidiary Consolidated Edison Company of New York (CECONY); figures below are consolidated Con Edison unless noted. The filing provides quarterly data, including Q4, but is an annual report rather than a standalone quarterly filing. Amounts are in U.S. dollars.

Business context

Con Edison is a regulated utility holding company whose businesses include CECONY and Orange and Rockland (O&R), renewable energy and energy services businesses, and electric and gas transmission investments. Management expects regulated utilities to provide substantially all earnings over the next few years.

Financial performance and liquidity

Metric	FY 2018	FY 2017	Change
Operating revenues	$12.337 billion	$12.033 billion	Up 2.5%
Operating income	$2.664 billion	$2.774 billion	Down 4.0%
Net income	$1.382 billion	$1.525 billion	Down 9.4%
Diluted EPS	$4.42	$4.94	Down 10.5%
Adjusted earnings (non-GAAP)	$1.349 billion; $4.33/share	$1.264 billion; $4.12/share	Up 6.7% and 5.1% per share
Operating cash flow	$2.695 billion	$3.367 billion	Down $672 million
Cash used in investing	$5.471 billion	$3.710 billion	Higher use, primarily acquisition-related
Long-term debt, excluding current portion	$17.495 billion	$14.731 billion	Up $2.764 billion

• Operating margin was approximately 21.6% in 2018 versus 23.1% in 2017; net margin was approximately 11.2% versus 12.7%. These are calculated from reported operating income and revenue and include the 2018 acquisition gain in operating income.
• Cash, temporary cash investments and restricted cash totaled $1.006 billion at year-end. The balance sheet also showed $1.741 billion of commercial paper and an $825 million term loan, alongside $650 million of long-term debt due within one year. Working capital was negative $2.343 billion.
• The companies had $2.250 billion of revolving credit capacity available under a facility that was undrawn at year-end. Con Edison’s common equity ratio was 49.0%, down from 51.1% in 2017; its reported senior unsecured debt ratings were Baa1/BBB+/BBB+.
• Capital expenditures were $5.249 billion, including $3.210 billion by the Utilities and $1.791 billion by the Clean Energy Businesses. Dividends declared were $2.86 per share, up from $2.76.
• CECONY reported revenue of $10.680 billion and net income of $1.196 billion, compared with $10.468 billion and $1.104 billion in 2017. CECONY operating income fell to $2.354 billion from $2.549 billion.
• For Q4 2018, Con Edison reported revenue of $2.949 billion and net income of $331 million, versus $2.961 billion and $505 million in Q4 2017; diluted EPS was $1.05 versus $1.62.

Material changes versus 2017

• Reported earnings declined, while adjusted earnings rose. The comparison is significantly affected by the $259 million 2017 net-income benefit from remeasuring deferred taxes under the Tax Cuts and Jobs Act (TCJA). In 2018, Con Edison recorded $42 million of tax expense from a subsequent TCJA-related remeasurement.
• Utility earnings improved at CECONY, particularly from rate plans and customer growth, but higher depreciation, property taxes, interest and operating costs weighed on results. O&R net income fell to $59 million from $64 million.
• Clean Energy Businesses net income fell to $145 million from $332 million, despite higher operating income. The 2017 comparison included TCJA-related tax benefits; 2018 included a $131 million pre-tax ($89 million after-tax) gain on revaluing previously held interests upon the Sempra Solar Holdings acquisition.
• Con Edison acquired Sempra Solar Holdings in December for $1.609 billion, adding interests in renewable projects and increasing non-utility assets and project debt. Renewable project capacity in operation increased to 2,588 MW (AC), from 1,358 MW in 2017.
• Operating cash flow declined, reflecting storm and Puerto Rico restoration spending, MTA reliability costs, higher receivables and benefit-plan payments, partly offset by tax-related cash effects. Investing cash use increased primarily because of the Sempra acquisition.

Outlook, risks and contingencies

• Investment and financing: 2019 estimated capital expenditures are $3.627 billion, plus $650 million of scheduled long-term debt retirements. Management planned to issue $1.6–$2.2 billion of long-term debt, up to $500 million of common equity, and additional project-secured debt, alongside internal cash generation. The remaining approximately $425 million of the November 2018 equity forward was expected to be physically settled.
• Rates and demand: In January 2019, CECONY requested electric and gas rate increases of $485 million and $210 million, respectively, effective January 2020; these requests require regulatory approval. CECONY forecast five-year average peak-demand growth of about 0.1% for electricity and 1.0% for gas, and a 0.5% annual decline for steam. O&R’s corresponding forecasts were a 0.3% electric decline and 0.6% gas growth. O&R’s proposed 2019–2021 rate plan was subject to NYSPSC approval.
• Gas supply constraint: In January 2019, CECONY gave notice of a temporary moratorium, beginning in March, on new firm gas-service applications in most of Westchester County. The timing, scope and regulatory outcome remain important uncertainties.
• PG&E bankruptcy: PG&E’s January 2019 Chapter 11 filing constituted an event of default under power-purchase agreements covering 680 MW (AC) of Con Edison projects. At year-end, the related balance sheet included $885 million of net plant, $1.125 billion of PPA intangible assets, additional pledged plant of $292 million and $1.050 billion of related project debt. Distributions were suspended; lenders could accelerate the debt and foreclose. Management reported no impairment at year-end based on an assumption that the PPAs were unlikely to be rejected, but rejection could cause a material impairment and the debt could become current.
• Storms and operating incidents: The March 2018 storms interrupted service to approximately 209,000 CECONY, 93,000 O&R and 44,000 RECO customers. Regulatory investigations could result in penalties or affect cost recovery; the companies could not estimate possible losses. A July 2018 CECONY steam-main rupture led to $14 million of operating response costs and $8 million of capital and retirement costs; the investigation and potential claims remained unresolved, with no liability accrued.
• Environmental and legal exposure: Con Edison accrued $779 million for Superfund liabilities at year-end, largely related to manufactured-gas sites. Its estimated undiscounted potential liability for manufactured-gas-site investigation and remediation, including CECONY’s Astoria site, could reach $2.8 billion; actual exposure and remediation scope remain uncertain, and most costs are expected to be recoverable or deferrable through regulation. CECONY also could not estimate exposure at the Gowanus Canal and Newtown Creek sites. The 2014 Manhattan gas explosion involved eight deaths; lawsuits remained pending, and the company had not accrued damages because the loss could not be estimated.
• Other risks: The filing highlights extensive regulatory oversight, the ability to recover costs through rates, access to capital markets, cyber and physical security, severe weather and climate impacts, pension and postretirement obligations, and execution and market risks in renewable and transmission investments. Utilities’ rate recovery of prudent energy costs and decoupling mechanisms mitigate some commodity-price and volume exposure but do not eliminate regulatory or timing risk.
• Management and the auditor reported effective internal control over financial reporting. Sempra Solar Holdings, acquired in December, was excluded from the 2018 control assessment; it represented 3% of consolidated assets and less than 1% of annual revenue.

Investor verification priorities

1. Review the bridge from GAAP earnings to adjusted earnings, especially the 2017 TCJA benefit, 2018 TCJA remeasurement and Sempra acquisition gain.
2. Track the PG&E bankruptcy, PPA treatment, project distributions, potential debt acceleration and impairment exposure.
3. Check regulatory decisions on CECONY’s 2020 rate requests, O&R’s proposed rate plan, the Westchester gas moratorium and storm-response investigations.
4. Assess funding needs and refinancing: debt maturities, commercial paper and term-loan balances, planned debt and equity issuance, capital spending, and cash flow after investment.
5. Monitor the scope, cost, regulatory recovery and timing of environmental remediation and unresolved incident-related claims; compare recorded accruals with disclosed potential exposures.