Consolidated Edison, Inc. (Con Edison) — Q1 2017 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2017, compared with the same period in 2016. Con Edison is a holding company whose businesses include regulated electric, gas and steam utilities, clean energy businesses and transmission investments. CECONY is its wholly owned principal utility subsidiary; figures below are for Con Edison unless identified as CECONY. Dollars are in millions except per-share amounts.
Key financial results
| Metric | Con Edison Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenues | $3,228 | $3,156 | +2.3% |
| Operating income | $771 | $642 | +20.1% |
| Net income | $388 | $310 | +25.2% |
| Diluted EPS | $1.27 | $1.05 | +$0.22 |
| Dividends declared per share | $0.69 | $0.67 | +$0.02 |
| Operating margin | 23.9% | 20.3% | +3.6 percentage points |
| Net margin | 12.0% | 9.8% | +2.2 percentage points |
CECONY: Revenue was $2,856, up 8.5%; operating income was $705, up 10.2%; and net income was $339, up $29, or 9.4%.
Cash flow: Con Edison generated $448 of operating cash, down from $524. Investing outflows were $837, including $714 of utility construction expenditures; financing outflows were $320. Cash and temporary investments fell from $776 at year-end to $67 at March 31. CECONY operating cash flow was $380 versus $458, and utility construction expenditures were $672.
Debt and liquidity: At March 31, Con Edison had $14,862 of long-term debt, including current maturities, and $836 of commercial paper outstanding; CECONY had $12,075 of long-term debt and $445 of commercial paper. Con Edison’s current assets were $3,017 against current liabilities of $3,441; cash was $67. No loans were outstanding under the credit agreement. The common equity ratio was 49.4% for Con Edison and 49.8% for CECONY.
Material changes and management commentary
- Higher utility rate-plan revenues and lower pension and postretirement costs supported earnings growth. Con Edison attributed about $60 of higher net income to utility rate-plan and regulatory changes; lower utility benefit costs also contributed.
- CECONY gas revenue rose $164, primarily reflecting higher gas costs passed through to customers and higher rate-plan revenues/customer growth. Steam revenue increased $40, partly due to weather; electric revenue increased $20.
- Clean Energy Businesses’ revenue fell $174, primarily because the retail electric supply business was sold in September 2016. Segment net income improved to $7 from a $30 loss, reflecting improved operating and mark-to-market results. Q1 2016 included $33 of after-tax losses related to the sold business.
- Con Edison’s 2017 results included $2 of after-tax Clean Energy Businesses mark-to-market gains, versus $38 of after-tax mark-to-market losses in Q1 2016. These effects make period comparisons less representative of underlying operating trends.
- Operating cash flow was lower mainly because Q1 2016 benefited from larger income-tax refunds. Investment outflows declined year over year, chiefly because there were no comparable renewable-project acquisitions in Q1 2017, while utility construction spending increased.
- Con Edison issued $400 of 2.00% debentures due 2020 and prepaid a $400 variable-rate term loan due 2018. A subsidiary also issued $97 of 4.45% project-backed notes due 2042. Management reduced estimated 2018 long-term debt retirements by $400 to $1,288 following the prepayment.
Outlook, regulation and risks
- The filing provides no explicit company-wide earnings guidance. Con Edison expects 2017 pension contributions of $450, including $412 from CECONY, and other postretirement benefit contributions of $16, including $8 from CECONY.
- Con Edison Development reported 1,133 MW of renewable capacity in operation and 398 MW under construction, for 1,531 MW total. Q1 renewable generation increased 34.4% to 637 million kWh. Upton County Solar was expected to enter service in 2017; Panoche Valley Solar was expected in 2018.
- In February 2017, New Jersey regulators approved a RECO electric rate plan effective March 2017, including a first-year $1.7 base-rate increase and a 9.6% authorized return on equity. RECO separately sought a higher FERC transmission revenue requirement.
- A March 2017 New York order began changing compensation for distributed energy resources and phasing out net energy metering for new projects; existing resources retain current treatment, with significant changes for new residential and small commercial rooftop solar delayed until 2020.
- In connection with the 2014 Manhattan gas explosion, a February 2017 regulatory settlement bars recovery from customers of $126 of certain past emergency-response costs and provides $27 of future customer benefits. Approximately 80 suits remained pending; the company had not accrued a damages liability and could not estimate the possible loss.
- Environmental liabilities include $746 accrued for Con Edison Superfund sites, largely manufactured-gas-plant sites, with $808 of related regulatory assets. The filing cites a prior estimate of potential manufactured-gas-plant investigation and remediation liability of up to $2.8 billion for Con Edison ($2.6 billion for CECONY), based on assumptions that may differ from actual outcomes.
- Thousands of asbestos-related suits remain; the companies state that a loss above accrued amounts is reasonably possible but cannot estimate the excess. Con Edison also reported $2,193 of maximum guarantees outstanding.
- Other stated risks include extensive regulation and rate-plan outcomes, facility failures, cyberattacks, environmental exposure, energy-market disruption, pension and postretirement liabilities, and access to capital markets. The filing reported no material change in risk factors from the 2016 Form 10-K.
Important facts for investors to verify
- How much of the earnings increase reflects recurring utility rate-plan and cost improvements versus clean-energy mark-to-market effects and the prior-year retail-supply-business losses.
- Whether operating cash generation can support the elevated utility construction program, dividends and debt service while cash balances remain low.
- Progress and economics of renewable projects under construction, including in-service timing, project financing and contracted revenues.
- Developments in the Manhattan explosion litigation, environmental remediation estimates and asbestos claims, including any changes to accrued liabilities or regulatory recovery.
- Impacts of New York distributed-energy compensation changes and pending rate or transmission proceedings on future utility returns and customer costs.