Business context and reporting period
Consolidated Edison, Inc. (Con Edison) filed this unaudited combined Form 10-Q with its wholly owned subsidiary, Consolidated Edison Company of New York, Inc. (CECONY), for the quarter and six months ended June 30, 2019. Con Edison’s businesses include regulated electric, gas and steam utilities, clean energy businesses, and transmission investments. Unless noted, figures below are for Con Edison and dollars are in millions.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $2,744 | $2,696 | $6,258 | $6,060 |
| Operating income | $458 | $426 | $1,244 | $1,180 |
| Net income | $179 | $188 | $624 | $616 |
| Net income attributable to common stock | $152 | $188 | $576 | $616 |
| Diluted earnings per share | $0.46 | $0.60 | $1.77 | $1.98 |
Revenue rose about 2% in Q2 and 3% for the six months. Operating income increased in both periods, but common-stock earnings and EPS declined, reflecting higher interest expense and share dilution, among other factors. Q2 interest expense was $263 million, up from $197 million; six-month net interest expense was $510 million, versus $391 million.
CECONY reported Q2 net income of $152 million, compared with $149 million, and six-month net income of $564 million, compared with $538 million. Con Edison’s Clean Energy Businesses reported common-stock losses of $6 million for Q2 and $41 million for the six months, compared with income of $25 million and $31 million, respectively, in 2018. The Sempra Solar acquisition drove higher renewable revenue, but also higher depreciation and debt costs; tax-equity allocations under the HLBV method and mark-to-market losses also affected results.
Cash flow, liquidity and capitalization
- Six-month operating cash flow was $1,538 million, up from $1,040 million. Investing cash outflow was $1,876 million, including $1,613 million of utility construction expenditures. Financing provided $302 million, compared with $903 million in 2018.
- At June 30, cash and temporary cash investments were $831 million; restricted cash was $139 million, for combined cash and restricted cash of $970 million. The restricted balance largely relates to renewable-project debt arrangements.
- Con Edison reported $17,496 million of long-term debt, plus $1,972 million due within one year and $1,161 million of notes payable. Its common-equity ratio was 50.5%, up from 49.0% at year-end 2018. The $2.2 billion credit agreement had no loans outstanding.
- Con Edison issued $700 million of CECONY 4.125% debentures due 2049 and redeemed $475 million of CECONY debt at maturity. It also issued common shares for $425 million in March and $400 million in June; 1.05 million shares remained under a forward sale agreement.
Material changes versus the prior comparable period
- Utility rate-plan revenues supported earnings: CECONY’s six-month electric and gas base-rate revenues increased, while higher property taxes, depreciation, pension-related costs and other operating costs offset much of the benefit.
- Clean Energy Businesses revenue increased, chiefly following the December 2018 Sempra Solar acquisition. Six-month operating income increased to $83 million from $33 million, but common-stock results weakened as depreciation and interest expense rose and tax-equity earnings were allocated to noncontrolling interests.
- Six-month operating cash flow improved substantially, reflecting timing of pension and retiree-benefit contributions, lower storm restoration and MTA reliability costs, and reimbursement for Puerto Rico restoration work; higher customer credits associated with the federal tax law partly offset the increase.
- Con Edison adopted the new lease accounting standard in January 2019, recognizing $842 million of operating lease right-of-use assets and corresponding lease liabilities at June 30. Prior-year disclosures are not fully comparable.
Outlook, commentary and risks
- The filing does not provide a clear company-wide full-year earnings or EPS guidance figure. Management describes a strategy of dividend growth supported by regulated utility earnings and contracted assets.
- CECONY’s pending New York electric and gas rate cases seek January 2020 increases of $470 million and $206 million, respectively, with further illustrative increases in 2021 and 2022. Staff testimony supported substantially different 2020 increases—$58 million for electric and $83 million for gas. Outcomes remain subject to regulatory approval.
- PG&E’s Chapter 11 filing creates material exposure for Con Edison’s renewable projects: 680 MW of projects sell under PG&E power contracts. At June 30, Con Edison carried $853 million of related net plant, $1,090 million of PPA intangible assets and $1,032 million of related non-recourse debt, classified as due within one year. Distributions are suspended during the bankruptcy. Management recorded no impairment based on its assumption that the contracts are not likely to be rejected; rejection could cause a material impairment. Lenders may accelerate debt and foreclose on pledged projects.
- Regulatory and legal matters include the MTA subway reliability investigation, a steam-main rupture investigation, gas-operator qualification proceedings and investigations of 2018 storm response. The company generally could not estimate potential losses for these matters and had not accrued liabilities for them as of June 30 where stated.
- A July 13, 2019 outage interrupted service to about 72,000 CECONY customers. The company expects a $5 million negative revenue adjustment in Q3; investigations continue and additional exposure is not estimable. This occurred after quarter-end.
- Environmental liabilities include $770 million accrued for Superfund matters at Con Edison, with additional remediation exposure potentially material but not presently determinable. The filing also identifies risks from regulation, capital-market access, pensions, cyber events, facility damage, energy-market disruptions and climate-related requirements.
Important facts for investors to verify
- Track the PG&E bankruptcy, status of the PPAs, project cash distributions, lender remedies and any impairment or debt acceleration.
- Monitor the CECONY rate-case decisions against management’s requests and staff recommendations, and the timing of customer credits and cost recovery.
- Assess whether Clean Energy Businesses’ post-acquisition earnings can cover added depreciation and financing costs, and how HLBV allocations affect common shareholders.
- Reconcile operating cash flow and capital spending with funding needs, upcoming debt maturities, commercial-paper use and remaining forward-sale share issuance.
- Follow regulatory investigations and claims, including the July 2019 outages, MTA reliability and environmental matters, for potential penalties, customer adjustments or unaccrued losses.