Consolidated Edison, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. This is a combined filing for Con Edison and its wholly owned utility subsidiary, Consolidated Edison Company of New York (CECONY). Figures below are unaudited; dollar amounts are in millions unless stated otherwise.
Business context
Con Edison is a regulated utility holding company whose principal businesses are CECONY and Orange and Rockland (O&R), alongside renewable-energy and energy-services operations and transmission investments. CECONY delivers electric, gas and steam service in New York City and Westchester County. The company’s stated strategy emphasizes investment in reliable, resilient and cleaner energy infrastructure and dividend growth.
Financial results and liquidity
| Con Edison consolidated | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $3,328 | $3,211 | $9,388 | $9,072 |
| Operating income | $826 | $914 | $2,007 | $2,189 |
| Net income | $435 | $457 | $1,051 | $1,020 |
| Diluted earnings per share | $1.39 | $1.48 | $3.37 | $3.31 |
| Dividends declared per common share | $0.72 | $0.69 | $2.15 | $2.07 |
- For the first nine months, revenue rose 3.5% and net income rose 3.0%, while operating income fell 8.3%. The nine-month effective tax rate declined to 24% from 37%, helping net income and EPS despite lower operating income.
- Quarterly net income declined 4.8%; operating income was down 9.6%. Higher utility revenues were more than offset at the operating-income level by increased purchased power, depreciation and taxes, among other expenses.
- CECONY reported nine-month revenue of $8,121 and net income of $969, compared with $7,948 and $883 in 2017. Its operating income fell to $1,850 from $1,999.
- Cash from operations was $1,600 for the nine months, down from $2,227. Investing used $2,947, primarily reflecting utility construction; financing provided $748. Cash, temporary cash investments and restricted cash ended at $245, versus $110 a year earlier.
- At September 30, Con Edison had $16,608 of long-term debt including current maturities and $1,352 of commercial paper outstanding. Current assets were $3,356 and current liabilities $5,401. The common-equity ratio was 50.7%, compared with 51.1% at year-end 2017.
Material changes and notable items
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21%. Utilities deferred estimated customer benefits as regulatory liabilities; Con Edison and CECONY had deferred $325 and $304, respectively, through September. CECONY expected 2019 customer credits of $247 for electric, $102 for gas and $25 for steam service.
- Con Edison recorded $42 of parent-company tax expense following remeasurement of deferred taxes associated with its 2017 federal net operating loss carryover. The filing also reports $10 of after-tax transaction costs related to the proposed Sempra Solar Holdings acquisition.
- In September, a subsidiary agreed to acquire Sempra Solar Holdings for $1,540, subject to closing adjustments and regulatory and other conditions. The acquired interests include 981 MW (AC) of operating renewable projects and development rights; the acquired subsidiaries have $576 of project debt. The company expected to consolidate the projects after closing.
- Capital plans were increased to reflect the acquisition: up to $1,165 of common equity issuance, including $715 for the acquisition; $1,800–$2,400 of 2018 utility long-term debt issuance, of which $1,125 had been issued; and up to $825 of debt secured by acquired renewable projects, or other borrowings pending that issuance.
- Moody’s downgraded Con Edison’s senior unsecured debt to Baa1 from A3, CECONY’s to A3 from A2, and O&R’s to Baa1 from A3 in October 2018. CECONY commercial paper was downgraded to P-2 from P-1.
Outlook, risks and contingencies
- The filing provides no consolidated earnings guidance. Demand forecasts include average annual electric peak growth of about 0.1% for CECONY for 2019–2023; its forecast gas peak-demand growth was reduced to 1.3%. O&R forecasts electric peak demand to decline about 0.3% annually and gas peak demand to grow about 0.6% over 2019–2023.
- CECONY’s response to the 2017 subway power outage had cost $219 through September, including $189 deferred as a regulatory asset. It expected another $51 of costs in the remainder of 2018, also expected to be deferred. Recovery depends on regulatory treatment.
- March 2018 storms caused outages affecting approximately 209,000 CECONY, 93,000 O&R and 44,000 RECO customers. Storm costs were subject to regulatory review; the companies could not estimate any potential loss or penalty.
- A July 2018 Manhattan steam-main rupture resulted in estimated $10 of operating response costs and $7 of capital and retirement costs. A regulator investigation was ongoing; no liability was accrued, and the company could not estimate potential losses.
- For the 2014 Manhattan gas explosion, approximately 80 suits remained pending. CECONY had not accrued damages and could not estimate the possible loss. A related regulatory settlement provides $27 of future customer benefits and bars recovery of $126 of previously incurred gas emergency-response costs.
- Con Edison’s accrued Superfund and environmental costs were $720, with $754 in related regulatory assets. The filing cites a 2017 estimated potential range of up to $2.7 billion for investigation and remediation at manufactured-gas-plant sites; actual costs may differ materially. Asbestos claims also present possible exposure beyond accrued amounts that the companies could not estimate.
- Other stated risks include regulatory outcomes and rate recovery, facility failure, cyberattacks, environmental liabilities, pension and postretirement obligations, access to capital markets, interest rates, commodity and counterparty risks, and completion of the Sempra acquisition.
Investor facts to verify
- Whether the Sempra acquisition closes, its final purchase price and funding mix, and the amount and terms of related debt and equity issuance.
- Whether regulatory authorities permit recovery of deferred subway, storm and other utility costs, and whether investigations lead to penalties or additional obligations.
- How the Moody’s downgrades affect borrowing costs, commercial-paper access and planned capital-market issuance.
- Whether operating-income pressure, lower operating cash flow and rising construction investment persist, and how these trends affect leverage and dividend growth.
- Developments in the steam-main, explosion, environmental and other litigation matters, including any new loss estimates or accruals.