Business context and reporting period
Consolidated Edison, Inc. (Con Edison) filed this combined, unaudited Form 10-Q for the quarter and six months ended June 30, 2018. Its wholly owned subsidiary, Consolidated Edison Company of New York, Inc. (CECONY), is reported separately; CECONY’s results are included in Con Edison’s consolidated results. Con Edison operates regulated electric, gas and steam utilities, renewable-energy and energy-services businesses, and transmission investments.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2017 period.
| Con Edison | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $2,696 | $2,633 | $6,060 | $5,861 |
| Operating income | $426 | $464 | $1,180 | $1,275 |
| Net income | $188 | $175 | $616 | $563 |
| Diluted EPS | $0.60 | $0.57 | $1.98 | $1.84 |
| Dividends declared per share | $0.72 | $0.69 | $1.43 | $1.38 |
Six-month operating margin was approximately 19.5% versus 21.8% in 2017; net margin was approximately 10.2% versus 9.6%. These margins are calculated from reported revenue and income. CECONY’s six-month revenue was $5,222 (up from $5,149), operating income was $1,087 (down from $1,163), and net income was $538 (up from $482).
- Cash flow: Con Edison generated $1,040 of operating cash in the first half, down from $1,574. Investing used $1,866, principally reflecting $1,602 of utility construction expenditures. Financing provided $903. Cash, temporary investments and restricted cash ended at $921.
- Debt and liquidity: At June 30, Con Edison had $15,225 of long-term debt, $1,815 due within one year, and $869 of commercial paper outstanding. Cash and temporary cash investments were $866, with $55 of restricted cash. Current assets were $3,436 versus current liabilities of $5,456. The company reported no borrowings under its credit agreement.
- Capitalization: Con Edison’s common equity ratio was 50.7%, down from 51.1% at year-end 2017. Its six-month ratio of earnings to fixed charges was 2.7, compared with 3.3 a year earlier.
Material changes versus the prior period
- First-half net income increased $53, while operating income declined $95. Lower income-tax expense—primarily reflecting the federal corporate tax rate reduction under the Tax Cuts and Jobs Act (TCJA)—more than offset weaker operating income.
- Con Edison revenue rose $199 in the first half. Clean Energy Businesses revenue increased $108, largely from renewable projects and engineering, procurement and construction work, but operating income for that segment was nearly unchanged ($33 versus $34) as related operating and construction costs increased.
- CECONY operating income fell $76 in the first half. Higher electric and gas rate-plan revenues and gas customer growth were offset by customer credits/deferrals of TCJA benefits, increased operating costs, depreciation, property taxes and interest expense. Steam revenue benefited from colder-than-normal April weather.
- Operating cash flow fell by $534. The filing cites storm restoration, MTA reliability work, Puerto Rico restoration costs, higher pension contributions and lower income-tax refunds as significant factors. Cash outlays for utility construction also increased.
Outlook, management commentary, risks and contingencies
- The filing provides no company-wide earnings guidance. Management describes dividend growth as supported by earnings growth in regulated utilities and contracted assets and emphasizes investment in reliable, resilient, safe and cleaner energy.
- Utilities deferred an estimated $217 of first-half TCJA net benefits as regulatory liabilities for customers ($202 for CECONY). Regulatory treatment and timing of customer bill credits remained subject to state proceedings. Con Edison had remeasured deferred tax balances and recorded substantial future-tax regulatory liabilities; final assessment of provisional TCJA amounts was expected by the fourth quarter of 2018.
- CECONY reported $180 of costs through June 30 related to the MTA subway power reliability matter, including $150 deferred as a regulatory asset. It expected another $84 of costs during the remainder of 2018, mostly to be deferred, and planned to complete required work during 2018.
- March 2018 storms caused outages affecting approximately 209,000 CECONY customers, 93,000 O&R customers and 44,000 RECO customers. Storm costs were subject to regulatory review; the companies could not estimate the possible loss or recovery outcome.
- A CECONY steam main ruptured in Manhattan in July 2018, after quarter-end. The NYSPSC opened an investigation; CECONY had not accrued a liability and could not estimate the possible loss. The 2014 Manhattan gas explosion litigation also remained unresolved: about 80 suits were pending, and the company could not estimate damages, although it believed insurance would cover costs above a retention.
- Con Edison recorded $728 of Superfund and environmental liabilities, including $645 for manufactured-gas-plant sites, and $772 of related regulatory assets. Historical estimates for potential manufactured-gas-plant investigation and remediation costs could reach $2.7 billion for Con Edison; actual costs may differ materially. Thousands of asbestos suits remained, with potential exposure beyond accrued amounts that the company could not estimate.
- Mountain Valley Pipeline construction faced regulatory challenges and delays; the project’s estimated total cost was $3.5–$3.7 billion, with service targeted by the end of Q1 2019. Con Edison owns a 12.5% interest.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing stated there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether utility regulators approve the timing and allocation of TCJA customer benefits and recovery of storm and MTA reliability costs.
- How sustained operating-cost, property-tax, depreciation and interest-expense increases affect regulated utility earnings and cash generation.
- Progress and final costs of the MTA reliability work, storm restoration, and the July 2018 steam-main rupture investigation.
- Developments in environmental remediation estimates, asbestos claims and the Manhattan explosion litigation, for which potential losses may exceed recorded liabilities and are not estimable.
- Debt maturities, commercial-paper reliance, capital spending and the effect of financing costs on liquidity and fixed-charge coverage.