Consolidated Edison, Inc. 2016 Form 10-K Summary
Business context and period. This combined filing covers Consolidated Edison, Inc. (Con Edison) and its wholly owned regulated utility, Consolidated Edison Company of New York (CECONY), for the year ended December 31, 2016. Con Edison also owns O&R, clean-energy businesses and transmission investments. Regulated utilities generated 90% of Con Edison’s net income; management expects them to remain the principal earnings source.
Key financial results
| Metric | 2016 | 2015 |
|---|---|---|
| Operating revenue | $12.075 billion | $12.554 billion |
| Operating income | $2.575 billion | $2.427 billion |
| Net income | $1.245 billion | $1.193 billion |
| Diluted EPS | $4.12 | $4.05 |
| Adjusted earnings and EPS (non-GAAP) | $1.198 billion; $3.99 | $1.196 billion; $4.08 |
| Operating cash flow | $3.459 billion | $3.277 billion |
| Cash and temporary investments at year-end | $776 million | $944 million |
| Long-term debt at year-end | $14.735 billion | $12.006 billion |
| Total assets / total equity at year-end | $48.255 billion / $14.306 billion | $45.642 billion / $13.061 billion |
Operating margin rose to approximately 21.3% from 19.3%; net margin was approximately 10.3% versus 9.5%. Investing activities used $4.976 billion, including $2.835 billion of utility construction expenditures, $845 million of non-utility construction expenditures, and $1.076 billion invested in transmission projects. The common equity ratio declined to 49.3% from 52.1%. Con Edison ended the year with $1.054 billion of commercial paper outstanding; its revolving credit agreement provides up to $2.25 billion of commitments.
For CECONY, 2016 revenue was $10.165 billion, operating income $2.262 billion and net income $1.056 billion, compared with $10.328 billion, $2.247 billion and $1.084 billion, respectively, in 2015.
Material changes and unusual items
- Con Edison’s reported net income increased 4.4%, but adjusted earnings were nearly flat and adjusted EPS fell from $4.08 to $3.99. Reported 2016 earnings included a $56 million after-tax gain on the sale of the retail electric supply business and a $12 million after-tax goodwill impairment charge.
- Revenue declined 3.8%, reflecting lower energy-related revenue and the sale of the retail supply business. Operating income increased, helped by lower purchased-power and fuel costs and the sale gain.
- Clean Energy Businesses revenue fell to $1.091 billion from $1.383 billion, primarily following the retail electric supply business sale. The business recorded a $104 million pre-tax gain on that sale. Con Edison also sold O&R’s Pike utility subsidiary for $15 million.
- Capital investment accelerated: total capital expenditures were $5.235 billion, versus $3.418 billion in 2015. Con Edison issued approximately 10 million common shares for $702 million net proceeds and increased long-term debt.
- Fourth-quarter 2016 revenue was $2.707 billion, operating income $478 million, net income $207 million and diluted EPS $0.67, compared with $2.707 billion, $399 million, $176 million and $0.60 in fourth-quarter 2015.
Outlook, risks and contingencies
- Capital and financing: 2017 planned capital expenditures total $3.694 billion. The company expects to fund requirements with internally generated cash and securities, including $1.0–$1.8 billion of long-term debt and up to $350 million of common equity, in addition to equity issued through employee and dividend plans.
- Rates and regulation: In January 2017, regulators approved CECONY electric and gas rate plans for 2017–2019. The plans establish annual base-rate changes, but earnings depend on regulatory recovery, allowed returns, cost controls and performance measures. The broader New York REV proceeding and clean-energy requirements may change utility investment and earnings incentives.
- Gas safety settlement: A February 2017 NYSPSC settlement requires CECONY to forgo recovery of $126 million of excess gas emergency-response costs from 2014–2016 and provide $27 million in future customer benefits. The filing says the $27 million was accrued as a regulatory liability at year-end.
- Major incident: In the 2014 Manhattan gas explosion, eight people died and more than 50 were injured. Approximately 70 suits remained pending; CECONY had not accrued damages because it could not estimate the loss range. The company believes insurance will cover liability above a non-material retention, but outcomes remain uncertain.
- Environmental exposure: Recorded Superfund liabilities were $753 million for Con Edison and $655 million for CECONY, with regulatory assets of $823 million and $711 million, respectively. Estimated potential cleanup costs for manufactured-gas sites, including CECONY’s Astoria site, could reach $2.8 billion for Con Edison and $2.6 billion for CECONY; actual costs may differ materially and recovery depends on regulatory treatment.
- Other principal risks include extensive regulation and potential penalties, severe weather and infrastructure failure, cybersecurity threats, wholesale energy or supplier disruption, pension funding and capital-market access. Management states that it believes the companies can meet reasonably likely cash requirements; this depends in part on continued access to capital markets.
Most important facts for investors to verify
- Reconcile reported earnings growth with the decline in adjusted EPS and assess the sustainability of earnings excluding sale and mark-to-market items.
- Review the 2017–2019 CECONY rate plans, allowed returns, customer-benefit provisions and the financial effects of the gas-safety settlement.
- Assess funding needs and leverage against the elevated capital program, debt issuance plans, equity issuance and dividend commitments.
- Track exposure and potential recovery for the Manhattan explosion claims and environmental remediation obligations, including the substantial range of possible cleanup costs.
- Confirm project execution, returns and financing for transmission and renewable investments, and the effects of regulatory changes and clean-energy requirements.