Business context and reporting period
Consolidated Edison, Inc. (Con Edison) filed this combined Form 10-K with wholly owned utility subsidiary Consolidated Edison Company of New York, Inc. (CECONY). The fiscal year ended December 31, 2015; the filing also reports fourth-quarter results. Con Edison’s businesses are predominantly regulated electric, gas and steam delivery, alongside renewable-energy and competitive-energy operations. The Utilities accounted for 95% of Con Edison’s 2015 net income.
Financial results and liquidity
Unless otherwise noted, amounts are in millions of dollars. Con Edison’s 2015 results improved despite lower reported revenue, with gains largely reflecting utility rate plans and stronger competitive-energy results.
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Operating revenue | $12,554 | $12,919 | -2.8% |
| Operating income | $2,427 | $2,209 | +9.9% |
| Net income | $1,193 | $1,092 | +9.2% |
| Diluted earnings per share | $4.05 | $3.71 | +9.2% |
| Adjusted earnings (non-GAAP) | $1,196 | $1,140 | +4.9% |
| Adjusted diluted EPS (non-GAAP) | $4.08 | $3.89 | +4.9% |
| Net cash from operating activities | $3,277 | $2,831 | +$446 |
| Net cash used in investing activities | $(3,657) | $(2,759) | $(898) more used |
Operating margin was approximately 19.3%, versus 17.1% in 2014. Revenue fell mainly because lower purchased-energy costs flowed through customer bills; the filing says these costs are generally recovered from customers rather than generating a utility margin. Operating cash flow benefited primarily from lower income taxes paid, partly offset by increased pension contributions.
At year-end, Con Edison reported $45.642 billion in assets, $12.006 billion in long-term debt excluding current maturities, $739 million of long-term debt due within one year, and $1.529 billion of commercial paper. Cash and temporary investments were $944 million; current liabilities were $4.720 billion. Equity was $13.061 billion, and the common equity ratio was 52.1%. The company reported access to a $2.25 billion revolving credit facility, with no borrowings under it at year-end. CECONY separately reported $1.084 billion net income, $2.819 billion operating cash flow, and $10.787 billion long-term debt excluding current maturities.
Con Edison declared dividends of $2.60 per share for 2015, up from $2.52 in 2014. The board declared a first-quarter 2016 dividend of $0.67 per share.
Fourth-quarter Con Edison revenue was $2.707 billion versus $2.829 billion; net income was $176 million versus $81 million, and diluted EPS was $0.60 versus $0.28.
Material changes versus the prior comparable period
- Net income increased $101 million year over year. CECONY net income rose $26 million to $1.084 billion; competitive-energy net income increased $76 million to $59 million, while O&R net income fell $8 million to $52 million.
- Competitive-energy results improved principally with higher retail electric sales and favorable mark-to-market movements relative to 2014. The company reported a $45 million after-tax solar-project sale gain in 2014, which did not recur in 2015.
- CECONY gas operating income rose $42 million, including higher delivery volumes associated with oil-to-gas conversions. Steam operating income fell $20 million, reflecting higher fuel and property-tax costs and lower deliveries.
- Capital spending increased: utility construction expenditures were $2.595 billion and competitive-energy capital expenditures were $823 million, compared with $2.274 billion and $447 million, respectively, in 2014.
- Year-end assets rose to $45.642 billion from $44.071 billion, and long-term debt rose to $12.006 billion from $11.546 billion. Pension and retiree-benefit liabilities declined, primarily due to actuarial effects including higher discount rates.
Outlook, management commentary, risks and contingencies
- Capital and outlook: Estimated 2016 capital spending was $3.168 billion for energy delivery systems and $985 million for renewable electric production projects. Con Edison planned to fund 2016 requirements, including maturities, with internal funds and securities issuance, including $1.0–$1.5 billion of utility long-term debt, project-secured debt and up to $200 million of common equity. Management did not provide a specific earnings forecast in the supplied filing text. CECONY forecast average annual design-condition peak-demand growth over five years of 0.2% for electricity and 2.3% for gas, and a 0.8% decline for steam; O&R forecasts were 0.3% for electricity and 0.6% for gas.
- Rates and regulation: In January 2016, CECONY requested electric and gas delivery-rate increases of $482 million and $154 million, respectively, effective January 2017. The requests assume a 9.75% return on common equity and a 48% equity ratio; they were proposals, not approved rates. A proposed settlement of a CECONY prudence proceeding, subject to NYSPSC approval, would provide $116 million in customer credits and forgo recovery of an aggregate $55 million of returns on capital spending over 2017–2044.
- Gas explosion and safety matters: The NTSB attributed the March 2014 Manhattan explosion and fire, which killed eight and injured more than 50, to a defective gas-service fusion joint and a city sewer-line breach. CECONY faced approximately 70 lawsuits and an NYSPSC show-cause order concerning alleged gas-safety violations. The company disputed the alleged violations and said it could not estimate potential loss; no liability was accrued for the incident at year-end.
- Environmental exposure: Con Edison’s accrued Superfund liabilities were $765 million, alongside $904 million of related regulatory assets. Its estimated undiscounted potential liability for manufactured-gas-plant and Astoria-site investigation and remediation could reach $2.8 billion; CECONY’s corresponding estimate was up to $2.7 billion. These are potential estimates, not amounts accrued, and actual costs may differ. CECONY could not estimate its exposure at the Gowanus Canal site. Much of the Utilities’ environmental costs is subject to regulatory recovery or deferral, but recovery depends on applicable approvals and rate mechanisms.
- Portfolio changes and unusual items: Con Edison planned to sell its retail electric supply business, with closing expected within 12 months. O&R agreed to sell Pike for $16 million, subject to regulatory approvals, and recorded a $5 million impairment charge before tax. Con Edison’s 2015 adjusted earnings exclude specified items and are a non-GAAP measure; reported net income remains the GAAP measure.
- Other risks: The filing highlights extensive regulatory oversight and possible penalties, rate-plan and cost-recovery uncertainty, severe weather and infrastructure failure, cyberattacks, wholesale-energy and counterparty risk, environmental obligations, pension funding and access to capital markets. The 2015 annual pension and other postretirement benefit cost is sensitive to actuarial assumptions; CECONY and O&R expected pension contributions of $469 million and $38 million, respectively, in 2016.
Most important facts for investors to verify
- Whether the NYSPSC approves CECONY’s proposed 2017 electric and gas rate increases and the terms of any resulting rate plans.
- The status and potential financial consequences of the Manhattan explosion litigation, NYSPSC safety proceedings, and plastic-fusion compliance matters.
- Whether the prudence-case settlement is approved and how the customer credits and foregone returns are ultimately recorded.
- Actual environmental remediation costs, recoverability from customers, and developments at manufactured-gas-plant, Astoria and Gowanus sites.
- Completion, proceeds and earnings effects of the proposed retail electric supply and Pike sales.
- Execution and funding of the planned capital program, debt and equity issuance, and the company’s ability to sustain dividend growth.
- How much of 2015 earnings improvement reflects recurring utility performance versus competitive-energy mark-to-market effects and other non-recurring items.