How did earnings and cash flow look in 1997?

Net income for common stock was $694.5 million ($2.95 per share), nearly flat versus 1996, as lower operations and maintenance expense offset weather effects and reduced incentive earnings. Net cash flow from operations rose to $1.24 billion in 1997 from $1.11 billion in 1996, and after common and preferred dividends the net amount was about $727 million.

What is the biggest long-term risk to the utility's franchise?

Retail competition and stranded costs. Customers may buy power from other suppliers starting in June 1998, with full access by 2001. Con Edison must sell at least half of its New York City fossil capacity and keep only a 'provider of last resort' obligation. Recovery of stranded costs depends on a post-transition non-bypassable charge, and the NUG contract exposure is capped at a potential $300 million disallowance, so the outcome depends on market prices and PSC decisions.

What are the major near-term operational and legal issues?

Indian Point 2 has been offline since October 1997 for unscheduled maintenance, with restart expected after NRC review and an independent safety assessment. Spent nuclear fuel storage is adequate only until about 2005 because DOE has missed its disposal obligation, and the company has been sued over several Superfund, PCB and asbestos claims. Management says none is expected to have a material adverse effect, but the BCF Oil, Capasso and Hunts Point matters remain open.

Is the dividend and capital return plan sustainable?

The company has paid the same quarterly dividend of $0.525 in 1997 and raised the per-share annual total modestly ($2.10 vs. $2.08). Capital spending is about $620-650 million per year, and total 1998 capital requirements including debt retirement are estimated at $865 million. The $1 billion repurchase is expected to be financed partly by debt and generating-plant sale proceeds, so the company's leverage and the timing of divestitures will determine how much room remains for dividend growth.

ED 10-K FY1997 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 27, 1998. Cited figures are marked; the original filing is the authoritative source.

Consolidated Edison, Inc. (CEI) filed this combined 10-K on March 27, 1998 (signed March 26) for fiscal 1997, the year in which it became the holding company for Consolidated Edison Company of New York (Con Edison) on January 1, 1998, following a shareholder-approved holding company reorganization.

Con Edison's regulated electric, gas and steam utility serves New York City (except part of Queens) and most of Westchester County, with electric revenues of $5.6 billion^a (79.1% of the total). Full-year 1997 operating revenues were $7.12 billion (up from $6.96 billion), net income for common stock was $694.5 million, and basic and diluted EPS was $2.95 versus $2.93 in 1996. The earnings gain was driven mainly by lower operations and maintenance expenses from productivity improvements, partly offset by weather and reduced incentive earnings.

Cash dividends were $2.10^b per share, and the common equity ratio was a strong 56.8%. The most important investor issues are structural and regulatory. Under the September 1997 PSC Settlement Agreement, Con Edison must divest at least 50% of its New York City fossil-fueled generating capacity (about 5,500 MW in-city) by 2002, and retail electricity access begins in June 1998 and is extended to all customers by December 31, 2001.

A rate plan through March 2002 cut annualized rates by $107.5 million^c in January 1998 and is designed to reduce generation-related revenues by roughly $1 billion over the transition. The company is also recovering stranded costs through a non-bypassable charge, though the recovery is subject to limits on NUG contract disallowances. CEI has authorized a $1 billion share repurchase, which the PSC approved in March 1998, and it plans to invest $300 million in 1998-1999 in non-utility subsidiaries such as Con Edison Solutions, Con Edison Development, Con Edison Energy and Con Edison Communications.

Risks flagged in the filing include the Indian Point 2 nuclear unit, which has been out of service since October 1997 and is under an NRC Confirmatory Action Letter, a continuing Superfund and environmental liability profile, pending asbestos and PCB litigation, and uncertainty over spent fuel storage after the DOE missed its January 1998 disposal deadline. Management considers these legal matters not likely to have a material adverse effect, though the BCF, Capasso and Hunts Point matters remain open. Overall, the company is a high-dividend, high-rated utility (A1/A+/AA- senior debt) whose value depends heavily on how the divestiture and stranded-cost recovery play out.

02—Key points

Key Highlights

Holding company reorganization effective January 1, 1998: Con Edison became a subsidiary of CEI, with each Con Edison common share exchanged one-for-one for CEI common shares.
1997 net income for common stock was $694.5 million, or $2.95 per share, up slightly from $2.93 in 1996, with total operating revenues of $7.12 billion.
Dividends of $2.10 per share were paid in 1997 (up from $2.08), with a quarterly rate of $0.525 and a 53-cent dividend declared for early 1998.
A $1 billion CEI common stock repurchase was approved by the PSC in March 1998, to be funded by internal cash, debt and possibly generating-plant sale proceeds.
The PSC Settlement Agreement requires divestiture of at least 50% of New York City fossil generating capacity by December 2002, with retail access for all customers by 2001 and a rate reduction of about $1 billion over the transition.
Indian Point 2 nuclear unit has been offline since October 1997; restart is pending NRC concurrence, and steam generator replacement (about $108 million) may be needed by 2001.
Strong credit profile: common equity ratio of 56.8% and interest coverage of 4.09x, with senior unsecured debt rated A1/A+/AA-.

03—Questions

Frequently Asked Questions

What changed structurally for investors in 1998?
CEI became the holding company for Con Edison on January 1, 1998. Shareholders exchanged Con Edison shares one-for-one for CEI shares, and CEI now owns the regulated utility plus unregulated subsidiaries such as Con Edison Solutions, Con Edison Development, Con Edison Energy and Con Edison Communications. CEI's ability to pay dividends now depends mainly on distributions from Con Edison, which the PSC Settlement Agreement limits to 100% of income available for dividends on a two-year rolling average.
How did earnings and cash flow look in 1997?
Net income for common stock was $694.5 million ($2.95 per share), nearly flat versus 1996, as lower operations and maintenance expense offset weather effects and reduced incentive earnings. Net cash flow from operations rose to $1.24 billion in 1997 from $1.11 billion in 1996, and after common and preferred dividends the net amount was about $727 million.
What is the biggest long-term risk to the utility's franchise?
Retail competition and stranded costs. Customers may buy power from other suppliers starting in June 1998, with full access by 2001. Con Edison must sell at least half of its New York City fossil capacity and keep only a 'provider of last resort' obligation. Recovery of stranded costs depends on a post-transition non-bypassable charge, and the NUG contract exposure is capped at a potential $300 million disallowance, so the outcome depends on market prices and PSC decisions.
What are the major near-term operational and legal issues?
Indian Point 2 has been offline since October 1997 for unscheduled maintenance, with restart expected after NRC review and an independent safety assessment. Spent nuclear fuel storage is adequate only until about 2005 because DOE has missed its disposal obligation, and the company has been sued over several Superfund, PCB and asbestos claims. Management says none is expected to have a material adverse effect, but the BCF Oil, Capasso and Hunts Point matters remain open.
Is the dividend and capital return plan sustainable?
The company has paid the same quarterly dividend of $0.525 in 1997 and raised the per-share annual total modestly ($2.10 vs. $2.08). Capital spending is about $620-650 million per year, and total 1998 capital requirements including debt retirement are estimated at $865 million. The $1 billion repurchase is expected to be financed partly by debt and generating-plant sale proceeds, so the company's leverage and the timing of divestitures will determine how much room remains for dividend growth.

04—Continue

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