FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x |
Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the quarterly period ended JUNE 30, 2007 | ||
OR |
||
¨ |
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number |
Exact name of registrant as specified in its charter and principal office address and telephone number |
State of Incorporation |
I.R.S. Employer ID. Number | |||
1-14514 |
Consolidated Edison, Inc. 4 Irving Place, New York, New York 10003 (212) 460-4600 |
New York | 13-3965100 | |||
1-1217 |
Consolidated Edison Company of New York, Inc. 4 Irving Place, New York, New York 10003 (212) 460-4600 |
New York | 13-5009340 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Con Edison |
Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ |
Con Edison of New York |
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Con Edison | Yes ¨ No x | |||
Con Edison of New York | Yes ¨ No x |
As of the close of business on July 31, 2007, Con Edison had outstanding 270,975,263 Common Shares ($.10 par value). All of the outstanding common equity of Con Edison of New York is held by Con Edison.
1
Filing Format
This Quarterly Report on Form 10-Q is a combined report being filed separately by two different registrants: Consolidated Edison, Inc. (Con Edison) and Consolidated Edison Company of New York, Inc. (Con Edison of New York). Con Edison of New York is a subsidiary of Con Edison and, as such, the information in this report about Con Edison of New York also applies to Con Edison. As used in this report, the term the Companies refers to Con Edison and Con Edison of New York. However, Con Edison of New York makes no representation as to the information contained in this report relating to Con Edison or the subsidiaries of Con Edison other than itself.
2
PAGE | ||||
4 | ||||
PART IFinancial Information |
||||
Item 1 |
Financial Statements (Unaudited) | |||
Con Edison |
||||
6 | ||||
8 | ||||
9 | ||||
10 | ||||
11 | ||||
Con Edison of New York |
||||
12 | ||||
14 | ||||
15 | ||||
16 | ||||
17 | ||||
18 | ||||
Item 2 |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
43 | ||
Item 3 |
71 | |||
Item 4 |
71 | |||
PART IIOther Information |
||||
Item 1 |
72 | |||
Item 1a |
72 | |||
Item 4 |
73 | |||
Item 6 |
75 | |||
76 |
3
The following is a glossary of frequently used abbreviations or acronyms that are found in the Companies SEC reports:
Con Edison Companies |
||
Con Edison |
Consolidated Edison, Inc. | |
Con Edison Communications |
Con Edison Communications, LLC | |
Con Edison Development |
Consolidated Edison Development, Inc. | |
Con Edison Energy |
Consolidated Edison Energy, Inc. | |
Con Edison of New York |
Consolidated Edison Company of New York, Inc. | |
Con Edison Solutions |
Consolidated Edison Solutions, Inc. | |
O&R |
Orange and Rockland Utilities, Inc. | |
Pike |
Pike County Light & Power Company | |
RECO |
Rockland Electric Company | |
The Companies |
Con Edison and Con Edison of New York | |
The Utilities |
Con Edison of New York and O&R | |
Regulatory and State Agencies |
||
DEC |
New York State Department of Environmental Conservation | |
EPA |
Environmental Protection Agency | |
FERC |
Federal Energy Regulatory Commission | |
IRS |
Internal Revenue Service | |
ISO-NE |
ISO New England | |
NJBPU |
New Jersey Board of Public Utilities | |
NJDEP |
New Jersey Department of Environmental Protection | |
NYAG |
New York Attorney General | |
NYISO |
New York Independent System Operator | |
NYPA |
New York Power Authority | |
NYSERDA |
New York State Energy Research and Development Authority | |
NYSRC |
New York State Reliability Council | |
PJM |
PJM Interconnection | |
PSC |
New York State Public Service Commission | |
PPUC |
Pennsylvania Public Utility Commission | |
SEC |
Securities and Exchange Commission | |
Other |
||
ABO |
Accumulated Benefit Obligation | |
APB |
Accounting Principles Board | |
AFDC |
Allowance for funds used during construction | |
CO2 |
Carbon dioxide | |
COSO |
Committee of Sponsoring Organizations of the Treadway Commission | |
DIG |
Derivatives Implementation Group | |
District Court |
The United States District Court for the Southern District of New York | |
dths |
Dekatherms | |
EITF |
Emerging Issues Task Force | |
EMF |
Electric and magnetic fields |
4
Other |
||
ERRP |
East River Repowering Project | |
FASB |
Financial Accounting Standards Board | |
FIN |
FASB Interpretation No. | |
First Quarter Form 10-Q |
The Companies combined Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007 | |
Fitch |
Fitch Ratings | |
Form 10-K |
The Companies combined Annual Report on Form 10-K for the year ended December 31, 2006 | |
FSP |
FASB Staff Position | |
GHG |
Greenhouse gases | |
kV |
Kilovolts | |
kWh |
Kilowatt-hour | |
LILO |
Lease In/Lease Out | |
LTIP |
Long Term Incentive Plan | |
MD&A |
Managements Discussion and Analysis of Financial Condition and Results of Operations | |
mdths |
Thousand dekatherms | |
MGP Sites |
Manufactured gas plant sites | |
mmlbs |
Million pounds | |
Moodys |
Moodys Investors Service | |
MVA |
Megavolt amperes | |
MW |
Megawatts or thousand kilowatts | |
MWH |
Megawatt hour | |
NUGs |
Non-utility generators | |
OCI |
Other Comprehensive Income | |
PCBs |
Polychlorinated biphenyls | |
PPA |
Power purchase agreement | |
PRP |
Potentially responsible party | |
S&P |
Standard & Poors Rating Services | |
SFAS |
Statement of Financial Accounting Standards | |
SO2 |
Sulfur dioxide | |
SSCM |
Simplified service cost method | |
Second Quarter Form 10-Q |
The Companies combined Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007 | |
Superfund |
Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state statutes | |
VaR |
Value-at-Risk | |
VIE |
Variable interest entity |
5
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, 2007 | December 31, 2006 | |||||
(Millions of Dollars) | ||||||
ASSETS |
||||||
UTILITY PLANT, AT ORIGINAL COST |
||||||
Electric |
$ | 15,417 | $ | 14,775 | ||
Gas |
3,307 | 3,233 | ||||
Steam |
1,717 | 1,691 | ||||
General |
1,675 | 1,635 | ||||
TOTAL |
22,116 | 21,334 | ||||
Less: Accumulated depreciation |
4,684 | 4,583 | ||||
Net |
17,432 | 16,751 | ||||
Construction work in progress |
858 | 872 | ||||
NET UTILITY PLANT |
18,290 | 17,623 | ||||
NON-UTILITY PLANT |
||||||
Generating assets, less accumulated depreciation of $140 and $127 in 2007 and 2006, respectively |
773 | 785 | ||||
Non-utility property, less accumulated depreciation of $39 and $36 in 2007 and 2006, respectively |
31 | 34 | ||||
Construction work in progress |
3 | 3 | ||||
NET PLANT |
19,097 | 18,445 | ||||
CURRENT ASSETS |
||||||
Cash and temporary cash investments |
186 | 94 | ||||
Restricted cash |
17 | 18 | ||||
Accounts receivable - customers, less allowance for uncollectible accounts of $45 in 2007 and 2006 |
867 | 825 | ||||
Accrued unbilled revenue |
138 | 122 | ||||
Other receivables, less allowance for uncollectible accounts of $6 and $4 in 2007 and 2006, respectively |
446 | 522 | ||||
Fuel oil, at average cost |
52 | 56 | ||||
Gas in storage, at average cost |
188 | 253 | ||||
Materials and supplies, at average cost |
141 | 157 | ||||
Prepayments |
125 | 157 | ||||
Fair value of derivative assets |
52 | 122 | ||||
Recoverable energy costs |
206 | 235 | ||||
Deferred derivative losses |
177 | 237 | ||||
Other current assets |
56 | 139 | ||||
TOTAL CURRENT ASSETS |
2,651 | 2,937 | ||||
INVESTMENTS |
381 | 366 | ||||
DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS |
||||||
Goodwill |
408 | 406 | ||||
Intangible assets, less accumulated amortization of $39 and $34 in 2007 and 2006, respectively |
75 | 80 | ||||
Regulatory assets |
4,110 | 4,179 | ||||
Other deferred charges and noncurrent assets |
428 | 286 | ||||
TOTAL DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS |
5,021 | 4,951 | ||||
TOTAL ASSETS |
$ | 27,150 | $ | 26,699 |
The accompanying notes are an integral part of these financial statements.
6
Consolidated Edison, Inc.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, 2007 | December 31, 2006 | |||||
(Millions of Dollars) | ||||||
CAPITALIZATION AND LIABILITIES |
||||||
CAPITALIZATION |
||||||
Common shareholders equity (See Statement of Common Shareholders Equity) |
$ | 8,806 | $ | 8,004 | ||
Preferred stock of subsidiary |
213 | 213 | ||||
Long-term debt |
7,778 | 8,298 | ||||
TOTAL CAPITALIZATION |
16,797 | 16,515 | ||||
MINORITY INTERESTS |
42 | 41 | ||||
NONCURRENT LIABILITIES |
||||||
Obligations under capital leases |
24 | 26 | ||||
Provision for injuries and damages |
156 | 155 | ||||
Pension and retiree benefits |
857 | 737 | ||||
Superfund and other environmental costs |
330 | 292 | ||||
Uncertain income taxes |
147 | | ||||
Asset retirement obligations |
99 | 97 | ||||
Fair value of derivative liabilities |
57 | 97 | ||||
Other noncurrent liabilities |
92 | 93 | ||||
TOTAL NONCURRENT LIABILITIES |
1,762 | 1,497 | ||||
CURRENT LIABILITIES |
||||||
Long-term debt due within one year |
536 | 374 | ||||
Notes payable |
315 | 117 | ||||
Accounts payable |
1,119 | 1,126 | ||||
Customer deposits |
240 | 228 | ||||
Accrued taxes |
51 | 36 | ||||
Accrued interest |
136 | 139 | ||||
Accrued wages |
87 | 79 | ||||
Fair value of derivative liabilities |
185 | 395 | ||||
Deferred derivative gains |
9 | 6 | ||||
Deferred income taxes - recoverable energy costs |
84 | 96 | ||||
Other current liabilities |
252 | 276 | ||||
TOTAL CURRENT LIABILITIES |
3,014 | 2,872 | ||||
DEFERRED CREDITS AND REGULATORY LIABILITIES |
||||||
Deferred income taxes and investment tax credits |
4,104 | 4,095 | ||||
Regulatory liabilities |
1,411 | 1,657 | ||||
Other deferred credits |
20 | 22 | ||||
TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES |
5,535 | 5,774 | ||||
TOTAL CAPITALIZATION AND LIABILITIES |
$ | 27,150 | $ | 26,699 |
The accompanying notes are an integral part of these financial statements.
7
CONSOLIDATED INCOME STATEMENT
(UNAUDITED)
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(Millions of Dollars/Except Share Data) | ||||||||||||||||
OPERATING REVENUES |
||||||||||||||||
Electric |
$ | 1,896 | $ | 1,666 | $ | 3,683 | $ | 3,425 | ||||||||
Gas |
422 | 349 | 1,271 | 1,192 | ||||||||||||
Steam |
128 | 106 | 422 | 381 | ||||||||||||
Non-utility |
583 | 434 | 1,071 | 874 | ||||||||||||
TOTAL OPERATING REVENUES |
3,029 | 2,555 | 6,447 | 5,872 | ||||||||||||
OPERATING EXPENSES |
||||||||||||||||
Purchased power |
1,251 | 1,019 | 2,361 | 2,203 | ||||||||||||
Fuel |
181 | 145 | 450 | 400 | ||||||||||||
Gas purchased for resale |
250 | 189 | 764 | 745 | ||||||||||||
Other operations and maintenance |
504 | 437 | 1,002 | 877 | ||||||||||||
Depreciation and amortization |
167 | 153 | 331 | 305 | ||||||||||||
Taxes, other than income taxes |
318 | 299 | 647 | 617 | ||||||||||||
Income taxes |
78 | 65 | 229 | 172 | ||||||||||||
TOTAL OPERATING EXPENSES |
2,749 | 2,307 | 5,784 | 5,319 | ||||||||||||
OPERATING INCOME |
280 | 248 | 663 | 553 | ||||||||||||
OTHER INCOME (DEDUCTIONS) |
||||||||||||||||
Investment and other income |
21 | 8 | 36 | 20 | ||||||||||||
Allowance for equity funds used during construction |
2 | 1 | 3 | 2 | ||||||||||||
Preferred stock dividend requirements of subsidiary |
(3 | ) | (3 | ) | (6 | ) | (6 | ) | ||||||||
Other deductions |
(13 | ) | (4 | ) | (18 | ) | (9 | ) | ||||||||
Income taxes |
5 | 6 | 10 | 1 | ||||||||||||
TOTAL OTHER INCOME (DEDUCTIONS) |
12 | 8 | 25 | 8 | ||||||||||||
INTEREST EXPENSE |
||||||||||||||||
Interest on long-term debt |
126 | 119 | 254 | 232 | ||||||||||||
Other interest |
14 | 12 | 29 | 25 | ||||||||||||
Allowance for borrowed funds used during construction |
(2 | ) | (1 | ) | (5 | ) | (2 | ) | ||||||||
NET INTEREST EXPENSE |
138 | 130 | 278 | 255 | ||||||||||||
INCOME FROM CONTINUING OPERATIONS |
154 | 126 | 410 | 306 | ||||||||||||
INCOME FROM DISCONTINUED OPERATIONS (NET OF INCOME TAXES) |
| (2 | ) | | (1 | ) | ||||||||||
NET INCOME |
$ | 154 | $ | 124 | $ | 410 | $ | 305 | ||||||||
EARNINGS PER COMMON SHARE - BASIC |
||||||||||||||||
Continuing operations |
$ | 0.58 | $ | 0.51 | $ | 1.57 | $ | 1.24 | ||||||||
Discontinued operations |
| (0.01 | ) | | | |||||||||||
Net income |
$ | 0.58 | $ | 0.50 | $ | 1.57 | $ | 1.24 | ||||||||
EARNINGS PER COMMON SHARE - DILUTED |
||||||||||||||||
Continuing operations |
$ | 0.58 | $ | 0.51 | $ | 1.56 | $ | 1.24 | ||||||||
Discontinued operations |
| (0.01 | ) | | | |||||||||||
Net income |
$ | 0.58 | $ | 0.50 | $ | 1.56 | $ | 1.24 | ||||||||
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK |
$ | 0.580 | $ | 0.575 | $ | 1.160 | $ | 1.150 | ||||||||
AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC (IN MILLIONS) |
264.9 | 245.9 | 261.9 | 245.7 | ||||||||||||
AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED (IN MILLIONS) |
266.2 | 246.7 | 263.1 | 246.7 |
The accompanying notes are an integral part of these financial statements.
8
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(Millions of Dollars) | ||||||||||||||||
NET INCOME |
$ | 154 | $ | 124 | $ | 410 | $ | 305 | ||||||||
OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAXES |
||||||||||||||||
Pension plan liability adjustments, net of $1, $0, $2 and $(3) taxes in 2007 and 2006, respectively |
2 | | 3 | (4 | ) | |||||||||||
Unrealized gains/(losses) on derivatives qualified as cash flow hedges, net of $(11), $(8), $3 and $(40) taxes in 2007 and 2006, respectively |
(19 | ) | (11 | ) | 4 | (57 | ) | |||||||||
Less: Reclassification adjustment for losses included in net income, net of $(5), $(10), $(14) and $(28) taxes in 2007 and 2006, respectively |
(8 | ) | (14 | ) | (20 | ) | (40 | ) | ||||||||
TOTAL OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAXES |
(9 | ) | 3 | 27 | (21 | ) | ||||||||||
COMPREHENSIVE INCOME |
$ | 145 | $ | 127 | $ | 437 | $ | 284 |
The accompanying notes are an integral part of these financial statements.
9
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
Common Stock | Additional In Capital |
Retained Earnings |
Treasury Stock | Capital Stock Expense |
Accumulated Other Comprehensive Loss |
Total | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||
(Millions of Dollars/Except Share Data) | |||||||||||||||||||||||||||||||
BALANCE AS OF |
245,286,058 | $ | 27 | $ | 2,768 | $ | 5,605 | 23,210,700 | $ | (1,001 | ) | $ | (55 | ) | $ | (34 | ) | $ | 7,310 | ||||||||||||
Net income |
181 | 181 | |||||||||||||||||||||||||||||
Common stock dividends |
(141 | ) | (141 | ) | |||||||||||||||||||||||||||
Issuance of common |
456,347 | 24 | 24 | ||||||||||||||||||||||||||||
Stock options |
(23 | ) | 35 | 12 | |||||||||||||||||||||||||||
Other comprehensive loss |
(24 | ) | (24 | ) | |||||||||||||||||||||||||||
BALANCE AS OF MARCH 31, 2006 |
245,742,405 | $ | 27 | $ | 2,769 | $ | 5,680 | 23,210,700 | $ | (1,001 | ) | $ | (55 | ) | $ | (58 | ) | $ | 7,362 | ||||||||||||
Net income |
124 | 124 | |||||||||||||||||||||||||||||
Common stock dividends |
(142 | ) | (142 | ) | |||||||||||||||||||||||||||
Issuance of common |
491,822 | 28 | 28 | ||||||||||||||||||||||||||||
Other comprehensive income |
3 | 3 | |||||||||||||||||||||||||||||
BALANCE AS OF JUNE 30, 2006 |
246,234,227 | $ | 27 | $ | 2,797 | $ | 5,662 | 23,210,700 | $ | (1,001 | ) | $ | (55 | ) | $ | (55 | ) | $ | 7,375 | ||||||||||||
BALANCE AS OF |
257,456,303 | $ | 28 | $ | 3,314 | $ | 5,804 | 23,210,700 | $ | (1,001 | ) | $ | (58 | ) | $ | (83 | ) | $ | 8,004 | ||||||||||||
Net income |
256 | 256 | |||||||||||||||||||||||||||||
Common stock dividends |
(150 | ) | (150 | ) | |||||||||||||||||||||||||||
Issuance of common |
1,327,669 | 61 | 61 | ||||||||||||||||||||||||||||
Other comprehensive income |
36 | 36 | |||||||||||||||||||||||||||||
BALANCE AS OF MARCH 31, 2007 |
258,783,972 | $ | 28 | $ | 3,375 | $ | 5,910 | 23,210,700 | $ | (1,001 | ) | $ | (58 | ) | $ | (47 | ) | $ | 8,207 | ||||||||||||
Net income |
154 | 154 | |||||||||||||||||||||||||||||
Common stock dividends |
(156 | ) | (156 | ) | |||||||||||||||||||||||||||
Issuance of common |
11,000,000 | 1 | 559 | (2 | ) | 558 | |||||||||||||||||||||||||
Issuance of common |
1,089,068 | 52 | 52 | ||||||||||||||||||||||||||||
Other comprehensive loss |
(9 | ) | (9 | ) | |||||||||||||||||||||||||||
BALANCE AS OF JUNE 30, 2007 |
270,873,040 | $ | 29 | $ | 3,986 | $ | 5,908 | 23,210,700 | $ | (1,001 | ) | $ | (60 | ) | $ | (56 | ) | $ | 8,806 |
10 The accompanying notes are an integral part of these financial statements. |
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended June 30, |
||||||||
2007 |
2006 |
|||||||
(Millions of Dollars) | ||||||||
OPERATING ACTIVITIES |
||||||||
Net Income |
$ | 410 | $ | 305 | ||||
PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME |
||||||||
Depreciation and amortization |
331 | 305 | ||||||
Deferred income taxes |
89 | 11 | ||||||
Rate case amortization and accruals |
(254 | ) | (137 | ) | ||||
Common equity component of allowance for funds used during construction |
(3 | ) | (2 | ) | ||||
Prepaid pension costs (net of capitalized amounts) |
71 | 15 | ||||||
Other non-cash items (net) |
(55 | ) | 122 | |||||
CHANGES IN ASSETS AND LIABILITIES |
||||||||
Accounts receivable - customers, less allowance for uncollectibles |
(42 | ) | 347 | |||||
Materials and supplies, including fuel oil and gas in storage |
85 | 22 | ||||||
Other receivables and other current assets |
143 | (104 | ) | |||||
Prepayments |
32 | 286 | ||||||
Recoverable energy costs |
74 | 89 | ||||||
Accounts payable |
(7 | ) | (273 | ) | ||||
Pensions and retiree benefits |
13 | 61 | ||||||
Accrued taxes |
22 | (63 | ) | |||||
Accrued interest |
(3 | ) | 23 | |||||
Deferred charges, noncurrent assets and other regulatory assets |
(257 | ) | (125 | ) | ||||
Deferred credits and other regulatory liabilities |
146 | (9 | ) | |||||
Other assets |
(10 | ) | 8 | |||||
Other liabilities |
36 | (78 | ) | |||||
NET CASH FLOWS FROM OPERATING ACTIVITIES |
821 | 803 | ||||||
INVESTING ACTIVITIES |
||||||||
Utility construction expenditures (excluding capitalized support costs of $(30) and $(22) in 2007 and 2006, respectively) |
(891 | ) | (872 | ) | ||||
Cost of removal less salvage |
(73 | ) | (83 | ) | ||||
Non-utility construction expenditures |
(3 | ) | (2 | ) | ||||
Common equity component of allowance for funds used during construction |
3 | 2 | ||||||
Restricted cash |
1 | (3 | ) | |||||
Proceeds from sale of properties |
30 | 60 | ||||||
Proceeds from sale of Con Edison Communications |
| 39 | ||||||
NET CASH FLOWS USED IN INVESTING ACTIVITIES |
(933 | ) | (859 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Net proceeds from/(payments of) short-term debt |
198 | (403 | ) | |||||
Retirement of long-term debt |
(359 | ) | (109 | ) | ||||
Issuance of long-term debt |
| 800 | ||||||
Issuance of common stock |
651 | 20 | ||||||
Debt issuance costs |
| (7 | ) | |||||
Common stock dividends |
(286 | ) | (263 | ) | ||||
NET CASH FLOWS FROM FINANCING ACTIVITIES |
204 | 38 | ||||||
CASH AND TEMPORARY CASH INVESTMENTS: |
||||||||
NET CHANGE FOR THE PERIOD |
92 | (18 | ) | |||||
BALANCE AT BEGINNING OF PERIOD |
94 | 81 | ||||||
BALANCE AT END OF PERIOD |
$ | 186 | $ | 63 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 226 | $ | 212 | ||||
Income taxes |
$ | 75 | $ | 171 |
The accompanying notes are an integral part of these financial statements. |
11 |
Consolidated Edison Company of New York, Inc.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, 2007 | December 31, 2006 | |||||
(Millions of Dollars) | ||||||
ASSETS |
||||||
UTILITY PLANT, AT ORIGINAL COST |
||||||
Electric |
$ | 14,479 | $ | 13,872 | ||
Gas |
2,915 | 2,848 | ||||
Steam |
1,717 | 1,691 | ||||
General |
1,546 | 1,510 | ||||
TOTAL |
20,657 | 19,921 | ||||
Less: Accumulated depreciation |
4,267 | 4,173 | ||||
Net |
16,390 | 15,748 | ||||
Construction work in progress |
833 | 832 | ||||
NET UTILITY PLANT |
17,223 | 16,580 | ||||
NON-UTILITY PROPERTY |
||||||
Non-utility property, less accumulated depreciation of $17 in 2007 and 2006 |
13 | 15 | ||||
NET PLANT |
17,236 | 16,595 | ||||
CURRENT ASSETS |
||||||
Cash and temporary cash investments |
60 | 47 | ||||
Accounts receivable - customers, less allowance for uncollectible accounts of $41 and $40 in 2007 and 2006, respectively |
719 | 716 | ||||
Other receivables, less allowance for uncollectible accounts of $5 and $3 in 2007 and 2006, respectively |
333 | 365 | ||||
Accounts receivable from affiliated companies |
104 | 138 | ||||
Fuel oil, at average cost |
45 | 47 | ||||
Gas in storage, at average cost |
149 | 193 | ||||
Materials and supplies, at average cost |
127 | 126 | ||||
Prepayments |
77 | 84 | ||||
Fair value of derivative assets |
3 | | ||||
Recoverable energy costs |
185 | 213 | ||||
Deferred derivative losses |
167 | 213 | ||||
Other current assets |
3 | 14 | ||||
TOTAL CURRENT ASSETS |
1,972 | 2,156 | ||||
INVESTMENTS |
101 | 91 | ||||
DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS |
||||||
Regulatory assets |
3,710 | 3,764 | ||||
Other deferred charges and noncurrent assets |
340 | 210 | ||||
TOTAL DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS |
4,050 | 3,974 | ||||
TOTAL ASSETS |
$ | 23,359 | $ | 22,816 |
12 The accompanying notes are an integral part of these financial statements. |
Consolidated Edison Company of New York, Inc.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, 2007 | December 31, 2006 | |||||
(Millions of Dollars) | ||||||
CAPITALIZATION AND LIABILITIES |
||||||
CAPITALIZATION |
||||||
Common shareholders equity (See Statement of Common Shareholders Equity) |
$ | 7,761 | $ | 7,132 | ||
Preferred stock |
213 | 213 | ||||
Long-term debt |
6,743 | 6,925 | ||||
TOTAL CAPITALIZATION |
14,717 | 14,270 | ||||
NONCURRENT LIABILITIES |
||||||
Obligations under capital leases |
24 | 26 | ||||
Provision for injuries and damages |
150 | 148 | ||||
Pensions and retiree benefits |
553 | 449 | ||||
Superfund and other environmental costs |
282 | 243 | ||||
Uncertain income taxes |
134 | | ||||
Asset retirement obligations |
99 | 96 | ||||
Fair value of derivative liabilities |
21 | 35 | ||||
Other noncurrent liabilities |
76 | 72 | ||||
TOTAL NONCURRENT LIABILITIES |
1,339 | 1,069 | ||||
CURRENT LIABILITIES |
||||||
Long-term debt due within one year |
510 | 330 | ||||
Accounts payable |
852 | 866 | ||||
Accounts payable to affiliated companies |
15 | 14 | ||||
Customer deposits |
225 | 214 | ||||
Accrued taxes |
147 | 118 | ||||
Accrued interest |
122 | 121 | ||||
Accrued wages |
81 | 71 | ||||
Fair value of derivative liabilities |
83 | 193 | ||||
Deferred derivative gains |
7 | 5 | ||||
Deferred income taxes - recoverable energy costs |
75 | 87 | ||||
Other current liabilities |
215 | 233 | ||||
TOTAL CURRENT LIABILITIES |
2,332 | 2,252 | ||||
DEFERRED CREDITS AND REGULATORY LIABILITIES |
||||||
Deferred income taxes and investment tax credits |
3,680 | 3,682 | ||||
Regulatory liabilities |
1,274 | 1,524 | ||||
Other deferred credits |
17 | 19 | ||||
TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES |
4,971 | 5,225 | ||||
TOTAL CAPITALIZATION AND LIABILITIES |
$ | 23,359 | $ | 22,816 |
The accompanying notes are an integral part of these financial statements. |
13 |
Consolidated Edison Company of New York, Inc.
CONSOLIDATED INCOME STATEMENT
(UNAUDITED)
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(Millions of Dollars) | ||||||||||||||||
OPERATING REVENUES |
||||||||||||||||
Electric |
$ | 1,731 | $ | 1,543 | $ | 3,374 | $ | 3,176 | ||||||||
Gas |
377 | 316 | 1,113 | 1,052 | ||||||||||||
Steam |
128 | 106 | 422 | 381 | ||||||||||||
TOTAL OPERATING REVENUES |
2,236 | 1,965 | 4,909 | 4,609 | ||||||||||||
OPERATING EXPENSES |
||||||||||||||||
Purchased power |
713 | 642 | 1,369 | 1,417 | ||||||||||||
Fuel |
123 | 100 | 335 | 293 | ||||||||||||
Gas purchased for resale |
216 | 169 | 650 | 628 | ||||||||||||
Other operations and maintenance |
431 | 364 | 863 | 739 | ||||||||||||
Depreciation and amortization |
147 | 135 | 292 | 268 | ||||||||||||
Taxes, other than income taxes |
303 | 282 | 615 | 581 | ||||||||||||
Income taxes |
61 | 55 | 197 | 168 | ||||||||||||
TOTAL OPERATING EXPENSES |
1,994 | 1,747 | 4,321 | 4,094 | ||||||||||||
OPERATING INCOME |
242 | 218 | 588 | 515 | ||||||||||||
OTHER INCOME (DEDUCTIONS) |
||||||||||||||||
Investment and other income |
15 | 5 | 25 | 15 | ||||||||||||
Allowance for equity funds used during construction |
2 | 1 | 3 | 2 | ||||||||||||
Other deductions |
(3 | ) | (3 | ) | (7 | ) | (7 | ) | ||||||||
Income taxes |
(2 | ) | 3 | | 2 | |||||||||||
TOTAL OTHER INCOME (DEDUCTIONS) |
12 | 6 | 21 | 12 | ||||||||||||
INTEREST EXPENSE |
||||||||||||||||
Interest on long-term debt |
105 | 96 | 209 | 185 | ||||||||||||
Other interest |
9 | 10 | 23 | 20 | ||||||||||||
Allowance for borrowed funds used during construction |
(2 | ) | (1 | ) | (4 | ) | (2 | ) | ||||||||
NET INTEREST EXPENSE |
112 | 105 | 228 | 203 | ||||||||||||
NET INCOME |
142 | 119 | 381 | 324 | ||||||||||||
PREFERRED STOCK DIVIDEND REQUIREMENTS |
3 | 3 | 6 | 6 | ||||||||||||
NET INCOME FOR COMMON STOCK |
$ | 139 | $ | 116 | $ | 375 | $ | 318 |
14 | The accompanying notes are an integral part of these financial statements. |
Consolidated Edison Company of New York, Inc.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
||||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||
(Millions of Dollars) | |||||||||||||
NET INCOME |
$ | 142 | $ | 119 | $ | 381 | $ | 324 | |||||
OTHER COMPREHENSIVE LOSS, NET OF TAXES |
|||||||||||||
Pension plan liability adjustments, net of $0, $0, $0 and $(3) taxes in 2007 and 2006, respectively |
| | | (4 | ) | ||||||||
Unrealized losses on derivatives qualified as cash flow hedges |
| | | (1 | ) | ||||||||
TOTAL OTHER COMPREHENSIVE LOSS, NET OF TAXES |
| | | (5 | ) | ||||||||
COMPREHENSIVE INCOME |
$ | 142 | $ | 119 | $ | 381 | $ | 319 |
The accompanying notes are an integral part of these financial statements. | 15 |
Consolidated Edison Company of New York, Inc.
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
Common Stock | Additional Paid- In Capital |
Retained Earnings |
Repurchased Stock |
Capital Expense |
Accumulated Loss |
Total | ||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||
(Millions of Dollars/Except Share Data) | ||||||||||||||||||||||||||||
BALANCE AS OF DECEMBER 31, 2005 |
235,488,094 | $ | 589 | $ | 1,802 | $ | 5,074 | $ | (962 | ) | $ | (55 | ) | $ | (11 | ) | $ | 6,437 | ||||||||||
Net income |
205 | 205 | ||||||||||||||||||||||||||
Common stock dividend to parent |
(113 | ) | (113 | ) | ||||||||||||||||||||||||
Cumulative preferred dividends |
(3 | ) | (3 | ) | ||||||||||||||||||||||||
Other comprehensive loss |
(5 | ) | (5 | ) | ||||||||||||||||||||||||
BALANCE AS OF MARCH 31, 2006 |
235,488,094 | $ | 589 | $ | 1,802 | $ | 5,163 | $ | (962 | ) | $ | (55 | ) | $ | (16 | ) | $ | 6,521 | ||||||||||
Net income |
119 | 119 | ||||||||||||||||||||||||||
Common stock dividend to parent |
(115 | ) | (115 | ) | ||||||||||||||||||||||||
Cumulative preferred dividends |
(3 | ) | (3 | ) | ||||||||||||||||||||||||
BALANCE AS OF JUNE 30, 2006 |
235,488,094 | $ | 589 | $ | 1,802 | $ | 5,164 | $ | (962 | ) | $ | (55 | ) | $ | (16 | ) | $ | 6,522 | ||||||||||
BALANCE AS OF DECEMBER 31, 2006 |
235,488,094 | $ | 589 | $ | 2,252 | $ | 5,320 | $ | (962 | ) | $ | (58 | ) | $ | (9 | ) | $ | 7,132 | ||||||||||
Net income |
239 | 239 | ||||||||||||||||||||||||||
Common stock dividend to parent |
(131 | ) | (131 | ) | ||||||||||||||||||||||||
Cumulative preferred dividends |
(3 | ) | (3 | ) | ||||||||||||||||||||||||
BALANCE AS OF MARCH 31, 2007 |
235,488,094 | $ | 589 | $ | 2,252 | $ | 5,425 | $ | (962 | ) | $ | (58 | ) | $ | (9 | ) | $ | 7,237 | ||||||||||
Net income |
142 | 142 | ||||||||||||||||||||||||||
Common stock dividend to parent |
(131 | ) | (131 | ) | ||||||||||||||||||||||||
Capital contribution by parent |
518 | (2 | ) | 516 | ||||||||||||||||||||||||
Cumulative preferred dividends |
(3 | ) | (3 | ) | ||||||||||||||||||||||||
BALANCE AS OF JUNE 30, 2007 |
235,488,094 | $ | 589 | $ | 2,770 | $ | 5,433 | $ | (962 | ) | $ | (60 | ) | $ | (9 | ) | $ | 7,761 |
16 | The accompanying notes are an integral part of these financial statements. |
Consolidated Edison Company of New York, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended June 30, |
||||||||
2007 | 2006 | |||||||
(Millions of Dollars) | ||||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 381 | $ | 324 | ||||
PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME |
||||||||
Depreciation and amortization |
292 | 268 | ||||||
Deferred income taxes |
86 | 31 | ||||||
Rate case amortization and accruals |
(254 | ) | (137 | ) | ||||
Common equity component of allowance for funds used during construction |
(3 | ) | (2 | ) | ||||
Prepaid pension costs (net of capitalized amounts) |
12 | 15 | ||||||
Other non-cash items (net) |
(32 | ) | (1 | ) | ||||
CHANGES IN ASSETS AND LIABILITIES |
||||||||
Accounts receivable - customers, less allowance for uncollectibles |
(3 | ) | 308 | |||||
Materials and supplies, including fuel oil and gas in storage |
45 | 4 | ||||||
Other receivables and other current assets |
89 | (39 | ) | |||||
Prepayments |
7 | 350 | ||||||
Recoverable energy costs |
69 | 85 | ||||||
Accounts payable |
(18 | ) | (289 | ) | ||||
Pensions and retiree benefits |
(7 | ) | 35 | |||||
Accrued taxes |
35 | (94 | ) | |||||
Accrued interest |
1 | 23 | ||||||
Deferred charges, noncurrent assets and other regulatory assets |
(248 | ) | (125 | ) | ||||
Deferred credits and other regulatory liabilities |
156 | (4 | ) | |||||
Other assets |
(1 | ) | | |||||
Other liabilities |
48 | (67 | ) | |||||
NET CASH FLOWS FROM OPERATING ACTIVITIES |
655 | 685 | ||||||
INVESTING ACTIVITIES |
||||||||
Utility construction expenditures (excluding capitalized support costs of $(30) and $(22) in 2007 and 2006, respectively) |
(852 | ) | (823 | ) | ||||
Cost of removal less salvage |
(71 | ) | (82 | ) | ||||
Common equity component of allowance for funds used during construction |
3 | 2 | ||||||
Proceeds from sale of properties |
30 | 60 | ||||||
NET CASH FLOWS USED IN INVESTING ACTIVITIES |
(890 | ) | (843 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Net payments of short-term debt |
| (323 | ) | |||||
Retirement of long-term debt |
| (100 | ) | |||||
Issuance of long-term debt |
| 800 | ||||||
Debt issuance costs |
| (7 | ) | |||||
Capital contribution by parent |
516 | | ||||||
Dividend to parent |
(262 | ) | (228 | ) | ||||
Preferred stock dividends |
(6 | ) | (6 | ) | ||||
NET CASH FLOWS FROM FINANCING ACTIVITIES |
248 | 136 | ||||||
CASH AND TEMPORARY CASH INVESTMENTS: |
||||||||
NET CHANGE FOR THE PERIOD |
13 | (22 | ) | |||||
BALANCE AT BEGINNING OF PERIOD |
47 | 61 | ||||||
BALANCE AT END OF PERIOD |
$ | 60 | $ | 39 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 203 | $ | 161 | ||||
Income taxes |
$ | 102 | $ | 183 |
The accompanying notes are an integral part of these financial statements. | 17 |
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
General
These combined notes accompany and form an integral part of the separate consolidated financial statements of each of the two separate registrants: Consolidated Edison, Inc. and its subsidiaries (Con Edison) and Consolidated Edison Company of New York, Inc. and its subsidiaries (Con Edison of New York). Con Edison of New York is a subsidiary of Con Edison and as such its financial condition and results of operations and cash flows, which are presented separately in the Con Edison of New York consolidated financial statements, are also consolidated, along with those of Con Edisons other utility subsidiary, Orange and Rockland Utilities, Inc. (O&R), and Con Edisons competitive energy businesses (discussed below) in Con Edisons consolidated financial statements. The term Utilities is used in these notes to refer to Con Edison of New York and O&R.
As used in these notes, the term Companies refers to Con Edison and Con Edison of New York and, except as otherwise noted, the information in these combined notes relates to each of the Companies. However, Con Edison of New York makes no representation as to information relating to Con Edison or the subsidiaries of Con Edison other than itself.
The separate interim consolidated financial statements of each of the Companies are unaudited but, in the opinion of their respective managements, reflect all adjustments (which include only normally recurring adjustments) necessary for a fair presentation of the results for the interim periods presented. The Companies separate interim consolidated financial statements should be read together with their separate audited financial statements (including the combined notes thereto) included in Item 8 of their combined Annual Report on Form 10-K for the year ended December 31, 2006 (the Form 10-K) and their separate unaudited financial statements (including the combined notes thereto) included in Part I, Item 1 of their combined Quarterly Report Form 10-Q for the quarterly period ended March 31, 2007 (the First Quarter Form 10-Q). Information in the notes to the consolidated financial statements in the Form 10-K and the First Quarter Form 10-Q referred to in these notes is incorporated by reference herein. The use of terms such as see or refer to shall be deemed to incorporate by reference into this discussion and analysis the information to which reference is made. Certain prior period amounts have been reclassified to conform to the current period presentation. Results for interim periods are not necessarily indicative of results for the entire fiscal year.
Con Edison has two regulated utility subsidiaries: Con Edison of New York and O&R. Con Edison of New York provides electric service and gas service in New York City and Westchester County. The company also provides steam service in parts of Manhattan. O&R, along with its regulated utility subsidiaries, provides electric service in southeastern New York and adjacent areas of northern New Jersey and eastern Pennsylvania and gas service in southeastern New York and adjacent areas of eastern Pennsylvania. Con Edison has the following competitive energy businesses: Consolidated Edison
18
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Solutions, Inc. (Con Edison Solutions), a retail energy services company that sells electricity and also offers energy-related services; Consolidated Edison Energy, Inc. (Con Edison Energy), a wholesale energy supply company; and Consolidated Edison Development, Inc. (Con Edison Development), a company that owns, leases or operates generating plants and participates in other infrastructure projects.
Note A - Earnings Per Common Share
Reference is made to Earnings Per Common Share in Note A to the financial statements included in Item 8 of the Form 10-K. For the three and six months ended June 30, 2007 and 2006, Con Edisons basic and diluted EPS are calculated as follows:
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||
(Millions of Dollars, except per share amounts/Shares in Millions) | 2007 | 2006 | 2007 | 2006 | ||||||||||
Income from continuing operations |
$ | 154 | $ | 126 | $ | 410 | $ | 306 | ||||||
Income from discontinued operations, net of tax |
| (2 | ) | | (1 | ) | ||||||||
Net income |
$ | 154 | $ | 124 | $ | 410 | $ | 305 | ||||||
Weighted average common shares outstanding - Basic |
264.9 | 245.9 | 261.8 | 245.7 | ||||||||||
Add: Incremental shares attributable to effect of potentially dilutive securities |
1.3 | 0.8 | 1.3 | 1.0 | ||||||||||
Adjusted weighted average common shares outstanding - Diluted |
266.2 | 246.7 | 263.1 | 246.7 | ||||||||||
EARNINGS PER COMMON SHARE - BASIC |
||||||||||||||
Continuing operations |
$ | 0.58 | $ | 0.51 | $ | 1.57 | $ | 1.24 | ||||||
Discontinued operations |
| (0.01 | ) | | | |||||||||
Net income |
$ | 0.58 | $ | 0.50 | $ | 1.57 | $ | 1.24 | ||||||
EARNINGS PER COMMON SHARE - DILUTED |
||||||||||||||
Continuing operations |
$ | 0.58 | $ | 0.51 | $ | 1.56 | $ | 1.24 | ||||||
Discontinued operations |
| (0.01 | ) | | | |||||||||
Net income |
$ | 0.58 | $ | 0.50 | $ | 1.56 | $ | 1.24 |
Note B - Regulatory Matters
Reference is made to Accounting Policies in Note A and Rate Agreements in Note B to the financial statements included in Item 8 of the Form 10-K and Note B to the financial statements in Part I, Item 1 of the First Quarter Form 10-Q.
Rate Agreements
O&R - Electric
In March 2007, the PSC ordered that O&Rs rates be made temporary, the effect of which is that amounts collected by O&R for electric service rendered in New York State after March 1, 2007 will be subject to refund pending the conclusion of a proceeding, which is now ongoing, to set new rates
19
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
effective July 1, 2007. In the order, the PSC confirmed that no issues had been raised regarding the companys service adequacy or operations. In June 2007, O&R commenced an action in New York State Supreme Court seeking to have the order annulled.
Con Edison of New York - Gas
On June 1, 2007, Con Edison of New York entered into a Joint Proposal with the staff of the PSC and other parties with respect to the rates the company can charge its customers for gas service. The Joint Proposal is subject to PSC approval.
The Joint Proposal covers the three-year period from October 1, 2007 through September 30, 2010, and provides for rate increases of $67.4 million, $32.7 million and $42.7 million, effective October 1, 2007, 2008 and 2009, respectively. In addition, under the Joint Proposal revenues will increase $17.1 million starting in the first rate year because certain costs that are currently recovered in rates will instead be recovered under the provisions pursuant to which the company recovers its gas supply-related costs.
Additional provisions of the Joint Proposal include:
| earnings in excess of a 10.9 percent return on equity for the first rate year and a 10.7 percent return on equity for the second and third rate years (based upon the actual average equity ratio, subject to a maximum equity ratio of 50 percent of capitalization) would be shared equally with customers, with 20 basis points of the first rate years earnings sharing threshold predicated on achieving certain energy efficiency goals and the earnings subject to sharing for each rate year being determined after reflecting in earnings the effects of any reduction in expense deferrals (discussed below); |
| a revenue decoupling mechanism for the first rate year (which may be continued or modified for the second or third rate years) under which the companys revenues from most firm customer classifications would be determined by multiplying the forecasted delivery revenue per customer reflected in gas rates times the actual number of customers and a regulatory asset for recovery from customers would be recorded if actual delivery revenues billed to customers are less than the forecasted amount or a regulatory liability for future customer benefit would be recorded if the actual revenues are more than the forecasted amount; |
| opportunities to retain for shareholders annual gas net revenues from non-firm customer transactions: 20 percent of any net revenues between $35 million and $50 million and 25 percent of any net revenues above $50 million; |
| continuation of provisions for the recovery from customers on a current basis of the cost of purchased gas and supply-related costs; |
20
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
| annual reconciliation of the difference between the actual annual average amount of gas utility plant (excluding plant additions resulting from moving facilities to avoid interfering with government projects), net of depreciation, up to a maximum annual average amount, and the annual average amounts reflected in gas rates, with the revenue requirement impact of the difference recorded as a regulatory asset or a regulatory liability, as the case may be, and a separate reconciliation of interference plant additions that would not be subject to a maximum annual average amount; |
| annual reconciliations of the differences between the actual amounts of pension and other post-retirement benefit expenses, environmental remediation expenses, property taxes and non-capital expenses resulting from the moving of facilities to avoid interfering with government projects and the amounts reflected for such expenses in gas rates, with the differences (or in the case of property taxes and interference expenses, 90 percent of the differences) deferred as a regulatory asset or accrued as a regulatory liability, as the case may be; provided that earnings above the earnings sharing threshold (discussed above) would reduce the deferral as a regulatory asset of the differences in pension and other post-employment benefit expenses, property taxes and interference expenses by up to 50 percent (but not to the extent the reduction would cause the resulting earnings to decrease below the threshold); and |
| potential penalties of up to $7.5 million for each rate year if the company does not meet certain standards for leak management, emergency response, prevention of damage to facilities, gas main replacement and customer satisfaction. |
21
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Regulatory Assets and Liabilities
Regulatory assets and liabilities at June 30, 2007 and December 31, 2006 were comprised of the following items:
Con Edison | Con Edison of New York | |||||||||||
(Millions of Dollars) | 2007 | 2006 | 2007 | 2006 | ||||||||
Regulatory assets |
||||||||||||
Unrecognized pension and other postretirement costs |
$ | 1,935 | $ | 1,929 | $ | 1,799 | $ | 1,776 | ||||
Future federal income tax |
1,034 | 995 | 978 | 941 | ||||||||
Environmental remediation costs |
367 | 318 | 304 | 255 | ||||||||
World Trade Center restoration costs |
148 | 147 | 148 | 147 | ||||||||
Pension and other postretirement benefits deferrals |
118 | 157 | 54 | 98 | ||||||||
Revenue taxes |
71 | 68 | 70 | 67 | ||||||||
O&R transition bond charges |
65 | 67 | | | ||||||||
Net T&D reconciliation |
53 | 94 | 53 | 94 | ||||||||
Electric rate increase accrual |
45 | 44 | 45 | 44 | ||||||||
Unbilled gas revenue |
44 | 44 | 44 | 44 | ||||||||
Workers compensation |
43 | 42 | 43 | 42 | ||||||||
Other retirement program costs |
18 | 20 | 18 | 20 | ||||||||
Recoverable energy costs |
14 | 55 | 14 | 55 | ||||||||
Asbestos-related costs |
10 | 10 | 10 | 10 | ||||||||
Deferred derivative losses - long-term |
5 | 18 | 4 | 15 | ||||||||
Other |
140 | 171 | 126 | 156 | ||||||||
Regulatory assets |
4,110 | 4,179 | 3,710 | 3,764 | ||||||||
Deferred derivative losses - current |
177 | 237 | 167 | 213 | ||||||||
Recoverable energy costs - current |
206 | 235 | 185 | 213 | ||||||||
Total Regulatory Assets |
$ | 4,493 | $ | 4,651 | $ | 4,062 | $ | 4,190 | ||||
Regulatory liabilities |
||||||||||||
Allowance for cost of removal less salvage |
$ | 473 | $ | 492 | $ | 412 | $ | 432 | ||||
Gain on sale of First Avenue properties |
144 | 144 | 144 | 144 | ||||||||
Net electric deferrals |
139 | 164 | 139 | 164 | ||||||||
Prior year deferred tax amortization |
81 | 81 | 81 | 81 | ||||||||
2004 electric, gas and steam one-time rate agreement charges |
53 | 85 | 53 | 85 | ||||||||
NYS tax law changes |
53 | 38 | 43 | 28 | ||||||||
Interest on federal income tax refund |
41 | 41 | 41 | 41 | ||||||||
Net steam deferrals |
35 | 48 | 35 | 48 | ||||||||
O&R refundable energy costs |
34 | 40 | | | ||||||||
Gain on sale of W. 24th St. property |
32 | 46 | 32 | 46 | ||||||||
Transmission congestion contracts |
19 | 96 | 19 | 96 | ||||||||
Deferred derivative gains - long-term |
16 | 2 | 6 | 1 | ||||||||
Property tax reconciliation |
15 | 39 | 15 | 39 | ||||||||
EPA SO2 allowance proceeds - electric and steam |
12 | 106 | 12 | 106 | ||||||||
DC service incentive |
11 | 13 | 11 | 13 | ||||||||
Gas interruptible sales credits |
10 | 8 | 10 | 8 | ||||||||
Other |
243 | 214 | 221 | 192 | ||||||||
Regulatory liabilities |
1,411 | 1,657 | 1,274 | 1,524 | ||||||||
Deferred derivative gains - current |
9 | 6 | 7 | 5 | ||||||||
Total Regulatory Liabilities |
$ | 1,420 | $ | 1,663 | $ | 1,281 | $ | 1,529 |
22
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
In March 2007, in accordance with the 2005 Electric Rate Agreement, the company offset $265 million of regulatory liabilities against an equal amount of regulatory assets. The regulatory liabilities settled related primarily to proceeds from the sale of sulfur dioxide allowances, prior years transmission congestion contracts auction proceeds, gains from the sale of properties, penalties related to customer outages, and the cost reconciliations for property taxes and interference costs. The regulatory assets recovered related primarily to the Net T&D reconciliation and cost reconciliations for pension and other postretirement benefit costs.
Power Outage Proceedings
During a July 2006 heat wave, electric service was interrupted to a number of Con Edison of New Yorks customers, predominantly in the companys Long Island City distribution network in Queens, New York. Also, a number of the companys customers in Westchester County, New York, experienced weather-related outages in 2006.
In April 2007, the PSC expanded its ongoing proceeding investigating the Queens outage to also consider the prudence of the companys conduct with respect to the outage. The investigation has been reviewing the circumstances surrounding the outage, the companys response, communication and restoration efforts, the need for changes to the companys practices and procedures and the costs incurred by the company related to the outage. The PSC indicated that the prudence examination should consider and address, among other things: (i) the reasonableness of the companys response to the outage, its monitoring of its distribution system, its use of available information, its procedures for determining whether to shut down the Long Island City network (and the prudence of its decision not to do so) and its operation and maintenance of equipment in the Long Island City network; and (ii) whether and to what extent, the expenses and capital expenditures associated with the outage that the company has incurred, or may incur, should be borne by the companys customers. In February 2007, the PSC staff issued a report on the outage which, among other things, includes the PSC staffs (i) finding that the overriding cause of the outage was the companys failure to adequately operate, maintain and oversee the Long Island City network, (ii) conclusion that the company should have, but failed to, shut down the Long Island City network to minimize the impact of the outage to customers, and (iii) recommendation that the PSC initiate a proceeding to consider the prudence of the companys actions or inactions during the outage.
The PSC is also reviewing the Westchester outages, and has ordered the company to show cause why it should not be liable for certain food spoilage claims in connection with the September 2006 outage in Westchester resulting from Tropical Storm Ernesto.
23
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
The PSC has engaged an independent third party consultant to audit the companys performance in response to outage emergencies and planning for restoration of service.
As of June 30, 2007, Con Edison of New York had paid $14 million, $5 million of which was reimbursed by insurers, to compensate customers for spoilage of food and other perishables resulting from the Queens outage, incurred estimated operating costs of $39 million, net of $1 million of insurance reimbursement, invested $48 million in capital assets and retirements in the Long Island City network after the Queens outage, and accrued penalties under its 2005 electric rate agreement of $18 million relating to customer outages.
In July 2007, the PSC issued a notice requesting comments on the tariff provisions pursuant to which the company is required to reimburse its electric customers for losses resulting from service interruptions in certain circumstances. The current provisions provide for reimbursement to affected residential and commercial customers for food spoilage of up to $450 and $9,000, respectively, with a maximum aggregate of $15 million for an outage. The Company is not required to provide reimbursement for outages caused by certain events such as storms, provided the company makes reasonable efforts to restore service as soon as practicable.
The Companies are unable to predict whether the outages and any related proceedings will have any further material adverse effect on their results of operations or have a material adverse effect on their financial position or liquidity.
Note C - Short-Term Borrowing and Credit Agreements
Reference is made to Note D to the financial statements in Item 8 of the Form 10-K and Note C to the financial statements in Part I, Item 1 of the First Quarter Form 10-Q.
In June 2007, the Companies credit agreement, which was to expire in June 2011, was extended for an additional year, with a maximum of $2.2 billion available to Con Edison of New York and $1 billion available to Con Edison in the additional year.
At June 30, 2007, Con Edison had $314 million of commercial paper outstanding at a weighted average interest rate of 5.5 percent, none of which was outstanding under Con Edison of New Yorks program. At June 30, 2006, Con Edison had $352 million of commercial paper outstanding of which $197 million was outstanding under Con Edison of New Yorks program. The weighted average interest rate at June 30, 2006 was 5.4 percent and 5.3 percent for Con Edison and Con Edison of New York, respectively. At June 30, 2007 and 2006, no loans were outstanding under the Companies credit agreements and $47 million and $15 million of letters of credit were outstanding, respectively.
24
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note D - Pension Benefits
Reference is made to Note E to the financial statements in Item 8 of the Form 10-K and Note D to the financial statements in Part I, Item 1 of the First Quarter Form 10-Q.
Net Periodic Benefit Cost
The components of the Companies net periodic benefit costs for the three and six months ended June 30, 2007 and 2006 were as follows:
For the Three Months Ended June 30, | ||||||||||||||||
Con Edison | Con Edison of New York |
|||||||||||||||
(Millions of Dollars) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Service cost - including administrative expenses |
$ | 33 | $ | 33 | $ | 31 | $ | 31 | ||||||||
Interest cost on projected benefit obligation |
123 | 115 | 115 | 108 | ||||||||||||
Expected return on plan assets |
(162 | ) | (155 | ) | (155 | ) | (149 | ) | ||||||||
Amortization of net actuarial loss |
40 | 32 | 34 | 26 | ||||||||||||
Amortization of prior service costs |
3 | 4 | 3 | 3 | ||||||||||||
NET PERIODIC BENEFIT COST |
$ | 37 | $ | 29 | $ | 28 | $ | 19 | ||||||||
Amortization of regulatory asset* |
1 | 1 | 1 | 1 | ||||||||||||
TOTAL PERIODIC BENEFIT COST |
$ | 38 | $ | 30 | $ | 29 | $ | 20 | ||||||||
Cost capitalized |
(11 | ) | (9 | ) | (8 | ) | (7 | ) | ||||||||
Cost deferred |
(20 | ) | (28 | ) | (18 | ) | (24 | ) | ||||||||
Cost charged/(credited) to operating expenses |
$ | 7 | $ | (7 | ) | $ | 3 | $ | (11 | ) |
* | Relates to increases in Con Edison of New Yorks pension obligations of $33 million from a 1993 special retirement program and $45 million from a 1999 special retirement program. |
For the Six Months Ended June 30, | ||||||||||||||||
Con Edison | Con Edison of New York |
|||||||||||||||
(Millions of Dollars) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Service cost - including administrative expenses |
$ | 66 | $ | 67 | $ | 61 | $ | 62 | ||||||||
Interest cost on projected benefit obligation |
246 | 229 | 230 | 215 | ||||||||||||
Expected return on plan assets |
(323 | ) | (310 | ) | (309 | ) | (298 | ) | ||||||||
Amortization of net actuarial loss |
80 | 63 | 69 | 52 | ||||||||||||
Amortization of prior service costs |
5 | 7 | 5 | 6 | ||||||||||||
NET PERIODIC BENEFIT COST |
$ | 74 | $ | 56 | $ | 56 | $ | 37 | ||||||||
Amortization of regulatory asset* |
2 | 2 | 2 | 2 | ||||||||||||
TOTAL PERIODIC BENEFIT COST |
$ | 76 | $ | 58 | $ | 58 | $ | 39 | ||||||||
Cost capitalized |
(23 | ) | (17 | ) | (18 | ) | (13 | ) | ||||||||
Cost deferred |
(49 | ) | (58 | ) | (45 | ) | (51 | ) | ||||||||
Cost charged/(credited) to operating expenses |
$ | 4 | $ | (17 | ) | $ | (5 | ) | $ | (25 | ) |
* | Relates to increases in Con Edison of New Yorks pension obligations of $33 million from a 1993 special retirement program and $45 million from a 1999 special retirement program. |
25
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note E - Other Postretirement Benefits
Reference is made to Note F to the financial statements in Item 8 of the Form 10-K and Note E to the financial statements in Part I, Item 1 of the First Quarter Form 10-Q.
Net Periodic Benefit Cost
The components of the Companies net periodic postretirement benefit costs for the three and six months ended June 30, 2007 and 2006 were as follows:
For the Three Months Ended June 30, | ||||||||||||||||
Con Edison | Con Edison of New York |
|||||||||||||||
(Millions of Dollars) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Service cost |
$ | 5 | $ | 5 | $ | 4 | $ | 4 | ||||||||
Interest cost on accumulated other postretirement benefit obligation |
23 | 22 | 21 | 19 | ||||||||||||
Expected return on plan assets |
(20 | ) | (20 | ) | (19 | ) | (18 | ) | ||||||||
Amortization of net actuarial loss |
16 | 15 | 14 | 12 | ||||||||||||
Amortization of prior service cost |
(3 | ) | (4 | ) | (3 | ) | (4 | ) | ||||||||
Amortization of transition obligation |
1 | 1 | 1 | 1 | ||||||||||||
NET PERIODIC POSTRETIREMENT BENEFIT COST |
$ | 22 | $ | 19 | $ | 18 | $ | 14 | ||||||||
Cost capitalized |
(8 | ) | (5 | ) | (6 | ) | (4 | ) | ||||||||
Cost deferred |
(9 | ) | (9 | ) | (9 | ) | (7 | ) | ||||||||
Cost charged to operating expenses |
$ | 5 | $ | 5 | $ | 3 | $ | 3 | ||||||||
For the Six Months Ended June 30, | ||||||||||||||||
Con Edison | Con Edison of New York |
|||||||||||||||
(Millions of Dollars) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Service cost |
$ | 9 | $ | 9 | $ | 7 | $ | 7 | ||||||||
Interest cost on accumulated other postretirement benefit obligation |
46 | 43 | 41 | 38 | ||||||||||||
Expected return on plan assets |
(40 | ) | (39 | ) | (37 | ) | (36 | ) | ||||||||
Amortization of net actuarial loss |
33 | 29 | 29 | 24 | ||||||||||||
Amortization of prior service cost |
(7 | ) | (7 | ) | (7 | ) | (7 | ) | ||||||||
Amortization of transition obligation |
2 | 2 | 2 | 2 | ||||||||||||
NET PERIODIC POSTRETIREMENT BENEFIT COST |
$ | 43 | $ | 37 | $ | 35 | $ | 28 | ||||||||
Cost capitalized |
(15 | ) | (11 | ) | (12 | ) | (9 | ) | ||||||||
Cost deferred |
(20 | ) | (15 | ) | (18 | ) | (12 | ) | ||||||||
Cost charged to operating expenses |
$ | 8 | $ | 11 | $ | 5 | $ | 7 |
26
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note F - Environmental Matters
Superfund Sites
Hazardous substances, such as asbestos, polychlorinated biphenyls (PCBs) and coal tar, have been used or generated in the course of operations of the Utilities and their predecessors and are present at sites and in facilities and equipment they currently or previously owned, including sites at which gas was manufactured or stored.
The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state statutes (Superfund) impose joint and several liability, regardless of fault, upon generators of hazardous substances for investigation and remediation costs (which include costs of demolition, removal, disposal, storage, replacement, containment, and monitoring) and environmental damages. Liability under these laws can be material and may be imposed for contamination from past acts, even though such past acts may have been lawful at the time they occurred. The sites at which the Utilities have been asserted to have liability under these laws, including their manufactured gas plant sites, are referred to herein as Superfund Sites.
For Superfund Sites where there are other potentially responsible parties and the Utilities are not managing the site investigation and remediation, the accrued liability represents an estimate in 2006 dollars of the amount the Utilities will need to pay to discharge their related obligations. For Superfund Sites (including the manufactured gas plant sites) for which one of the Utilities is managing the investigation and remediation, the accrued liability represents an estimate in 2006 dollars of the companys share of undiscounted cost to investigate the sites and, for sites that have been investigated in whole or in part, the cost to remediate the sites. Remediation costs are estimated in light of the information available, applicable remediation standards, and experience with similar sites.
The accrued liabilities and regulatory assets related to Superfund Sites at June 30, 2007 and December 31, 2006 were as follows:
Con Edison | Con Edison of New York | |||||||||||
(Millions of Dollars) | 2007 | 2006 | 2007 | 2006 | ||||||||
Accrued Liabilities: |
||||||||||||
Manufactured gas plant sites |
$ | 268 | $ | 228 | $ | 221 | $ | 180 | ||||
Other Superfund Sites |
62 | 64 | 61 | 63 | ||||||||
Total |
$ | 330 | $ | 292 | $ | 282 | $ | 243 | ||||
Regulatory assets |
$ | 367 | $ | 318 | $ | 304 | $ | 255 |
27
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Most of the accrued Superfund Site liability relates to sites that have been investigated, in whole or in part. As investigations progress on these and other sites, the Utilities expect that additional liability will be accrued, the amount of which is not presently determinable but may be material. Under their current rate agreements, the Utilities are permitted to recover or defer as regulatory assets (for subsequent recovery through rates) certain site investigation and remediation costs.
Environmental remediation payments and insurance recoveries received related to Superfund Sites for the three and six months ended June 30, 2007 and 2006 were as follows:
For the Three Months Ended June 30, | ||||||||||||
Con Edison | Con Edison of New York | |||||||||||
(Millions of Dollars) | 2007 | 2006 | 2007 | 2006 | ||||||||
Remediation payments |
$ | 9 | $ | 17 | $ | 7 | $ | 13 | ||||
Insurance recoveries received |
1 | 3 | 1 | 3 | ||||||||
For the Six Months Ended June 30, | ||||||||||||
Con Edison | Con Edison of New York | |||||||||||
(Millions of Dollars) | 2007 | 2006 | 2007 | 2006 | ||||||||
Remediation payments |
$ | 18 | $ | 29 | $ | 16 | $ | 24 | ||||
Insurance recoveries received |
1 | 3 | 1 | 3 |
In 2006, Con Edison of New York estimated that for its manufactured gas plant sites, its aggregate undiscounted potential liability for the investigation and remediation of coal tar and/or other manufactured gas plant-related environmental contaminants could range up to $1.1 billion. In 2006, O&R estimated that for its manufactured gas plant sites, each of which has been investigated, the aggregate undiscounted potential liability for the remediation of such contaminants could range up to $96 million. These estimates were based on the assumption that there is contamination at the sites that have not yet been investigated and additional assumptions about these and the other sites regarding the extent of contamination and the type and extent of remediation that may be required. Actual experience may be materially different.
Asbestos Proceedings
Suits have been brought in New York State and federal courts against the Utilities and many other defendants, wherein a large number of plaintiffs sought large amounts of compensatory and punitive damages for deaths and injuries allegedly caused by exposure to asbestos at various premises of the Utilities. The suits that have been resolved, which are many, have been resolved without any payment
28
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
by the Utilities, or for amounts that were not, in the aggregate, material to them. The amounts specified in all the remaining thousands of suits total billions of dollars; however, the Utilities believe that these amounts are greatly exaggerated, based on the disposition of previous claims. In 2006, Con Edison of New York estimated that its aggregate undiscounted potential liability for these suits and additional suits that may be brought over the next 15 years is $10 million. The estimate was based upon a combination of modeling, historical data analysis and risk factor assessment. Actual experience may be materially different. In addition, certain current and former employees have claimed or are claiming workers compensation benefits based on alleged disability from exposure to asbestos. Under its current rate agreements, Con Edison of New York is permitted to defer as regulatory assets (for subsequent recovery through rates) costs incurred for its asbestos lawsuits and workers compensation claims. The accrued liability for asbestos suits and workers compensation proceedings (including those related to asbestos exposure) and the amounts deferred as regulatory assets for the Companies at June 30, 2007 and December 31, 2006 were as follows:
Con Edison | Con Edison of New York | |||||||||||
(Millions of Dollars) | 2007 | 2006 | 2007 | 2006 | ||||||||
Accrued liability - asbestos suits |
$ | 10 | $ | 10 | $ | 10 | $ | 10 | ||||
Regulatory assets - asbestos suits |
$ | 10 | $ | 10 | $ | 10 | $ | 10 | ||||
Accrued liability - workers compensation |
$ | 119 | $ | 117 | $ | 114 | $ | 112 | ||||
Regulatory assets - workers compensation |
$ | 43 | $ | 42 | $ | 43 | $ | 42 |
Note G - Other Material Contingencies
Manhattan Steam Main Rupture
In July 2007, a Con Edison of New York steam main located in midtown Manhattan ruptured for reasons that have not yet been determined. It has been reported that one person died and others were injured as a result of the incident. Debris from the incident included dirt and mud containing asbestos. The response to the incident has required the closing of several buildings and streets for various periods. The company has notified its insurers of the incident and believes that the policies currently in force will cover most of the companys costs, which could be substantial, to satisfy its liability to others in connection with the incident.
Lease In/Lease Out Transactions
In each of 1997 and 1999, Con Edison Development entered into a transaction in which it leased property and then immediately subleased it back to the lessor (termed Lease In/Lease Out, or LILO transaction). The transactions respectively involve gas distribution and electric generating facilities in the Netherlands, with a total investment of $259 million. The transactions were financed with $93 million of equity and $166 million of non-recourse, long-term debt secured by the underlying assets. In
29
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
accordance with Statement of Financial Accounting Standards (SFAS) No. 13, Accounting for Leases, Con Edison is accounting for the two LILO transactions as leveraged leases. Accordingly, the companys investment in these leases, net of non-recourse debt, is carried as a single amount in Con Edisons consolidated balance sheet and income is recognized pursuant to a method that incorporates a level rate of return for those years when net investment in the lease is positive, based upon the after-tax cash flows projected at the inception of the leveraged leases. At June 30, 2007 and December 31, 2006, the companys investment in these leveraged leases ($234 million and $232 million, respectively) net of deferred tax liabilities ($217 million and $208 million, respectively), amounted to $17 million and $24 million, respectively.
On audit of Con Edisons tax return for 1997, the Internal Revenue Service (IRS) disallowed the tax losses in connection with the 1997 LILO transaction. In December 2005, Con Edison paid a $0.3 million income tax deficiency asserted by the IRS for the tax year 1997 with respect to the 1997 LILO transaction. In April 2006, the company paid interest of $0.2 million associated with the deficiency and commenced an action in the United States Court of Federal Claims, entitled Consolidated Edison Company of New York, Inc. v. United States, to obtain a refund of this tax payment and interest. In September 2006, at the audit level, the IRS also disallowed $151 million of net tax deductions taken with respect to both of the LILO transactions for the tax years 1998 through 2001. In November 2006, Con Edison filed an appeal of this disallowance with the Appeals Office of the IRS, where consideration of this matter is pending. In March 2007, at the audit level, the IRS disallowed $43 million of net tax deductions taken with respect to both of the LILO transactions for the tax year 2005. Con Edison filed an appeal of this disallowance with the Appeals Office of the IRS, where consideration of this matter is pending.
Con Edison believes that its LILO transactions have been correctly reported, and has not recorded any reserve with respect to the disallowance of tax losses, or related interest, in connection with its LILO transactions. Con Edisons estimated tax savings, reflected in its financial statements, from the two LILO transactions through June 30, 2007, in the aggregate, was $163 million. If Con Edison were required to repay all or a portion of these amounts, it would also be required to pay interest of up to $53 million.
Northeast Utilities Litigation
Con Edison and Northeast Utilities are pursuing claims against each other for damages as a result of the alleged breach of their agreement and plan of merger, dated as of October 13, 1999, as amended and restated as of January 11, 2000. The litigation, entitled Consolidated Edison, Inc. v. Northeast Utilities, was commenced in March 2001 and is pending in the United States District Court for the Southern District of New York. The parties are seeking to recover from each other fees and expenses
30
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
each incurred in connection with the merger agreement and preparing for the merger. In addition, Con Edison is seeking to recover from Northeast Utilities compensation for synergies that were lost when the merger did not occur, together with the attorneys fees it has incurred in connection with the litigation. Con Edison does not expect that the lawsuit will have a material adverse effect on its financial position, results of operations or liquidity.
Mirant Litigation
In June 2007, the United States Bankruptcy Court for the Northern District of Texas approved the settlement of the legal proceedings relating to the June 1999 sale of generating assets by Con Edison of New York and O&R to affiliates of Mirant Corporation (which had filed a petition for reorganization under the U.S. Bankruptcy Code). Pursuant to the settlement, the proceedings against Con Edison of New York and O&R were dismissed, with prejudice, and they paid certain amounts to the Mirant affiliates, which, in aggregate, were not material to the Companies.
Guarantees
Con Edison and its subsidiaries enter into various agreements providing financial or performance assurance primarily to third parties on behalf of their subsidiaries. In addition, a Con Edison Development subsidiary has issued a guarantee on behalf of an entity in which it has an equity interest. Maximum amounts guaranteed by Con Edison totaled $1.3 billion and $1.2 billion at June 30, 2007 and December 31, 2006, respectively.
A summary, by type and term, of Con Edisons total guarantees at June 30, 2007 is as follows:
Guarantee Type | 03 years | 410 years | > 10 years | Total | ||||||||
(Millions of Dollars) | ||||||||||||
Commodity transactions |
$ | 893 | $ | 33 | $ | 211 | $ | 1,137 | ||||
Affordable housing program |
| 22 | | 22 | ||||||||
Intra-company guarantees |
45 | | 1 | 46 | ||||||||
Other guarantees |
44 | 42 | | 86 | ||||||||
TOTAL |
$ | 982 | $ | 97 | $ | 212 | $ | 1,291 |
For a description of guarantee types, see Note H to the financial statements in Item 8 of the Form 10-K.
Note H - Income Tax
Uncertain Tax Positions
Reference is made to Note H to the financial statements in Part I, Item 1 of the First Quarter Form 10-Q for information about the Companies January 2007 adoption of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN 48).
31
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
The Companies uncertain tax positions include use of the simplified service cost method (SSCM) to determine the extent to which construction-related costs could be deducted in 2002 through 2005. The Companies expect that they will be required to repay, with interest, a portion of their past SSCM tax benefits ($331 million, of which $303 million is attributable to Con Edison of New York) and to capitalize and depreciate over a period of years costs they previously deducted under SSCM. Interest on all past SSCM tax benefits for Con Edison and Con Edison of New York could be approximately $99 million and $90 million, respectively. Repayment of the SSCM tax benefits would not otherwise affect the Companies results of operations because deferred taxes have been previously provided for the related temporary differences between the SSCM deductions taken for federal income tax purposes and the corresponding amounts charged to expense for financial reporting purposes.
At June 30, 2007, the liabilities for uncertain tax positions for Con Edison and Con Edison of New York were $147 million and $134 million, respectively, and accrued interest on the liabilities amounted to $32 million and $28 million, respectively. The Companies recognize interest accrued related to the liability for uncertain tax positions in interest expense and penalties, if any, in operating expenses in the Companies consolidated income statements. The Companies recognized interest expense for uncertain tax positions for the three and six months ended June 30, 2007 were as follows:
For the Three Months Ended June 30, 2007 |
For the Six Months Ended June 30, 2007 | |||||||||||
(Millions of Dollars) | Con Edison |
Con Edison of New York |
Con Edison |
Con Edison of New York | ||||||||
Interest expense |
$ | 6 | $ | 3 | $ | 10 | $ | 7 |
In June 2007, Con Edison paid $160 million to the Internal Revenue Service, $147 million of which is attributable to Con Edison of New York, as a deposit for the repayment, including related interest, that the Companies expect will be required with respect to the past SSCM benefits. As a result, for federal income tax purposes, interest will continue to accrue only on the portion of the liability, if any, that exceeds the deposit. Con Edison and Con Edison of New York have recorded the deposit as a noncurrent asset on their consolidated balance sheet.
The Companies do not expect the total amounts of uncertain tax positions to significantly increase or decrease within the next 12 months.
Note I - Stock-Based Compensation
For a description of stock-based compensation, including stock options, restricted stock units (RSUs) and the stock purchase plan, reference is made to Note M to the financial statements in Item 8 of the Form 10-K.
32
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
In accordance with SFAS No. 123(R), Share-Based Payment (SFAS No. 123(R)), the Companies have recognized the cost of stock-based compensation as an expense using a fair value measurement method. The following table summarizes stock-based compensation expense recognized by the Companies in the three and six months ended June 30, 2007 and 2006:
For the Three Months Ended June 30, | ||||||||||||
Con Edison | Con Edison of New York | |||||||||||
(Millions of Dollars) | 2007 | 2006 | 2007 | 2006 | ||||||||
Stock options |
$ | | $ | 3 | $ | | $ | 2 | ||||
Restricted stock units |
1 | 1 | 1 | 1 | ||||||||
Performance-based restricted stock |
1 | 1 | 1 | 1 | ||||||||
Total |
$ | 2 | $ | 5 | $ | 2 | $ | 4 | ||||
For the Six Months Ended June 30, | ||||||||||||
Con Edison | Con Edison of New York | |||||||||||
(Millions of Dollars) | 2007 | 2006 | 2007 | 2006 | ||||||||
Stock options |
$ | 1 | $ | 6 | $ | 1 | $ | 5 | ||||
Restricted stock units |
1 | 1 | 1 | 1 | ||||||||
Performance-based restricted stock |
2 | 9 | 2 | 8 | ||||||||
Total |
$ | 4 | $ | 16 | $ | 4 | $ | 14 |
33
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Stock Options
A summary of changes in the status of stock options during the three and six months ended June 30, 2007 and 2006 were as follows:
Con Edison | Con Edison of New York | |||||||||||
Shares | Weighted Average Exercise Price |
Shares | Weighted Average Exercise Price | |||||||||
Outstanding at 12/31/05 |
7,867,151 | $ | 41.913 | 6,697,401 | $ | 42.000 | ||||||
Granted |
804,000 | 46.880 | 699,000 | 46.880 | ||||||||
Exercised |
(67,500 | ) | 37.560 | (60,800 | ) | 37.404 | ||||||
Forfeited |
(20,900 | ) | 42.691 | (5,000 | ) | 44.688 | ||||||
Outstanding at 3/31/06 |
8,582,751 | $ | 42.412 | 7,330,601 | $ | 42.503 | ||||||
Granted |
859,900 | 43.500 | 711,700 | 43.500 | ||||||||
Exercised |
(64,725 | ) | 35.935 | (55,725 | ) | 35.538 | ||||||
Forfeited |
(19,000 | ) | 44.353 | (13,000 | ) | 44.765 | ||||||
Outstanding at 6/30/06 |
9,358,926 | $ | 42.553 | 7,973,576 | $ | 42.637 | ||||||
Outstanding at 12/31/06 |
8,617,601 | $ | 42.773 | 7,346,601 | $ | 42.842 | ||||||
Granted |
| | | | ||||||||
Exercised |
(975,100 | ) | 41.630 | (907,050 | ) | 41.634 | ||||||
Forfeited |
(1,001 | ) | 42.169 | (1,001 | ) | 42.169 | ||||||
Outstanding at 3/31/07 |
7,641,500 | $ | 42.919 | 6,438,550 | $ | 43.013 | ||||||
Granted |
| | | | ||||||||
Exercised |
(668,350 | ) | 42.803 | (587,500 | ) | 42.829 | ||||||
Forfeited |
(19,350 | ) | 42.483 | (7,500 | ) | 41.870 | ||||||
Outstanding at 6/30/07 |
6,953,800 | $ | 42.931 | 5,843,550 | $ | 43.033 |
The change in the fair value of all outstanding options from their grant dates to June 30, 2007 and 2006 (aggregate intrinsic value) for Con Edison were $15 million and $18 million, respectively. The change in the fair value of all outstanding options from their grant dates to June 30, 2007 and 2006 (aggregate intrinsic value) for Con Edison of New York were $12 million and $14 million, respectively. The aggregate intrinsic value of options exercised in the period ended June 30, 2007 and 2006 were $6 million and $1 million and the cash received by Con Edison for payment of the exercise price were $30 million and $3 million, respectively. The weighted average remaining contractual life of options outstanding is five years as of June 30, 2007.
34
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
The following table summarizes stock options outstanding at June 30, 2007 for each plan year for the Companies:
Con Edison | Con Edison of New York | |||||||||||||||
Plan Year | Remaining Contractual Life |
Options Outstanding |
Weighted Average Exercise Price |
Options Exercisable |
Options Outstanding |
Weighted Average Exercise Price |
Options Exercisable | |||||||||
2006 |
9 | 1,645,600 | $ | 45.151 | | 1,401,700 | $ | 45.186 | | |||||||
2005 |
8 | 1,262,400 | 42.740 | | 1,022,750 | 42.721 | | |||||||||
2004 |
7 | 950,950 | 43.776 | 950,950 | 756,850 | 43.769 | 756,850 | |||||||||
2003 |
6 | 810,600 | 39.916 | 810,600 | 637,900 | 39.941 | 637,900 | |||||||||
2002 |
5 | 959,850 | 42.510 | 959,850 | 822,350 | 42.510 | 822,350 | |||||||||
2001 |
4 | 506,050 | 37.750 | 506,050 | 438,050 | 37.750 | 438,050 | |||||||||
2000 |
3 | 145,350 | 32.500 | 145,350 | 109,850 | 32.500 | 109,850 | |||||||||
1999 |
2 | 561,450 | 47.938 | 561,450 | 544,050 | 47.938 | 544,050 | |||||||||
1998/97 |
1 | 111,550 | 42.563 | 111,550 | 110,050 | 42.563 | 110,050 | |||||||||
Total |
6,953,800 | $ | 42.931 | 4,045,800 | 5,843,550 | $ | 43.033 | 3,419,100 |
There were no new awards granted in 2007. The exercise prices of options awarded in 2006 range from $43.50 to $46.88. The total expense to be recognized in future periods for unvested stock options outstanding as of June 30, 2007 is $3 million for Con Edison, including $2 million for Con Edison of New York.
Restricted Stock Units
At June 30, 2007 and 2006, there were 115,055 and 222,500 units outstanding for Con Edison employees, of which 63,055 and 171,700 units are outstanding for Con Edison of New York employees. The weighted average fair value as of the grant date of the outstanding units for June 30, 2007 and 2006 were $42.87 and $36.59 per unit for Con Edison, respectively. The weighted average fair value as of the grant date of the outstanding units for June 30, 2007 and 2006 were $45.88 and $36.31 per unit for Con Edison of New York, respectively. The total expense to be recognized by the Companies in future periods for unvested awards outstanding as of June 30, 2007 for Con Edison and Con Edison of New York were $1.5 million and $1 million, respectively.
35
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
A summary of changes in the status of the Performance RSUs Total Shareholder Return (TSR) portion during the three and six months ended June 30, 2007 and 2006 were as follows:
Con Edison | Con Edison of New York | |||||||||||
Units | Weighted Average Fair Value* |
Units | Weighted Average Fair Value* | |||||||||
Non-vested at 12/31/05 |
204,425 | $ | 31.461 | 171,950 | $ | 31.581 | ||||||
Granted |
99,300 | 43.830 | 87,400 | 43.830 | ||||||||
Vested and Exercised |
(156,450 | ) | 46.477 | (144,475 | ) | 46.455 | ||||||
Forfeited |
| | | | ||||||||
Non-vested at 3/31/06 |
147,275 | $ | 29.313 | 114,875 | $ | 29.530 | ||||||
Granted |
| | | | ||||||||
Vested and Exercised |
| | | | ||||||||
Forfeited |
| | | | ||||||||
Non-vested at 6/30/06 |
147,275 | $ | 31.250 | 114,875 | $ | 44.440 | ||||||
Non-vested at 12/31/06 |
126,425 | $ | 13.992 | 94,025 | $ | 14.420 | ||||||
Granted |
113,600 | 45.730 | 81,848 | 45.730 | ||||||||
Vested and Exercised |
(31,400 | ) | | (21,475 | ) | | ||||||
Forfeited |
| | | | ||||||||
Non-vested at 3/31/07 |
208,625 | $ | 36.108 | 154,398 | $ | 35.709 | ||||||
Granted |
33,280 | 48.060 | 30,805 | 48.060 | ||||||||
Vested and Exercised |
| | | | ||||||||
Forfeited |
| | | | ||||||||
Non-vested at 6/30/07 |
241,905 | $ | 20.152 | 185,203 | $ | 20.155 |
* | Fair value is determined using the Monte Carlo simulation. |
36
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
A summary of changes in the status of the Performance RSUs Executive Incentive Plan (EIP) portion during the three and six months ended June 30, 2007 and 2006 were as follows:
Con Edison | Con Edison of New York | |||||||||||
Units | Weighted Average Price |
Units | Weighted Average Price | |||||||||
Non-vested at 12/31/05 |
204,425 | $ | 43.297 | 171,950 | $ | 43.300 | ||||||
Granted |
99,300 | 46.880 | 87,400 | 46.880 | ||||||||
Vested and Exercised |
(156,450 | ) | 46.477 | (144,475 | ) | 46.455 | ||||||
Forfeited |
| | | | ||||||||
Non-vested at 3/31/06 |
147,275 | $ | 43.500 | 114,875 | $ | 43.500 | ||||||
Granted |
| | | | ||||||||
Vested and Exercised |
| | | | ||||||||
Forfeited |
| | | | ||||||||
Non-vested at 6/30/06 |
147,275 | $ | 44.440 | 114,875 | $ | 44.440 | ||||||
Non-vested at 12/31/06 |
126,425 | $ | 48.070 | 94,025 | $ | 48.070 | ||||||
Granted |
113,600 | 47.815 | 81,848 | 47.807 | ||||||||
Vested and Exercised |
(31,400 | ) | 47.530 | (21,475 | ) | 47.530 | ||||||
Forfeited |
| | | | ||||||||
Non-vested at 3/31/07 |
208,625 | $ | 51.060 | 154,398 | $ | 51.060 | ||||||
Granted |
33,280 | 51.060 | 30,805 | 51.060 | ||||||||
Vested and Exercised |
| | | | ||||||||
Forfeited |
| | | | ||||||||
Non-vested at 6/30/07 |
241,905 | $ | 45.120 | 185,203 | $ | 45.120 |
The total expense to be recognized by Con Edison in future periods for unvested Performance RSUs outstanding as of June 30, 2007 is $9 million, including $7 million for Con Edison of New York.
Stock Purchase Plan
In the three months ended June 30, 2007 and 2006, 155,415 shares and 162,533 shares were purchased under the Stock Purchase Plan at a weighted average price of $49.56 and $44.06 per share, respectively. In the six months ended June 30, 2007 and 2006, 304,812 shares and 312,117 shares were purchased under the Stock Purchase Plan at a weighted average price of $49.04 and $45.07 per share, respectively.
37
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note J - Financial Information By Business Segment
Reference is made to Note N to the financial statements in Item 8 of the Form 10-K.
The financial data for the business segments are as follows:
For the Three Months Ended June 30, | ||||||||||||||||||||||||||||
Operating Revenues |
Inter-segment revenues |
Depreciation and amortization |
Operating Income | |||||||||||||||||||||||||
(Millions of Dollars) | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | ||||||||||||||||||||
Con Edison of New York |
||||||||||||||||||||||||||||
Electric |
$ | 1,731 | $ | 1,543 | $ | 3 | $ | 2 | $ | 111 | $ | 103 | $ | 191 | $ | 180 | ||||||||||||
Gas |
377 | 316 | 1 | 1 | 21 | 20 | 43 | 30 | ||||||||||||||||||||
Steam |
128 | 106 | 23 | 19 | 15 | 12 | 8 | 8 | ||||||||||||||||||||
Consolidation adjustments |
| | (27 | ) | (22 | ) | | | | | ||||||||||||||||||
Total Con Edison of New York |
$ | 2,236 | $ | 1,965 | $ | | $ | | $ | 147 | $ | 135 | $ | 242 | $ | 218 | ||||||||||||
O&R |
||||||||||||||||||||||||||||
Electric |
$ | 165 | $ | 123 | $ | | $ | | $ | 7 | $ | 6 | $ | 15 | $ | 9 | ||||||||||||
Gas |
45 | 34 | | | 3 | 3 | 1 | | ||||||||||||||||||||
Total O&R |
$ | 210 | $ | 157 | $ | | $ | | $ | 10 | $ | 9 | $ | 16 | $ | 9 | ||||||||||||
Competitive energy businesses |
$ | 583 | $ | 434 | $ | 1 | $ | 18 | $ | 10 | $ | 10 | $ | 22 | $ | 20 | ||||||||||||
Other* |
| (1 | ) | (1 | ) | (18 | ) | | (1 | ) | | 1 | ||||||||||||||||
Total Con Edison |
$ | 3,029 | $ | 2,555 | $ | | $ | | $ | 167 | $ | 153 | $ | 280 | $ | 248 |
* | Parent company expenses, primarily interest, and consolidation adjustments. Other does not represent a business segment. |
For the Six Months Ended June 30, | |||||||||||||||||||||||||||
Operating Revenues |
Inter-segment revenues |
Depreciation and amortization |
Operating Income | ||||||||||||||||||||||||
(Millions of Dollars) | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||||||
Con Edison of New York |
|||||||||||||||||||||||||||
Electric |
$ | 3,374 | $ | 3,176 | $ | 5 | $ | 5 | $ | 220 | $ | 204 | $ | 363 | $ | 317 | |||||||||||
Gas |
1,113 | 1,052 | 2 | 1 | 42 | 40 | 155 | 129 | |||||||||||||||||||
Steam |
422 | 381 | 40 | 38 | 30 | 24 | 70 | 69 | |||||||||||||||||||
Consolidation adjustments |
| | (47 | ) | (44 | ) | | | | | |||||||||||||||||
Total Con Edison of New York |
$ | 4,909 | $ | 4,609 | $ | | $ | | $ | 292 | $ | 268 | $ | 588 | $ | 515 | |||||||||||
O&R |
|||||||||||||||||||||||||||
Electric |
$ | 309 | $ | 249 | $ | | $ | | $ | 13 | $ | 12 | $ | 25 | $ | 18 | |||||||||||
Gas |
158 | 140 | | | 5 | 5 | 17 | 10 | |||||||||||||||||||
Total O&R |
$ | 467 | $ | 389 | $ | | $ | | $ | 18 | $ | 17 | $ | 42 | $ | 28 | |||||||||||
Competitive energy businesses |
$ | 1,071 | $ | 874 | $ | 3 | $ | 34 | $ | 20 | $ | 20 | $ | 36 | $ | 10 | |||||||||||
Other* |
| | (3 | ) | (34 | ) | 1 | | (3 | ) | | ||||||||||||||||
Total Con Edison |
$ | 6,447 | $ | 5,872 | $ | | $ | | $ | 331 | $ | 305 | $ | 663 | $ | 553 |
* | Parent company expenses, primarily interest, and consolidation adjustments. Other does not represent a business segment. |
38
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note K - Derivative Instruments and Hedging Activities
Reference is made to Note O to the financial statements in Item 8 of the Form 10-K.
Energy Price Hedging
Con Edisons subsidiaries hedge market price fluctuations associated with physical purchases and sales of electricity, natural gas, and steam by using derivative instruments including futures, forwards, basis swaps, options, transmission congestion contracts and financial transmission rights contracts. The fair values of these hedges at June 30, 2007 and December 31, 2006 were as follows:
Con Edison | Con Edison of New York |
|||||||||||||||
(Millions of Dollars) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Fair value of net assets |
$ | (141 | ) | $ | (319 | ) | $ | (88 | ) | $ | (206 | ) |
Credit Exposure
The Companies are exposed to credit risk related to transactions entered into primarily for the various energy supply and hedging activities by the Utilities and the competitive energy businesses. The Companies use credit policies to manage this risk, including an established credit approval process, monitoring of counterparty limits, netting provisions within agreements, collateral or prepayment arrangements, credit insurance and credit default swaps.
Con Edison and Con Edison of New York had $198 million and $50 million credit exposure in connection with energy supply and hedging activities, net of collateral and reserves, at June 30, 2007, respectively. Con Edisons net credit exposure consisted of $118 million with investment-grade counterparties (a portion of which is insured through credit insurance and hedged with credit default swaps), $78 million with commodity exchange brokers and $2 million with entities which lacked ratings or whose ratings were not investment grade. Con Edison of New Yorks net credit exposure was primarily with commodity exchange brokers.
Cash Flow Hedges
Con Edisons subsidiaries, primarily the competitive energy businesses, designate a portion of derivative instruments as cash flow hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133). Under cash flow hedge accounting, to the extent a hedge is determined to be effective, the unrealized gain or loss on the hedge is recorded in OCI and reclassified to earnings at the time the underlying transaction is completed. A gain or loss relating to any portion of the hedge determined to be ineffective is recognized in earnings in the period in which such determination is made.
39
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
The following table presents selected information related to these cash flow hedges included in accumulated OCI at June 30, 2007:
Maximum Term | Accumulated Other Comprehensive Income/ (Loss) Net of Tax |
Portion Expected to be Reclassified to Earnings during the Next 12 Months | |||||||||||||||||
(Term in Months/Millions of Dollars) |
Con Edison | Con Edison of New York |
Con Edison | Con Edison of New York |
Con Edison | Con Edison of New York | |||||||||||||
Energy Price Hedges |
42 | $ | | $ | (16 | ) | $ | | $ | (18 | ) | $ | |
The actual amounts that will be reclassified to earnings may vary from the expected amounts presented above as a result of changes in market prices. The effect of reclassification from accumulated OCI to earnings will generally be offset by the recognition of the hedged transaction in earnings.
The unrealized net gains and losses relating to the hedge ineffectiveness of these cash flow hedges that were recognized in net earnings for the three and six months ended June 30, 2007 and 2006 were immaterial to the results of operations of the Companies for those periods.
Other Derivatives
The Companies enter into certain derivative instruments that do not qualify or are not designated as hedges under SFAS No. 133. However, management believes these instruments represent economic hedges that mitigate exposure to fluctuations in commodity prices. The Utilities are permitted by their respective regulators to reflect in rates all reasonably incurred gains and losses on these instruments. See Recoverable Energy Costs in Note A to the financial statements in Item 8 of the Form 10-K. Con Edisons competitive energy businesses record unrealized gains and losses on these derivative contracts in earnings in the reporting period in which they occur. Generally, the collateral requirements associated with, and settlement of, derivative transactions are included in net cash flows from operating activities in the Companies consolidated statement of cash flows. For the three months ended June 30, 2007 and 2006, Con Edison recorded in non-utility operating revenues an unrealized pre-tax gain amounting to $3 million and a pre-tax loss of $8 million, respectively. For the six months ended June 30, 2007 and 2006, Con Edison recorded in non-utility operating revenues unrealized pre-tax losses of $13 million and $59 million, respectively.
Interest Rate Hedging
Con Edisons subsidiaries use interest rate swaps to manage interest rate exposure associated with debt. The fair values of these interest rate swaps at June 30, 2007 and December 31, 2006 were as follows:
Con Edison | Con Edison of New York |
|||||||||||||||
(Millions of Dollars) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Fair value of interest rate swaps |
$ | (15 | ) | $ | (15 | ) | $ | (5 | ) | $ | (3 | ) |
40
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Fair Value Hedges
Con Edison of New Yorks swap (related to its $225 million of Series 2001A tax-exempt debt) is designated as a fair value hedge, which qualifies for short-cut hedge accounting under SFAS No. 133. Under this method, changes in fair value of the swap are recorded directly against the carrying value of the hedged bonds and have no impact on earnings.
Cash Flow Hedges
Con Edison Developments and O&Rs swaps are designated as cash flow hedges under SFAS No. 133. Any gain or loss on the hedges is recorded in OCI and reclassified to interest expense and included in earnings during the periods in which the hedged interest payments occur. See Interest Rate Hedging in Note O to the financial statements in Item 8 of the Form 10-K for the contractual components of the interest rate swaps accounted for as cash flow hedges.
Note L - New Financial Accounting Standards
Reference is made to Note S to the financial statements in Item 8 of the Form 10-K.
In June 2007, the FASB issued Emerging Issues Task Force (EITF) Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to be used in Future Research and Development Activities. The EITF concluded that nonrefundable advance payments for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the related services are performed. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense. The guidance in this EITF becomes effective for fiscal years beginning after December 15, 2007. The Companies do not expect this EITF to have a material effect on their financial position, results of operations or liquidity.
In May 2007, the FASB issued FASB Staff Position (FSP) No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. The guidance in this FSP clarifies how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. The guidance in this FSP becomes effective upon adoption of the FASB Interpretation No. 48, which the Companies adopted in January 2007. See Note H. The application of this FSP did not have a material impact on the Companies financial position, results of operations or liquidity.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The guidance in this Statement becomes
41
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
effective for fiscal periods beginning after November 15, 2007. The Companies are currently evaluating the impact of this Statement on their financial position, results of operations or liquidity.
In September 2006, the FASB issued EITF Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements. This Issue requires employers to record a liability for future benefits for endorsement split-dollar life insurance arrangements that provide a postretirement benefit to an employee. The guidance in this EITF becomes effective for fiscal periods beginning after December 15, 2007. The Companies do not expect this EITF to have a material impact on their financial position, results of operations or liquidity.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands the disclosures about fair value measurements. It applies to other accounting pronouncements that require fair value measurements and, accordingly, does not require any new fair value measurements. The guidance in this Statement becomes effective for financial statements issued for fiscal years beginning after November 15, 2007. The Companies are currently evaluating the impact of this Statement on their financial position, results of operations or liquidity.
42
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) |
This combined managements discussion and analysis of financial condition and results of operations (MD&A) relates to the consolidated financial statements (the Second Quarter Financial Statements) included in this report of two separate registrants: Consolidated Edison, Inc. (Con Edison) and Consolidated Edison Company of New York, Inc. (Con Edison of New York) and should be read in conjunction with the financial statements and the notes thereto. As used in this report, the term the Companies refers to Con Edison and Con Edison of New York. Con Edison of New York is a subsidiary of Con Edison and, as such, information in this MD&A about Con Edison of New York applies to Con Edison.
This MD&A should be read in conjunction with the Second Quarter Financial Statements and the notes thereto and the MD&A in Item 7 of the Companies combined Annual Report on Form 10-K for the year ended December 31, 2006 (File Nos. 1-14514 and 1-1217, the Form 10-K) and the MD&A in Part I, Item 2 of their combined Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007 (File Nos. 1-14514 and 1-1217, the First Quarter Form 10-Q).
Information in the notes to the consolidated financial statements referred to in this discussion and analysis is incorporated by reference herein. The use of terms such as see or refer to shall be deemed to incorporate by reference into this discussion and analysis the information to which reference is made.
Corporate Overview
Con Edisons principal business operations are those of its utility companies, Con Edison of New York and Orange and Rockland Utilities, Inc. (O&R), together known as the Utilities. Con Edison also has competitive energy businesses (see Competitive Energy Businesses, below). Certain financial data of Con Edisons businesses is presented below:
Three Months Ended June 30, 2007 |
Six Months Ended June 30, 2007 |
At June 30, 2007 | |||||||||||||||||||||||||||
(Millions of Dollars) | Operating Revenues |
Net Income | Operating Revenues |
Net Income | Assets | ||||||||||||||||||||||||
Con Edison of New York |
$ | 2,236 | 74 % | $ | 139 | 90 % | $ | 4,909 | 76 % | $ | 375 | 91 % | $ | 23,359 | 86 % | ||||||||||||||
O&R |
210 | 7 % | 6 | 4 % | 467 | 7 % | 26 | 6 % | 1,746 | 6 % | |||||||||||||||||||
Total Utilities |
2,446 | 81 % | 145 | 94 % | 5,376 | 83 % | 401 | 97 % | < |