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, 2008 | ||
OR |
||
¨ |
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to |
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.
Con Edison | Yes x No ¨ | |||
Con Edison of New York | Yes x No ¨ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Con Edison |
Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ |
Con Edison of New York |
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer x | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Con Edison | Yes ¨ No x | |||
Con Edison of New York | Yes ¨ No x |
As of July 31, 2008, Con Edison had outstanding 273,190,866 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 |
47 | ||
ITEM 3 |
81 | |||
ITEM 4 |
81 | |||
ITEM 4T |
81 | |||
PART IIOther Information |
||||
ITEM 1 |
82 | |||
ITEM 1A |
82 | |||
ITEM 4 |
83 | |||
ITEM 6 |
85 | |||
86 |
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 |
||
ALJs |
Administrative Law Judges | |
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 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 |
4
Other |
||
EMF |
Electric and magnetic fields | |
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, 2008 | |
Fitch |
Fitch Ratings | |
Form 10-K |
The Companies combined Annual Report on Form 10-K for the year ended December 31, 2007 | |
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 | |
Net T&D Revenues |
Revenue requirement impact resulting from the reconciliation pursuant to Con Edison of New Yorks electric rate agreement of the differences between the actual amount of transmission and distribution utility plant, net of depreciation, to the amount reflected in electric rates | |
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, 2008 | |
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, 2008 |
December 31, 2007 | |||||
(Millions of Dollars) | ||||||
ASSETS |
||||||
UTILITY PLANT, AT ORIGINAL COST |
||||||
Electric |
$ | 16,785 | $ | 15,979 | ||
Gas |
3,545 | 3,403 | ||||
Steam |
1,785 | 1,755 | ||||
General |
1,747 | 1,732 | ||||
TOTAL |
23,862 | 22,869 | ||||
Less: Accumulated depreciation |
4,922 | 4,784 | ||||
Net |
18,940 | 18,085 | ||||
Construction work in progress |
968 | 1,028 | ||||
NET UTILITY PLANT |
19,908 | 19,113 | ||||
NON-UTILITY PLANT |
||||||
Non-utility property, less accumulated depreciation of $39 and $36 in 2008 and 2007, respectively |
20 | 18 | ||||
Non-utility property held for sale |
| 778 | ||||
Construction work in progress |
1 | 5 | ||||
NET PLANT |
19,929 | 19,914 | ||||
CURRENT ASSETS |
||||||
Cash and temporary cash investments |
1,757 | 210 | ||||
Restricted cash |
1 | 1 | ||||
Accounts receivablecustomers, less allowance for uncollectible accounts of $51 and $47 in 2008 and 2007, respectively |
901 | 970 | ||||
Accrued unbilled revenue |
161 | 149 | ||||
Other receivables, less allowance for uncollectible accounts of $6 in 2008 and 2007 |
425 | 288 | ||||
Fuel oil, at average cost |
50 | 44 | ||||
Gas in storage, at average cost |
245 | 215 | ||||
Materials and supplies, at average cost |
145 | 146 | ||||
Prepayments |
103 | 119 | ||||
Fair value of derivative assets |
385 | 98 | ||||
Recoverable energy costs |
345 | 213 | ||||
Deferred derivative losses |
2 | 45 | ||||
Current assets held for sale |
| 40 | ||||
Other current assets |
11 | 12 | ||||
TOTAL CURRENT ASSETS |
4,531 | 2,550 | ||||
INVESTMENTS |
380 | 378 | ||||
DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS |
||||||
Goodwill |
415 | 408 | ||||
Intangible assets, less accumulated amortization of $1 |
||||||
in 2008 and 2007 |
2 | 2 | ||||
Regulatory assets |
4,381 | 4,511 | ||||
Noncurrent assets held for sale |
| 88 | ||||
Other deferred charges and noncurrent assets |
616 | 411 | ||||
TOTAL DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS |
5,414 | 5,420 | ||||
TOTAL ASSETS |
$ | 30,254 | $ | 28,262 |
The accompanying notes are an integral part of these financial statements.
6
Consolidated Edison, Inc.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, 2008 |
December 31, 2007 | |||||
(Millions of Dollars) | ||||||
CAPITALIZATION AND LIABILITIES |
||||||
CAPITALIZATION |
||||||
Common shareholders equity (See Statement of Common Shareholders Equity) |
$ | 9,680 | $ | 9,076 | ||
Preferred stock of subsidiary |
213 | 213 | ||||
Long-term debt |
8,802 | 7,611 | ||||
TOTAL CAPITALIZATION |
18,695 | 16,900 | ||||
MINORITY INTERESTS |
| 43 | ||||
NONCURRENT LIABILITIES |
||||||
Obligations under capital leases |
19 | 22 | ||||
Provision for injuries and damages |
162 | 161 | ||||
Pensions and retiree benefits |
1,049 | 938 | ||||
Superfund and other environmental costs |
290 | 327 | ||||
Uncertain income taxes |
147 | 155 | ||||
Asset retirement obligations |
116 | 110 | ||||
Fair value of derivative liabilities |
105 | 15 | ||||
Noncurrent liabilities held for sale |
| 61 | ||||
Other noncurrent liabilities |
88 | 95 | ||||
TOTAL NONCURRENT LIABILITIES |
1,976 | 1,884 | ||||
CURRENT LIABILITIES |
||||||
Long-term debt due within one year |
582 | 809 | ||||
Notes payable |
77 | 840 | ||||
Accounts payable |
1,387 | 1,187 | ||||
Customer deposits |
260 | 249 | ||||
Accrued taxes |
283 | 26 | ||||
Accrued interest |
153 | 149 | ||||
Accrued wages |
81 | 82 | ||||
Fair value of derivative liabilities |
273 | 76 | ||||
Deferred derivative gains |
372 | 10 | ||||
Deferred income taxes - recoverable energy costs |
140 | 86 | ||||
Current liabilities held for sale |
| 28 | ||||
Other current liabilities |
341 | 309 | ||||
TOTAL CURRENT LIABILITIES |
3,949 | 3,851 | ||||
DEFERRED CREDITS AND REGULATORY LIABILITIES |
||||||
Deferred income taxes and investment tax credits |
4,660 | 4,465 | ||||
Regulatory liabilities |
940 | 1,097 | ||||
Other deferred credits |
34 | 22 | ||||
TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES |
5,634 | 5,584 | ||||
TOTAL CAPITALIZATION AND LIABILITIES |
$ | 30,254 | $ | 28,262 |
The accompanying notes are an integral part of these financial statements.
7
Consolidated Edison, Inc.
(UNAUDITED)
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(Millions of Dollars/Except Share Data) | ||||||||||||||||
OPERATING REVENUES |
||||||||||||||||
Electric |
$ | 1,957 | $ | 1,896 | $ | 3,830 | $ | 3,683 | ||||||||
Gas |
426 | 422 | 1,272 | 1,271 | ||||||||||||
Steam |
133 | 128 | 418 | 422 | ||||||||||||
Non-utility |
633 | 511 | 1,205 | 937 | ||||||||||||
TOTAL OPERATING REVENUES |
$ | 3,149 | 2,957 | 6,725 | 6,313 | |||||||||||
OPERATING EXPENSES |
||||||||||||||||
Purchased power |
1,362 | 1,254 | 2,653 | 2,372 | ||||||||||||
Fuel |
124 | 136 | 325 | 355 | ||||||||||||
Gas purchased for resale |
243 | 250 | 740 | 764 | ||||||||||||
Other operations and maintenance |
572 | 497 | 1,108 | 988 | ||||||||||||
Depreciation and amortization |
182 | 160 | 347 | 318 | ||||||||||||
Taxes, other than income taxes |
328 | 317 | 677 | 645 | ||||||||||||
Income taxes |
203 | 76 | 351 | 229 | ||||||||||||
TOTAL OPERATING EXPENSES |
3,014 | 2,690 | 6,201 | 5,671 | ||||||||||||
Gain on sale of generation projects |
295 | | 295 | | ||||||||||||
OPERATING INCOME |
430 | 267 | 819 | 642 | ||||||||||||
OTHER INCOME (DEDUCTIONS) |
||||||||||||||||
Investment and other income |
11 | 21 | 69 | 35 | ||||||||||||
Allowance for equity funds used during construction |
2 | 2 | 4 | 3 | ||||||||||||
Preferred stock dividend requirements of subsidiary |
(3 | ) | (3 | ) | (6 | ) | (6 | ) | ||||||||
Other deductions |
(5 | ) | (13 | ) | (9 | ) | (17 | ) | ||||||||
Income taxes |
(5 | ) | 5 | (21 | ) | 10 | ||||||||||
TOTAL OTHER INCOME (DEDUCTIONS) |
| 12 | 37 | 25 | ||||||||||||
INTEREST EXPENSE |
||||||||||||||||
Interest on long-term debt |
131 | 116 | 244 | 234 | ||||||||||||
Other interest |
| 14 | 16 | 29 | ||||||||||||
Allowance for borrowed funds used during construction |
(3 | ) | (2 | ) | (6 | ) | (5 | ) | ||||||||
NET INTEREST EXPENSE |
128 | 128 | 254 | 258 | ||||||||||||
INCOME FROM CONTINUING OPERATIONS |
302 | 151 | 602 | 409 | ||||||||||||
INCOME FROM DISCONTINUED OPERATIONS |
||||||||||||||||
Gain on sale of generation projects, net of tax expense of $160 in 2008 |
248 | | 248 | | ||||||||||||
Income from discontinued operations, net of tax expense of $1 and $3 in 2008 and $3 and $0 in 2007, respectively |
2 | 3 | 4 | 1 | ||||||||||||
TOTAL INCOME FROM DISCONTINUED OPERATIONS |
250 | 3 | 252 | 1 | ||||||||||||
NET INCOME |
$ | 552 | $ | 154 | $ | 854 | $ | 410 | ||||||||
EARNINGS PER COMMON SHARE - BASIC |
||||||||||||||||
Continuing operations |
$ | 1.10 | $ | 0.57 | $ | 2.21 | $ | 1.56 | ||||||||
Discontinued operations |
0.92 | 0.01 | 0.93 | 0.01 | ||||||||||||
Net income |
$ | 2.02 | $ | 0.58 | $ | 3.14 | $ | 1.57 | ||||||||
EARNINGS PER COMMON SHARE - DILUTED |
||||||||||||||||
Continuing operations |
$ | 1.10 | $ | 0.57 | $ | 2.20 | $ | 1.55 | ||||||||
Discontinued operations |
0.92 | 0.01 | 0.93 | 0.01 | ||||||||||||
Net income |
$ | 2.02 | $ | 0.58 | $ | 3.13 | $ | 1.56 | ||||||||
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK |
$ | 0.585 | $ | 0.580 | $ | 1.170 | $ | 1.160 | ||||||||
AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC (IN MILLIONS) |
272.7 | 264.9 | 272.5 | 261.9 | ||||||||||||
AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED (IN MILLIONS) |
273.5 | 266.2 | 273.3 | 263.1 |
The accompanying notes are an integral part of these financial statements.
8
Consolidated Edison, Inc.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(Millions of Dollars) | ||||||||||||||||
NET INCOME |
$ | 552 | $ | 154 | $ | 854 | $ | 410 | ||||||||
OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAXES |
||||||||||||||||
Pension plan liability adjustments, net of $1 and $1 in 2008 and $1 and $2 taxes 2007, respectively |
1 | 2 | 2 | 3 | ||||||||||||
Unrealized gains/(losses) on derivatives qualified as cash flow hedges, net of $0 and $(1) in 2008 and $(11) and $3 taxes in 2007, respectively |
| (19 | ) | (2 | ) | 4 | ||||||||||
Less: Reclassification adjustment for unrealized losses included in regulatory assets, net of $(5) taxes in 2008 |
| | (8 | ) | | |||||||||||
Less: Reclassification adjustment for losses included in net income, net of $(1) and $(1) in 2008 and $(5) and $(14) taxes in 2007, respectively |
(2 | ) | (8 | ) | (2 | ) | (20 | ) | ||||||||
TOTAL OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAXES |
3 | (9 | ) | 10 | 27 | |||||||||||
COMPREHENSIVE INCOME |
$ | 555 | $ | 145 | $ | 864 | $ | 437 |
The accompanying notes are an integral part of these financial statements.
9
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS EQUITY
(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 DECEMBER 31, 2006 |
257,456,303 | $ | 28 | $ | 3,314 | $ | 5,804 | 23,210,700 | $ | (1,001 | ) | $ | (58 | ) | $ | (83 | ) | $ | 8,004 | |||||||||||
Net income |
0 | 256 | 256 | |||||||||||||||||||||||||||
Common stock dividends |
(150 | ) | (150 | ) | ||||||||||||||||||||||||||
Issuance of common sharesdividend reinvestment and employee stock plans |
1,327,669 | 61 | 61 | |||||||||||||||||||||||||||
Stock options |
| |||||||||||||||||||||||||||||
Other comprehensive loss |
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 sharespublic offering |
11,000,000 | 1 | 559 | (2 | ) | 558 | ||||||||||||||||||||||||
Issuance of common sharesdividend reinvestment and employee stock plans |
1,089,068 | 52 | 52 | |||||||||||||||||||||||||||
Other comprehensive income |
(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 | |||||||||||
BALANCE AS OF DECEMBER 31, 2007 |
272,024,874 | $ | 29 | $ | 4,038 | $ | 6,113 | 23,210,700 | $ | (1,001 | ) | $ | (60 | ) | $ | (43 | ) | $ | 9,076 | |||||||||||
Net income |
303 | 303 | ||||||||||||||||||||||||||||
Common stock dividends |
(160 | ) | (160 | ) | ||||||||||||||||||||||||||
Issuance of common sharesdividend reinvestment and employee stock plans |
476,809 | 21 | 21 | |||||||||||||||||||||||||||
Other comprehensive income |
7 | 7 | ||||||||||||||||||||||||||||
Adjustment for adoption of FASB Statement No. 157 |
17 | 17 | ||||||||||||||||||||||||||||
BALANCE AS OF MARCH 31, 2008 |
272,501,683 | $ | 29 | $ | 4,059 | $ | 6,273 | 23,210,700 | $ | (1,001 | ) | $ | (60 | ) | $ | (36 | ) | $ | 9,264 | |||||||||||
Net income |
552 | 552 | ||||||||||||||||||||||||||||
Common stock dividends |
(162 | ) | (162 | ) | ||||||||||||||||||||||||||
Issuance of common sharesdividend reinvestment and employee stock plans |
493,092 | 23 | 23 | |||||||||||||||||||||||||||
Other comprehensive income |
3 | 3 | ||||||||||||||||||||||||||||
BALANCE AS OF JUNE 30, 2008 |
272,994,775 | $ | 29 | $ | 4,082 | $ | 6,663 | 23,210,700 | $ | (1,001 | ) | $ | (60 | ) | $ | (33 | ) | $ | 9,680 |
The accompanying notes are an integral part of these financial statements.
10
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended June 30, |
||||||||
2008 |
2007 |
|||||||
OPERATING ACTIVITIES |
||||||||
Net Income |
$ | 854 | $ | 410 | ||||
PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME |
||||||||
Depreciation and amortization |
347 | 331 | ||||||
Deferred income taxes |
202 | 89 | ||||||
Rate case amortization and accruals |
(105 | ) | (156 | ) | ||||
Net transmission and distribution reconciliation |
(52 | ) | (98 | ) | ||||
Common equity component of allowance for funds used during construction |
(4 | ) | (3 | ) | ||||
Prepaid pension costs (net of capitalized amounts) |
| 71 | ||||||
Pre-tax gain on sale of generation projects |
(704 | ) | | |||||
Other non-cash items (net) |
(223 | ) | (55 | ) | ||||
CHANGES IN ASSETS AND LIABILITIES |
||||||||
Accounts receivablecustomers, less allowance for uncollectibles |
69 | (42 | ) | |||||
Materials and supplies, including fuel oil and gas in storage |
(35 | ) | 85 | |||||
Other receivables and other current assets |
(148 | ) | 143 | |||||
Prepayments |
16 | 32 | ||||||
Recoverable energy costs |
(33 | ) | 74 | |||||
Accounts payable |
335 | (7 | ) | |||||
Pensions and retiree benefits |
63 | 13 | ||||||
Accrued taxes |
257 | 22 | ||||||
Accrued interest |
4 | (3 | ) | |||||
Deferred charges, noncurrent assets and other regulatory assets |
(230 | ) | (257 | ) | ||||
Deferred credits and other regulatory liabilities |
638 | 146 | ||||||
Other assets |
133 | (10 | ) | |||||
Other liabilities |
(94 | ) | 36 | |||||
NET CASH FLOWS FROM OPERATING ACTIVITIES |
1,290 | 821 | ||||||
INVESTING ACTIVITIES |
||||||||
Utility construction expenditures (excluding capitalized support costs of $- and $(30) in 2008 and 2007, respectively) |
(1,068 | ) | (891 | ) | ||||
Cost of removal less salvage |
(90 | ) | (73 | ) | ||||
Non-utility construction expenditures |
3 | (3 | ) | |||||
Common equity component of allowance for funds used during construction |
4 | 3 | ||||||
Increase in restricted cash |
| 1 | ||||||
Proceeds from sale of generation projects |
1,477 | | ||||||
Proceeds from sale of properties |
| 30 | ||||||
Purchase of ownership interest in Hawkeye lease |
(12 | ) | | |||||
Purchase of ownership interest in Newington SCS |
(20 | ) | | |||||
NET CASH FLOWS FROM/(USED) IN INVESTING ACTIVITIES |
294 | (933 | ) | |||||
FINANCING ACTIVITIES |
||||||||
Net proceeds from/(payments of) short-term debt |
(763 | ) | 198 | |||||
Retirement of long-term debt |
(186 | ) | (359 | ) | ||||
Issuance of long-term debt |
1,200 | | ||||||
Issuance of common stock |
19 | 651 | ||||||
Debt issuance costs |
(9 | ) | | |||||
Common stock dividends |
(298 | ) | (286 | ) | ||||
NET CASH FLOWS FROM/(USED) FINANCING ACTIVITIES |
(37 | ) | 204 | |||||
CASH AND TEMPORARY CASH INVESTMENTS: |
||||||||
NET CHANGE FOR THE PERIOD |
1,547 | 92 | ||||||
BALANCE AT BEGINNING OF PERIOD |
210 | 94 | ||||||
BALANCE AT END OF PERIOD |
$ | 1,757 | $ | 186 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 244 | $ | 226 | ||||
Income taxes |
$ | 87 | $ | 75 |
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, 2008 |
December 31, 2007 | |||||
(Millions of Dollars) | ||||||
ASSETS |
||||||
UTILITY PLANT, AT ORIGINAL COST |
||||||
Electric |
$ | 15,795 | $ | 15,027 | ||
Gas |
3,133 | 2,999 | ||||
Steam |
1,785 | 1,755 | ||||
General |
1,608 | 1,599 | ||||
TOTAL |
22,321 | 21,380 | ||||
Less: Accumulated depreciation |
4,485 | 4,360 | ||||
Net |
17,836 | 17,020 | ||||
Construction work in progress |
931 | 973 | ||||
NET UTILITY PLANT |
18,767 | 17,993 | ||||
NON-UTILITY PROPERTY |
||||||
Non-utility property, less accumulated depreciation of $18 in 2008 and 2007 |
11 | 12 | ||||
NET PLANT |
18,778 | 18,005 | ||||
CURRENT ASSETS |
||||||
Cash and temporary cash investments |
341 | 121 | ||||
Accounts receivable - customers, less allowance for uncollectible accounts of $47 and $43 in 2008 and 2007, respectively |
748 | 832 | ||||
Other receivables, less allowance for uncollectible accounts of $3 and $4 in 2008 and 2007, respectively |
190 | 159 | ||||
Accounts receivable from affiliated companies |
182 | 96 | ||||
Fuel oil, at average cost |
50 | 44 | ||||
Gas in storage, at average cost |
197 | 170 | ||||
Materials and supplies, at average cost |
136 | 138 | ||||
Prepayments |
77 | 81 | ||||
Fair value of derivative assets |
128 | 66 | ||||
Recoverable energy costs |
334 | 190 | ||||
Deferred derivative losses |
1 | 44 | ||||
Other current assets |
4 | 5 | ||||
TOTAL CURRENT ASSETS |
2,388 | 1,946 | ||||
INVESTMENTS |
114 | 111 | ||||
DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS |
||||||
Regulatory assets |
3,979 | 4,103 | ||||
Other deferred charges and noncurrent assets |
394 | 339 | ||||
TOTAL DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS |
4,373 | 4,442 | ||||
TOTAL ASSETS |
$ | 25,653 | $ | 24,504 |
The accompanying notes are an integral part of these financial statements.
12
Consolidated Edison Company of New York, Inc.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, 2008 | December 31, 2007 | |||||
(Millions of Dollars) | ||||||
CAPITALIZATION AND LIABILITIES |
||||||
CAPITALIZATION |
||||||
Common shareholder's equity (See Statement of Common Shareholder's Equity) |
$ | 8,191 | $ | 8,086 | ||
Preferred stock |
213 | 213 | ||||
Long-term debt |
8,095 | 7,172 | ||||
TOTAL CAPITALIZATION |
16,499 | 15,471 | ||||
NONCURRENT LIABILITIES |
||||||
Obligations under capital leases |
19 | 22 | ||||
Provision for injuries and damages |
155 | 154 | ||||
Pensions and retiree benefits |
740 | 638 | ||||
Superfund and other environmental costs |
234 | 271 | ||||
Uncertain income taxes |
134 | 142 | ||||
Asset retirement obligations |
116 | 110 | ||||
Fair value of derivative liabilities |
| 4 | ||||
Other noncurrent liabilities |
75 | 77 | ||||
TOTAL NONCURRENT LIABILITIES |
1,473 | 1,418 | ||||
CURRENT LIABILITIES |
||||||
Long-term debt due within one year |
375 | 280 | ||||
Notes payable |
| 555 | ||||
Accounts payable |
1,015 | 899 | ||||
Accounts payable to affiliated companies |
32 | 19 | ||||
Customer deposits |
245 | 234 | ||||
Accrued taxes |
42 | 30 | ||||
Accrued interest |
137 | 134 | ||||
Accrued wages |
75 | 74 | ||||
Fair value of derivative liabilities |
47 | 20 | ||||
Deferred derivative gains |
263 | 5 | ||||
Deferred income taxesrecoverable energy costs |
136 | 77 | ||||
Other current liabilities |
309 | 276 | ||||
TOTAL CURRENT LIABILITIES |
2,676 | 2,603 | ||||
DEFERRED CREDITS AND REGULATORY LIABILITIES |
||||||
Deferred income taxes and investment tax credits |
4,214 | 4,018 | ||||
Regulatory liabilities |
760 | 976 | ||||
Other deferred credits |
31 | 18 | ||||
TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES |
5,005 | 5,012 | ||||
TOTAL CAPITALIZATION AND LIABILITIES |
$ | 25,653 | $ | 24,504 |
The accompanying notes are an integral part of these financial statements.
13
Consolidated Edison Company of New York, Inc.
(UNAUDITED)
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(Millions of Dollars) | ||||||||||||||||
OPERATING REVENUES |
||||||||||||||||
Electric |
$ | 1,778 | $ | 1,731 | $ | 3,492 | $ | 3,374 | ||||||||
Gas |
383 | 377 | 1,124 | 1,113 | ||||||||||||
Steam |
133 | 128 | 418 | 422 | ||||||||||||
TOTAL OPERATING REVENUES |
2,294 | 2,236 | 5,034 | 4,909 | ||||||||||||
OPERATING EXPENSES |
||||||||||||||||
Purchased power |
704 | 713 | 1,425 | 1,369 | ||||||||||||
Fuel |
124 | 123 | 322 | 335 | ||||||||||||
Gas purchased for resale |
215 | 216 | 642 | 650 | ||||||||||||
Other operations and maintenance |
488 | 431 | 950 | 863 | ||||||||||||
Depreciation and amortization |
171 | 147 | 325 | 292 | ||||||||||||
Taxes, other than income taxes |
313 | 303 | 645 | 615 | ||||||||||||
Income taxes |
41 | 61 | 154 | 197 | ||||||||||||
TOTAL OPERATING EXPENSES |
2,056 | 1,994 | 4,463 | 4,321 | ||||||||||||
OPERATING INCOME |
238 | 242 | 571 | 588 | ||||||||||||
OTHER INCOME (DEDUCTIONS) |
||||||||||||||||
Investment and other income |
10 | 15 | 13 | 25 | ||||||||||||
Allowance for equity funds used during construction |
2 | 2 | 4 | 3 | ||||||||||||
Other deductions |
(5 | ) | (3 | ) | (7 | ) | (7 | ) | ||||||||
Income taxes |
(4 | ) | (2 | ) | (3 | ) | | |||||||||
TOTAL OTHER INCOME (DEDUCTIONS) |
3 | 12 | 7 | 21 | ||||||||||||
INTEREST EXPENSE |
||||||||||||||||
Interest on long-term debt |
121 | 105 | 227 | 209 | ||||||||||||
Other interest |
(2 | ) | 9 | 10 | 23 | |||||||||||
Allowance for borrowed funds used during construction |
(2 | ) | (2 | ) | (5 | ) | (4 | ) | ||||||||
NET INTEREST EXPENSE |
117 | 112 | 232 | 228 | ||||||||||||
NET INCOME |
124 | 142 | 346 | 381 | ||||||||||||
PREFERRED STOCK DIVIDEND REQUIREMENTS |
3 | 3 | 6 | 6 | ||||||||||||
NET INCOME FOR COMMON STOCK |
$ | 121 | $ | 139 | $ | 340 | $ | 375 |
The accompanying notes are an integral part of these financial statements.
14
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, | |||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||
(Millions of Dollars) | ||||||||||||
NET INCOME |
$ | 124 | $ | 142 | $ | 346 | $ | 381 | ||||
OTHER COMPREHENSIVE INCOME, NET OF TAXES |
| | | | ||||||||
COMPREHENSIVE INCOME |
$ | 124 | $ | 142 | $ | 346 | $ | 381 |
The accompanying notes are an integral part of these financial statements.
15
Consolidated Edison Company of New York, Inc.
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDER'S EQUITY
(UNAUDITED)
Common Stock |
Additional Paid- In Capital |
Retained Earnings |
Repurchased Con Edison Stock |
Capital Stock Expense |
Accumulated Other Comprehensive Loss |
Total |
||||||||||||||||||||||
Shares |
Amount |
|||||||||||||||||||||||||||
(Millions of Dollars/Except Share Data) | ||||||||||||||||||||||||||||
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 | ||||||||||
BALANCE AS OF DECEMBER 31, 2007 |
235,488,094 | $ | 589 | $ | 2,912 | $ | 5,616 | $ | (962 | ) | $ | (60 | ) | $ | (9 | ) | $ | 8,086 | ||||||||||
Net income |
222 | 222 | ||||||||||||||||||||||||||
Common stock dividend to parent |
(139 | ) | (139 | ) | ||||||||||||||||||||||||
Capital contribution by parent |
23 | 23 | ||||||||||||||||||||||||||
Cumulative preferred dividends |
(3 | ) | (3 | ) | ||||||||||||||||||||||||
BALANCE AS OF MARCH 31, 2008 |
235,488,094 | $ | 589 | $ | 2,935 | $ | 5,696 | $ | (962 | ) | $ | (60 | ) | $ | (9 | ) | $ | 8,189 | ||||||||||
Net income |
124 | 124 | ||||||||||||||||||||||||||
Common stock dividend to parent |
(145 | ) | (145 | ) | ||||||||||||||||||||||||
Capital contribution by parent |
26 | 26 | ||||||||||||||||||||||||||
Cumulative preferred dividends |
(3 | ) | (3 | ) | ||||||||||||||||||||||||
BALANCE AS OF JUNE 30, 2008 |
235,488,094 | $ | 589 | $ | 2,961 | $ | 5,672 | $ | (962 | ) | $ | (60 | ) | $ | (9 | ) | $ | 8,191 |
The accompanying notes are an integral part of these financial statements.
16
Consolidated Edison Company of New York, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended June 30, |
||||||||
2008 | 2007 | |||||||
(Millions of Dollars) | ||||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 346 | $ | 381 | ||||
PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME |
||||||||
Depreciation and amortization |
325 | 292 | ||||||
Deferred income taxes |
193 | 86 | ||||||
Rate case amortization and accruals |
(105 | ) | (156 | ) | ||||
Net transmission and distribution reconciliation |
(52 | ) | (98 | ) | ||||
Common equity component of allowance for funds used during construction |
(4 | ) | (3 | ) | ||||
Prepaid pension costs (net of capitalized amounts) |
| 12 | ||||||
Other non-cash items (net) |
(27 | ) | (32 | ) | ||||
CHANGES IN ASSETS AND LIABILITIES |
||||||||
Accounts receivablecustomers, less allowance for uncollectibles |
84 | (3 | ) | |||||
Materials and supplies, including fuel oil and gas in storage |
(31 | ) | 45 | |||||
Other receivables and other current assets |
(171 | ) | 89 | |||||
Prepayments |
4 | 7 | ||||||
Recoverable energy costs |
(42 | ) | 69 | |||||
Accounts payable |
129 | (18 | ) | |||||
Pensions and retiree benefits |
44 | (7 | ) | |||||
Accrued taxes |
12 | 35 | ||||||
Accrued interest |
3 | 1 | ||||||
Deferred charges, noncurrent assets and other regulatory assets |
(119 | ) | (248 | ) | ||||
Deferred credits and other regulatory liabilities |
473 | 156 | ||||||
Other assets |
| (1 | ) | |||||
Other liabilities |
3 | 48 | ||||||
NET CASH FLOWS FROM OPERATING ACTIVITIES |
1,065 | 655 | ||||||
INVESTING ACTIVITIES |
||||||||
Utility construction expenditures (excluding capitalized support costs of $- and $(30) in 2008 and 2007, respectively) |
(1,031 | ) | (852 | ) | ||||
Cost of removal less salvage |
(88 | ) | (71 | ) | ||||
Common equity component of allowance for funds used during construction |
4 | 3 | ||||||
Proceeds from loan to affiliate |
55 | | ||||||
Proceeds from sale of properties |
| 30 | ||||||
NET CASH FLOWS USED IN INVESTING ACTIVITIES |
(1,060 | ) | (890 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Net payments of short-term debt |
(555 | ) | | |||||
Retirement of long-term debt |
(180 | ) | | |||||
Issuance of long-term debt |
1,200 | | ||||||
Debt issuance costs |
(9 | ) | | |||||
Capital contribution by parent |
49 | 516 | ||||||
Dividend to parent |
(284 | ) | (262 | ) | ||||
Preferred stock dividends |
(6 | ) | (6 | ) | ||||
NET CASH FLOWS FROM FINANCING ACTIVITIES |
215 | 248 | ||||||
CASH AND TEMPORARY CASH INVESTMENTS: |
||||||||
NET CHANGE FOR THE PERIOD |
220 | 13 | ||||||
BALANCE AT BEGINNING OF PERIOD |
121 | 47 | ||||||
BALANCE AT END OF PERIOD |
$ | 341 | $ | 60 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 223 | $ | 203 | ||||
Income taxes |
$ | 70 | $ | 102 |
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, 2007 (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 on Form 10-Q for the quarterly period ended March 31, 2008 (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 these notes 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 participates in infrastructure projects. During the second quarter of 2008, Con Edison Development and its subsidiary, CED/SCS Newington, LLC, completed the sale of their ownership interests in power generating projects with an aggregate capacity of approximately 1,706 megawatts. See Note N.
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, 2008 and 2007, 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) | 2008 | 2007 | 2008 | 2007 | ||||||||
Income from continuing operations |
$ | 302 | $ | 151 | $ | 601 | $ | 409 | ||||
Income from discontinued operations, net of tax |
250 | 3 | 253 | 1 | ||||||||
Net income |
$ | 552 | $ | 154 | $ | 854 | $ | 410 | ||||
Weighted average common shares outstanding - Basic |
272.7 | 264.9 | 272.5 | 261.8 | ||||||||
Add: Incremental shares attributable to effect of potentially dilutive securities |
0.8 | 1.3 | 0.8 | 1.3 | ||||||||
Adjusted weighted average common shares outstanding - Diluted |
273.5 | 266.2 | 273.3 | 263.1 | ||||||||
EARNINGS PER COMMON SHARE - BASIC |
||||||||||||
Continuing operations |
$ | 1.10 | $ | 0.57 | $ | 2.21 | $ | 1.56 | ||||
Discontinued operations |
0.92 | 0.01 | 0.93 | 0.01 | ||||||||
Net income |
$ | 2.02 | $ | 0.58 | $ | 3.14 | $ | 1.57 | ||||
EARNINGS PER COMMON SHARE DILUTED |
||||||||||||
Continuing operations |
$ | 1.10 | $ | 0.57 | $ | 2.20 | $ | 1.55 | ||||
Discontinued operations |
0.92 | 0.01 | 0.93 | 0.01 | ||||||||
Net income |
$ | 2.02 | $ | 0.58 | $ | 3.13 | $ | 1.56 |
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.
19
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Rate Agreements
Con Edison of New York - Electric
In May 2008, Con Edison of New York filed a proposal with the New York State Public Service Commission (PSC) for a three-year electric rate plan with level annual rate increases of $556.7 million effective April 2009, 2010 and 2011. The filing reflects a return on common equity of 10.0 percent and a common equity ratio of 48.0 percent.
The filing reflects efforts by Con Edison of New York to mitigate the impact on its customers of rate increases, including its proposed targeted energy efficiency programs and its proposal to begin to accrue revenues in the month electric service is provided instead of when it bills customers for the service.
The filing also includes an alternative proposal for an electric rate increase of $654 million, effective April 2009, to recover increased property taxes ($200 million); additional operating costs and new and/or expanded operating programs ($165 million); carrying charges on additional infrastructure investments ($230 million); and an increased return on equity as compared to the return on equity reflected in current electric rates ($115 million).
The company is requesting that expenses for pension and other post-retirement benefits, property taxes, municipal infrastructure support and environmental site investigation and remediation be reconciled to amounts reflected in rates and that increases, if any, in certain expenses above a four percent annual inflation rate be deferred as a regulatory asset if its annual return on common equity is less than the authorized return. The filing reflects continuation of the revenue decoupling mechanism that eliminates the direct relationship between the companys level of delivery revenues and profits. It also reflects continuation of the provisions pursuant to which the company recovers its purchased power and fuel costs from customers.
O&R - Electric
In July 2008, the PSC approved a Joint Proposal among O&R, the PSC staff and other parties for the rates O&R can charge its New York customers for electric service from July 2008 through June 2011. The rate plan approved by the PSC provides for electric rate increases of $15.6 million, $15.6 million and $5.7 million effective July 1, 2008, 2009 and 2010, respectively, and the collection of an additional $9.9 million during the 12-month period beginning July 1, 2010.
The Joint Proposal reflected the following major items:
| an annual return on common equity of 9.4 percent; |
20
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
| most of any actual earnings above a 10.2 percent return on equity (based on actual average common equity ratio, subject to a 50 percent maximum) are to be applied to reduce regulatory assets for pension and other post-retirement benefit expenses; |
| deferral as a regulatory asset or regulatory liability, as the case may be, of the difference between actual pension and other post-retirement benefit expenses, environmental remediation expenses, property taxes, tax-exempt debt costs and certain other expenses and amounts for those expenses reflected in rates; |
| deferral as a regulatory liability of the revenue requirement impact (i.e., return on investment, depreciation and income taxes) of the amount, if any, by which actual transmission and distribution related capital expenditures are less than amounts reflected in rates; |
| deferral as a regulatory asset of increases, if any, in certain expenses above a 4 percent annual inflation rate, but only if the actual annual return on common equity is less than 9.4 percent; |
| potential negative earnings adjustments of approximately $2 million to $3 million annually if certain customer service and system reliability performance targets are not met; |
| implementation of a revenue decoupling mechanism under which actual energy delivery revenues would be compared, on a periodic basis, with the authorized delivery revenues with the difference accrued, with interest, for refund to, or recovery from, customers, as applicable; |
| continuation of the rate provisions pursuant to which the company recovers its purchased power costs from customers; and |
| withdrawal of the litigation O&R commenced seeking to annul the PSCs March and October 2007 orders relating to O&Rs electric rates. |
Con Edison of New York - Steam
In June 2008, Con Edison of New York entered into a Joint Proposal with the PSC staff and other parties with respect to the rates the company can charge its customers for steam service. The Joint Proposal, which is subject to PSC approval, covers the period from October 1, 2008 through September 30, 2010. The Joint Proposal provides for steam rate increases of $43.7 million effective October 1, 2008 and 2009. The PSC is expected to consider the Joint Proposal in September 2008.
The Joint Proposal reflects the following major items:
| an annual return on common equity of 9.3 percent; |
21
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
| any actual earnings above a 10.1 percent return on equity (based on actual average common equity ratio, subject to a 50 percent maximum) are to be shared as follows: half will be deferred for the benefit of customers and the other half is to be retained by the company (with half of the companys share subject to offset to reduce any regulatory assets for under-collections of property taxes); |
| deferral as a regulatory asset or regulatory liability, as the case may be, of the difference between (i) actual costs for pension and other post-retirement benefits, environmental remediation, property taxes, tax-exempt debt, municipal infrastructure support and certain other costs and (ii) amounts for those costs reflected in rates (90 percent of the difference in the case of property taxes and interference costs); |
| deferral as a regulatory liability of the revenue requirement impact (i.e., return on investment, depreciation and income taxes) of the amount, if any, by which the actual capital expenditures related to steam production plant are less than amounts reflected in rates; |
| potential negative earnings adjustments (revenue reductions) of approximately $950,000 to $1 million annually if certain business development, customer service and safety performance targets are not met; |
| amortization of certain regulatory assets and liabilities, the net effect of which will be a non-cash increase in steam revenues of $20.3 million over the two-year period covered by the Joint Proposal; and |
| continuation of the rate provisions pursuant to which the company recovers its fuel and purchased steam costs from customers. |
22
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Regulatory Assets and Liabilities
Regulatory assets and liabilities at June 30, 2008 and December 31, 2007 were comprised of the following items:
Con Edison | Con Edison of New York | ||||||||||||
(Millions of Dollars) | 2008 | 2007 | 2008 | 2007 | |||||||||
Regulatory assets |
|||||||||||||
Unrecognized pension and other postretirement costs |
$ | 2,097 | $ | 2,106 | $ | 1,959 | $ | 1,956 | |||||
Future federal income tax |
1,168 | 1,112 | 1,112 | 1,057 | |||||||||
Environmental remediation costs |
385 | 378 | 319 | 312 | |||||||||
World Trade Center restoration costs |
149 | 154 | 149 | 154 | |||||||||
Pension and other postretirement benefits deferrals |
90 | 152 | 34 | 96 | |||||||||
Revenue taxes |
77 | 77 | 75 | 75 | |||||||||
O&R transition bond charges |
61 | 63 | | | |||||||||
Unbilled gas revenue |
44 | 44 | 44 | 44 | |||||||||
Workers compensation |
38 | 41 | 38 | 41 | |||||||||
Net electric deferrals |
36 | | 36 | | |||||||||
Other retirement program costs |
15 | 16 | 15 | 16 | |||||||||
Asbestos-related costs |
10 | 10 | 10 | 10 | |||||||||
Deferred derivative losses - long-term |
1 | 5 | 1 | 4 | |||||||||
Net T&D reconciliation |
| 142 | | 142 | |||||||||
Recoverable energy costs |
| 50 | | 50 | |||||||||
Electric rate increase accrual |
| 14 | | 14 | |||||||||
Other |
210 | 147 | 187 | 132 | |||||||||
Regulatory assets |
4,381 | 4,511 | 3,979 | 4,103 | |||||||||
Deferred derivative losses - current |
2 | 45 | 1 | 44 | |||||||||
Recoverable energy costs - current |
345 | 213 | 334 | 190 | |||||||||
Total Regulatory Assets |
$ | 4,728 | $ | 4,769 | $ | 4,314 | $ | 4,337 | |||||
Regulatory liabilities |
|||||||||||||
Allowance for cost of removal less salvage |
$ | 398 | $ | 422 | $ | 336 | $ | 362 | |||||
Deferred derivative gains - long-term |
152 | 21 | 78 | 8 | |||||||||
Refundable energy costs |
78 | 29 | 52 | | |||||||||
Net electric deferrals |
57 | 33 | 57 | 33 | |||||||||
Gain on sale of First Avenue properties |
32 | 124 | 32 | 124 | |||||||||
Gas excess earnings |
15 | 10 | 15 | 10 | |||||||||
Gas interruptible sales credits |
10 | 10 | 10 | 10 | |||||||||
Transmission congestion contracts |
7 | 40 | 7 | 40 | |||||||||
Net steam deferrals |
7 | 21 | 7 | 21 | |||||||||
EPA SO2 allowance proceeds electric and steam |
6 | 18 | 6 | 18 | |||||||||
Property tax reconciliation |
5 | 41 | 5 | 41 | |||||||||
Prior year deferred tax amortization |
2 | 51 | 2 | 51 | |||||||||
NYS tax law changes |
1 | 42 | | 41 | |||||||||
DC service incentive |
1 | 10 | 1 | 10 | |||||||||
Interest on federal income tax refund |
| 41 | | 41 | |||||||||
2004 electric, gas and steam one-time rate agreement charges |
| 16 | | 16 | |||||||||
Gain on sale of W. 24th St. property |
| 10 | | 10 | |||||||||
Other |
169 | 158 | 152 | 140 | |||||||||
Regulatory liabilities |
940 | 1,097 | 760 | 976 | |||||||||
Deferred derivative gains current |
372 | 10 | 263 | 5 | |||||||||
Total Regulatory Liabilities |
$ | 1,312 | $ | 1,107 | $ | 1,023 | $ | 981 |
23
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Power Outage Proceedings
In July 2008, the PSC approved a Joint Proposal among Con Edison of New York, the PSC staff and other parties with respect to the July 2006 Queens outage. The PSC order provides that (i) the company will make available $17 million for the benefit of the communities affected by the outage, including customer bill credits, and will not recover from customers $40 million of capital costs incurred to replace and repair electric delivery facilities and $6 million of related carrying charges; and (ii) the company will be released from all prudence-related claims that were or could have been asserted in any PSC proceeding relating to the outage other than with respect to any damage to the Long Island City network, or incremental costs, that are neither known nor reasonably foreseeable.
In June 2008, the PSC concluded that Con Edison of New York is not liable for food spoilage claims in connection with the September 2006 outage in Westchester resulting from Tropical Storm Ernesto.
Note C - Long-term Debt
Reference is made to Note C 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.
At June 30, 2008, $49 million of the $55 million of O&Rs weekly-rate, tax-exempt debt that is insured by Financial Guaranty Insurance Company (Series 1994A Debt), and $1 million of the $44 million of such debt insured by Ambac Assurance Company (Series 1995 A Debt), had been tendered by bondholders and purchased with funds drawn under letters of credit maintained as liquidity facilities for the tax-exempt debt. O&R reimbursed the bank for the funds used to purchase the tendered bonds, together with interest thereon.
In June 2008, Con Edison issued $326 million of 8.71 percent long-term unsecured notes due in 2022 in exchange for a like amount of secured project debt in connection with the purchase by a subsidiary of Con Edison Development of a 525 MW generating project in Newington, New Hampshire. Upon completion of the exchange, the project debt was cancelled. Previously, the project had been leased by the subsidiary and Con Edison had guaranteed the payment of certain obligations in connection with the project. See Notes H and P to the financial statements in Item 8 of the Form 10-K. The new notes are, and the project debt had been, included in Con Edisons consolidated balance sheet. Con Edison Development subsequently completed the sale of its ownership interests in the project. See Note N.
The new notes mature, bear interest and are subject to substantially the same terms as the project debt (other than terms relating to the project being leased or security for the debt), including the payment of a make-whole premium in connection with any optional prepayment. There are no significant debt covenants applicable to the notes other than covenants requiring Con Edison to pay principal and
24
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
interest when due, not to consolidate with or merge into any other corporation and to continue its business unless certain conditions are met, and not to permit its ratio of consolidated debt to consolidated capital to exceed 0.675 to 1. The failure to comply with applicable covenants would, except as provided, constitute an event of default with respect to the notes. Events of default with respect to the notes also include events of default of other indebtedness of Con Edison or its material subsidiaries having a then outstanding principal balance in excess of $100 million. If an event of default with respect to the notes occurs and is continuing, the note holders may, subject to certain conditions, declare the unpaid principal amount of the notes, together with any accrued and unpaid interest and applicable make-whole premium, due and payable.
Note D - 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 D to the financial statements in Part I, Item 1 of the First Quarter Form 10-Q.
At June 30, 2008, Con Edison had $77 million of commercial paper outstanding, none of which was outstanding under Con Edison of New Yorks program. The weighted average interest rate at June 30, 2008 was 3.0 percent for Con Edison. At June 30, 2007, Con Edison had $314 million of commercial paper outstanding, none of which was outstanding under Con Edison of New Yorks program. The weighted average interest rate at June 30, 2007 was 5.5 percent for Con Edison. At June 30, 2008 and 2007, no loans were outstanding under the Companies credit agreements and $115 million and $47 million of letters of credit were outstanding, respectively.
25
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note E - Pension Benefits
Reference is made to Note E 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 benefit costs for the three and six months ended June 30, 2008 and 2007 were as follows:
For the Three Months Ended June 30, | ||||||||||||||||
Con Edison | Con Edison of New York |
|||||||||||||||
(Millions of Dollars) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Service cost including administrative expenses |
$ | 34 | $ | 33 | $ | 32 | $ | 31 | ||||||||
Interest cost on projected benefit obligation |
129 | 123 | 121 | 115 | ||||||||||||
Expected return on plan assets |
(173 | ) | (162 | ) | (165 | ) | (155 | ) | ||||||||
Amortization of net actuarial loss |
48 | 40 | 42 | 34 | ||||||||||||
Amortization of prior service costs |
2 | 3 | 2 | 3 | ||||||||||||
NET PERIODIC BENEFIT COST |
$ | 40 | $ | 37 | $ | 32 | $ | 28 | ||||||||
Amortization of regulatory asset* |
1 | 1 | 1 | 1 | ||||||||||||
TOTAL PERIODIC BENEFIT COST |
$ | 41 | $ | 38 | $ | 33 | $ | 29 | ||||||||
Cost capitalized |
(14 | ) | (11 | ) | (11 | ) | (8 | ) | ||||||||
Cost deferred |
(5 | ) | (20 | ) | (7 | ) | (18 | ) | ||||||||
Cost charged to operating expenses |
$ | 22 | $ | 7 | $ | 15 | $ | 3 |
* | 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) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Service cost including administrative expenses |
$ | 69 | $ | 66 | $ | 64 | $ | 61 | ||||||||
Interest cost on projected benefit obligation |
258 | 246 | 241 | 230 | ||||||||||||
Expected return on plan assets |
(346 | ) | (323 | ) | (330 | ) | (309 | ) | ||||||||
Amortization of net actuarial loss |
96 | 80 | 85 | 69 | ||||||||||||
Amortization of prior service costs |
4 | 5 | 4 | 5 | ||||||||||||
NET PERIODIC BENEFIT COST |
$ | 81 | $ | 74 | $ | 64 | $ | 56 | ||||||||
Amortization of regulatory asset* |
2 | 2 | 2 | 2 | ||||||||||||
TOTAL PERIODIC BENEFIT COST |
$ | 83 | $ | 76 | $ | 66 | $ | 58 | ||||||||
Cost capitalized |
(28 | ) | (23 | ) | (23 | ) | (18 | ) | ||||||||
Cost deferred |
(25 | ) | (49 | ) | (28 | ) | (45 | ) | ||||||||
Cost charged/(credited) to operating expenses |
$ | 30 | $ | 4 | $ | 15 | $ | (5 | ) |
* | 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. |
26
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note F - Other Postretirement Benefits
Reference is made to Note F to the financial statements in Item 8 of the Form 10-K and Note F 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, 2008 and 2007 were as follows:
For the Three Months Ended June 30, | ||||||||||||||||
Con Edison | Con Edison of New York |
|||||||||||||||
(Millions of Dollars) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Service cost |
$ | 5 | $ | 5 | $ | 4 | $ | 4 | ||||||||
Interest cost on accumulated other postretirement benefit obligation |
23 | 23 | 21 | 21 | ||||||||||||
Expected return on plan assets |
(21 | ) | (20 | ) | (19 | ) | (19 | ) | ||||||||
Amortization of net actuarial loss |
17 | 16 | 14 | 14 | ||||||||||||
Amortization of prior service cost |
(3 | ) | (3 | ) | (4 | ) | (3 | ) | ||||||||
Amortization of transition obligation |
1 | 1 | 1 | 1 | ||||||||||||
NET PERIODIC POSTRETIREMENT BENEFIT COST |
$ | 22 | $ | 22 | $ | 17 | $ | 18 | ||||||||
Cost capitalized |
(7 | ) | (8 | ) | (6 | ) | (6 | ) | ||||||||
Cost deferred |
(4 | ) | (9 | ) | (2 | ) | (9 | ) | ||||||||
Cost charged to operating expenses |
$ | 11 | $ | 5 | $ | 9 | $ | 3 |
For the Six Months Ended June 30, | ||||||||||||||||
Con Edison | Con Edison of New York |
|||||||||||||||
(Millions of Dollars) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Service cost |
$ | 10 | $ | 9 | $ | 8 | $ | 7 | ||||||||
Interest cost on accumulated other postretirement benefit obligation |
47 | 46 | 42 | 41 | ||||||||||||
Expected return on plan assets |
(43 | ) | (40 | ) | (39 | ) | (37 | ) | ||||||||
Amortization of net actuarial loss |
34 | 33 | 29 | 29 | ||||||||||||
Amortization of prior service cost |
(6 | ) | (7 | ) | (7 | ) | (7 | ) | ||||||||
Amortization of transition obligation |
2 | 2 | 2 | 2 | ||||||||||||
NET PERIODIC POSTRETIREMENT BENEFIT COST |
$ | 44 | $ | 43 | $ | 35 | $ | 35 | ||||||||
Cost capitalized |
(15 | ) | (15 | ) | (12 | ) | (12 | ) | ||||||||
Cost deferred |
(11 | ) | (20 | ) | (9 | ) | (18 | ) | ||||||||
Cost charged to operating expenses |
$ | 18 | $ | 8 | $ | 14 | $ | 5 |
27
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note G - 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 and any neighboring areas to which contamination may have migrated, 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 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 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, 2008 and December 31, 2007 were as follows:
Con Edison | Con Edison of New York | ||||||||||||
(Millions of Dollars) | 2008 | 2007 | 2008 | 2007 | |||||||||
Accrued Liabilities: |
|||||||||||||
Manufactured gas plant sites |
$ | 242 | $ | 267 | $ | 187 | $ | 212 | |||||
Other Superfund Sites |
48 | 60 | 47 | 59 | |||||||||
Total |
$ | 290 | $ | 327 | $ | 234 | $ | 271 | |||||
Regulatory assets |
$ | 385 | $ | 378 | $ | 319 | $ | 312 |
28
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, 2008 and 2007 were as follows:
For the Three Months Ended June 30, | ||||||||||||
Con Edison | Con Edison of New York | |||||||||||
(Millions of Dollars) | 2008 | 2007 | 2008 | 2007 | ||||||||
Remediation payments |
$ | 31 | $ | 9 | $ | 31 | $ | 7 | ||||
Insurance recoveries received |
| 1 | | 1 | ||||||||
For the Six Months Ended June 30, | ||||||||||||
Con Edison | Con Edison of New York | |||||||||||
(Millions of Dollars) | 2008 | 2007 | 2008 | 2007 | ||||||||
Remediation payments |
$ | 53 | $ | 18 | $ | 52 | $ | 16 | ||||
Insurance recoveries received |
| 1 | | 1 |
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 2007, 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 $115 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 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
29
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
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, 2008 and December 31, 2007 were as follows:
Con Edison | Con Edison of New York | |||||||||||
(Millions of Dollars) | 2008 | 2007 | 2008 | 2007 | ||||||||
Accrued liability asbestos suits |
$ | 10 | $ | 10 | $ | 10 | $ | 10 | ||||
Regulatory assets asbestos suits |
$ | 10 | $ | 10 | $ | 10 | $ | 10 | ||||
Accrued liability workers compensation |
$ | 114 | $ | 116 | $ | 108 | $ | 111 | ||||
Regulatory assets workers compensation |
$ | 38 | $ | 41 | $ | 38 | $ | 41 |
Note H - Other Material Contingencies
Manhattan Steam Main Rupture
In July 2007, a Con Edison of New York steam main located in midtown Manhattan ruptured. It has been reported that one person died and others were injured as a result of the incident. Several buildings in the area were damaged. Debris from the incident included dirt and mud containing asbestos. The response to the incident required the closing of several buildings and streets for various periods. As of June 30, 2008, with respect to the incident, the company incurred estimated operating costs of $35 million for property damage, clean up and other response costs, recorded $21 million in actual and expected insurance recoveries and invested $12 million in capital, retirement and other costs. Over 50 suits are pending against the company seeking generally unspecified compensatory and, in some cases, punitive damages, for personal injury, property damage and business interruption. 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 the company is unable to estimate, but which could be substantial, to satisfy its liability to others in connection with the incident.
In August 2008, Con Edison of New York entered into a Joint Proposal with the PSC staff and the New York State Consumer Protection Board with respect to the PSCs ongoing proceeding relating to the steam main rupture. (See Regulatory Matters Con Edison of New York Steam in Note B to
30
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
the financial statements in Item 8 of the Form 10-K.) Pursuant to the Joint Proposal, which is subject to PSC approval, among other things, the company (i) will not recover from customers the operating, capital and retirement costs it incurred as a result of the steam main rupture; (ii) will, in general, effectively be limited in its recovery from customers of premiums for its excess liability insurance policies for each of the policy years beginning April 2008 through April 2011 to amounts designed to prevent recovery of any premium increase resulting from the steam main rupture; and (iii) will be released from all prudence-related claims that were or could have been asserted in any PSC proceeding relating to the steam main rupture other than with respect to any damage to company facilities, or incremental costs, that are neither known nor reasonably foreseeable. The Joint Proposal does not preclude the PSC from pursuing a penalty action for any violations of the Public Service Law or the PSCs regulations or orders.
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 electric generating and gas distribution 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 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. The companys investment in these leveraged leases was immaterial at June 30, 2008 and $9 million at December 31, 2007 and is comprised of a $235 million gross investment less $235 million of deferred tax liabilities at June 30, 2008 and $235 million gross investment less $226 million of deferred tax liabilities at December 31, 2007.
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. A trial was completed in November 2007 and post trial briefs have been filed. A decision is possible later this year.
31
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Two cases involving LILO and sale in/lease out transactions have been decided in other courts, each of which was decided in favor of the government and one of which has been affirmed on appeal. See, BB&T Corp. v. United States, 523 F.3d 461 (4th Cir. 2008), and AWG Leasing Trust v. United States, 1:07-CV-857 (N.D. Ohio May 28, 2008). The court before which Con Edison stands, the Court of Federal Claims, has not previously rendered a decision with respect to such transactions and is not bound by these cases. Con Edison believes its tax deductions are proper and that its transaction is distinguishable on a number of grounds. For example, the two cases recently decided involved investments by banks in industrial assets, Swedish wood pulp mill equipment and a German waste-to-energy disposal facility respectively. In contrast, the facts surrounding Con Edisons investment are quite different. Its investment was made in the context of the deregulation of the electric energy industry in New York. It involved an acquisition by Con Edison Development of a leasehold interest in an electric generating power plant in the Netherlands. The asset is consistent with Con Edison Developments plan at the time to invest in a variety of international infrastructure projects. Moreover, in both BB&T and AWG the United States, as defendant, successfully argued that the counterparties in those cases were certain to exercise their early purchase options and, therefore, that those transactions did not qualify as leases. In contrast, Con Edison produced evidence that it is unclear whether the counterparty will exercise its early purchase option.
In a third LILO case, a jury verdict was rendered, partially favorable to the taxpayer and partially favorable to the government. See, Fifth Third Bancorp & Subsidiaries v. United States, 1:05-CV-350 (S.D. Ohio April 18, 2008). Post-verdict motions are pending in that case and a decision has not been rendered.
In connection with its audit of Con Edisons federal income tax return for the tax year 2006, the IRS disallowed $43 million of net tax deductions taken with respect to both of the LILO transactions for the tax year. Con Edison filed an appeal of this audit level disallowance with the Appeals Office of the IRS, where consideration of this matter is pending. In connection with its audit of Con Edisons federal income tax returns for the tax years 1998 through 2005, the IRS indicated that it intends to disallow $332 million of net tax deductions taken with respect to both of the LILO transactions for the tax years. If and when these audit level disallowances become appealable, Con Edison intends to file appeals of the disallowances with the Appeals Office of the IRS.
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, 2008, in the aggregate, was $180 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 $71 million at June 30, 2008.
32
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FASB Statement (FAS) 13-2, Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction, which became effective for fiscal years beginning after December 15, 2006. This FSP requires the expected timing of income tax cash flows generated by Con Edisons LILO transactions to be reviewed at least annually. If the expected timing of the cash flows is revised, the rate of return and the allocation of income would be recalculated from the inception of the LILO transactions, and the company would be required to recalculate the accounting effect of the LILO transactions, which would result in a charge to earnings that could have a material adverse effect on the companys results of operations.
Uncertain Tax Positions
Reference is made to Uncertain Tax Positions in Note L to the financial statements included in Item 8 of the Form 10-K.
In July 2008, the IRS entered into a closing agreement with Con Edison covering the Companies use of the simplified service cost method (SSCM) to determine the extent to which construction-related costs could be deducted in 2002 through 2004. The closing agreement does not cover 2005, the last year for which SSCM is an uncertain tax position. The Companies do not expect the required repayment, with interest, to the IRS of their SSCM tax benefits for 2002 through 2005 to exceed the $160 million ($147 million of which is attributable to Con Edison of New York) the Companies paid to the IRS in June 2007 as a deposit for the repayment.
Other Contingencies
See Power Outage Proceedings in Note B.
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 $1.5 billion and $1.4 billion at June 30, 2008 and December 31, 2007, respectively.
33
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
A summary, by type and term, of Con Edisons total guarantees at June 30, 2008 is as follows:
Guarantee Type | 0 3 years | 4 10 years | > 10 years | Total | ||||||||
(Millions of Dollars) | ||||||||||||
Commodity transactions |
$ | 857 | $ | 41 | $ | 273 | $ | 1,171 | ||||
Affordable housing program |
| 15 | | 15 | ||||||||
Intra-company guarantees |
39 | | 1 | 40 | ||||||||
Other guarantees |
217 | 34 | | 251 | ||||||||
TOTAL |
$ | 1,113 | $ | 90 | $ | 274 | $ | 1,477 |
For a description of guarantee types, see Note H to the financial statements in Item 8 of the Form 10-K.
Note I - Stock-Based Compensation
For a description of stock-based compensation, including stock options, restricted stock units (RSUs) and stock purchase plan, reference is made to Note M to the financial statements in Item 8 of the Form 10-K.
In accordance with SFAS No. 123(R), Share-Based Payment, 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, 2008 and 2007:
For the Three Months Ended June 30, | ||||||||||||
Con Edison |
Con Edison of New York | |||||||||||
(Millions of Dollars) | 2008 | 2007 | 2008 | 2007 | ||||||||
Stock options |
$ | | $ | | $ | | $ | | ||||
Restricted stock units |
| 1 | | 1 | ||||||||
Performance-based restricted stock |
1 | 1 | 1 | 1 | ||||||||
Total |
$ | 1 | $ | 2 | $ | 1 | $ | 2 |
For the Six Months Ended June 30, | ||||||||||||
Con Edison |
Con Edison of New York | |||||||||||
(Millions of Dollars) | 2008 | 2007 | 2008 | 2007 | ||||||||
Stock options |
$ | 1 | $ | 1 | $ | 1 | $ | 1 | ||||
Restricted stock units |
| 1 | | 1 | ||||||||
Performance-based restricted stock |
| 2 | | 2 | ||||||||
Total |
$ | 1 | $ | 4 | $ | 1 | $ | 4 |
34
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, 2008 and 2007 is as follows:
Con Edison | Con Edison of New York | |||||||||||
Shares | Weighted Average Exercise Price |
Shares | Weighted Average Exercise Price | |||||||||
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 | ||||||
Outstanding at 12/31/07 |
6,596,850 | $ | 43.072 | 5,531,850 | $ | 43.187 | ||||||
Granted |
| | | | ||||||||
Exercised |
(26,500 | ) | 39.658 | (22,000 | ) | 39.242 | ||||||
Forfeited |
(75,550 | ) | 43.028 | (73,050 | ) | 43.032 | ||||||
Outstanding at 3/31/08 |
6,494,800 | $ | 43.087 | 5,436,800 | $ | 43.205 | ||||||
Granted |
| | | | ||||||||
Exercised |
(5,000 | ) | 36.988 | (5,000 | ) | 36.988 | ||||||
Forfeited |
(36,600 | ) | 43.648 | (17,000 | ) | 43.602 | ||||||
Outstanding at 6/30/08 |
6,453,200 | $ | 43.088 | 5,414,800 | $ | 43.209 |
The change in the fair value of all outstanding options from their grant dates to June 30, 2008 and 2007 (aggregate intrinsic value) for Con Edison was $(26) million and $15 million, respectively. The change in the fair value of all outstanding options from their grant dates to June 30, 2008 and 2007 (aggregate intrinsic value) for Con Edison of New York was $(22) million and $12 million, respectively. The aggregate intrinsic value of options exercised in the period ended June 30, 2008 and 2007 was $0.2 million and $6 million, respectively, and the cash received by Con Edison for payment of the exercise price was $1.2 million and $30 million, respectively. The weighted average remaining contractual life of options outstanding is four years as of June 30, 2008.
35
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
The following table summarizes stock options outstanding at June 30, 2008 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 |
8 | 1,624,300 | $ | 45.173 | | 1,394,700 | $ | 45.194 | | |||||||
2005 |
7 | 1,238,500 | 42.751 | 1,238,500 | 1,013,750 | 42.725 | 1,013,750 | |||||||||
2004 |
6 | 920,300 | 43.765 | 920,300 | 739,850 | 43.762 | 739,850 | |||||||||
2003 |
5 | 789,600 | 39.955 | 789,600 | 620,900 | 39.981 | 620,900 | |||||||||
2002 |
4 | 848,550 | 42.510 | 848,550 | 712,550 | 42.510 | 712,550 | |||||||||
2001 |
3 | 364,800 | 37.750 | 364,800 | 316,800 | 37.750 | 316,800 | |||||||||
2000 |
2 | 124,150 | 32.500 | 124,150 | 88,650 | 32.500 | 88,650 | |||||||||
1999 |
1 | 543,000 | 47.940 | 543,000 | 527,600 | 47.940 | 527,600 | |||||||||
Total |
6,453,200 | $ | 43.088 | 4,828,900 | 5,414,800 | $ | 43.209 | 4,020,100 |
There were no new awards granted in 2008 and 2007. The total expense to be recognized in future periods for unvested stock options outstanding as of June 30, 2008 is $0.5 million for Con Edison and Con Edison of New York.
Restricted Stock Units
At June 30, 2008 and 2007, there were 136,535 and 115,055 units outstanding, respectively, for Con Edison employees, of which 83,635 and 63,055 units outstanding, respectively, for Con Edison of New York. The weighted average fair value as of the grant date of the outstanding units other than Performance RSUs or awards under the directors deferred compensation plan for June 30, 2008 and 2007 was $42.28 and $42.87 per unit, respectively, for Con Edison. The weighted average fair value as of the grant date of the outstanding units for June 30, 2008 and 2007 was $44.22 and $45.88 per unit, respectively, for Con Edison of New York. The total expense to be recognized by the Companies in future periods for unvested awards outstanding as of June 30, 2008 for Con Edison and Con Edison of New York was $1.4 million and $1.3 million, respectively.
36
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, 2008 and 2007 is as follows:
Con Edison | Con Edison of New York | ||||||||||||
Units | Weighted Average Fair Value* |
Units | Weighted Average Fair Value* | ||||||||||
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 | |||||||
Non-vested at 12/31/07 |
195,980 | $ | 33.398 | 146,033 | $ | 33.048 | |||||||
Granted |
159,950 | 36.270 | 115,758 | 36.270 | |||||||||
Vested and Exercised |
(5 | ) | 31.370 | | | ||||||||
Forfeited |
(5,270 | ) | | (200 | ) | | |||||||
Non-vested at 3/31/08 |
350,655 | $ | 21.178 | 261,591 | $ | 20.918 | |||||||
Granted |
38,375 | 25.980 | 35,515 | 25.980 | |||||||||
Vested and Exercised |
| | | | |||||||||
Forfeited |
(4,839 | ) | | (2,814 | ) | | |||||||
Non-vested at 6/30/08 |
384,191 | $ | 15.269 | 294,292 | $ | 15.177 |
* | Fair value is determined using the Monte Carlo simulation. |
37
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, 2008 and 2007 is as follows:
Con Edison | Con Edison of New York | ||||||||||||
Units | Weighted Average Price |
Units | Weighted Average Price | ||||||||||
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 | |||||||
Non-vested at 12/31/07 |
195,980 | $ | 48.850 | 146,033 | $ | 48.850 | |||||||
Granted |
159,950 | 46.440 | 115,758 | 46.440 | |||||||||
Vested and Exercised |
(20 | ) | 43.570 | | | ||||||||
Forfeited |
(5,255 | ) | | (200 | ) | | |||||||
Non-vested at 3/31/08 |
350,655 | $ | 39.700 | 261,591 | $ | 39.700 | |||||||
Granted |
38,375 | 39.700 | 35,515 | 39.700 | |||||||||
Vested and Exercised |
| | | | |||||||||
Forfeited |
(4,839 | ) | | (2,814 | ) | | |||||||
Non-vested at 6/30/08 |
384,191 | $ | 39.090 | 294,292 | $ | 39.090 |
The total expense to be recognized by Con Edison in future periods for unvested Performance RSUs outstanding as of June 30, 2008 is $14 million, including $11 million for Con Edison of New York.
Stock Purchase Plan
In the three months ended June 30, 2008 and 2007, 150,558 shares and 155,415 shares were purchased under the Stock Purchase Plan at a weighted average price of $41.00 and $49.56 per share, respectively. In the six months ended June 30, 2008 and 2007, 311,914 shares and 304,812 shares were purchased under the Stock Purchase Plan at a weighted average price of $44.30 and $49.04 per share, respectively.
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.
38
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
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) | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||||||
Con Edison of New York |
|||||||||||||||||||||||||||
Electric |
$ | 1,778 | $ | 1,731 | $ | 3 | $ | 3 | $ | 133 | $ | 111 | $ | 203 | $ | 191 | |||||||||||
Gas |
383 | 377 | 1 | 1 | 22 | 21 | 31 | 43 | |||||||||||||||||||
Steam |
133 | 128 | 20 | 23 | 16 | 15 | 4 | 8 | |||||||||||||||||||
Consolidation adjustments |
| | (24 | ) | (27 | ) | | | | | |||||||||||||||||
Total Con Edison of New York |
$ | 2,294 | $ | 2,236 | $ | | $ | | $ | 171 | $ | 147 | $ | 238 | $ | 242 | |||||||||||
O&R |
|||||||||||||||||||||||||||
Electric |
$ | 180 | $ | 165 | $ | | $ | | $ | 7 | $ | 7 | $ | 10 | $ | 15 | |||||||||||
Gas |
43 | 45 | | | 3 | 3 | | 1 | |||||||||||||||||||
Total O&R |
$ | 223 | $ | 210 | $ | | $ | $ | 10 | $ | 10 | $ | 10 | $ | 16 | ||||||||||||
Competitive energy businesses* |
$ | 623 | $ | 513 | $ | (3 | ) | $ | 1 | $ | 1 | $ | 3 | $ | 182 | $ | 9 | ||||||||||
Other** |
9 | (2 | ) | 3 | (1 | ) | | | | | |||||||||||||||||
Total Con Edison |
$ | 3,149 | $ | 2,957 | $ | | $ | | $ | 182 | $ | 160 | $ | 430 | $ | 267 |
* | Operating income includes the gain on the sale of Con Edison Developments generation projects within continuing operations. |
** | 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) | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||||||||
Con Edison of New York |
|||||||||||||||||||||||||||||
Electric |
$ | 3,492 | $ | 3,374 | $ | 6 | $ | 5 | $ | 250 | $ | 220 | $ | 366 | $ | 363 | |||||||||||||
Gas |
1,124 | 1,113 | 2 | 2 | 44 | 42 | 145 | 155 | |||||||||||||||||||||
Steam |
418 | 422 | 38 | 40 | 31 | 30 | 60 | 70 | |||||||||||||||||||||
Consolidation adjustments |
| | (46 | ) | (47 | ) | | | | | |||||||||||||||||||
Total Con Edison of New York |
$ | 5,034 | $ | 4,909 | $ | | $ | | $ | 325 | $ | 292 | $ | 571 | $ | 588 | |||||||||||||
O&R |
|||||||||||||||||||||||||||||
Electric |
$ | 338 | $ | 309 | $ | $ | | $ | 14 | $ | 13 | $ | 15 | $ | 25 | ||||||||||||||
Gas |
148 | 158 | | 6 | 5 | 15 | 17 | ||||||||||||||||||||||
Total O&R |
$ | 486 | $ | 467 | $ | $ | | $ | 20 | $ | 18 | $ | 30 | $ | 42 | ||||||||||||||
Competitive energy businesses* |
$ | 1,197 | $ | 945 | $ | 4 | $ | 3 | $ | 2 | $ | 8 | $ | 219 | $ | 15 | |||||||||||||
Other** |
8 | (8 | ) | (4 | ) | (3 | ) | | | (1 | ) | (3 | ) | ||||||||||||||||
Total Con Edison |
$ | 6,725 | $ | 6,313 | $ | | $ | | $ | 347 | $ | 318 | $ | 819 | $ | 642 |
* | Operating income includes the gain on the sale of Con Edison Developments generation projects within continuing operations. |
** | Parent company expenses, primarily interest, and consolidation adjustments. Other does not represent a business segment. |
39
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 and Note K to the financial statements in Part I, Item 1 of the First Quarter Form 10-Q.
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, 2008 and December 31, 2007 were as follows:
Con Edison | Con Edison of New York |
|||||||||||||||
(Millions of Dollars) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Fair value of net assets - gross |
$ | 586 | $ | (70 | ) | $ | 301 | $ | (49 | ) | ||||||
Impact of netting of cash collateral |
(344 | ) | 115 | (178 | ) | 92 | ||||||||||
Fair value of net assets - net |
$ | 242 | $ | 45 | $ | 123 | $ | 43 |
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.
At June 30, 2008, Con Edison and Con Edison of New York had $610 million and $203 million, respectively, of credit exposure in connection with energy supply and hedging activities, net of collateral and reserves of $450 million and $123 million, respectively. Con Edisons net credit exposure consisted of $507 million with investment-grade counterparties (a portion of which is insured through credit insurance and hedged with credit default swaps), $100 million primarily with commodity exchange brokers or independent system operators and $3 million with non-investment grade counterparties. Con Edison of New Yorks net credit exposure consisted of $135 million with investment-grade counterparties and $68 million with commodity exchange brokers.
Economic Hedges
The Companies enter into certain derivative instruments that do not qualify or are not designated as hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. 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
40
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
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. For the three months ended June 30, 2008 and 2007, Con Edison recorded in non-utility operating revenues an unrealized pre-tax gain of $51 million and a pre-tax loss of $6 million, respectively. For the six months ended June 30, 2008 and 2007, Con Edison recorded in non-utility operating revenues an unrealized pre-tax gain of $106 million and a pre-tax loss of $14 million, respectively.
Interest Rate Swaps
In May 2008, Con Edison Developments interest rate swaps that were designated as cash flow hedges under SFAS No. 133 were sold. The losses were classified to Income/(loss) from discontinued operations for the three and six months ended June 30, 2008 and were immaterial to Con Edisons results of operations.
O&R has an interest rate swap related to its Series 1994A Debt. See Note C. At December 31, 2007, the swap was designated as a cash flow hedge, the fair value of which was an unrealized loss of $11 million that was recorded in OCI. In February 2008, the swap counterparty changed the method of calculating its payments under the swap and, as a result, the swap no longer qualified as a hedge under SFAS No. 133. In accordance with O&Rs July 2008 electric rate plan (see Note B), O&R is to defer as a regulatory asset or liability the difference between its actual interest and swap costs relating to its tax-exempt debt and the amount for such costs reflected in rates. Similar treatment is expected in O&Rs other services. The fair value of this interest rate swap at June 30, 2008 was an unrealized loss of $11 million, which has been deferred as a regulatory asset.
Note L - Fair Value Measurements
Reference is made to Note L to the financial statements in Part I, Item 1 of the First Quarter Form 10-Q.
Effective January 1, 2008, the Companies adopted FASB Statement No. 157, Fair Value Measurements (SFAS No. 157). This Statement defines fair value, establishes a framework for measuring fair value and expands the disclosures about fair value measurements.
41
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) CONTINUED