Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

x

 

Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended JUNE 30, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

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, 2009, Con Edison had outstanding 274,985,240 Common Shares ($.10 par value). All of the outstanding common equity of Con Edison of New York is held by Con Edison.

 

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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.

 

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Table of Contents

TABLE OF CONTENTS

 

          PAGE

Glossary of Terms

   4

PART I—Financial Information

    

ITEM 1

  

Financial Statements (Unaudited)

    
    

Con Edison

    
    

Consolidated Balance Sheet

   6
    

Consolidated Income Statement

   8
    

Consolidated Statement of Comprehensive Income

   9
    

Consolidated Statement of Common Shareholders’ Equity

   10
    

Consolidated Statement of Cash Flows

   11
    

Con Edison of New York

    
    

Consolidated Balance Sheet

   12
    

Consolidated Income Statement

   14
    

Consolidated Statement of Comprehensive Income

   15
    

Consolidated Statement of Common Shareholder’s Equity

   16
    

Consolidated Statement of Cash Flows

   17
    

Notes to Financial Statements (Unaudited)

   18

ITEM 2

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   47

ITEM 3

  

Quantitative and Qualitative Disclosures About Market Risk

   80

ITEM 4

  

Controls and Procedures

   80

ITEM 4T

  

Controls and Procedures

   80

PART II—Other Information

    

ITEM 1

  

Legal Proceedings

   81

ITEM 1A

  

Risk Factors

   81

ITEM 4

  

Submission of Matters to a Vote of Security Holders

   82

ITEM 6

  

Exhibits

   84

Signatures

   85

 

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GLOSSARY OF TERMS

 

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

 

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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, 2009

Fitch

   Fitch Ratings

Form 10-K

   The Companies’ combined Annual Report on Form 10-K for the year ended December 31, 2008

FSP

   FASB Staff Position

GHG

   Greenhouse gases

kV

   Kilovolts

kWh

   Kilowatt-hour

LILO

   Lease In/Lease Out

LTIP

   Long Term Incentive Plan

MD&A

   Management’s Discussion and Analysis of Financial Condition and Results of Operations

mdths

   Thousand dekatherms

MGP Sites

   Manufactured gas plant sites

mmlbs

   Million pounds

Moody’s

   Moody’s 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 York’s 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 & Poor’s 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, 2009

Superfund

   Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state statutes

VaR

   Value-at-Risk

VIE

   Variable interest entity

 

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Consolidated Edison, Inc.

 

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

     June 30, 2009    December 31, 2008
     (Millions of Dollars)

ASSETS

             

UTILITY PLANT, AT ORIGINAL COST

             

Electric

   $ 18,104    $ 17,483

Gas

     3,839      3,696

Steam

     1,880      1,849

General

     1,858      1,795

TOTAL

     25,681      24,823

Less: Accumulated depreciation

     5,222      5,079

Net

     20,459      19,744

Construction work in progress

     1,126      1,109

NET UTILITY PLANT

     21,585      20,853

NON-UTILITY PLANT

             

Non-utility property, less accumulated depreciation of $43 and $40 in 2009 and 2008, respectively

     19      20

Construction work in progress

     3      1

NET PLANT

     21,607      20,874

CURRENT ASSETS

             

Cash and temporary cash investments

     311      74

Accounts receivable—customers, less allowance for uncollectible accounts of $67 and $60 in 2009 and 2008, respectively

     938      1,098

Accrued unbilled revenue

     475      131

Other receivables, less allowance for uncollectible accounts of $4 in 2009 and 2008

     155      194

Fuel oil, at average cost

     28      37

Gas in storage, at average cost

     170      325

Materials and supplies, at average cost

     159      154

Prepayments

     175      697

Fair value of derivative assets

     203      162

Recoverable energy costs

     36      172

Deferred derivative losses

     263      288

Other current assets

     84      37

TOTAL CURRENT ASSETS

     2,997      3,369

INVESTMENTS

     368      356

DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS

             

Goodwill

     413      411

Intangible assets, less accumulated amortization of $2 in 2009 and 2008

     4      5

Regulatory assets

     7,858      8,055

Other deferred charges and noncurrent assets

     463      428

TOTAL DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS

     8,738      8,899

TOTAL ASSETS

   $ 33,710    $ 33,498

 

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison, Inc.

 

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

     June 30, 2009    December 31, 2008
     (Millions of Dollars)

CAPITALIZATION AND LIABILITIES

             

CAPITALIZATION

             

Common shareholders’ equity (See Statement of Common Shareholders’ Equity)

   $ 9,748    $ 9,698

Preferred stock of subsidiary

     213      213

Long-term debt

     9,664      9,232

TOTAL CAPITALIZATION

     19,625      19,143

NONCURRENT LIABILITIES

             

Obligations under capital leases

     14      17

Provision for injuries and damages

     175      169

Pensions and retiree benefits

     4,322      4,511

Superfund and other environmental costs

     227      250

Uncertain income taxes

     123      118

Asset retirement obligations

     118      115

Fair value of derivative liabilities

     150      120

Other noncurrent liabilities

     89      79

TOTAL NONCURRENT LIABILITIES

     5,218      5,379

CURRENT LIABILITIES

             

Long-term debt due within one year

     588      482

Notes payable

     100      363

Accounts payable

     939      1,161

Customer deposits

     268      265

Accrued taxes

     29      57

Accrued interest

     155      139

Accrued wages

     81      88

Fair value of derivative liabilities

     217      192

Deferred derivative gains

     10      23

Deferred income taxes—recoverable energy costs

     15      70

Other current liabilities

     333      365

TOTAL CURRENT LIABILITIES

     2,735      3,205

DEFERRED CREDITS AND REGULATORY LIABILITIES

             

Deferred income taxes and investment tax credits

     5,206      4,999

Regulatory liabilities

     891      737

Other deferred credits

     35      35

TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES

     6,132      5,771

TOTAL CAPITALIZATION AND LIABILITIES

   $ 33,710    $ 33,498

 

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison, Inc.

 

CONSOLIDATED INCOME STATEMENT

(UNAUDITED)

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
       2009         2008         2009         2008    
    

(Millions of Dollars/Except Share Data)

 

OPERATING REVENUES

                                

Electric

   $ 1,955      $ 1,957      $ 3,758      $ 3,830   

Gas

     334        426        1,222        1,272   

Steam

     113        133        444        418   

Non-utility

     443        633        845        1,205   

TOTAL OPERATING REVENUES

     2,845        3,149        6,269        6,725   

OPERATING EXPENSES

                                

Purchased power

     1,065        1,362        2,205        2,653   

Fuel

     86        124        321        325   

Gas purchased for resale

     136        243        633        740   

Other operations and maintenance

     622        572        1,203        1,108   

Depreciation and amortization

     197        182        389        347   

Taxes, other than income taxes

     367        328        727        677   

Income taxes

     78        190        177        337   

TOTAL OPERATING EXPENSES

     2,551        3,001        5,655        6,187   

Gain on sale of generation projects

            260               260   

OPERATING INCOME

     294        408        614        798   

OTHER INCOME (DEDUCTIONS)

                                

Investment and other income

     18        11        21        69   

Allowance for equity funds used during construction

     3        2        5        4   

Other deductions

     (5     (5     (8     (10

Income taxes

     (2     (5     3        (21

TOTAL OTHER INCOME (DEDUCTIONS)

     14        3        21        42   

INTEREST EXPENSE

                                

Interest on long-term debt

     151        131        293        244   

Other interest

     6               10        16   

Allowance for borrowed funds used during construction

     (2     (3     (4     (6

NET INTEREST EXPENSE

     155        128        299        254   

INCOME FROM CONTINUING OPERATIONS

     153        283        336        586   

INCOME FROM DISCONTINUED OPERATIONS

                                

Gain on sale of generation projects, net of tax expense of $174 in 2008

            270               270   

Income from discontinued operations, net of tax expense of $1 and $3 in 2008

            2               4   

TOTAL INCOME FROM DISCONTINUED OPERATIONS

            272               274   

NET INCOME

   $ 153      $ 555      $ 336      $ 860   

Preferred stock dividend requirements of subsidiary

     (3     (3     (6     (6

NET INCOME FOR COMMON STOCK

   $ 150      $ 552      $ 330      $ 854   

EARNINGS PER COMMON SHAREBASIC

                                

Continuing operations

   $ 0.55      $ 1.03      $ 1.20      $ 2.13   

Discontinued operations

            0.99               1.01   

Net income for common stock

   $ 0.55      $ 2.02      $ 1.20      $ 3.14   

EARNINGS PER COMMON SHAREDILUTED

                                

Continuing operations

   $ 0.55      $ 1.03      $ 1.20      $ 2.12   

Discontinued operations

            0.99               1.01   

Net income for common stock

   $ 0.55      $ 2.02      $ 1.20      $ 3.13   

DIVIDENDS DECLARED PER SHARE OF COMMON STOCK

   $ 0.590      $ 0.585      $ 1.180      $ 1.170   

AVERAGE NUMBER OF SHARES OUTSTANDINGBASIC (IN MILLIONS)

     274.5        272.7        274.2        272.5   

AVERAGE NUMBER OF SHARES OUTSTANDINGDILUTED (IN MILLIONS)

     275.3        273.5        275.0        273.3   

 

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison, Inc.

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 

     For the Three Months
Ended June 30,
   

For the Six Months

Ended June 30,

 
     2009     2008     2009     2008  
     (Millions of Dollars)     (Millions of Dollars)  

NET INCOME

   $ 153      $ 555      $ 336      $ 860   

OTHER COMPREHENSIVE INCOME, NET OF TAXES

                                

Pension plan liability adjustments, net of taxes of $1 and $2 in 2009 and $1 and $1 in 2008, respectively

     1        1        3        2   

Unrealized losses on derivatives qualified as cash flow hedges, net of taxes of $(1) in 2008

                          (2

Less: Reclassification adjustment for losses included in net income, net of taxes of $0 in 2009 and $(1) and $(1) in 2008

     (1     (2            (2

Less: Reclassification adjustment for unrealized losses included in regulatory assets, net of taxes of $(5) in 2008

                          (8

TOTAL OTHER COMPREHENSIVE INCOME, NET OF TAXES

     2        3        3        10   

COMPREHENSIVE INCOME

     155        558        339        870   

Preferred stock dividend requirements of subsidiary

     (3     (3     (6     (6

COMPREHENSIVE INCOME FOR COMMON STOCK

   $ 152      $ 555      $ 333      $ 864   

 

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison, Inc.

 

CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS’ EQUITY

(UNAUDITED)

 

    Common Stock   Additional
Paid-In
Capital
 

Retained

Earnings

    Treasury Stock    

Capital
Stock

Expense

   

Accumulated

Other
Comprehensive

Income/(Loss)

    Total  
    Shares   Amount       Shares   Amount        
    (Millions of Dollars/Except Share Data)  

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 for common stock

                    303                                    303   

Common stock dividends

                    (160                                 (160

Issuance of common shares—dividend 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 for common stock

                    552                                    552   

Common stock dividends

                    (162                                 (162

Issuance of common shares—dividend 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   

BALANCE AS OF DECEMBER 31, 2008

  273,721,686   $ 29   $ 4,112   $ 6,685      23,210,700   $ (1,001   $ (60   $ (67   $ 9,698   

Net income for common stock

                    180                                    180   

Common stock dividends

                    (162                                 (162

Issuance of common shares—dividend reinvestment and employee stock plans

  532,533           20                                         20   

Other comprehensive income

                                                1        1   

BALANCE AS OF MARCH 31, 2009

  274,254,219   $ 29   $ 4,132   $ 6,703      23,210,700   $ (1,001   $ (60   $ (66   $ 9,737   

Net income for common stock

                    150                                    150   

Common stock dividends

                    (162                                 (162

Issuance of common shares—dividend reinvestment and employee stock plans

  584,916           21                                         21   

Other comprehensive income

                                                2        2   

BALANCE AS OF JUNE 30, 2009

  274,839,135   $ 29   $ 4,153   $ 6,691      23,210,700   $ (1,001   $ (60   $ (64   $ 9,748   

 

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison, Inc.

 

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

     For the Six Months
Ended June 30,
 
       2009         2008    
     (Millions of Dollars)  

OPERATING ACTIVITIES

                

Net income

   $ 336      $ 860   

PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME

                

Depreciation and amortization

     389        347   

Deferred income taxes

     159        202   

Rate case amortization and accruals

     (13     (105

Net transmission and distribution reconciliation

            (52

Common equity component of allowance for funds used during construction

     (5     (4

Pre-tax gain on sale of generation projects

            (704

Net derivative losses

     26        (106

Other non-cash items (net)

     (13     (229

CHANGES IN ASSETS AND LIABILITIES

                

Accounts receivable—customers, less allowance for uncollectibles

     160        69   

Materials and supplies, including fuel oil and gas in storage

     159        (35

Other receivables and other current assets

     (68     (148

Prepayments

     522        16   

Recoverable energy costs

     128        (33

Accounts payable

     (157     335   

Pensions and retiree benefits

     5        63   

Accrued taxes

     (28     257   

Accrued interest

     16        4   

Deferred charges, noncurrent assets and other regulatory assets

     (114     (124

Deferred credits and other regulatory liabilities

     (19     638   

Other assets

     (1     133   

Other liabilities

     (45     (94

NET CASH FLOWS FROM OPERATING ACTIVITIES

     1,437        1,290   

INVESTING ACTIVITIES

                

Utility construction expenditures

     (1,034     (1,068

Cost of removal less salvage

     (87     (90

Non-utility construction expenditures

     (3     3   

Common equity component of allowance for funds used during construction

     5        4   

Proceeds from sale of generation projects

            1,477   

Purchase of ownership interest in Hawkeye lease

            (12

Purchase of ownership interest in Newington SCS

            (20

NET CASH FLOWS (USED IN)/FROM INVESTING ACTIVITIES

     (1,119     294   

FINANCING ACTIVITIES

                

Net payments of short-term debt

     (263     (763

Retirement of long-term debt

     (278     (186

Issuance of long-term debt

     750        1,200   

Issuance of common stock

     15        19   

Debt issuance costs

     (5     (9

Common stock dividends

     (300     (298

NET CASH FLOWS USED IN FINANCING ACTIVITIES

     (81     (37

CASH AND TEMPORARY CASH INVESTMENTS:

                

NET CHANGE FOR THE PERIOD

     237        1,547   

BALANCE AT BEGINNING OF PERIOD

     74        210   

BALANCE AT END OF PERIOD

   $ 311      $ 1,757   

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

                

Cash paid during the period for:

                

Interest

   $ 270      $ 244   

Income taxes

   $ 7      $ 87   

 

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison Company of New York, Inc.

 

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

     June 30, 2009    December 31, 2008
     (Millions of Dollars)

ASSETS

             

UTILITY PLANT AT ORIGINAL COST

             

Electric

   $ 17,055    $ 16,460

Gas

     3,407      3,273

Steam

     1,880      1,849

General

     1,707      1,646

TOTAL

     24,049      23,228

Less: Accumulated depreciation

     4,770      4,636

Net

     19,279      18,592

Construction work in progress

     1,071      1,051

NET UTILITY PLANT

     20,350      19,643

NON-UTILITY PROPERTY

             

Non-utility property, less accumulated depreciation of $20 and $19 in 2009 and 2008, respectively

     10      11

NET PLANT

     20,360      19,654

CURRENT ASSETS

             

Cash and temporary cash investments

     290      37

Accounts receivable—customers, less allowance for uncollectible accounts of $60 and $53 in 2009 and 2008, respectively

     793      937

Other receivables, less allowance for uncollectible accounts of $3 in 2009 and 2008

     107      127

Accrued unbilled revenue

     357     

Accounts receivable from affiliated companies

     44      272

Fuel oil, at average cost

     28      37

Gas in storage, at average cost

     137      261

Materials and supplies, at average cost

     149      145

Prepayments

     75      538

Fair value of derivative assets

     54      71

Recoverable energy costs

          146

Deferred derivative losses

     207      247

Other current assets

     71      22

TOTAL CURRENT ASSETS

     2,312      2,840

INVESTMENTS

     105      93

DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS

             

Regulatory assets

     7,308      7,486

Other deferred charges and noncurrent assets

     359      342

TOTAL DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS

     7,667      7,828

TOTAL ASSETS

   $ 30,444    $ 30,415

 

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison Company of New York, Inc.

 

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

     June 30, 2009    December 31, 2008
     (Millions of Dollars)

CAPITALIZATION AND LIABILITIES

             

CAPITALIZATION

             

Common shareholder’s equity (See Statement of Common Shareholder’s Equity)

   $ 8,999    $ 8,991

Preferred stock

     213      213

Long-term debt

     8,919      8,494

TOTAL CAPITALIZATION

     18,131      17,698

NONCURRENT LIABILITIES

             

Obligations under capital leases

     14      17

Provision for injuries and damages

     168      163

Pensions and retiree benefits

     3,859      4,059

Superfund and other environmental costs

     175      196

Uncertain income taxes

     107      108

Asset retirement obligations

     118      115

Fair value of derivative liabilities

     40      29

Other noncurrent liabilities

     62      61

TOTAL NONCURRENT LIABILITIES

     4,543      4,748

CURRENT LIABILITIES

             

Long-term debt due within one year

     525      475

Notes payable

          253

Accounts payable

     726      952

Accounts payable to affiliated companies

     10      26

Customer deposits

     253      250

Accrued taxes

     27      41

Accrued taxes to affiliated companies

     23      25

Accrued interest

     144      131

Accrued wages

     76      80

Fair value of derivative liabilities

     76      87

Deferred derivative gains

     10      23

Deferred income taxes—recoverable energy costs

          59

Other current liabilities

     299      325

TOTAL CURRENT LIABILITIES

     2,169      2,727

DEFERRED CREDITS AND REGULATORY LIABILITIES

             

Deferred income taxes and investment tax credits

     4,807      4,611

Regulatory liabilities

     762      600

Other deferred credits

     32      31

TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES

     5,601      5,242

TOTAL CAPITALIZATION AND LIABILITIES

   $ 30,444    $ 30,415

 

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison Company of New York, Inc.

 

CONSOLIDATED INCOME STATEMENT

(UNAUDITED)

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
         2009             2008             2009             2008      
    

(Millions of Dollars)

 

OPERATING REVENUES

                                

Electric

   $ 1,812      $ 1,778      $ 3,469      $ 3,492   

Gas

     295        383        1,077        1,124   

Steam

     113        133        444        418   

TOTAL OPERATING REVENUES

     2,220        2,294        4,990        5,034   

OPERATING EXPENSES

                                

Purchased power

     609        704        1,256        1,425   

Fuel

     86        124        321        322   

Gas purchased for resale

     114        215        542        642   

Other operations and maintenance

     532        488        1,033        950   

Depreciation and amortization

     185        171        366        325   

Taxes, other than income taxes

     354        313        697        645   

Income taxes

     67        41        176        154   

TOTAL OPERATING EXPENSES

     1,947        2,056        4,391        4,463   

OPERATING INCOME

     273        238        599        571   

OTHER INCOME (DEDUCTIONS)

                                

Investment and other income

     12        10        15        13   

Allowance for equity funds used during construction

     3        2        5        4   

Other deductions

     (4     (5     (7     (7

Income taxes

     (5     (4     (4     (3

TOTAL OTHER INCOME (DEDUCTIONS)

     6        3        9        7   

INTEREST EXPENSE

                                

Interest on long-term debt

     137        121        265        227   

Other interest

     5        (2     7        10   

Allowance for borrowed funds used during construction

     (2     (2     (3     (5

NET INTEREST EXPENSE

     140        117        269        232   

NET INCOME

     139        124        339        346   

PREFERRED STOCK DIVIDEND REQUIREMENTS

     3        3        6        6   

NET INCOME FOR COMMON STOCK

   $ 136      $ 121      $ 333      $ 340   

 

The accompanying notes are an integral part of these financial statements.

 

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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,
         2009            2008            2009            2008    
    

(Millions of Dollars)

NET INCOME

   $ 139    $ 124    $ 339    $ 346

OTHER COMPREHENSIVE INCOME, NET OF TAXES

                   

COMPREHENSIVE INCOME

   $ 139    $ 124    $ 339    $ 346

 

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison Company of New York, Inc.

 

CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS EQUITY

(UNAUDITED)

 

    Common Stock   Additional
Paid-In
Capital
  Retained
Earnings
    Repurchased
Con Edison
Stock
    Capital
Stock
Expense
    Accumulated
Other
Comprehensive
Income/(Loss)
    Total  
    Shares   Amount            
    (Millions of Dollars/Except Share Data)  

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   

BALANCE AS OF DECEMBER 31, 2008

  235,488,094   $ 589   $ 3,664   $ 5,780      $ (962   $ (60   $ (20   $ 8,991   

Net income

                    200                                200   

Common stock dividend to parent

                    (163                             (163

Cumulative preferred dividends

                    (3                             (3

BALANCE AS OF MARCH 31, 2009

  235,488,094   $ 589   $ 3,664   $ 5,814      $ (962   $ (60   $ (20   $ 9,025   

Net income

                    139                                139   

Common stock dividend to parent

                    (163                             (163

Cumulative preferred dividends

                    (3                             (3

BALANCE AS OF JUNE 30, 2009

  235,488,094   $ 589   $ 3,664   $ 5,787      $ (962   $ (60   $ (20   $ 8,998   

 

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison Company of New York, Inc.

 

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

     For the Six Months
Ended June 30,
 
         2009             2008      
     (Millions of Dollars)  

OPERATING ACTIVITIES

                

Net income

   $ 339      $ 346   

PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME

                

Depreciation and amortization

     366        325   

Deferred income taxes

     151        193   

Rate case amortization and accruals

     (13     (105

Net transmission and distribution reconciliation

            (52

Common equity component of allowance for funds used during construction

     (5     (4

Other non-cash items (net)

     (52     (27

CHANGES IN ASSETS AND LIABILITIES

                

Accounts receivable—customers, less allowance for uncollectibles

     144        84   

Materials and supplies, including fuel oil and gas in storage

     129        (31

Other receivables and other current assets

     71        (171

Prepayments

     463        4   

Recoverable energy costs

     148        (42

Accounts payable

     (242     129   

Pensions and retiree benefits

     (16     44   

Accrued taxes

     (16     12   

Accrued interest

     13        3   

Deferred charges, noncurrent assets and other regulatory assets

     (63     (119

Deferred credits and other regulatory liabilities

     (45     473   

Other liabilities

     (45     3   

NET CASH FLOWS FROM OPERATING ACTIVITIES

     1,327        1,065   

INVESTING ACTIVITIES

                

Utility construction expenditures

     (992     (1,031

Cost of removal less salvage

     (85     (88

Common equity component of allowance for funds used during construction

     5        4   

Loan to affiliate

     113        55   

NET CASH FLOWS USED IN INVESTING ACTIVITIES

     (959     (1,060

FINANCING ACTIVITIES

                

Net payments of short-term debt

     (253     (555

Retirement of long-term debt

     (275     (180

Issuance of long-term debt

     750        1,200   

Capital contribution by parent

            49   

Debt issuance costs

     (5     (9

Dividend to parent

     (326     (284

Preferred stock dividends

     (6     (6

NET CASH FLOWS (USED IN)/FROM FINANCING ACTIVITIES

     (115     215   

CASH AND TEMPORARY CASH INVESTMENTS:

                

NET CHANGE FOR THE PERIOD

     253        220   

BALANCE AT BEGINNING OF PERIOD

     37        121   

BALANCE AT END OF PERIOD

   $ 290      $ 341   

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

                

Cash paid during the period for:

                

Interest

   $ 244      $ 223   

Income taxes

   $ 15      $ 70   

 

The accompanying notes are an integral part of these financial statements.

 

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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 Edison’s other utility subsidiary, Orange and Rockland Utilities, Inc. (O&R), and Con Edison’s competitive energy businesses (discussed below) in Con Edison’s 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, 2008 (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, 2009 (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.

 

The Companies have, pursuant to Statement of Financial Accounting Standard (SFAS) No. 165, “Subsequent Events” (which is effective for periods ending after June 15, 2009), evaluated events or transactions that occurred after June 30, 2009 through the filing with the Securities and Exchange Commission of this Quarterly Report on Form 10-Q for potential recognition or disclosure in the consolidated financial statements.

 

Certain prior period amounts have been reclassified to conform to the current period presentation. Effective June 2009, the Companies are including receivables purchased from energy supply companies

 

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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

 

within accounts receivable—customers, and to conform to this presentation, have reclassified receivables purchased from energy supply companies that were included in other receivables at December 31, 2008 ($148 million for Con Edison; $121 million for Con Edison of New York). This reclassification more appropriately reflects the Utilities’ customer operations’ practices, policies and procedures. 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 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 M.

 

Note A—Summary of Significant Accounting Policies

Revenues

The Utilities and Con Edison Solutions recognize revenues for electric, gas and steam service on a monthly billing cycle basis. The Utilities defer over a 12-month period net interruptible gas revenues, other than those authorized by the New York State Public Service Commission (PSC) to be retained by the Utilities, for refund to firm gas sales and transportation customers. O&R and Con Edison Solutions accrue revenues at the end of each month for estimated energy service not yet billed to customers. Prior to March 31, 2009, Con Edison of New York did not accrue revenues for estimated energy service not yet billed to customers except for certain unbilled gas revenues accrued in 1989. Effective March 31, 2009, the PSC authorized Con Edison of New York to accrue unbilled electric, gas and steam revenues. The adoption of this accounting for unbilled revenues had no effect on net income. See Note A to the financial statements in Part I, Item 1 of the First Quarter Form 10-Q. Unbilled revenues included in Con Edison’s balance sheet at June 30, 2009 and December 31, 2008 were $475 million (including $357 million for Con Edison of New York) and $131 million, respectively.

 

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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

 

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, 2009 and 2008, Con Edison’s 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)      2009        2008        2009        2008  

Income for common stock from continuing operations

   $ 150    $ 280    $ 330    $ 580

Income for common stock from discontinued operations, net of tax

          272           274

Net income for common stock

   $ 150    $ 552    $ 330    $ 854

Weighted average common shares outstanding—Basic

     274.5      272.7      274.2      272.5

Add: Incremental shares attributable to effect of potentially dilutive securities

     0.8      0.8      0.8      0.8

Adjusted weighted average common shares outstanding—Diluted

     275.3      273.5      275.0      273.3

EARNINGS PER COMMON SHARE—BASIC

                           

Continuing operations

   $ 0.55    $ 1.03    $ 1.20    $ 2.13

Discontinued operations

          0.99           1.01

Net income for common stock

   $ 0.55    $ 2.02    $ 1.20    $ 3.14

EARNINGS PER COMMON SHARE—DILUTED

                           

Continuing operations

   $ 0.55    $ 1.03    $ 1.20    $ 2.12

Discontinued operations

          0.99           1.01

Net income for common stock

   $ 0.55    $ 2.02    $ 1.20    $ 3.13

 

Note B—Regulatory Matters

Reference is made to “Accounting Policies” in Note A and “Rate Agreements” in Note B to the financial statements included in Item 8 of the Form 10-K and Note B to the financial statements in Part I, Item 1 of the First Quarter Form 10-Q.

 

Rate Agreements

Con Edison of New York—Electric

In May 2009, Con Edison of New York filed a request with the PSC for a three-year electric rate plan with level annual rate increases of $695 million effective April 2010, 2011 and 2012. The filing reflects a return on common equity of 11.60 percent and a common equity ratio of 48.2 percent.

 

The filing also includes an alternative proposal for an electric rate increase of $854 million, effective April 2010, reflecting a return on common equity of 10.9 percent and a common equity ratio of 48.2 percent. Included in the increase would be recovery of increased property taxes ($127 million); additional operating costs and new and or expanded operating programs ($153 million); carrying

 

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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

 

charges on additional infrastructure investments ($237 million); increased pension and other post-retirement benefit costs ($114 million); and an increased return on equity as compared to the return on equity reflected in current electric rates ($127 million).

 

The filing reflects continuation of the current provisions pursuant to which expenses for pension and other post-retirement benefits, property taxes, long-term debt and environmental site investigation and remediation are reconciled to amounts reflected in rates and avoided revenue requirements (as updated, $23 million) as a result of austerity measures (discussed below). The company is requesting reconciliation for municipal infrastructure support costs and the impact of new laws. As part of the three-year rate plan, the company is requesting that increases, if any, in certain expenses above a 4 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 also reflects continuation of the revenue decoupling mechanism that eliminates the direct relationship between the company’s level of delivery revenues and profits and the provisions pursuant to which the company recovers its purchased power and fuel costs from customers.

 

In April 2009, the PSC directed the company to file with the PSC in May 2009 the company’s plan with respect to austerity measures that would reduce the company’s revenue requirements during the rate year ending March 31, 2010 by $60 million. The PSC further directed the company to provide, in its next electric rate filing or within 30 days thereafter, the austerity program efforts it plans to continue beyond that rate year. The company has, as directed by the PSC, filed its austerity plans, which include reductions in labor costs, including compensation and other employee benefits, deferral of expenditures for capital projects and operating and maintenance programs and other initiatives. These reductions would collectively represent $47 million of the $60 million reduction sought by the PSC. The company will seek further opportunities for austerity when it prepares its 2010 budgets. In May 2009, the company filed with the PSC a request for rehearing of the PSC’s April 2009 order with respect to its austerity provisions and certain other matters.

 

The PSC’s April 2009 order covering Con Edison of New York’s electric rates, among other things, provided for the continuation of the collection of a portion (increased, to reflect higher capital costs, from $237 million collected in the rate year ended March 2009 to $254 million for the rate year ending March 2010) of the April 2008 rate increase subject to potential refund to customers following further PSC review and completion of an investigation by the PSC staff of the $1.6 billion of capital expenditures during the April 2005 through March 2008 period covered by the 2005 electric rate agreement for transmission and distribution utility plant that were above the amounts of such expenditures reflected in rates. The portion collected would also be subject to refund in the event the

 

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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

 

PSC determined that some disallowance of costs the company has recovered is warranted to address potential impacts of alleged unlawful conduct by arrested employees and contractors (see “Investigation of Contractor Payments” in Note H). The company is unable to estimate the amount, if any, of any refund that might be required and, accordingly, has not established a regulatory liability for a refund.

 

Con Edison of New York—Gas and Steam

In June 2009, the PSC approved a Joint Proposal by Con Edison of New York, the PSC Staff and other parties under which, starting in July 2009, a portion of the company’s gas and steam revenues ($32 million and $6 million annually, respectively) would be subject to potential refund to customers in the event the PSC determined that some disallowance of costs the company has recovered is warranted to address potential impacts of alleged unlawful conduct by arrested employees and contractors (see “Investigation of Contractor Payments” in Note H). The company is unable to estimate the amount, if any, of any refund that might be required.

 

O&R—Gas

In June 2009, O&R entered into a settlement agreement with the staff of the PSC and other parties. The settlement agreement, which is subject to PSC approval, establishes a rate plan that covers the three-year period November 1, 2009 through October 31, 2012. The rate plan provides two rate increase alternatives for consideration by the PSC. The first alternative is for increases in base rates of $12.8 million in the first year, $5.2 million in the second year and $4.5 million in the third year. The second alternative is for increases in base rates of $9 million in each of the first two years and $4.6 million in the third year, with an additional $4.3 million to be collected though a surcharge in the third rate year.

 

The rate plan reflects the following major items:

 

   

an annual return on common equity of 10.4 percent;

 

   

most of any actual earnings above an 11.4 percent annual return on common equity (based upon the actual average common equity ratio, subject to a maximum 50 percent of capitalization) are to be applied to reduce regulatory assets;

 

   

deferral as a regulatory asset or liability, as the case may be, of differences between the actual level of certain expenses, including expenses for pension and other postretirement benefits, environmental remediation, property taxes and taxable and tax-exempt long-term debt, and amounts for those expenses reflected in rates;

 

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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 average gas net plant balances are less than balances reflected in rates;

 

   

deferral as a regulatory asset of increases, if any over the course of the rate plan, in certain expenses above a 4 percent annual inflation rate, but only if the actual annual return on common equity is less than 10.4 percent;

 

   

implementation of a revenue decoupling mechanism;

 

   

continuation of the provisions pursuant to which the company recovers its cost of purchasing gas and the provisions pursuant to which the effects of weather on gas income are moderated; and

 

   

potential negative earnings adjustments of up to $1.4 million annually if certain operations and customer service requirements are not met.

 

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Regulatory Assets and Liabilities

Regulatory assets and liabilities at June 30, 2009 and December 31, 2008 were comprised of the following items:

 

     Con Edison     Con Edison of
New York
(Millions of Dollars)    2009    2008     2009    2008

Regulatory assets

                            

Unrecognized pension and other postretirement costs

   $ 5,407    $ 5,602      $ 5,154    $ 5,335

Future federal income tax

     1,222      1,186        1,162      1,127

Environmental remediation costs

     385      378        325      316

Revenue taxes

     108      101        106      99

Pension and other postretirement benefits deferrals

     106      92        50      38

Deferred derivative losses—long-term

     112      94        70      54

Net electric deferrals

     82      27           82      27

Electric property tax petition

     73      41        73      41

World Trade Center restoration costs

     60      140        60      140

O&R transition bond charges

     58      59            

Workers’ compensation

     38      38        38      38

Gas rate plan deferral

     28      30        28      30

Unbilled gas revenue

     15      44        15      44

Other retirement program costs

     13      14        13      14

Asbestos-related costs

     10      10        9      9

Recoverable energy costs

          42             42

Other

     141      157        122      132

Regulatory assets

     7,858      8,055        7,308      7,486

Deferred derivative losses—current

     263      288        207      247

Recoverable energy costs—current

     36      172             146

Total Regulatory Assets

   $ 8,157    $ 8,515      $ 7,515    $ 7,879

Regulatory liabilities

                            

Allowance for cost of removal less salvage

   $ 374    $ 378      $ 308    $ 313

Refundable energy costs

     152      104        105      47

Net unbilled revenue deferrals

     96             96     

Electric rate case deferral

     57             57     

Rate case amortizations

     35      68        35      68

Gain on sale of First Avenue properties

     17      30        17      30

Other

     160      157        144      142

Regulatory liabilities

     891      737        762      600

Deferred derivative gains—current

     10      23        10      23

Total Regulatory Liabilities

   $ 901    $ 760      $ 772    $ 623

 

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Other Regulatory Matters

Con Edison of New York expects that the PSC will be releasing a report on its management audit of the company. The PSC is required to audit New York utilities every five years. The company expects that the PSC consultant that performed the audit will identify areas for improvement, including with respect to the company’s construction program, planning and business processes and regulatory relationships.

 

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.

 

In June 2009, $49 million of the $55 million of O&R’s weekly-rate, tax-exempt debt insured by Financial Guaranty Insurance Company (Series 1994A Debt) that had been tendered was remarketed, and the proceeds from the remarketing were used to pay short-term borrowings that funded the purchased tendered bonds.

 

Note D—Short-Term Borrowing

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, 2009, Con Edison had $100 million of commercial paper outstanding, none of which was outstanding under Con Edison of New York’s program. The weighted average interest rate was 0.4 percent for Con Edison. At December 31, 2008, Con Edison had $363 million of commercial paper outstanding of which $253 million was outstanding under Con Edison of New York’s program. The weighted average interest rate was 2.4 percent and 3.2 percent for Con Edison and Con Edison of New York, respectively. At June 30, 2009 and December 31, 2008, no loans were outstanding under the Companies’ credit agreements and $282 million (including $126 million for Con Edison of New York) and $316 million (including $107 million for Con Edison of New York) of letters of credit were outstanding, respectively.

 

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.

 

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Net Periodic Benefit Cost

The components of the Companies’ net periodic benefit costs for the three and six months ended June 30, 2009 and 2008 were as follows:

 

     For the Three Months Ended June 30,

 
     Con Edison     Con Edison of
New York
 
(Millions of Dollars)       2009           2008           2009           2008     

Service cost—including administrative expenses

   $ 40      $ 34      $ 37      $ 32   

Interest cost on projected benefit obligation

     131        129        123        121   

Expected return on plan assets

     (173     (173 )          (165     (165

Amortization of net actuarial loss

     75        48        68        42   

Amortization of prior service costs

     2        2        2        2   

NET PERIODIC BENEFIT COST

   $ 75      $ 40      $ 65      $ 32   

Amortization of regulatory asset*

     1        1        1        1   

TOTAL PERIODIC BENEFIT COST

   $ 76      $ 41      $ 66      $ 33   

Cost capitalized

     (27     (14     (25     (11

Cost deferred

     (5     (5     (3     (7

Cost charged to operating expenses

   $ 44      $ 22      $ 38      $ 15   
* Relates to increases in Con Edison of New York’s 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)       2009           2008           2009           2008     

Service cost—including administrative expenses

   $ 80      $ 69      $ 74      $ 64   

Interest cost on projected benefit obligation

     262        258        246        241   

Expected return on plan assets

     (346     (346 )          (330     (330

Amortization of net actuarial loss

     150        96        136        85   

Amortization of prior service costs

     4        4        4        4   

NET PERIODIC BENEFIT COST

   $ 150      $ 81      $ 130      $ 64   

Amortization of regulatory asset*

     2        2        2        2   

TOTAL PERIODIC BENEFIT COST

   $ 152      $ 83      $ 132      $ 66   

Cost capitalized

     (54     (28     (50     (23

Cost deferred

     (36     (25     (31     (28

Cost charged to operating expenses

   $ 62      $ 30      $ 51      $ 15   
* Relates to increases in Con Edison of New York’s pension obligations of $33 million from a 1993 special retirement program and $45 million from a 1999 special retirement program.

 

Expected Contributions

Based on current estimates, the Companies are not required under funding regulations and laws to make any contributions to the pension plan during 2009. The Companies’ policy is to fund their accounting cost to the extent tax deductible, therefore, Con Edison and Con Edison of New York

 

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expect to make discretionary contributions to the pension plan of $282 million and $244 million, respectively, of which Con Edison of New York contributed $184 million in the first half of 2009. Con Edison of New York expects to make discretionary contributions of $5 million to the non-qualified supplemental pension plan during 2009. The Companies are continuing to monitor changes to funding and tax laws that may impact future pension plan funding requirements.

 

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, 2009 and 2008 were as follows:

 

     For the Three Months Ended June 30,

 
     Con Edison     Con Edison of
New York
 
(Millions of Dollars)       2009           2008           2009           2008     

Service cost

   $ 5      $ 5      $ 4      $ 4   

Interest cost on accumulated other postretirement benefit obligation

     24        23        21        21   

Expected return on plan assets

     (21     (21     (20     (19

Amortization of net actuarial loss

     18        17        16        14   

Amortization of prior service cost

     (3     (3 )          (3     (4

Amortization of transition obligation

     1        1        1        1   

NET PERIODIC POSTRETIREMENT BENEFIT COST

   $ 24      $ 22      $ 19      $ 17   

Cost capitalized

     (9     (7     (8     (6

Cost deferred

            (4            (2

Cost charged to operating expenses

   $ 15      $ 11      $ 11      $ 9   

 

     For the Six Months Ended June 30,

 
     Con Edison     Con Edison of
New York
 
(Millions of Dollars)       2009           2008           2009           2008     

Service cost

   $ 10      $ 10      $ 8      $ 8   

Interest cost on accumulated other postretirement benefit obligation

     48        47        42        42   

Expected return on plan assets

     (42     (43 )          (40     (39

Amortization of net actuarial loss

     36        34        32        29   

Amortization of prior service cost

     (6     (6     (6     (7

Amortization of transition obligation

     2        2        2        2   

NET PERIODIC POSTRETIREMENT BENEFIT COST

   $ 48      $ 44      $ 38      $ 35   

Cost capitalized

     (18     (15     (15     (12

Cost deferred

     (1     (11     (2     (9

Cost charged to operating expenses

   $ 29      $ 18      $ 21      $ 14   

 

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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 company’s 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, 2009 and December 31, 2008 were as follows:

 

     Con Edison     Con Edison of
New York
(Millions of Dollars)    2009    2008     2009    2008

Accrued Liabilities:

                            

Manufactured gas plant sites

   $ 180    $ 207      $ 129    $ 155

Other Superfund Sites

     47      43           46      41

Total

   $ 227    $ 250      $ 175    $ 196

Regulatory assets

   $ 385    $ 378      $ 325    $ 315

 

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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.

 

There were no insurance recoveries received related to Superfund Sites for the three and six months ended June 30, 2009 and 2008. Environmental remediation costs incurred related to Superfund Sites during the three and six months ended June 30, 2009 and 2008 were as follows:

 

     For the Three Months Ended June 30,

     Con Edison    

Con Edison of

New York

(Millions of Dollars)    2009    2008     2009    2008

Remediation costs incurred

   $ 24    $ 31         $ 23    $ 31
     For the Six Months Ended June 30,

     Con Edison    

Con Edison of

New York

(Millions of Dollars)    2009    2008     2009    2008

Remediation costs incurred

   $ 40    $ 53         $ 39    $ 52

 

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

 

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that these amounts are greatly exaggerated, based on the disposition of previous claims. In 2008, 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 $9 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, 2009 and December 31, 2008 were as follows:

 

     Con Edison     Con Edison of
New York
(Millions of Dollars)    2009    2008     2009    2008

Accrued liability—asbestos suits

   $ 10    $ 10      $ 9    $ 9

Regulatory assets—asbestos suits

   $ 10    $ 10       $ 9    $ 9

Accrued liability—workers’ compensation

   $ 114    $ 114      $ 108    $ 109

Regulatory assets—workers’ compensation

   $ 38    $ 38      $ 38    $ 38

 

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. Approximately 100 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 not accrued a liability for the suits. The company has notified its insurers of the incident and believes that the policies in force at the time of the incident will cover most of the company’s costs, which the company is unable to estimate, but which could be substantial, to satisfy its liability to others in connection with the incident.

 

Investigation of Contractor Payments

In January 2009, Con Edison of New York commenced an internal investigation relating to the arrests of certain employees and retired employees (most of whom have since been indicted or pleaded guilty) for accepting kickbacks from contractors that performed construction work for the company. The company has retained a law firm, which has retained an accounting firm, to assist in the company’s

 

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investigation. The company is providing information to governmental authorities in connection with their investigation of the arrested employees and contractors. The company has terminated its employment of the arrested employees and its contracts with the contractors. In February 2009, the PSC commenced a proceeding that, among other things, will examine the prudence of certain of the company’s expenditures relating to the arrests and consider whether additional expenditures should also be examined (see Note B). The company, based upon its evaluation of its internal controls for 2008 and previous years, believes that the controls were effective to provide reasonable assurance that its financial statements have been fairly presented, in all material respects, in conformity with generally accepted accounting principles. Because the company’s investigation is ongoing, the company is unable to predict the impact of any of the employees’ unlawful conduct on the company’s internal controls, business, results of operations or financial position.

 

Permit Non-Compliance and Pollution Discharges

In March 2009, the New York State Department of Environmental Conservation (DEC) issued a proposed Administrative Order on Consent to Con Edison of New York with respect to non-compliance with certain laws, regulations and permit conditions and discharges of pollutants at the company’s steam generating facilities. The proposed order effectively institutes a civil enforcement proceeding against the company. In the proposed order, the DEC is seeking, among other things, the company’s agreement to pay a penalty in an amount the DEC has not yet specified, retain an independent consultant to conduct a comprehensive audit of the company’s generating facilities to determine compliance with federal and New York State environmental laws and regulations and recommend best practices, remove all equipment containing polychlorinated biphenyls from the company’s steam and electric facilities, remediate polychlorinated biphenyl contamination, install certain wastewater treatment facilities, and comply with additional sampling, monitoring, and training requirements. The company will seek to resolve this proceeding through a negotiated settlement with the DEC. It is unable to predict the impact of the proceeding on the company’s operations or the amount of the penalty and the additional costs, which could be substantial, to comply with the requirements resulting from this proceeding.

 

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 transactions). 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 SFAS No. 13, “Accounting for Leases,” Con Edison is accounting for the two LILO

 

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transactions as leveraged leases. Accordingly, the company’s investment in these leases, net of non-recourse debt, is carried as a single amount in Con Edison’s 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 company’s net investment in these leveraged leases was $(16) million at June 30, 2009 and $(8) million at December 31, 2008 and is comprised of a $235 million gross investment less $251 million of deferred tax liabilities at June 30, 2009 and $235 million gross investment less $243 million of deferred tax liabilities at December 31, 2008.

 

On audit of Con Edison’s 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, post trial briefs have been filed and oral argument took place on August 13, 2008. A decision is expected later this year.

 

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 Edison’s 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 Development’s 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.

 

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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). Following the verdict, the taxpayer reported that it had entered into a closing agreement with the IRS to settle all of its leveraged leases. Also, in a fourth LILO case, a jury verdict was rendered in favor of the government. See, Altria Group v. United States, Case No. 1:06-CV-09430-RJH-FM (S.D. New York July 9, 2009).

 

In connection with its audit of Con Edison’s federal income tax return for the tax years 2007 and 2006, the IRS disallowed $41 million and $43 million of net tax deductions taken with respect to both of the LILO transactions for the tax years. Con Edison filed an appeal of the 2007 and 2006 audit level disallowances with the Appeals Office of the IRS. In connection with its audit of Con Edison’s 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 Edison’s estimated tax savings, reflected in its financial statements, from the two LILO transactions through June 30, 2009, in the aggregate, was $205 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 $85 million at June 30, 2009.

 

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 Edison’s 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 company’s results of operations.

 

Guarantees

Con Edison and its subsidiaries enter into various agreements providing financial or performance assurance primarily to third parties on behalf of their subsidiaries. Maximum amounts guaranteed by Con Edison totaled $1.2 billion and $1.6 billion at June 30, 2009 and December 31, 2008, respectively.

 

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A summary, by type and term, of Con Edison’s total guarantees at June 30, 2009 is as follows:

 

Guarantee Type    0 – 3 years    4 – 10 years    > 10 years    Total
     (Millions of Dollars)

Commodity transactions

   $ 713    $ 43    $ 189    $ 945

Affordable housing program

          9           9

Intra-company guarantees

     39           1      40

Other guarantees

     197      27           224

TOTAL

   $ 949    $ 79    $ 190    $ 1,218

 

For a description of guarantee types, see Note H to the financial statements in Item 8 of the Form 10-K.

 

Note I—Financial Information by Business Segment

Reference is made to Note N to the financial statements in Item 8 of the Form 10-K.

 

The financial data for the business segments are as follows:

 

     For the Three Months Ended June 30,
    

Operating

revenues

    Inter-segment
revenues
    Depreciation and
amortization
   

Operating

income

(Millions of Dollars)    2009     2008     2009     2008     2009    2008     2009     2008

Con Edison of New York

                                                             

Electric

   $ 1,812      $ 1,778      $ 3      $ 3      $ 146    $ 133      $ 230      $ 203

Gas

     295        383        1        1        24      22        38        31

Steam

     113        133           18        20           15      16           5        4

Consolidation adjustments

                   (22     (24                       

Total Con Edison of New York

   $ 2,220      $ 2,294      $      $      $ 185    $ 171      $ 273      $ 238

O&R

                                                             

Electric

   $ 144      $ 180      $      $      $ 8    $ 7      $ 8      $ 10

Gas

     39        43                      3      3        1       

Total O&R

   $ 183      $ 223      $      $      $ 11    $ 10      $ 9      $ 10

Competitive energy businesses*

   $ 454      $ 623      $ (1   $ (3   $ 1    $ 1      $ 14      $ 160

Other**

     (12     9        1        3                    (2    

Total Con Edison

   $ 2,845      $ 3,149      $      $      $ 197    $ 182      $ 294      $ 408
* Includes the gain on the sale of Con Edison Development’s generation projects within continuing operations.
** Parent company expenses, primarily interest, and consolidation adjustments. Other does not represent a business segment.

 

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     For the Six Months Ended June 30,  
    

Operating

revenues

    Inter-segment
revenues
    Depreciation and
amortization
   

Operating

income

 
(Millions of Dollars)    2009     2008     2009     2008     2009    2008     2009     2008  

Con Edison of New York

                                                               

Electric

   $ 3,469      $ 3,492      $ 6      $ 6      $ 288    $ 250      $ 356      $ 366   

Gas

     1,077        1,124        2        2        49      44        169        145   

Steam

     444        418        36        38           29      31           74        60   

Consolidation adjustments

                   (44     (46                          

Total Con Edison of New York

   $ 4,990      $ 5,034         $      $      $ 366    $ 325      $ 599      $ 571   

O&R

                                                               

Electric

   $ 289      $ 338      $      $        $ 15    $ 14      $ 14      $ 15   

Gas

     145        148                       6      6        15        15   

Total O&R

   $ 434      $ 486      $      $        $ 21    $ 20      $ 29      $ 30   

Competitive energy businesses*

   $ 867      $ 1,197      $ (3   $ 4      $ 2    $ 2      $ (11   $ 198   

Other**

     (22     8        3        (4                 (3     (1

Total Con Edison

   $ 6,269      $ 6,725      $      $      $ 389    $ 347      $ 614      $ 798   
* Includes the gain on the sale of Con Edison Development’s generation projects within continuing operations.
** Parent company expenses, primarily interest, and consolidation adjustments. Other does not represent a business segment.

 

Note J—Derivative Instruments and Hedging Activities

Derivative instruments and hedging activities are accounted for in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (SFAS No. 133). Under SFAS No. 133, derivatives are recognized on the balance sheet at fair value, unless an exception is available under the standard. Certain qualifying derivative contracts have been designated as normal purchases or normal sales contracts. These contracts are not reported at fair value under SFAS No. 133.

 

Effective January 1, 2009, the Companies adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS No. 161). SFAS No. 161 amends and expands the disclosure requirements of Statement 133 with the intent to provide users of financial statements with enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The Statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements.

 

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Energy Price Hedging

Con Edison’s 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 derivative instruments at June 30, 2009 and December 31, 2008 were as follows:

 

     Con Edison     Con Edison of
New York
 
(Millions of Dollars)    2009     2008     2009     2008  

Fair value of net derivative assets/(liabilities)—gross

   $ (450   $ (428   $ (231   $ (259

Impact of netting of cash collateral

     339        322           169        224   

Fair value of net derivative assets/(liabilities)—net

   $ (111   $ (106   $ (62   $ (35

 

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, 2009, Con Edison and Con Edison of New York had $309 million and $31 million of credit exposure in connection with energy supply and hedging activities, net of collateral, respectively. Con Edison’s net credit exposure consisted of $218 million with investment-grade counterparties and $91 million primarily with commodity exchange brokers or independent system operators. Con Edison of New York’s entire net credit exposure was with commodity exchange brokers.

 

Economic Hedges

The Companies enter into derivative instruments that do not qualify or are not designated as hedges under SFAS No. 133. However, management believes these instruments represent economic hedges that mitigate exposure to fluctuations in commodity prices.

 

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The fair values of the Companies’ commodity derivatives at June 30, 2009 were:

 

Fair Value of Commodity Derivatives(a)  
(Millions of Dollars)    Balance Sheet Location    Con Edison      Con Edison of
New York
 
Asset Derivatives  

Current

   Fair value of derivative assets    $ 812       $ 359   

Long term

   Other deferred charges and non-current assets      496            299   

Total asset derivatives

   $ 1,308       $ 658   

Impact of netting

     (1,064      (604

Net asset derivatives

   $ 244       $ 54   
Liability Derivatives  

Current

   Fair value of derivative liabilities    $ 1,137       $ 515   

Long term

   Fair value of derivative liabilities      621         374   

Total liability derivatives

   $ 1,758       $ 889   

Impact of netting

     (1,403      (773

Net liability derivatives

   $ 355       $ 116   
(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under SFAS No. 133 and, therefore, are excluded from the table.

 

The Utilities generally recover all of their prudently incurred fuel, purchased power and gas cost, including hedging gains and losses, in accordance with rate provisions approved by the applicable state utility commissions. See “Recoverable Energy Costs” in Note A to the financial statements in Item 8 of the Form 10-K. In accordance with SFAS No. 71, the Utilities record a regulatory asset or liability to defer recognition of unrealized gains and losses on their electric and gas derivatives. As gains and losses are realized in future periods, they will be recognized as purchased power, gas and fuel costs in the Companies’ consolidated income statements. Con Edison’s competitive energy businesses record realized and unrealized gains and losses on their derivative contracts in earnings in the reporting period in which they occur.

 

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The following table presents the changes in the fair values of commodity derivatives that have been deferred or recognized in earnings for the three and six months ended June 30, 2009:

 

Realized and Unrealized Gains/(Losses) on Commodity Derivatives(a)

Deferred or Recognized in Income for the Three Months Ended June 30, 2009


 
(Millions of Dollars)    Balance Sheet Location      Con Edison      Con Edison of
New York
 

Pre-tax gains/(losses) deferred in accordance with FAS71:

                   

Current

   Deferred derivative gains      $ (9    $ (9

Total deferred gains

          $ (9    $ (9

Current

   Deferred derivative losses      $ 65       $ 66   

Current

   Recoverable energy costs      $ (122    $ (102

Long term

   Regulatory assets      $ 25       $ 15   
                     

Total deferred losses

          $ (32    $ (21

Net deferred losses

          $ (41    $ (30
     Income Statement Location                

Pre-tax gain/(loss) recognized in income

                   
     Purchased power expense      $ (144 )         $   
     Gas purchased for resale        (1        
     Non-utility revenue        139 (b)         

Total pre-tax gain/(loss) recognized in income

     $ (6    $   
(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under SFAS No. 133 and, therefore, are excluded from the table.
(b) For the three months ended June 30, 2009, Con Edison recorded in non-utility operating revenues an unrealized pre-tax gain of $31 million.

 

Realized and Unrealized Gains/(Losses) on Commodity Derivatives(a)

Deferred or Recognized in Income for the Six Months Ended June 30, 2009


 
(Millions of Dollars)    Balance Sheet Location      Con Edison      Con Edison of
New York
 

Pre-tax gains/(losses) deferred in accordance with FAS71:

                   

Current

   Deferred derivative gains      $ (13    $ (13

Total deferred gains

          $ (13    $ (13

Current

   Deferred derivative losses      $ 25       $ 40   

Current

   Recoverable energy costs      $ (303    $ (259

Long term

   Regulatory assets      $ (20    $ (16
                     

Total deferred losses

          $ (298    $ (235

Net deferred losses

          $ (311    $ (248
     Income Statement Location                

Pre-tax gain/(loss) recognized in income

                   
     Purchased power expense      $ (255    $   
     Gas purchased for resale        2              
     Non-utility revenue        215 (b)         

Total pre-tax gain/(loss) recognized in income

     $ (38    $   

 

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(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under SFAS No. 133 and, therefore, are excluded from the table.
(b) For the six months ended June 30, 2009, Con Edison recorded in non-utility operating revenues an unrealized pre-tax loss of $26 million.

 

As of June 30, 2009, Con Edison had 1,440 contracts, including 689 Con Edison of New York contracts, which were considered to be derivatives under SFAS No. 133 (excluding qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts). The following table presents the number of contracts by commodity type:

 

    Electric Derivatives   Gas Derivatives
    Number of
Energy
Contracts(a)
  MWhs(b)     Number of
Capacity
Contracts(a)
  MWs(b)   Number of
Contracts(a)
  Dths(b)    

Total Number of

Contracts(a)

Con Edison

  583   16,224,863       78   7,442   779   198,601,000       1,440

Con Edison of New York

  95   3,124,200          594   194,890,000      689
(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under SFAS No. 133 and, therefore, are excluded from the table.
(b) Volumes are reported net of long and short positions.

 

The Companies also enter into electric congestion and gas basis swap contracts to hedge the congestion and transportation charges which are associated with electric and gas contracts and hedged volumes.

 

The collateral requirements associated with, and settlement of, derivative transactions are included in net cash flows from operating activities in the Companies’ consolidated statement of cash flows. Most derivative instrument contracts contain provisions that may require the Companies to provide collateral on derivative instruments in net liability positions. The amount of collateral to be provided will depend on the fair value of the derivative instruments and the Companies’ credit ratings.

 

The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position and collateral posted at June 30, 2009, and the additional collateral that would have been required to be posted had the lowest applicable credit rating been reduced one level and to below investment grade were:

 

(Millions of Dollars)    Con Edison(a)     Con Edison of New York(a)  

Aggregate fair value—net liabilities

   $ 499      $ 135   

Collateral posted

   $ 332      $ 80 (b) 

Additional collateral( c) (downgrade one level from current ratings(d))

   $ 40      $ 23   

Additional collateral(c) (downgrade to below investment grade from current ratings(d))

   $ 325 (e)    $ 92   
(a)

Non-derivative transactions for the purchase and sale of electricity and gas and qualifying derivative instruments, which have been designated as normal purchases or normal sales, are excluded from the table. These transactions primarily include purchases of electricity from independent system operators. In the event the Utilities and Con Edison’s competitive energy businesses were no longer extended

 

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unsecured credit for such purchases, the Companies would be required to post collateral, which at June 30, 2009, would have amounted to an estimated $365 million for Con Edison, including $113 million for Con Edison of New York. For certain other such non-derivative transactions, the Companies could be required to post collateral under certain circumstances, including in the event counterparties had reasonable grounds for insecurity.

(b) Across the Utilities’ energy derivative positions, credit limits for the same counterparties are generally integrated. At June 30, 2009, all collateral for these positions was posted by Con Edison of New York, including an estimated $41 million attributable to O&R.
(c) The Companies measure the collateral requirements by taking into consideration the fair value amounts of derivative instruments that contain credit-risk-related contingent features that are in a net liabilities position plus amounts owed to counterparties for settled transactions and amounts required by counterparties for minimum financial security. The fair value amounts represent unrealized losses, net of any unrealized gains where the Companies have a legally enforceable right of setoff.
(d) The current ratings are Moody’s, S&P and Fitch long-term credit rating of, as applicable, Con Edison (Baa1/BBB+/BBB+), Con Edison of New York (A3/A-/A-) or O&R (Baa1/A-/A). Credit ratings assigned by rating agencies are expressions of opinions that are subject to revision or withdrawal at any time by the assigning rating agency.
(e) Derivative instruments that are net assets have been excluded from the table. At June 30, 2009, if Con Edison had been downgraded to below investment grade, its competitive energy businesses would have been required to post additional collateral for such derivative instruments of $123 million.

 

Interest Rate Swaps

In May 2008, Con Edison Development’s 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 year ended December 31, 2008 and were immaterial to Con Edison’s results of operations.

 

O&R has an interest rate swap related to its Series 1994A Debt. See Note C. O&R pays a fixed-rate of 6.09 percent and receives a LIBOR-based variable rate. The fair value of this interest rate swap at June 30, 2009 was an unrealized loss of $12 million, which has been included in Con Edison’s consolidated balance sheet as a noncurrent liability/fair value of derivative liabilities and a regulatory asset. The increase in the fair value of the swap for the three and six months ended June 30, 2009 was $2 million and $3 million, respectively. In the event O&R’s credit rating was downgraded to BBB-/Baa3 or lower, the swap counterparty could elect to terminate the agreement and O&R would be required to settle immediately.

 

Note K—Fair Value Measurements

Reference is made to Note P 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 Form 10-Q.

 

FASB Statement No. 157, “Fair Value Measurements” (SFAS No. 157) defines fair value, establishes a framework for measuring fair value and expands the disclosures about fair value measurements.

 

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Assets and liabilities measured at fair value on a recurring basis as of June 30, 2009 are summarized below under the three-level hierarchy established by SFAS No. 157. SFAS No. 157 defines the levels within the hierarchy as follows:

 

   

Level 1—Consists of assets or liabilities whose value is based on unadjusted quoted prices in active markets at the measurement date.

 

   

Level 2—Consists of assets or liabilities valued using industry standard models and based on prices, other than quoted prices within Level 1, that are either directly or indirectly observable as of the measurement date.

 

   

Level 3—Consists of assets or liabilities whose fair value is estimated based on internally developed models or methodologies using inputs that are generally less readily observable and supported by little, if any, market activity at the measurement date.

 

Assets and liabilities measured at fair value on a recurring basis as of June 30, 2009 are summarized below:

 

     Level 1    Level 2    Level 3   

Netting

Adjustments(4)

    Total
(Millions of Dollars)    Con
Edison
   Con
Edison
of
New
York
   Con
Edison
   Con
Edison
of
New
York
   Con
Edison
   Con
Edison
of
New
York
   Con
Edison
    Con
Edison
of
New
York
    Con
Edison
   Con
Edison
of
New
York

Derivative assets:

                                                                       

Energy(1)

   $ 1    $    $ 172    $ 15    $ 366    $ 32    $ (271   $ 32      $ 268    $ 79

Other assets(3)

     26      26                82      74                    108      100

Total

   $ 27    $ 26    $ 172    $ 15    $ 448    $ 106    $ (271   $ 32      $ 376    $ 179

Derivative liabilities:

                                                                       

Energy(1)

   $ 22    $ 22    $ 516    $ 226    $ 451    $ 30    $ (610   $ (137   $ 379    $ 141

Financial & other(2)

                         12                         12     

Total

   $ 22    $ 22    $ 516    $ 226    $ 463    $ 30    $ (610   $ (137   $ 391    $ 141
(1) A significant portion of the energy derivative contracts categorized in Level 3 is valued using either an industry acceptable model or an internally developed model with observable inputs. The models also include some less readily observable inputs resulting in the classification of the entire contract as Level 3. See Note J.
(2) Includes an interest rate swap. See Note J.
(3) Other assets are comprised of assets such as life insurance contracts within the Deferred Income Plan and Supplemental Retirement Income Plans, held in rabbi trusts.
(4) Amounts represent the impact of legally-enforceable master netting agreements that allow the Companies to net gain and loss positions and cash collateral held or placed with the same counterparties.

 

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Assets and liabilities measured at fair value on a recurring basis as of December 31, 2008 are summarized below:

 

     Level 1    Level 2    Level 3   

Netting

Adjustments(4)

    Total
(Millions of Dollars)    Con
Edison
   Con
Edison
of
New
York
   Con
Edison
   Con
Edison
of
New
York
   Con
Edison
   Con
Edison
of
New
York
   Con
Edison
    Con
Edison
of
New
York
    Con
Edison
   Con
Edison
of
New
York

Derivative assets:

                                                                       

Energy(1)

   $ 1    $    $ 150    $ 38    $ 206    $ 16    $ (117   $ 65      $ 240    $ 119

Other assets(3)

     23      23                73      65                    96      88

Total

   $ 24    $ 23    $ 150    $ 38    $ 279    $ 81    $ (117   $ 65      $ 336    $ 207

Derivative liabilities:

                                                                       

Energy(1)

   $ 34    $ 34    $ 495    $ 264    $ 256    $ 15    $ (439   $ (159   $ 346    $ 154

Financial & other(2)